RESEARCH PROJECT REPORT

(BCOM (H)-1604)

On

“Preference of Salaried Class on Various

Investment Options Available To Them”

Towards partial fulfillment of

Bachelor of Commerce (Honours)
(BBD University, Lucknow)

Guided By: Submitted by:

Mr. Kaushlendra Singh Anjali Singh

Roll No. 1160678009

Session 2018-2019
School of Management

Babu Banarasi Das University

Sector I, Dr. Akhilesh Das Nagar, Faizabad Road, Lucknow (U.P.) India
i
 DECLARATION

I do hereby declare that all the work presented in the research report entitled

“Preference of Salaried Class on Various Investment Options Available To

Them” is carried out and being submitted at the school of management for the

award of Bachelor of Commerce (Honours), is an authentic record of Anjali

Singh. The work is carried out under the guidance of Mr. Kaushlendra Singh

(faculty guide). It hasn‘t been submitted at any other place for any other

academic purpose.

(Anjali Singh)

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 ACKNOWLEDGEMENT

Before I get into the thick of the things I would like to add a few heartfelt words for

the people who were part of this research report in numerous ways and people who

gave unending support right from the stage the project was started, appreciated and

encouraged when being depressed.

In this context I would like to express my gratitude towards my parents and family

members who have constantly supported and played a pivotal role in shaping my

career.

I owe my sincere gratitude towards faculty guide Mr. Kaushlendra Singh of BBDU,

Lucknow for extending the support towards the completion of the Research Report.

And finally I would like to thank my friends for their unending support.

(Anjali Singh)

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 PREFACE

Research Report is an important part of the Management studies. It bears immense

important in the field of Business Management. It offers the student to explore the

valuable treasure of experience and an exposure to real work culture followed by the

industries and thereby helping the students to bridge gap between the theories

explained in the book and their practical implementations.

Research plays an important role in future building of an individual so that we can

understand the real world in which he has to work in future. The theories greatly

enhance our knowledge and provide opportunities to blend theoretical with the

practical knowledge where researcher gets familiar with certain aspect of research. I

feel proud to get myself to do research at topic “Preference of Salaried Class on

Various Investment Options Available to Them”.

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 TABLE OF CONTENT

Declaration ii

Acknowledgement iii

Preface iv

Sr. No. Topic Page no.

1. Introduction 1-35

2. Literature Review 30-35

3. Industry Profile 36-60

4. Scope of the Study 61-63

5. Objectives of the study 64-65

6. Research Methodology 66-70

7. Limitations of the Study 71-72

8. Data Analysis & Interpretation 73-88

9. Findings 89-92

10. Recommendation 93-94

11. Conclusion 95-96

12. Bibliography vi-viii

13. Annexure ix-xii

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INTRODUCTION

1
 INTRODUCTION

Indian investor today have to endure a slow-moving economy, the steep market

declines prompted by declining revenues, alarming reports of scandals ranging from

illegal corporate accounting practices like that of Satyam to insider trading to make

investment decisions. Stock market‘s performance is not simply the result of

intelligible characteristics but also due to the emotions that are still baffling to the

analysts. Despite loads of information coming from all directions, it is not the

calculations of financial wizards, or company‘s performance or widely accepted

criterion of stock performance but the investor‘s irrational emotions like

overconfidence, fear, risk aversion, etc., seem to decisively drive and dictate the

fortunes of the market.

The market is so volatile that its behaviour is unpredictable. In the past couple of

years, the movement of share prices exceeded all the limits and had gone remarkably

low and high levels. These dramatic prices of the shares ruin the concept of intrinsic

value and rational investment behaviour. The traditional finance theories assume that

investors are rational but they are unable to explain the behaviour and pricing of the

stock market completely.

Many research studies have validated the relationship between a dependent variable

i.e., risk tolerance level and independent variables such as demographic

characteristics of an investor. Most of the Indian investors are from high income

group, well educated, salaried, and independent in making investment decisions and

from the past trends it is also seen that they are conservative in nature. Television is

the media that is largely influencing the investor‘s decisions. Hence, in the present

project report an attempt has been made to study the relationship between risk

tolerance level and demographic characteristics of Indian investors.

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INTRODUCTION TO INVESTMENT

The money one earns is partly spent and the rest is saved for meeting future expenses,

instead of keeping savings idle one may like to use savings in order to get returns on it

in the future, this is called as investment. In an economic sense, an investment is the

purchase of goods that are not consumed today but are used in the future to create

wealth. In finance, an investment is a monetary asset purchased with the idea that the

asset will provide income in the future or appreciate and be sold at a higher price.

Mere earning will not help one to secure the future, so it becomes important to invest.

One of the important reasons why one needs to invest wisely is to meet the cost of

Inflation. Inflation is the rate at which the cost of living increases. The cost of living is

simply what it costs to buy the goods and services you need to live. Inflation causes

money to lose value because it will not buy the same amount of a good or a service in

the future as it does now or did in the past. The sooner one starts investing the better.

By investing early one allow one‘s investments more time to grow, whereby the

concept of compounding increases one‘s income, by accumulating the principal and

the interest or dividend earned on it, year after year.

The dictionary meaning of investment is to commit money in order to earn a financial

return or to make use of the money for future benefits or advantages. People commit

money to investments with expectations to increase their future wealth by investing

money to spend in future years. For example, if you invest Rs. 1000 today and earn

10% over the next year, you will have Rs.1100 one year from today.

An investment can be described as perfect if it satisfies all the needs of all investors.

So, the starting point in searching for the perfect investment would be to examine

investor needs. If all those needs are met by the investment, then that investment can

be termed the perfect investment. Most investors and advisors spend a great deal of

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time understanding the merits of the thousands of investments available in India.

Little time, however, is spent understanding the needs of the investor and ensuring

that the most appropriate investments are selected for him.

Before making any investment, one must ensure to:

 Obtain written documents explaining the investment

 Read and understand such documents

 Verify the legitimacy of the investment

 Find out the costs and benefits associated with the investment

 Assess the risk-return profile of the investment

 Know the liquidity and safety aspects of the investment

 Ascertain if it is appropriate for your specific goals

 Compare these details with other investment opportunities available

 Examine if it fits in with other investments you are considering or you have

already made

 Deal only through an authorized intermediary

 Seek all clarifications about the intermediary and the investment

 Explore the options available to you if something were to go wrong, and then, if

satisfied, make the investment.

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INVESTMENT NEEDS OF AN INVESTOR

Investing money is a stepping stone to manage spending habits and prepare for the

future expenses. Most people recognize the need to put their money away for events

or circumstances that may occur in future. People invest money to manage their

personal finances some of them invest to plan for retirement, while others invest to

accumulate wealth. Each one has a different need and each of them expect something

from their money in future.

By and large, most investors have eight common needs from their investments:

i. Security of original capital

ii. Wealth accumulation

iii. Tax Advantages

iv. Life cover

v. Income

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TYPES OF INVESTMENT AVENUES

Figure 1.1: Various investment alternatives

Source: Investment analysis and portfolio management

Author: Prasanna Chandra

Figure 1.1 shows various investment alternatives which are explained below. One can

invest money in different types of Investment instruments. These instruments can be

financial or non-financial in nature. There are many factors that affect one‘s choice of

investment. Millions of Indians buy fixed deposits, post office savings certificates,

stocks, bonds or mutual funds, purchase gold, silver, or make similar investments.

They all have a reason for investing their money. Some people want to supplement

their retirement income when they reach the age of 60, while others want to become

millionaires before the age of 40. We will look at various factors that affect our choice

of an investment alternative, let us first understand the basics of some of the popular

investment avenues.

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NON MARKETABLE FINANCIAL ASSETS: A good portion of financial

assets is represented by non-marketable financial assets. These can be classified into

the following broad categories:

 Bank Deposits: The simplest of investment avenues, by opening a bank account

and depositing money in it one can make a bank deposit. There are various kinds

of bank accounts: current account, savings account and fixed deposit account. The

interest rate on fixed deposits varies with the term of the deposit. In general, it is

lower for fixed deposits of shorter term and higher for fixed deposits of longer

term. Bank deposits enjoy exceptionally high liquidity.

 Post Office Savings Account: A post office savings account is similar to a

savings bank account. The interest rate is 6 percent per annum.

 Post Office Time Deposits (POTDs): Similar to fixed deposits of commercial

banks, POTD can be made in multiplies of 50 without any limit. The interest rates

on POTDs are, in general, slightly higher than those on bank deposits. The interest

is calculated half-yearly and paid annually.

 Monthly Income Scheme of the Post Office (MISPO): A popular scheme of the

post office, the MISPO is meant to provide regular monthly income to the

depositors. The term of the scheme is 6 years. The minimum amount of

investment is 1,000. The maximum investment can be 3, 00,000 in a single

account or 6, 00,000 in a joint account. The interest rate is 8.0 percent per annum,

payable monthly. A bonus of 10 percent is payable on maturity.

 Kisan Vikas Patra (KVP): A scheme of the post office, for which the minimum

amount of investment is 1,000. There is no maximum limit. The investment

doubles in 8 years and 7 months. Hence the compound interest rate works out to

8.4 percent. There is a withdrawal facility after 2 ½ years.

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 National Savings Certificate: Issued at the post offices, National Savings

Certificate comes in denominations of 100, 500, 1,000, 5,000 and 10,000. It has a

term of 6 years. Over this period Rs. 100 becomes Rs. 160.1. Hence the

compound rate of return works out to 8.16 percent.

 Company Deposits: Many companies, large and small, solicit fixed deposits from

the public. Fixed deposits mobilized by manufacturing companies are regulated by

the Company Law Board and fixed deposits mobilized by finance company (more

precisely non-banking finance companies) are regulated by the Reserve Bank of

India. The interest rates on company deposits are higher than those on bank fixed

deposits, but so is risk.

 Employee Provident Fund Scheme : A major vehicle of savings for salaried

employees, where each employee has a separate provident fund account in which

both the employer and employee are required to contribute a certain minimum

amount on a monthly basis.

 Public Provident Fund Scheme: One of the most attractive investment avenues

available in India. Individuals and HUFs can participate in this scheme. A PPF

account may be opened at any branch of State Bank of India or its subsidiaries or

at specified branches of the other public sector banks. The subscriber to a PPF

account is required to make a minimum deposit of 100 per year. The maximum

permissible deposit per year is 70,000. PPF deposits currently earn a compound

interest rate of 8.0 percent per annum, which is totally exempt from taxes.

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BONDS: Bonds are fixed income instruments which are issued for the purpose of

raising capital. Both private entities, such as companies, financial institutions, and the

central or state government and other government institutions use this instrument as a

means of garnering funds. Bonds issued by the Government carry the lowest level of

risk but could deliver fair returns. Many people invest in bonds with an objective of

earning certain amount of interest on their deposits and/or to save tax. Bonds are

considered to be a less risky investment option and are generally preferred by risk-

averse investors. Bond prices are also subject to market risk. Bonds may be classified

into the following categories:

 Government securities: Debt securities issued by the central government state

government and quasi government agencies are referred as gilt edge securities. It

has maturities ranging from 3-20 years and carry interest rate that usually vary

between 7 to 10 percent.

 Debentures of private sector companies: Debentures are viewed as a mixture of

having a shareholding and a fixed interest loan. Debenture holders are normally

entitled to a return equivalent to a fixed percentage of their initial investment. The

security inherent in debentures makes them a safer investment than shares.

 Preference shares: Investing in shares is safer and dividends are assured every

year.

 Savings bonds

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 MUTUAL FUNDS: A mutual fund allows a group of people to pool their money

together and have it professionally managed, in keeping with a predetermined

investment objective. This investment avenue is popular because of its cost-

efficiency, risk-diversification, professional management and sound regulation. There

are three broad types of mutual fund schemes classified on basis of investment

objective:

 EQUITY SCHEMES: The aim of growth funds is to provide capital appreciation

over the medium to long- term. Such schemes normally invest a major part of their

corpus in equities. Such funds have comparatively high risks. These schemes provide

different options to the investors like dividend option, capital appreciation, etc. and

the investors may choose an option depending on their preferences. Growth schemes

are good for investors having a long-term outlook seeking appreciation over a period

of time.

 DEBT SCHEMES: The aim of income funds is to provide regular and steady

income to investors. Such schemes generally invest in fixed income securities such as

bonds, corporate debentures, Government securities and money market instruments.

Such funds are less risky compared to equity schemes. These funds are not affected

because of fluctuations in equity markets. However, opportunities of capital

appreciation are also limited in such funds. The NAVs of such funds are affected

because of change in interest rates in the country. If the interest rates fall, NAVs of

such funds are likely to increase in the short run and vice versa. However, long term

investors may not bother about these fluctuations.

 BALANCED SCHEMES: The aim of balanced funds is to provide both growth

and regular income as such schemes invest both in equities and fixed income

securities in the proportion indicated in their offer documents. These are appropriate

10
for investors looking for moderate growth. They generally invest 40-60% in equity

and debt instruments. These funds are also affected because of fluctuations in share

prices in the stock markets. However, NAVs of such funds are likely to be less

volatile compared to pure equity funds.

REAL ESTATE: Residential real estate is more than just an investment. There are

more ways than ever before to profit from real estate investment. Real estate is a great

investment option. It can generate an ongoing income source. It can also rise in value

overtime and prove a good investment in the cash value of the home or land. Many

advisors warn against borrowing money to purchase investments. The best way to do

this is to save up and pay cash for the home. One should be able to afford the

payments on the property when the property is vacant, otherwise the property may

end up being a burden instead of helping to build wealth.

EQUITY SHARES: Equities are a type of security that represents the ownership

in a company. Equities are traded (bought and sold) in stock markets. Alternatively,

they can be purchased via the Initial Public Offering (IPO) route, i.e. directly from the

company. Investing in equities is a good long-term investment option as the returns on

equities over a long time horizon are generally higher than most other investment

avenues. However, along with the possibility of greater returns comes greater risk.

MONEY MARKET INSTRUMENTS: The money market is the market in

which short term funds are borrowed and lent. These instruments can be broadly

classified as:

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 Treasury Bills: These are the lowest risk category instruments for the short term.

RBI issues treasury bills [T-bills] at a prefixed day and for a fixed amount. There

are 4 types of treasury bills: 14-day T-bill, 91-day T-bill, 182-day T-bill and 364-

day T-bill.

 Certificates of Deposits: After treasury bills, the next lowest risk category

investment option is certificate of deposit (CD) issued by banks and financial

Institution (FI). A CD is a negotiable promissory note, secure and short term, of

up to a year, in nature. Although RBI allows CDs up to one-year maturity, the

maturity most quoted in the market is for 90 days.

 Commercial Papers: Commercial papers are negotiable short-term unsecured

promissory notes with fixed maturities, issued by well-rated organizations. These

are generally sold on discount basis. Organizations can issue CPs either directly or

through banks or merchant banks. These instruments are normally issued for

30/45/60/90/120/180/270/364 days.

 Commercial Bills: Bills of exchange are negotiable instruments drawn by the

seller or drawer of the goods on the buyer or drawee of the good for the value of

the goods delivered. These are called as trade bills and when they are accepted by

commercial banks they are called as commercial bills. If the bill is payable at a

future date and the seller needs money during the currency of the bill then the

seller may approach the bank for discounting the bill.

LIFE INSURANCE POLICIES: Insurance is a form of risk management that

is primarily used to hedge the risk of a contingent loss. Insurance is defined as the

equitable transfer of the risk of a loss, from one entity to another, in exchange for a

premium. An insurer is a company that sells insurance; insured or the policyholder is

a person or entity buying the insurance. The insurance rate is a factor that is used to

12
determine the amount which is to be charged for a certain amount of insurance

coverage, and is called the premium. It can be classified as:

 Money-back Insurance: Money-back Insurance schemes are used as investment

avenues as they offer partial cash-back at certain intervals. This money can be

utilized for children‘s education, marriage, etc.

 Endowment Insurance: These are term policies. Investors have to pay the

premiums for a particular term, and at maturity the accrued bonus and other

benefits are returned to the policyholder if he survives at maturity.

BULLION MARKET: Precious metals like gold and silver had been a safe

haven for Indian investors since ages. Besides jewellery these metals are used for

investment purposes also. Since last 1 year, both Gold and Silver have highly

appreciated in value both in the domestic as well as the international markets. In

addition to its attributes as a store of value, the case for investing in gold revolves

around the role it can play as a portfolio diversifier.

FINANCIAL DERIVATIVES: Derivatives are contracts and can be used as an

underlying asset. Various types of Derivatives are:

 Forwards: A forward contract is a customized contract between two entities,

where settlement takes place on a specific date in the future at today‘s pre-agreed

price.

 Futures: A futures contract is an agreement between two parties to buy or sell an

asset at a certain time in the future at a certain price. Futures contracts are special

types of forward contracts in the sense that the former are standardized exchange

traded contracts

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 Options: Options are of two types - calls and puts. Calls give the buyer the right

but not the obligation to buy a given quantity of the underlying asset, at a given

price on or before a given future date. Puts give the buyer the right, but not the

obligation to sell a given quantity of the underlying asset at a given price on or

before a given date.

 Swaps: Swaps are private agreements between two parties to exchange cash flows

in the future according to a prearranged formula. They can be regarded as

portfolios of forward contracts. E.g. Currency swaps, interest swaps.

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EVALUATION OF VARIOUS INVESTMENT AVENUES

Table 1.1: Summary evaluation of various investment avenues

Source: Investment analysis and portfolio management

Author: Prasanna Chandra

Table 1.1 shows the evaluation of various investment avenues. From this table we can

say that risk, liquidity and return are the so called factors which are considered before

making an investment. But there is a tradeoff between risk and return. Higher the risk

higher is the return. Lower the risk and lower is the return. The decision of which

mode of investment to choose largely depends upon the investors necessity and the

factors which according to him is the most vital one.

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People with more security concern choose fixed investment like bank deposits and

investments in government securities and various post office savings. The main

reason for choosing such an investment mode is that the amount invested in the above

stated securities seems to be very secure and hence they seemed to be more preferred

one where security is the prime concern.

People whom returns are most important are ready to take risk to earn fairer risk. The

preferred mode of investment over here is equity shares and mutual fund. The risk

factor in these modes of investment is basically the returns are basically performance

based. If the company performs well the investors can accept fairer returns but if the

company fails to perform then there can be a threat to the invested amount. Hence the

returns are very volatile with the changes in the market conditions.

ATTRIBUTES OF INVESTMENT

Investment can be said to be an art. Many people invest money without knowing what

they are doing. Only a few people really understand the art of investing money. They

invest according to certain principles. There are also certain factors that affect the

investment decisions. All these are done mainly to increase the return on the

investment and also to keep the risk to a minimum. The various factors that affect the

investment decisions are given below.

For evaluating an investment avenue, the following attributes are relevant.

a) Rate of Return: The rate of return on an investment for a period (which is usually

a period of one year) is defined as follows:

Rate of return = Annual income + (Ending price – Beginning price)

Beginning price

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 Yield: Yield is the annual rate of return for any investment and is expressed as a

percentage. With stocks, yield can refer to the rate of income generated from a stock

in the form of regular dividends. This is often represented in percentage form,

calculated as the annual dividend payments divided by the stock's current share price.

Current yield= Annual cash inflows

Market price

Capital Appreciation: It‘s the rise in the market price of an asset. Capital

appreciation is one of two major ways for investors to profit from an investment in a

company. The other is through dividend income.

b) Risk: The risk of investment refers to the variability of its rate of return.

A simple measure of dispersion is the range of values, which is simply the difference

between the highest and the lowest values.

Figure 1.2: Relationship between Expected Return and Risk

Figure 1.2 shows the relationship between expected return and risk. From this figure it

is clear that with higher risk the returns also increases while it decrease as the risk

decreases. High variance indicates high degree of risk and low variance indicates

lesser risk. Expected returns increases when investors is willing to take risk.

Other measures commonly used in finance are as follows:

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 Variance: This is the mean of the squares of deviations of individual returns around

their average values

 Standard deviation: This is the square root of variance

 Beta: This reflects how volatile the return from an investment is, in response to

market swings.

 Risk = Actual Return – Expected Returns

If, Actual Return = Expected Return = Risk Free Investment

If, Actual Return > or < Expected Return is risky investment

c) Marketability: An investment is highly marketable or liquid if:

 it can be transacted quickly

 the transaction cost is low; and

 the price change between two successive transactions is negligible.

The liquidity of a market may be judged in terms of its depth, breadth, and resilience.

Depth refers to the existence of buy as well as sells orders around the current market

price. Breadth implies the presence of such orders in substantial volume. Resilience

means that new orders emerge in response to price changes. Generally, equity shares

of well established companies enjoy high marketability and equity shares of small

companies in their formative years have low marketability. High marketability is a

desirable characteristic and low marketability is an undesirable one.

d) Tax Shelter: Tax benefits are of the following three kinds:

 Initial Tax Benefit: An initial tax benefit refers to the tax relief enjoyed at the time of

making the investment.

 Continuing Tax Benefit: A continuing tax benefits represent the tax shield associated

with the periodic returns from the investment.

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  Terminal Tax Benefits: A terminal tax benefit refers to relief from taxation when an

investment is realized or liquidated.

e) Convenience: Convenience broadly refers to the ease with which the investment can

be made and looked after.

The degree of convenience associated with investments varies widely. At one end of

the spectrum is the deposit in a savings bank account that can be made readily and

that does not require any maintenance effort. At the other end of the spectrum is the

purchase of a property that may involved a lot of procedural and legal hassles at the

time of acquisitions and a great deal of maintenance effort subsequently.

APPROACHES TO INVESTMENT DECISION MAKING

The stock market is thronged by investors pursuing diverse investment strategies

which may be subsumed under four broad approaches:

i. Fundamental Approach: The basic tenets of the fundamental approach, which is

perhaps most commonly advocated by investment professionals, are as follows:

 There is an intrinsic value of a security, which depends upon underlying economic

(fundamental) factors. The intrinsic value can be established by a penetrating analysis

of the fundamental factors relating to the company, industry, and economy.

 At any given point of time, there are some securities for which the existing market

price will differ from the intrinsic value. Sooner or later, of course, the market price

will fall in line with the intrinsic value.

 Superior returns can be earned by buying under-valued securities (securities whose

intrinsic value exceeds the market price) and selling over-valued securities (securities

whose intrinsic value is less than the market price).

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ii. Psychological Approach: The psychological approach is based on the premise that

stock prices are guided by emotion rather than reason. Stock prices are believed to be

influenced by the psychological mood of investors. When greed and euphoria sweep

the market, prices rise to dizzy heights. On the other hand, when fear and despair

envelop the market, prices fall to abysmally low levels.

Since psychic values appear to be more important than intrinsic values, the

psychological approach suggests that it is more profitable to analyze how investors

tend to behave as the market is swept by waves of optimism and pessimism, which

seem to alternate. The psychological approach has been described vividly as the

‗castles in the air‘ theory Burton G. Malkiel.

Those who subscribe to the psychological approach or the ‗castles in the air‘ theory

generally use some form of technical analysis which is concerned with a study of

internal market data, with a view to developing trading rules aimed at profit making.

The basic premise of technical analysis is that there are certain persistent and

recurring patterns of price movements, which can be discerned by analyzing market

data. Technical analysts use a variety of tools like bar chart, point and figure chart,

moving average analysis, breadth of market analysis, etc.

iii. Academic Approach: Over the last five decades or so, the academic community has

studied various aspects of the capital market, particularly in the advanced countries,

with the help of fairly sophisticated methods of investigation.

 Stock markets are reasonably efficient in reacting quickly and rationally to the flow of

information. Hence, stock prices reflect intrinsic value fairly well. Put differently,

Market price = Intrinsic value

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  Stock price behaviour corresponds to a random walk. This means that successive

price changes are independent. As a result, past price behaviour cannot be used to

predict future price behaviour.

 In the capital market, there is a positive relationship between risk and return. More

specifically, the expected return from a security is linearly related to its systematic

risk

iv. Eclectic Approach: The eclectic approach draws on all the three different approaches

discussed above. The basic premises of the eclectic approach are as follows:

 Fundamental analysis is helpful in establishing basic standards and benchmarks.

However, since there are uncertainties associated with fundamental analysis,

exclusive reliance on fundamental analysis should be avoided. Equally important,

excessive refinement and complexity in fundamental analysis must be viewed with

caution.

 Technical analysis is useful in broadly gauging the prevailing mood of investors and

the relative strengths of supply and demand forces. However, since the mood of

investors can vary unpredictably excessive reliance on technical indicators can be

hazardous. More important, complicated technical systems should ordinarily be

regarded as suspect because they often represent figments of imagination rather than

tools of proven usefulness.

 The market is neither as well-ordered as the academic approach suggest, nor as

speculative as the psychological approach indicates. While it is characterized by some

inefficiencies and imperfection, it seems to react reasonably efficiently and rationally

to the flow of information. Likewise, despite many instances of mispriced securities,

there appears to be a fairly strong correlation between risk and return.

 Level of return often necessitates the assumption of a higher level of risk.

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COMMON ERRORS IN INVESTMENT MANAGEMENT

Investments always do not generate wealth sometimes it fail do so because of some

conditions. The reason for this failure is either the market condition or some mistakes

made by the investors. We cannot control market condition but errors made by

investors could be avoided. Investors appear to be prone to the errors in managing

their investments. Some of the errors made by investors are discussed below:

INADEQUATE COMPREHENSION OF RETURN AND RISK

Many investors have unrealistic and exaggerated expectations from investments, in

particular from equity shares and convertible debentures. One often comes across

investors who say that they hope to earn a return of 25 to 30 percent per year with

virtually no risk exposure or even double their investment in a year or so. They have

apparently been misled by one or more of the following; (a) tall and unjustified claims

made by people with vested interests;

(b) Exceptional performance of some portfolio they have seen or managed, which

may be attributable mostly to fortuitous factors; and

(c) Promises made by tipsters, operators, and others. In most of the cases, such

expectations reflect investor inexperience and gullibility.

VAGUELY FORMULATED INVESTMENT POLICY

Often investors do not clearly spell out their risk disposition and investment policy.

This tends to create confusion and impairs the quality of investment decisions.

Ironically, conservative investors turn aggressive when the bull market is near its peak

in the hope of reaping a bonanza; likewise, in the wake of sharp losses inflicted by a

bear market, aggressive investors turn unduly cautions and overlook opportunities

before them. Ragnar D. Naess put it this way: ―The fear of losing capital when prices

22
 are low and declining, and the greed for more capital gains when prices are rising, are

probably, more than any other factors, responsible for poor performance. ―if you

know what your risk attitude is and why you are investing, you will learn how to

invest well. A well articulated investment policy, adhered to consistently over a

period of time, saves a great deal of disappointment.

NAIVE EXTRAPOLATION OF THE PAST

Investors generally believe in a simple extrapolation of past trends and events and do

not effectively incorporate changes into expectations. As Arthur Zeikel says:

―People generally, and investors particularly, fail to appreciate the working of

countervailing forces; change and momentum are largely misunderstood concepts.

Most investors tend to cling to the course to which they are currently committed,

especially at turning point.‖

`The apparent comfort provided by extrapolating too far, however, is dangerous. As

Peter Bernstein says: ―Momentum causes things to run further and longer than we

anticipate. They very familiarity of a force in motion reduces our ability to see when it

is losing its momentum. Indeed, that is why extrapolating the present into the future

so frequently turns out to be the genesis of an embarrassing forecast.‖

CURSORY DECISION MAKING

Investment decision making is characterized by a great deal of cursoriness. Investors

tend to:

 Base their decisions on partial evidence, unreliable hearsay, or casual tips given by

brokers, friends, and others.

 Cavalierly brush aside several of investment risk (market risk, business risk, and

interest rate risk) as greed overpowers them.

23
 Uncritically follow others because of the temptation to ride the bandwagon or lack of

confidence in their own judgment.

UNTIMELY ENTRIES AND EXITS

Investors tend to follow an irrational start and stop approach to the market

characterized by untimely entries (after a market advance has long been underway)

and exit (after a long period of stagnation and decline).

HIGH COSTS

Investors trade excessively and spend a lot on investment management. A good

proportion of investors indulge in day trading in the hope of making quick profits.

However more often transaction cost wipes out whatever profits they may generate

from frequent trading.

OVER-DIVERSIFICATION AND UNDER-DIVERSIFICATION

Many individuals have portfolios consisting of thirty to sixty, or even more, different

stocks. Managing such portfolios is an unwieldy task and as R.J.Jenrette put it: Over-

diversification is probably the greatest enemy of portfolio performance. Most of the

portfolios we look at have too many names. As a result, the impact of a good idea is

negligible.‖

Perhaps as common as over-diversification is under-diversification. Many individuals

do not apparently understand the principle of diversification and its benefit in term of

risk reduction. A number of individual portfolios seem to be highly under-diversified,

carrying an avoidable risk exposure.

24
WRONG ATTITUDE TOWARDS LOSSES AND PROFITS

An investor has an aversion to admit his mistake and cut losses short. If the price falls,

contrary to his expectation at the time of purchase, he somehow hopes that it will

rebound and he can break even. Surprisingly, such a belief persists even when the

prospects look dismal and there may be a greater possibility of a further decline. If the

price recovers due to favourable conditions, there is a tendency to dispose of the share

when its price more or less equals the original purchase price, even though there may

be a fair chance of further increases. The psychological relief experienced by an

investor from recovering losses seems to motivate such behaviour. This means the

tendency is to let the losses run and cut profits short, rather than to cut the losses short

and let the profits run.

RISKS IN INVESTMENT

Risk is uncertainty of the income /capital appreciation or loss or both. Every

investment (equity, debt, property, etc.) carries an element of risk that is unique to it.

Though risk cannot be totally eliminated, it can be managed by undertaking

effective risk management. To manage risk, one first need to identify different kinds

of risks involved in investing and then take appropriate steps to reduce it.

Risk and return share a direct relationship with one another. Therefore, an investment

which carries negligible risk, will offer a low return (viz. bonds issued by the Reserve

Bank of India) while an investment which carries a higher risk, also offers the

potential of higher returns (stocks).All investments are a ‗trade off‘ between risk and

returns. Let us first discuss the types of risks.

25
 TYPES OF RISKS

All investments carry their unique set of risks. Though there are several types of risks,

the important ones are - market risk, credit risk, interest rate risk, inflation risk,

currency risk and liquidity risk. These are briefly explained below:

a) Market Risk: A share may rise or fall depending on the fortunes of the company, the

industry it is in, or in response to investor sentiment.

b) Credit Risk: This risk is attributed to debt investments wherein the borrower may

default on interest and/or principal repayment.

c) Interest Rate Risk: When interest rates rise, fixed income investments lose value.

This is because the investor will continue to earn the same (lower) interest rate until

the investment matures while market interest rates have already gone up. In order to

compensate for a lower interest rate compared to the market rate, the fixed income

investment will thus have to be priced at a lower rate.

d) Inflation Risk: Rising inflation will erode the value of your income and asset. Due to

inflation, the cost of products and services will rise and consequently, your future

income and assets will be worth less than what they are worth today.

e) Currency Risk: Changes in exchange rates between currencies could lead to decline

in value of your investments. With Indian investors now being allowed to invest in

other countries, you will now be exposed to currency risk i.e. a fall in the value of the

currency in which you are investing vis-à-vis your home currency i.e. the Rupee.

f) Liquidity Risk: Certain investments carry the risk of poor liquidity either due to the

nature of the asset or regulatory reasons. For example, property is inherently an

illiquid investment as it cannot be sold as simply as selling stocks. Certain

investments like the Reserve Bank of India bonds are not transferable till maturity.

26
 Investments in Equity Linked Savings Schemes are illiquid for a period of 3 years and

in case you redeem from such schemes, your tax benefit is withdrawn.

RISK MANAGEMENT

Once different kinds of risks associated with investments are identified appropriate

steps can be taken to reduce these risks. Some of these steps are:

a) Diversification: Most types of risks can be managed by diversifying your

investments across asset classes (stocks, bonds, properties etc.), industry, currencies

etc. Diversification spreads the risk and reduces the adverse impact that any one

investment might have on a portfolio.

b) Research and Monitor: Rigorous research and continuous monitoring will help in

controlling the market and credit risk of your investments. This will caution

beforehand to avoid an investment and alert in case the risk is increasing on an

investment already undertaken.

27
RISK TOLERANCE LEVEL: Risk includes the possibility of losing money.

However, extra considerations should be made in addition to the safety of the

principal and the potential for growth. These considerations include the likelihood of

achieving the financial goals you have established. Additionally, one should consider

whether he/she is willing and able to accept a higher level of risk in order to achieve

further rewards.

Before starting on the setting of the investment portfolio, every investor should

establish his/her risk tolerance level. Only after this he/she is ready to build strategies

for the accomplishment of his/her financial goals. The higher the degree of risk

involved in the investment portfolio the greater the chances of higher returns and

failures.

The setting of the risk tolerance level is very subjective issue. However, younger

investors can afford more risk taking since they have more time to fix the losses. On

the other hand older investors should apply more conservative approach since they

have less time in front of them. But, they should keep in mind that they greatly

decrease their chances of faster achieving their financial goals.

A portfolio that carries more bonds is considered more conservative and risk averse.

However, the one that includes a greater percentage of stocks is more risk taking with

higher potential of rewards. Many financial experts recommend the diversification

between investments with different degrees of risk. This is a good idea since your

portfolio will benefit from the rises and falls of the different investments and will

alleviate the potential of losing money.

Risk Personalities: Based on the risk capacity and risk tolerance, risk appetite can be

decided. This is the level of risk that one is ready to bear. Broadly risk personalities

can be categorised at 3 levels – Conservative, Balanced and Aggressive. Each risk

28
 personality has a different objective which it aims to achieve through the investment

portfolio. These personalities are explained below:

 Conservative personality: For investors having this personality preservation of the

capital invested is the ultimate goal, even if it means compromising on the returns.

 Balanced personality: People with this type of personality wish to strike a balance

between high-risk and low-risk investments.

 Aggressive personality: Investors with such personality do not wish to compromise

at all on the returns, even if their capital erodes.

29
LITERATURE
REVIEW

30
 LITERATURE REVIEW

The literature review section examines the importance of research studies, company

data or industry reports that serve as a foundation for the setup of study. The research

dimension of the related literature and the relevant information begins from an

explanatory perspective, approaching towards specific studies which do related to

judge the limitations and informational gaps in data from the secondary sources. This

analysis may reveal conclusions from past studies to realize the reliability of the

secondary sources and their credibility. This in turn enables one to rely on a

comprehensive review for the study.

Literature suggests that major research in the area of investor‘s behaviour has been

done by behavioural scientists such as Weber (1999), Shiller (2000) and Shefrin

(2000). Shiller (2000) who strongly advocated that stock market is governed by the

market information which directly affects the behaviour of the investors. Several

studies have brought out the relationship between the demographics such as Gender,

Age and risk tolerance level of individuals. Of this the relationship between Age and

risk tolerance level has attracted much attention.

Horvath and Zuckerman (1993) suggested that one‘s biological, demographic and

socioeconomic characteristics; together with his/her psychological makeup affects

one‘s risk tolerance level. Malkiel (1996) suggested that an individual‘s risk tolerance

is related to his/her household situation, lifecycle stage and subjective factors. Mittra

(1995) discussed factors that were related to individuals risk tolerance, which

included years until retirement, knowledge sophistication, income and net worth.

Guiso, Jappelli and Terlizzese (1996), Bajtelsmit and VenDerhei (1997), Powell

and Ansic (1997), Jianakoplos and Bernasek (1998), Hariharan, Chapman and

31
Domain (2000), Hartog, Ferrer-I-Carbonell and Jonker (2002) concluded that males

are more risk tolerant than females.

Wallach and Kogan (1961) were perhaps the first to study the relationship between

risk tolerance and age. Cohn, Lewellen et.al found risky asset fraction of the portfolio

to be positively correlated with income and age and negatively correlated with marital

status. Morin and Suarez found evidence of increasing risk aversion with age although

the households appear to become less risk averse as their wealth increases. Yoo

(1994) found that the change in the risky asset holdings were not uniform. He found

individuals to increase their investments in risky assets throughout their working life

time, and decrease their risk exposure once they retire. Lewellen et.al while

identifying the systematic patterns of investment behaviour exhibited by individuals

found age and expressed risk taking propensities to be inversely related with major

shifts taking place at age 55 and beyond. Indian studies on individual investor‘s were

mostly confined to studies on share ownership, except a few.

The RBI's survey of ownership of shares and L.C. Gupta's enquiry into the ownership

pattern of Industrial shares in India were a few in this direction. The NCAER's studies

brought out the frequent form of savings of individuals and the components of

financial investments of rural households.

The Indian Shareowners Survey brought out a volley of information on shareowners.

Rajarajan V (1997, 1998, 2000 and 2003) classified investors on the basis of their

demographics. He has also brought out the investor‘s characteristics on the basis of

their investment size. He found that the percentage of risky assets to total financial

investments had declined as the investor moves up through various stages in life

cycle. Also investor‘s lifestyles based characteristics has been identified. The above

discussion presents a detailed picture about the various facets of risk studies that have

32
taken place in the past. In the present study, the findings of many of these studies are

verified and updated.

Latha Krishnan (2006) explained as Investments come in many forms. While some

people consider hard assets such as land, house, gold and platinum as investments,

others look to monetary instruments such as stocks and bonds as ways to make their

money grow.

A cautious or conservative investor is unlikely to play carelessly with his hard-earned

money. So he keeps to safe investments that guarantee the return of his capital and

still earn good returns in a stipulated period if the product in which he invested gains

in that period. In such an investment, even if the markets go down and he does not

gain much, he also does not suffer a heavy loss.

A wealthy person with more money to invest can take more risks and invest in a

variety of products that major financial players provide. A wealth of information on

these as well as comments and criticisms on their performances and profitability is

readily available.

―Perception of investors towards capital market instruments globally‖ by John

Marshall and ―Investment analysis and Portfolio management‘‖ by Punithavathy

Pandian. John Marshall‘s study was at global scale and it explains the perception of

people across globe towards capital market instruments and Pandian explains the

theoretical aspects of capital market instruments and use of various investment

avenues to build a strong portfolio.

33
For long researchers have researched on the demographic factors that influence the

investment decisions of an individual. The focus has mostly remained on core

factors such as age, gender, income, marital status, profession, education and

financial knowledge. A number of research studies have been undertaken in India

and abroad to identify the investment behaviour of retail investors and households.

Gupta et al. (2001) studied the Indian household investors‘ preferences, future

intentions and experiences and found that bonds were regarded as an investment for

the retired people but that did not have much appeal for young people. The market

penetration achieved by mutual funds was found to be much lower than equity shares

for all age classes.

Gupta and Jain (2008) on the basis of an all-India survey of 1463 households found

the preferences of investors among the major categories of financial assets, such as

investment in shares, indirect investment through various types of mutual fund

schemes, other investment types such as exchange-traded gold fund, bank fixed

deposits and government savings schemes.

The study provides interesting information about how the investors‘ attitude towards

various investment types are related to their income and age, their portfolio

diversification practices, and the over-all quality of market regulation as viewed

by the investors themselves.

Verma (2008) studied the effect of demographics and personality on

investment choice among Indian investors and found that mutual funds were

popular amongst professionals, students and the self employed. Retirees displayed

their risk aversion by not investing in mutual funds and equity shares. It was also

found that higher the education, higher was the level of understanding of investment

34
complexities. Graduates and above in qualification preferred to invest in equity shares

as well as mutual funds.

Nagpal and Bodla (2009) studied the lifestyle characteristics of the respondents

and their influence on investment preferences. The study concludes that investors‘

lifestyle predominantly decides the risk taking capacity of investors. The study found

that inspite of the phenomenal growth in the security market, the individual investors

prefer less risky investments, viz., life insurance policies, fixed deposits with

banks and post office, PPF and NSC.

Davar and Gill (2009) investigated the underlying dimensions in the selection

of different investment avenues for the households. The results of the study

revealed emphasis on familiarity, satisfaction, opinion and demographic

dimensions for all investment avenues.

Chitra and Sreedevi (2011) analyzed the influence of seven personality

traits—emotional stability, extraversion, risk, return, agreeability, conscientiousness

and reasoning—on the choice of the investment pattern. The results of the study show

that these personality traits of the investors have an impact on the individuals while

taking decisions and also have a strong influence on determining the method

of investment. The study found that the influence of personality traits on the

investment decision is more compared to that of demographic variables. From the

review of literature it can be said that various studies on investment behavior and

preferences provide a piecemeal account of investment behavior of salaried

individuals. Very few studies on investment behavior have been carried out in India.

The present study bridges this gap.

35
INDUSTRY
PROFILE

36
 INDUSTRY PROFILE
INDIAN FINANCIAL MARKET

Money always flows from surplus sector to deficit sector. That means persons having

excess of money lend it to those who need money to fulfil their requirement.

Similarly, in business sectors the surplus money flows from the investors or lenders to

the businessmen for the purpose of production or sale of goods and services. So, we

find two different groups, one who invest money or lend money and the others, who

borrow or use the money.

The financial markets act as a link between these two different groups. It facilitates

this function by acting as an intermediary between the borrowers and lenders of

money. So, financial market may be defined as ‗a transmission mechanism between

investors (or lenders) and the borrowers (or users) through which transfer of funds is

facilitated‘. It consists of individual investors, financial institutions and other

intermediaries who are linked by a formal trading rules and communication network

for trading the various financial assets and credit instruments.

Financial market talks about the primary market, FDIs, alternative investment options,

banking and insurance and the pension sectors, asset management segment as well.

India Financial market happens to be one of the oldest across the globe and is the

fastest growing and best among all the financial markets of the emerging economies.

The history of Indian capital markets spans back 200 years, around the end of the 18th

century. It was at this time that India was under the rule of the East India Company.

The capital market of India initially developed around Mumbai; with around 200 to

250 securities brokers participating in active trade during the second half of the 19th

century.

37
SCOPE OF INDIAN FINANCIAL MARKET

The financial market in India at present is more advanced than many other sectors as

it became organized as early as the 19th century with the securities exchanges in

Mumbai, Ahmedabad and Kolkata. In the early 1960s, the number of securities

exchanges in India became eight - including Mumbai, Ahmedabad and Kolkata. Apart

from these three exchanges, there was the Madras, Kanpur, Delhi, Bangalore and

Pune exchanges as well. Today there are 23 regional securities exchanges in India.

The Indian stock markets till date have remained stagnant due to the rigid economic

controls. It was only in 1991, after the liberalization process that the India securities

market witnessed a flurry of IPOs serially. The market saw many new companies

spanning across different industry segments and business began to flourish. The

launch of the NSE (National Stock Exchange) and the OTCEI (Over the Counter

Exchange of India) in the mid 1990s helped in regulating a smooth and transparent

form of securities trading. The regulatory body for the Indian capital markets was the

SEBI (Securities and Exchange Board of India). The capital markets in India

experienced turbulence after which the SEBI came into prominence. The market

loopholes had to be bridged by taking drastic measures.

POTENTIAL OF INDIAN FINANCIAL MARKET

India Financial Market helps in promoting the savings of the economy - helping to

adopt an effective channel to transmit various financial policies. The Indian financial

sector is well-developed, competitive, efficient and integrated to face all shocks. In

the India financial market there are various types of financial products whose prices

are determined by the numerous buyers and sellers in the market. The other

determinant factor of the prices of the financial products is the market forces of

38
demand and supply. The various other types of Indian markets help in the functioning

of the wide India financial sector.

FEATURES OF INDIAN FINANCIAL MARKET

 India Financial Indices - BSE 30 Index, various sector indexes, stock quotes,

Sensex charts, bond prices, foreign exchange, Rupee & Dollar Chart

 Indian Financial market news

 Stock News - Bombay Stock Exchange, BSE Sensex 30 index, S&P CNX-

Nifty, company information, issues on market capitalization, corporate

earnings statements

 Fixed Income - Corporate Bond Prices, Corporate Debt details, Debt trading

activities, Interest Rates, Money Market, Government Securities, Public

Sector Debt, External Debt Service

 Foreign Investment - Foreign Debt Database composed by BIS, IMF,

OECD,& World Bank, Investments in India & Abroad

 Global Equity Indexes - Dow Jones Global indexes, Morgan Stanley Equity

Indexes

 Currency Indexes - FX & Gold Chart Plotter, J. P. Morgan Currency Indexes

 National and Global Market Relations

 Mutual Funds

 Insurance

 Loans

 Forex and Bullion

39
 The main functions of financial market are:

 It provides facilities for interaction between the investors and the borrowers.

 It provides pricing information resulting from the interaction between buyers and

sellers in the market when they trade the financial assets.

 It provides security to dealings in financial assets.

 It ensures liquidity by providing a mechanism for an investor to sell the financial

assets. It ensures low cost of transactions and information.

40
CLASSIFICATION OF FINANCIAL MARKETS

Figure 3.1: Classification of financial markets

Source: Investment analysis and portfolio management

Author: Prasanna Chandra

Figure 3.1 shows the classification of financial markets. From this figure we can

interpret that there are different ways of classifying financial market.

41
 One is to classify financial market by the type of financial claim. The debt market

is the financial market foe fixed claims (debt instrument) and the equity market is

the financial market for residual claims (equity instruments)

 The second way is to classify financial markets by the maturity of claims. The

market for short term financial claims is referred to as the money market and the

market for long term financial claims is referred to as the capital market.

 The third way to classify financial markets is based on whether the claims

represent new issues or outstanding issues. The market where issues sell new

claims is referred as primary market and the market where issues sell outstanding

claims is referred as secondary market.

 The fourth way to classify financial markets is by the timing of delivery. A cash or

spot market is one where the delivery occurs immediately and forward or futures

markets are those markets where the delivery occurs at a pre determined time in

future.

 The fifth way to classify financial markets is by the nature of its organizational

structure. An exchange traded market is characterized by a centralized

organization with standardized procedures and an over the counter market is a

decentralized market with customized procedures.

These markets are further explained in detail.

MONEY MARKET

The money market is a market for short-term funds, which deals in financial assets

whose period of maturity is up to one year. It should be noted that money market does

not deal in cash or money as such but simply provides a market for credit instruments

such as bills of exchange, promissory notes, commercial paper, treasury bills, etc.

42
These financial instruments are close substitute of money. These instruments help the

business units, other organizations and the Government to borrow the funds to meet

their short-term requirement.

Money market does not imply to any specific market place. Rather it refers to the

whole networks of financial institutions dealing in short-term funds, which provides

an outlet to lenders and a source of supply for such funds to borrowers. Most of the

money market transactions are taken place on telephone, fax or Internet. The Indian

money market consists of Reserve Bank of India, Commercial banks, Co-operative

banks, and other specialized financial institutions. The Reserve Bank of India is the

leader of the money market in India. Some Non-Banking Financial Companies

(NBFCs) and financial institutions like LIC, GIC, UTI, etc. also operate in the Indian

money market.

CAPITAL MARKET

Capital Market may be defined as a market dealing in medium and long-term funds. It

is an institutional arrangement for borrowing medium and long-term funds and which

provides facilities for marketing and trading of securities. So it constitutes all long-

term borrowings from banks and financial institutions, borrowings from foreign

markets and raising of capital by issue various securities such as shares debentures,

bonds, etc.

The market where securities are traded known as Securities market. It consists of two

different segments namely primary and secondary market. The primary market deals

with new or fresh issue of securities and is, therefore, also known as new issue

market; whereas the secondary market provides a place for purchase and sale of

existing securities and is often termed as stock market or stock exchange.

43
PRIMARY MARKET

The Primary Market consists of arrangements, which facilitate the procurement of

long-term funds by companies by making fresh issue of shares and debentures. You

know that companies make fresh issue of shares and/or debentures at their formation

stage and, if necessary, subsequently for the expansion of business. It is usually done

through private placement to friends, relatives and financial institutions or by making

public issue. In any case, the companies have to follow a well-established legal

procedure and involve a number of intermediaries such as underwriters, brokers, etc.

who form an integral part of the primary market. You must have learnt about many

initial public offers (IPOs) made recently by a number of public sector undertakings

such as ONGC, GAIL, NTPC and the private sector companies like Tata Consultancy

Services (TCS), Biocon, Jet-Airways and so on.

SECONDARY MARKET

The secondary market known as stock market or stock exchange plays an equally

important role in mobilizing long-term funds by providing the necessary liquidity to

holdings in shares and debentures. It provides a place where these securities can be

encashed without any difficulty and delay. It is an organized market where shares and

debentures are traded regularly with high degree of transparency and security. In fact,

an active secondary market facilitates the growth of primary market as the investors in

the primary market are assured of a continuous market for liquidity of their holdings.

The major players in the primary market are merchant bankers, mutual funds,

financial institutions, and the individual investors; and in the secondary market you

have all these and the stockbrokers who are members of the stock exchange who

facilitate the trading.

44
After having a brief idea about the primary market and secondary market let see the

difference between them.

DISTINCTION BETWEEN PRIMARY MARKET AND

SECONDARY MARKET

The main points of distinction between the primary market and secondary market are

as follows:

1. Function: While the main function of primary market is to raise long-term funds

through fresh issue of securities, the main function of secondary market is to provide

continuous and ready market for the existing long-term securities.

2. Participants: While the major players in the primary market are financial

institutions, mutual funds, underwriters and individual investors, the major players in

secondary market are all of these and the stockbrokers who are members of the stock

exchange.

3. Listing Requirement: While only those securities can be dealt with in the

secondary market, which have been approved for the purpose (listed), there is no such

requirement in case of primary market.

4. Determination of prices: In case of primary market, the prices are determined by

the management with due compliance with SEBI requirement for new issue of

securities. But in case of secondary market, the price of the securities is determined by

forces of demand and supply of the market and keeps on fluctuating.

45
 DISTINCTION BETWEEN CAPITAL MARKET AND MONEY

MARKET

Capital Market differs from money market in many ways.

 While money market is related to short-term funds, the capital market related to long

term funds.

 While money market deals in securities like treasury bills, commercial paper, trade

bills, deposit certificates, etc., the capital market deals in shares, debentures, bonds

and government securities.

 While the participants in money market are Reserve Bank of India, commercial banks,

non-banking financial companies, etc., the participants in capital market are

stockbrokers, underwriters, mutual funds, financial institutions, and individual

investors.

 While the money market is regulated by Reserve Bank of India, the capital market is

regulated by Securities Exchange Board of India (SEBI).

STOCK EXCHANGE

As indicated above, stock exchange is the term commonly used for a secondary

market, which provide a place where different types of existing securities such as

shares, debentures and bonds, government securities can be bought and sold on a

regular basis. A stock exchange is generally organised as an association, a society or a

company with a limited number of members. It is open only to these members who

act as brokers for the buyers and sellers. The Securities Contract (Regulation) Act has

defined stock exchange as an ― association, organisation or body of individuals,

whether incorporated or not, established for the purpose of assisting, regulating and

controlling business of buying, selling and dealing in securities‖.

46
The main characteristics of a stock exchange are:

 It is an organized market.

 It provides a place where existing and approved securities can be bought and sold

easily.

 In a stock exchange, transactions take place between its members or their

authorized agents.

 All transactions are regulated by rules and by laws of the concerned stock

exchange.

 It makes complete information available to public in regard to prices and volume

of transactions taking place every day.

 It may be noted that all securities are not permitted to be traded on a recognised

stock exchange.

 It is allowed only in those securities (called listed securities) that have been duly

approved for the purpose by the stock exchange authorities. The method of trading

nowadays is quite simple on account of the availability of on-line trading facility

with the help of computers.

 It is also quite fast as it takes just a few minutes to strike a deal through the

brokers who may be available close by. Similarly, on account of the system of

scrip-less trading and rolling settlement, the delivery of securities and the payment

of amount involved also take very little time, say, 2 days.

47
FUNCTIONS OF A STOCK EXCHANGE

The functions of stock exchange can be enumerated as follows:

 Provides ready and continuous market: By providing a place where listed

securities can be bought and sold regularly and conveniently, a stock exchange

ensures a ready and continuous market for various shares, debentures, bonds and

government securities. This lends a high degree of liquidity to holdings in these

securities as the investor can encash their holdings as and when they want.

 Provides information about prices and sales: A stock exchange maintains

complete record of all transactions taking place in different securities every day and

supplies regular information on their prices and sales volumes to press and other

media. In fact, now-a-days, you can get information about minute to minute

movement in prices of selected shares on TV channels like CNBC, Zee News, NDTV

and Headlines Today. This enables the investors in taking quick decisions on

purchase and sale of securities in which they are interested. Not only that, such

information helps them in ascertaining the trend in prices and the worth of their

holdings. This enables them to seek bank loans, if required.

 Provides safety to dealings and investment: Transactions on the stock

exchange are conducted only amongst its members with adequate transparency and in

strict conformity to its rules and regulations which include the procedure and timings

of delivery and payment to be followed. This provides a high degree of safety to

dealings at the stock exchange. There is little risk of loss on account of non-payment

or no delivery.

 Helps in mobilisation of savings and capital formation: Efficient

functioning of stock market creates a conducive climate for an active and growing

primary market. Good performance and outlook for shares in the stock exchanges

48
imparts buoyancy to the new issue market, which helps in mobilising savings for

investment in industrial and commercial establishments. The stock exchanges

provided liquidity and profitability to dealings and investments in shares and

debentures. It also educates people on where and how to invest their savings to get a

fair return. This encourages the habit of saving, investment and risk-taking among the

common people. Thus it helps mobilising surplus savings for investment in corporate

and government securities and contributes to capital formation.

 Barometer of economic and business conditions: Stock exchanges reflect

the changing conditions of economic health of a country, as the shares prices are

highly sensitive to changing economic, social and political conditions. It is observed

that during the periods of economic prosperity, the share prices tend to rise.

Conversely, prices tend to fall when there is economic stagnation and the business

activities slow down as a result of depressions. Thus, the intensity of trading at stock

exchanges and the corresponding rise on fall in the prices of securities reflects the

investor‘s assessment of the economic and business conditions in a country, and acts

as the barometer which indicates the general conditions of the atmosphere of business.

 Better Allocation of funds: As a result of stock market transactions, funds

flow from the less profitable to more profitable enterprises and they avail of the

greater potential for growth. Financial resources of the economy are thus better

allocated.

49
 ADVANTAGES OF STOCK EXCHANGES

Having discussed the functions of stock exchanges, let us look at the advantages

which can be outlined from the point of view of (a) Companies, (b) Investors, and (c)

the Society as a whole.

a) To the Companies

 The companies whose securities have been listed on a stock exchange enjoy a better

goodwill and credit-standing than other companies because they are supposed to be

financially sound.

 The market for their securities is enlarged as the investors all over the world become

aware of such securities and have an opportunity to invest

 As a result of enhanced goodwill and higher demand, the value of their securities

increases and their bargaining power in collective ventures, mergers, etc. is enhanced.

 The companies have the convenience to decide upon the size, price and timing of the

issue.

(b) To the Investors:

 The investors enjoy the ready availability of facility and convenience of buying and

selling the securities at will and at an opportune time.

 Because of the assured safety in dealings at the stock exchange the investors are free

from any anxiety about the delivery and payment problems.

 Availability of regular information on prices of securities traded at the stock

exchanges helps them in deciding on the timing of their purchase and sale.

 It becomes easier for them to raise loans from banks against their holdings in

securities traded at the stock exchange because banks prefer them as collateral on

account of their liquidity and convenient valuation.

50
 (c) To the Society

 The availability of lucrative avenues of investment and the liquidity thereof induces

people to save and invest in long-term securities. This leads to increased capital

formation in the country.

 The facility for convenient purchase and sale of securities at the stock exchange

provides support to new issue market. This helps in promotion and expansion of

industrial activity, which in turn contributes, to increase in the rate of industrial

growth.

 The Stock exchanges facilitate realisation of financial resources to more profitable

and growing industrial units where investors can easily increase their investment

substantially.

 The volume of activity at the stock exchanges and the movement of share prices

reflect the changing economic health.

 Since government securities are also traded at the stock exchanges, the government

borrowing is highly facilitated. The bonds issued by governments, electricity boards;

municipal corporations and public sector undertakings (PSUs) are found to be on offer

quite frequently and are generally successful.

51
LIMITATIONS OF STOCK EXCHANGES

Like any other institutions, the stock exchanges too have their limitations. One of the

common evils associated with stock exchange operations is the excessive speculation.

You know that speculation implies buying or selling securities to take advantage of

price differential at different times. The speculators generally do not take or give

delivery and pay or receive full payment. They settle their transactions just by paying

the difference in prices. Normally, speculation is considered a healthy practice and is

necessary for successful operation of stock exchange activity. But, when it becomes

excessive, it leads to wide fluctuations in prices and various malpractices by the

vested interests. In the process, genuine investors suffer and are driven out of the

market.

Another shortcoming of stock exchange operations is that security prices may

fluctuate due to unpredictable political, social and economic factors as well as on

account of rumours spread by interested parties. This makes it difficult to assess the

movement of prices in future and build appropriate strategies for investment in

securities. However, these days good amount of vigilance is exercised by stock

exchange authorities and SEBI to control activities at the stock exchange and ensure

their healthy functioning.

52
SPECULATION IN STOCK EXCHANGES

The buyers and sellers at the stock exchange undertake two types of operations, one

for speculation and the other for investment. Those who buy securities primarily to

earn a regular income from such investment and possibly make some long-term gain

on account of price rise in future are called investors. They take delivery of the

securities and make full payment of the price. Such transactions are called investment

transactions.

But, when the securities are bought with the sole object of selling them in future at

higher prices or these are sold now with the intention of buying at a lower price in

future, are called speculation transactions. The main objective of such transactions is

to take advantage of price differential at different times. The stock exchange also

provides for settlement of such transactions even by receiving or paying, as the case

may be, just the difference in prices. However, nowadays stock exchanges have a

system of rolling settlement. Such facility is limited only to transactions of purchase

and sale made on the same day, as no carry forward is allowed.

Though speculation and investment are different in some respects, in practice it is

difficult to say who is a genuine investor and who is a pure speculator. Sometimes

even a person who has purchased the shares as a long-term investment may suddenly

decide to sell to reap the benefit if the price of the share goes up too high or do it to

avoid heavy loss if the prices starts declining steeply. But he cannot be called a

speculator because his basic intention has been to invest. It is only when a person‘s

basic intention is to take advantage of a change in prices, and not to invest, then the

transaction may be termed as speculation.

In strict technical terms, however, the transaction is regarded as speculative only if it

is settled by receiving or paying the difference in prices without involving the

53
delivery of securities. It is so because, in practice, it is quite difficult to ascertain the

intention. Some people regard speculation as nothing but gambling and consider it as

an evil. But it is not true because while speculation is based on foresight and hard

calculation, gambling is a kind of blind and reckless activity involving high degree of

chance element. Not only that, speculation is a legal activity duly recognised as a

prerequisite for the success of stock exchange operations while gambling is regarded

as an evil and a punishable activity.

However, reckless speculation may take the form of gambling and should be avoided.

STOCK EXCHANGES IN INDIA

The first organised stock exchange in India was started in Mumbai known as Bombay

Stock Exchange (BSE). It was followed by Ahmedabad Stock Exchange in 1894 and

Kolkata Stock Exchange in 1908. The number of stock exchanges in India went up to

7 by 1939 and it increased to 21 by 1945 on account of heavy speculation activity

during Second World War. A number of unorganised stock exchanges also functioned

in the country without any formal set-up and were known as kerb market. The

Security Contracts (Regulation) Act was passed in 1956 for recognition and

regulation of Stock Exchanges in India. At present we have 23 stock exchanges in the

country. Of these, the most prominent stock exchange that came up is National Stock

Exchange (NSE). It is also based in Mumbai and was promoted by the leading

financial institutions in India. It was incorporated in 1992 and commenced operations

in 1994. This stock exchange has a corporate structure, fully automated screen-based

trading and nation-wide coverage.

Another stock exchange that needs special mention is Over the Counter Exchange of

India (OTCEI). It was also promoted by the financial institutions like UTI, ICICI,

54
IDBI, IFCI, LIC etc. in September 1992 specially to cater to small and medium sized

companies with equity capital of more than Rs.30 Lakhs and less than Rs.25 Crores. It

helps entrepreneurs in raising finances for their new projects in a cost effective

manner. It provides for nationwide online ring less trading with 20 plus

representative offices in all major cities of the country. On this stock exchange,

securities of those companies can be traded which are exclusively listed on OTCEI

only. In addition, certain shares and debentures listed with other stock exchanges in

India and the units of UTI and other mutual funds are also allowed to be traded on

OTCEI as permitted securities. It has been noticed that, of late, the turnover at this

stock exchange has considerably reduced and steps have been afoot to revitalise it. In

fact, as of now, BSE and NSE are the two Stock Exchanges, which enjoy nation-wide

coverage and handle most of the business in securities in the country.

REGULATIONS OF STOCK EXCHANGES

As indicated earlier, the stock exchanges suffer from certain limitations and require

strict control over their activities in order to ensure safety in dealings thereon. Hence,

as early as 1956, the Securities Contracts (Regulation) Act was passed which

provided for recognition of stock exchanges by the central Government. It has also the

provision of framing of proper bylaws by every stock exchange for regulation and

control of their functioning subject to the approval by the Government. All stock

exchanges are required submit information relating to its affairs as required by the

Government from time to time. The Government was given wide powers relating to

listing of securities, make or amend bylaws, withdraw recognition to, or supersede the

governing bodies of stock exchange in extraordinary/abnormal situations. Under the

Act, the Government promulgated the Securities Regulations (Rules) 1957, which

55
provided inter alia for the procedures to be followed for recognition of the stock

exchanges, submission of periodical returns and annual returns by recognised stock

exchanges, inquiry into the affairs of recognised stock exchanges and their members,

and requirements for listing of securities.

ROLE OF SEBI

As part of economic reforms programme started in June 1991, the Government of

India initiated several capital market reforms, which included the abolition of the

office of the Controller of Capital Issues (CCI) and granting statutory recognition to

Securities Exchange Board of India (SEBI) in 1992 for:

(a) Protecting the interest of investors in securities;

(b) Promoting the development of securities market;

(c) Regulating the securities market; and

(d) Matters connected there with or incidental thereto.

SEBI has been vested with necessary powers concerning various aspects of capital

market such as:

 Regulating the business in stock exchanges and any other securities market;

 Registering and regulating the working of various intermediaries and mutual

funds;

 Promoting and regulating self regulatory organisations;

 Promoting investors education and training of intermediaries;

 Prohibiting insider trading and unfair trade practices;

 Regulating substantial acquisition of shares and takeover of companies;

56
As part of its efforts to protect investors‘ interests, SEBI has initiated many primary

market reforms, which include improved disclosure standards in public issue

documents, introduction of prudential norms and simplification of issue procedures.

Companies are now required to disclose all material facts and risk factors associated

with their projects while making public issue. All issue documents are to be vetted by

SEBI to ensure that the disclosures are not only adequate but also authentic and

accurate. SEBI has also introduced a code of advertisement for public issues for

ensuring fair and truthful disclosures.

Merchant bankers and all mutual funds including UTI have been brought under the

regulatory framework of SEBI. A code of conduct has been issued specifying a high

degree of responsibility towards investors in respect of pricing and premium fixation

of issues. To reduce cost of issue, underwriting of issues has been made optional

subject to the condition that the issue is not under-subscribed. In case the issue is

under-subscribed i.e., it was not able to collect 90% of the amount offered to the

public, the entire amount would be refunded to the investors. The practice of

preferential allotment of shares to promoters at prices unrelated to the prevailing

market prices has been stopped and private placements have been made more

restrictive. All primary issues have now to be made through depository mode. The

initial public offers (IPOs) can go for book building for which the price band and

issue size have to be disclosed. Companies with dematerialized shares can alter the

par value as and when they so desire.

As for measures in the secondary market, it should be noted that all statutory powers

to regulate stock exchanges under the Securities Contracts (Regulation) Act have now

been vested with SEBI through the passage of securities law (Amendment) Act in

1995. SEBI has duly notified rules and a code of conduct to regulate the activities of

57
intermediaries in the securities market and then registration in the securities market

and then registration with SEBI is made compulsory. It has issued guidelines for

composition of the governing bodies of stock exchanges so as to include more public

representatives. Corporate membership has also been introduced at the stock

exchanges. It has notified the regulations on insider trading to protect and preserve the

integrity of stock markets and issued guidelines for mergers and acquisitions. SEBI

has constantly reviewed the traditional trading systems of Indian stock exchanges and

tried to simplify the procedure, achieve transparency in transactions and reduce their

costs.

EMERGENCE OF FINANCIAL SERVICES INDUSTRY IN INDIA

Services sector industry has started gaining large scale momentum since the process

of liberalization in 1991.Prior to its contribution to GDP was around 40 percent, but

since 1992 it has been grown rapidly and reached a value of 51 percent GDP.

Contribution of service sector to GNP in advanced counties like USA is as high as

75%.In India many innovative financial products and services like credit cards,

ATMs, consumer finance, venture financing have been emerging since 1980s And

these financial services have become an integral component of Indian financial

system. This integration is largely attributed to the liberalization of economic policies

and deregulation that led to economic changes, development and contemporary

evolution of capital market and financial disintermediation.

The far reaching changes in the Indian economy since liberalization in the early 1990s

have had a deep impact on the Indian financial sector. The financial sector has gone

through a complex and sometimes painful process of restructuring, capitalizing on

new opportunities as well as responding to new Challenges. During the last decade,

58
there has been a broadening and deepening of financial markets. Several new

instruments and products have been introduced.

Existing sectors have been opened to new private players. This has given a strong

impetus to the development and modernization of the financial sector. New players

have adopted international best practices and modern technology to offer a more

sophisticated range of financial services to corporate and retail customers. This

process has clearly improved the range of financial services and service providers

available to Indian customers. The entry of new players has led to even existing

players upgrading their product offerings and distribution channels. This continued to

be witnessed in 2002-03 across key sectors like commercial banking and insurance,

where private players achieved significant success.

These changes have taken place against a wider systemic backdrop of easing of

controls on interest rates and their realignment with market rates, gradual reduction in

resource pre-emption by the government, relaxation of stipulations on concessional

lending and removal of access to concessional resources for financial institutions.

Over the past few years, the sector has also witnessed substantial progress in

regulation and supervision. Financial intermediaries have gradually moved to

internationally acceptable norms for income recognition, asset classification, and

provisioning and capital adequacy.

This process continued in 2002-03, with RBI announcing guidelines for risk-based

supervision and consolidated supervision. While maintaining its soft interest rate

stance, RBI cautioned banks against taking large interest rate risks, and advocated a

move towards a floating rate interest rate structure. The past decade was also an

eventful one for the Indian capital markets. Reforms, particularly the establishment

and empowerment of securities and Exchange Board of India (SEBI), market-

59
determined prices and allocation of resources, screen-based nation-wide trading,

dematerialization and electronic transfer of securities, rolling settlement and

derivatives trading have greatly improved both the regulatory framework and

efficiency of trading and settlement.

On account of the subdued global economic conditions and the impact on the Indian

economy of the drought conditions prevailing in the country, 2002-03 was a subdued

year for equity markets. Despite this, the National Stock Exchange (NSE) and the

Bombay Stock Exchange (BSE) ranked third and sixth respectively among all

exchanges in the world with respect to the number of transactions. The year also

witnessed the grant of approval for setting up of a multi commodity exchange for

trading of various commodities.

The US$ 28 billion Indian financial sector has grown at around 15 per cent and has

displayed stability for the last several years, even when other markets in the Asian

region were facing a crisis. This stability was ensured through the resilience that has

been built into the system over time. The financial sector has kept pace with the

growing needs of corporate and other borrowers. Banks, capital market participants

and insurers have developed a wide range of products and services to suit varied

customer requirements. The Reserve Bank of India (RBI) has successfully introduced

a regime where interest rates are more in line with market forces.

Financial institutions have combated the reduction in interest rates and pressure on

their margins by constantly innovating and targeting attractive consumer segments.

Banks and trade financiers have also played an important role in promoting foreign

trade of the country. Here we will study the three industries with respect to India.

60
SCOPE OF
STUDY

61
 SCOPE OF STUDY

Based on previous research in related areas, a questionnaire was constructed to

measure the investment pattern of individuals on the basis of demographic

characteristics and the risk tolerance of investors was also calculated. It helped us to

understand how an Indian investor behaves while investing. This study will be helpful

to mutual fund companies and other investment companies to understand individual

behaviour of investors so that they could build suitable investment options for them

individually. Also this study will help the investor to decide the areas where they

could invest.

62
 NEED FOR STUDY

Investing money is a crucial and deciding the avenues where to invest needs a lot of

planning. In India people are more conservative and hence prefer investments that are

less risky. Similarly there are other demographic factors like age, income level,

gender which affect their decision. As the availability of financial products increase,

perception of investors towards such avenues changes over a period of time. It

becomes important for a marketer to understand the perception of investors towards

investment avenues to successfully pitch the product. Marketing is known as meeting

needs profitably. If the marketer is able to understand the mindset of investor towards

a product then he/she will be in a position to market the product. This report attempts

to study the behavior of Indian investors while making an investment. Here we also

look upon other factors that influence them while making investment decisions.

Innovations in financial products like derivatives, unit linked insurance products, fund

of funds likewise are not easily understood by the investor. Hence the need for this

study arises to understand what exactly an Indian investor thinks before investing

his/her money and how much risk he/she is willing to take. This report gives the

marketer and other peers to successfully market the financial products which are more

popular, as it gives information regarding the perception of investors towards

investment avenues in India.

63
 OBJECTIVES
OF THE STUDY

64
 OBJECTIVES
Primary Objectives

 To study the preference of salaried class on various investment options available in

Lucknow City

 To study the investment characteristics of salaried class investors on various

investment options available in Lucknow City

 To study the objectives of investment plan of an investors

Secondary Objectives

 To know the preferred investment avenues of investors

 To identify the preferred sources of information influencing investment decisions

 To understand the risk tolerance level of the investors and suggest a suitable portfolio

65
 RESEARCH
METHODOLOGY

66
 RESEARCH METHODOLOGY

Research methodology is a way to systematically represent research on any problem.

It tends taken by the researcher in studying the research problem along with the logic

behind them.

“Research design is the plan structure and strategy if investigation conceived so

as obtain answers to research question and to control variance”

A research design is the master plan or model for the conduct of formal investigation

and survey. It is a specification of methods and procedures for acquiring the

information needs for solving the problem. It decides the source of information and

methods for gathering the data. A questionnaire and other forms are tested to use the

collection of data.

In the research study there is no perfect study to solve the problem. The research

design has broadly three categories as follow.

RESEARCH
DESIGN

Exploratory Descriptive Casual

Research Research Research

I have used Descriptive Research

Design for research purpose.

67
 1. Exploratory Research

2. Descriptive Research

3. Casual Research

DESCRIPTIVE RESEARCH:

Descriptive research, also known as statistical research. It describes data and

characteristics about the population or phenomenon being studied.

Descriptive research answers the questions who, what, where, when and how. This

study is complex and determines high degree scientific skill to study the problem.

The description is used for frequencies, averages and other statistical calculations.

Often the best approach, prior to writing descriptive research, is to conduct a survey

investigation. Qualitative research often has the aim of description and researchers

may follow-up with examinations of why the observations exist and what the

implications of the findings are.

In short descriptive research deals with everything that can be counted and studied.

In this report, I have used this Descriptive Research Design for conducting

survey on “Preference of Salaried Class on Various Investment Options

Available To Them”

DATA COLLECTION METHOD:

Data collection usually takes place early on in an improvement project, and is often

formalized through a data collection plan which often contains the following data

collection methods.

The source of data collection method is as follows.

 Primary Data

 Secondary Data

68
 Primary Data:

Primary data means data collected directly from first-hand experience. Means data

collected for the first time by any researcher for any research use. There are many

methods of collecting primary data and the main methods include:

 Methods of collecting the primary data are:

 Questionnaire method

 Interviews method

 Focus group interviews

 Observation method

 Case-studies method

 Diaries method

I have used Questionnaire method for the Primary data collection for the study.

 Secondary Data:

Secondary data means data which are collected by any one for a particular research

purpose and which are used by others for different purpose.

I have also used the secondary data for the study like some company resources

like broachers, websites etc.

Sampling Plan:

“Sampling is the process to analyze the whole population by analyzing a part of

it.”

The effectiveness of the report depends on the sample size selected from the

population.

69
 Sampling Unit:

Here, target population is decided who are the actual and potential investors, each

sample has the chance to be selected on an equal basis & this research has been

conducted through surveying the whole of the Investment Avenues of Lucknow city.

 Sample Size:

I used sample size is 100.

SAMPLING FRAME:

Sampling frame is the actual set of units from which a sample has been drawn. In

sampling frame, I have used simple random sampling method for conducting

survey. In a simple random sample ('SRS') all units from the sampling frame have an

equal chance to be drawn and to occur in the sample.

Here, I have used sampling frame as an actual and potential investors from whole of

the Investment Avenues of Lucknow city and each sample has the chance to be

selected on an equal basis because I have used simple random sampling method for

surveying purpose.

DATA ANALYSIS TOOLS:

 Microsoft Office is used for data typing formatting and analyzing the data.

70
LIMITATIONS

71
 LIMITATIONS

1. Sample selected may not represent whole population, as sample size selected is

very small in proportion to population due to time and cost constraints.

2. Even many of the respondents may give bias answer.

3. The sample size was restricted to100 Salaried class Investors.

4. Resources like time and cost was a constraint.

5. The study was conducted in Lucknow. So the findings and conclusion drawn are

applicable to Lucknow only.

6. Respondent may be hesitant to provide their investment details.

7. Behavior of investors doesn‘t remain same for long time.

8. Time for the study is limited.

72
 DATA
ANALYSIS
&
INTERPRETATION

73
 Data Analysis and Interpretation

Que. 1. Do you investing in any Investment Avenues?

Particulars Investing Percentage

Yes 68 68%
No 32 32%
Total 100 100%

Investing In any Investment Avenues

( In Percentage)

Yes
36%

No

68%

Interpretation:
According to the above chart we can see that:
68% of investors (68) are investing in Investment Avenues.

While 36% of investors (36) are not investing in Investment Avenues.

74
Que. 2. If you want to invest, which investment option will provide the
best returns?

Investment option Investors in Percentage

Equity Share 53%

IPO 18%
Mutual Funds 8%
Bonds 7%
Fixed Deposits 4%
Other 10%

Investors are investing in

various
10%
Investment option
4% (Investors in Percentage) Equity Share
7% IPO
Mutual Funds
8% Bonds
53%
Fixed Deposits
Other

18%

Interpretation:
According to the previous chart:
According to 53% of investors, Equity Share will provide the best returns in
compare to other investment option.
18% of investors believe that IPO (Primary Market) will provide the best
returns.
8% of investors think that Mutual Funds will provide the best returns.
7% of investors believe that Bonds Market will provide the best returns.
4% of investors trust that Fixed Deposits will provide the best returns.
According to 10% of investors, other investment option will provide the
best returns.
According to them other investment options are:
 Commodity Market
 Insurance
 Government Securities etc.

75
 Que.3. which factors motivate you for investing in any Investment Avenues?

Motivation Factors Investors in Percentage

Return 49%
Liquidity 26%
Safety 7%
Capital Appreciation 17%
Other 1%

Motivating factors for Investors

to invest in any Investment Avenues
5% (Investors in Percentage)
16%
Return
6% 48%
Liquidity
Safety
Capital Appreciation
25%
Other

Interpretation:
According to the Previous Figure:
49% of investors are motivated by Return to invest in Investment Avenues.
26% of investors are motivated by Liquidity to invest in Investment
Avenues.
6% of investors are motivated by Safety to invest in Investment Avenues.
16% of investors are motivated by Capital Appreciation to invest in
Investment Avenues.
While 5% of investors are motivated by other factors like-Investment,
Profit etc. to invest in Investment Avenues.

76
Que. 4. How much percentage of your income you invest in Investment
Avenues?
Percentage of Income Investors in Percentage

Less than 5% 23%

5%-10% 45%
10%-15% 17%
15%-20% 7%
20%- 25% 5%
More than 25% 3%

Percentage of income investors are

investing in any Investment Avenues
(Investors in Percentage)
5% 3%
7% 23%
Less than 5%
5%-10%
17%
10%-15%
15%-20%
20%- 25%
More than 25%

45%

Interpretation:
According to the Previous Figure:
23% of the investors are investing Less than 5% of their income in Investment
Avenues.
45% of the investors are investing 5%-10% of their income in Investment Avenues.
17% of the investors are investing 10%-15% of their income in Investment
Avenues.
7% of the investors are investing 15%- 20% of their income in Investment Avenues.
5% of the investors are investing 20%-25% of their income in Investment Avenues.
While 3% of the investors are investing More than 25% of their income in
Investment Avenues.

77
 Que. 5. How do you trade in Investment Avenues?
Types of Trade Investors in Percentage

Intraday 13%
Delivery 31%
Speculation 26%
Arbitragers 17%
Hedging 11%
Other 2%

Investors are Trade in

Equity Market
(Investors
2% in Percentage)
11% 13%
Intraday

Delivery

Speculation
17%
Arbitragers

31% Hedging

Other

26%

Interpretation:
According to the Previous Figure:
13% of the investors are doing Intraday trading in Investment Avenues.
“Intraday Trading is trading for that one day only. Means any securities are
purchase & sell ―within the day.”

31% of the investors are investing in Investment Avenues as a Delivery base

Trading.
“Delivery based trading is normally considered as a safer approach for trading in
shares when compared to day trading. Delivery based trading involves buying shares
on a market day and selling them only after receiving the delivery of those shares in
demat account.”

26% of the investors are trading in Investment Avenues as a Speculator.

78
 “Speculators are those classes of investors who willingly take higher-than-
average risk in return for a higher-than-average profit potential in future.
Speculators aim primarily at quick profit from a short-term acquisition of
assets.”

17% of the investors are Arbitragers in Investment Avenues.

“Arbitrager means who purchases securities in one market for immediate
resale in another in the hope of profiting from the price differential”

11% of the investors are trading in Investment Avenues as Hedgers.

“Hedging means reducing or controlling risk. Hedgers wish to eliminate or
reduce the price risk to which they are already exposed.”

While 2% of the investors are trade in Investment Avenues for Other Purpose.

79
Que.6. What is the time horizon for investing in Investment Avenues?
Time Horizon Investors in Percentage

Less than 1 Months 14%

1 to 3 Months 28%
3 to 6 Months 15%
6 to 12 Months 18%
More than 12 Months 25%

Investors Time Horizon for

investing in Investment Avenues
(Investors in Percentage)
30% 28%
25%
25%

20% 18%
15%
15% 14%

10%

5%

0%
Less than 1 1 to 3 Months 3 to 6 Months 6 to 12 Months More than 12
Months Months

Interpretation:
According to the Previous Figure:

14% of investors invest in Investment Avenues for Less than 1 Months.

28% of investors invest in Investment Avenues for the period of

1 to 3 Months.

15% of investor’s time horizon for in Investment Avenues is 3 to 6 Months.

18% of investor’s time horizon for in Investment Avenues is 6 to 12 Months.

25% of investors invest in Investment Avenues for more than 12 Months.

80
Que.7. What is the rate of return expected by you from Investment Avenues
in a year?
Rate of Return Investors in Percentage
5% – 10 % 12%
10% – 15 % 18%
15% – 20% 32%
20% – 25% 26%
25% –30% 8%
30% and above 4%

4%
8% 12%
Rate of Return
5% – 10 %

10% – 15 %
18%
15% – 20%
26%
20% – 25%

25% –30%

30% and above

32%

Interpretation:
According to the above Figure:
12% of investors are expects 5%-10% return from Investment Avenues.
18% of investors are expects 10%-15% return from Investment Avenues.
32% of investors are expects 15%-20% return from Investment Avenues.
26% of investors are expects 20%-25% return from Investment Avenues.
Here, above two cases investors are more expects from Investment
Avenues.
8% of investors are expects 25%-30% return from Investment Avenues.
While 4% of investors are expects more than 30% return from Investment
Avenues.

81
Que.8. Are you satisfied with the current performance of the Equity Market in
terms of expected return?

Rate of Return No. of Investors Percentage

Fully Satisfied 17 17%

Satisfied 42 42%
Neutral 28 28%
Unsatisfied 10 10%
Fully Unsatisfied 3 3%
Total 100 100%

Investors satisfaction level

From Investment Avenues
(Investors in Numers)
80 73
70
60
49
50
40
30
30
18
20
10 5
0
Fully Satisfied Satisfied Neutral Unsatisfied Fully Unsatisfied

Interpretation:
According to the Previous Figure:
17 investors are Fully Satisfied from current performance of
Investment Avenues.
42 investors are Satisfied from Investment Avenues.
28 investors are Neutral with current performance of Investment Avenues.
10 investors are Unsatisfied from Investment Avenues.
While 3 investors are Fully Unsatisfied from Investment Avenues.

82
Que. 9. Who advise you to enter in any Investment Avenues?
Particulars Investors in Percentage
Friends 28%
Relatives 12%
Advisers 25%
Media 17%
Research Report 10%
Magazines 5%
Other 3%

Investor's Referance for enter into

Investment Avenues
(Investors in Percentage)
5% 3%
Friends
10% 28% Relatives

Advisers

Media
17%
Research Report

Magazines
12%
Other
25%

Interpretation:
According to the Above Figure:
Friends motivate 28% of the investors to enter into the Investment Avenues.
Relatives motivate 12% of the investors to enter into the Investment
Avenues.
25% of investors enter in Investment Avenues by the Advise of
Financial Advisor.
Media motivate 17% of the investors to enter into the Investment Avenues.
Magazines motivate 10% of the investors to enter into the Investment
Avenues.
5% of investors are motivates by Reading Magazines to enter in Investment
Avenues.
While other factors like self-Study, their own View etc. motivate 3%
of the investors to enter into the Investment Avenues.

83
Que.10. Which Factors do you consider most important while selecting the
Sectors?

Particulars Percentage

Market Trend 29%

Profitability 23%
Economic Condition 14%
Industry Condition 16%
Existence of well established Companies 12%
under Sectors
Government Policy 5%
Any Other 1%

Factors Consider by Investors

while selecting sector
(Investors in Percentage)
5% 1% Market Trend
12%
29% Profitability

Economic Condition

Industry Condition
16%
Existence of well established
Companies under Sectors
Government Policy

14% 23% Any Other

Interpretation:
According to the Previous Figure:

29% of the investors have considered Market Trend as a most important

factor while selecting the Sector.

23% of the investors have considered Profitability as a most important

factor while selecting the Sector.

14% of the investors have considered Economic Condition as a most

important factor while selecting the Sector.

84
16% of the investors have considered Industry Condition as a most
important factor while selecting the Sector.

12% of the investors have considered Existence of well established

Companies under Sectors as a most important factor while selecting the
Sector.

5% of the investors have considered Government Policy as a important

factor while selecting the Sector.

While 1% of the investors have considers Other Factor like

Global Position of the company and etc. important factor while selecting the
Sector.

85
 Que.11. Which Sectors do you prefer the most?
(Give 1 to 5 Orders in given boxes)
Here, I have decided to study only these five sectors.

Oil & Gas Sector

Banking Sector
IT Sector
Infrastructure Sector
Automobile Sector

Orders(Ranks) Given by Respondents

Sectors
1 2 3 4 5 Total

Oil & Gas Sector 25 17 28 12 18 100

Banking Sector 15 14 30 24 17 100

IT Sector 11 23 27 20 19 100

Infrastructure Sector 21 18 19 16 26 100

Automobile Sector 20 17 16 30 17 100

Total 92 89 120 102 97 500

100%
90%
80%
70%
60%
50%
40% 5
30%
20%
10% 4
0%
3
2
1

86
 Interpretation:
On the basis of Previous Figures:
Oil & Gas Sector:
 25 Investors gave 1st rank, 17 Investors gave 2nd rank, 28 investors gave 3rd
Rank, 12 Investors gave 4th Rank, & 18 Investors gave 5th Rank to this sector.
 Here, over all 25 investors have selected oil & gas sector as a First Rank in
comparison with First Rank of all sectors.

IT Sector:
 11 Investors gave 1st rank, 23 Investors gave 2nd rank, 27 investors gave 3rd
Rank, 20 Investors gave 4th Rank, & 19 Investors gave 5th Rank to this sector.
 Here, over all 23 investors have selected IT sector as a 2nd Rank in
comparison with 2nd Rank of all sectors.

Banking Sector:
 15 Investors gave 1st rank, 14 Investors gave 2nd rank, 30 investors gave 3rd
Rank, 24 Investors gave 4th Rank, & 17 Investors gave 5th Rank to
this sector.
 Here, over all 30 investors have selected Banking sector as a 3nd Rank in
comparison with 3nd Rank of all sectors.

Automobile Sector:
 20 Investors gave 1st rank, 17 Investors gave 2nd rank, 16 investors gave 3rd
Rank, 30 Investors gave 4th Rank, & 17 Investors gave 5th Rank to this sector.
 Here, over all 30 investors have selected Automobile sector as a 4th Rank in
comparison with 4th Rank of all sectors.

Infrastructure Sector:
 21 Investors gave 1st rank, 18 Investors gave 2nd rank, 16 investors gave 3rd
Rank, 16 Investors gave 4th Rank, & 26 Investors gave 5th Rank to
this sector.
 Here, over all 26 investors have selected Infrastructure sector as a
5nd Rank in comparison with 5nd Rank of all sectors.

87
Que. 12. Mention the most important factors for selecting a company of your
choice.

Factors affect for Investors in

selecting company Percentage
Earning Per Share 19%
Dividend 17%
Broker‘s advise 15%
Market capitalization 7%
Performance of company 16%
P.E. Ratio 24%
Other 2%

Factors affect to Investors for for

selecting company
2%
(Investors
19% in Percentage)
Earning Per Share
24%
Dividend
Broker’s advise
Market capitalization
17%
Performance of company
16% P.E. Ratio
Other
7% 15%

Interpretation:
On the basis of above Figures:
19% of the investors have considered Earning Per Share as a most important
factor to select a Company under the sector of their Choice.
17% of the investors have considered Dividend as a most important factor to
select a Company under the sector of their Choice.
While 15% of the investors are select a company under the sector of their choice
on the basis of Broker’s advises.
7% of the investors have considered Market capitalization by the company as a
important factor to select a company under the sector.
16% of the investors have considered as a Performance of company most
important factor to select a company under the sector of their choice.
24% of the investors have considered Price Earnings Ratio as a most important
factor select a company under the sector of their choice.
At last 2% of the investors have considered Other Factors like
Suggestion from reference group, External advisors, Stakeholders, Growth of
Company, Market Trend, Profitability and their own view etc. to select a
company under the sector.

88
FINDINGS

89
 FINDINGS
As the main objective of the research is to find out the “preference of salaried

class on various investment Options” in Lucknow city. So, I have questionnaire

method on 100 sample size for research and found out the views of salaried

investors on various parameters.

 From the research I found out that 68% of salaried investors are investing in

Investment Avenues. While 36% of salaried investors are not investing in

Investment Avenues as per my sample size 100.

 I also found out that, 53% of salaried investors believe that equity share is

better investment option and will provide the best returns in compare to other

investment option.

 I found out that the 49% of salaried investors who are dealing in any Investment

Avenues they are motivated by return factor and 26% of salaried investors are

motivated by Liquidity and some salaried investors also consider capital

appreciation and safety factor while investing in Investment Avenues in various

sectors.

 I also found out that the 45% of the salaried investors are ready or interested to

invest their 5%-10% of income in any Investment Avenues. It means many

salaried investors trust on the growth of Investment Avenues as they are ready to

spend major proportion of their income.

 Going ahead I found out that very few salaried investors want to deal in

intraday trading which shows that they consider safety factors while investing.

31% of the salaried investors are investing in Investment Avenues as a Delivery

base Trading and 26% of the salaried investors are trading in Investment

90
 Avenues as a Speculator. Means 26% of salaried investors who willingly take

higher-than-average risk in return for a higher-than-average profit potential.

 28% of salaried investors invest in Investment Avenues for the period of 1 to 3

Months and the same proportion of salaried investors are invest for long period

more than year.

 I also found out that 32% of salaried investors are expects 15%-20% return

from any Investment Avenues and 26% of salaried investors are expects 20%-

25% return from any Investment Avenues. Here, salaried investors are more

expects from any Investment Avenues.

 42% of salaried investors are satisfied with the current performance of the

Investment Avenues in terms of expected return, while 28% of salaried investors

are Neutral about Investment Avenues.

 I found that most of investors are motivated by their friends to enter in the

Investment Avenues and some investors are motivated by Advisers, Media,

Research Report and other factors like and self study of current scenario of

Investment Avenues.

 Other thing I found out that 29% of the investors have considered market trend

and 23% of the investors have considered Profitability as a most important

factor as a most important factor while selecting the Sector. There are also other

factors like - government policy, industry condition, and economic condition

also important factor while selecting the Sector

 Then I found that 44 investors selected Oil & gas sector as a First Rank (in

comparison with First Rank of all sectors)

1. 23 investors have selected IT sector as a 2nd Rank.

2. 30 investors have selected Banking sector as a 3nd Rank

91
 3. 30 investors have selected Automobile sector as a 4th Rank

4. 26 investors selected Infrastructure sector as a 5nd Rank

 I also found out that 24% of the investors have considered Price Earnings Ratio,

19% of the investors have considered Earning per Share and 17% of the

investors have considered Dividend as a most important factor while selecting a

company from these selected sectors. Investors also consider other factors like -

Suggestion from reference group, External advisors, Stakeholders, Growth of

Company, Market Trend, Profitability and their own view etc. are as an

important factor while selecting a company from these selected sectors.

92
RECOMMENDATIONS

93
 RECOMMENDATIONS
 Prefer investment for long term investment strategy that provides you

moderate return with liquidity.

 Investors should not invest in only Investment Avenues but, also invest in

other Safe Securities Like- Fixed Deposits, Government Securities, Bonds,

Mutual fund and Insurance etc. which also provides moderate return.

For Example: One should prefer

o Equity – 50%

o Other Safe Securities – 50%

So, one can get moderate return with liquidity.

 Investors should invest money at lower level price and sale the stock at higher

price.

 Investors should select company on the basis of PE ratio, EPS, Current

Growth of Company and Market capitalization and many more. So,

investors can get higher return on their investment.

 Always invest extra money in stock market. Do not invest by taking loan

from banks or other resources.

94
CONCLUSION

95
 CONCLUSION

From the survey I found that major people are investing in various Investment

Avenues only due to Earn High Return and Hedge the Risk by investing their major

proportion of income in any Investment Avenues. Here, the most of people are trade

in Investment Avenues as a speculation and they are invests for one to three months.

Generally, the investors who are invest for long period more than year they are surely

beneficial in Investment Avenues. Majority of people are motivated by their friends &

medias advise to enter into any Investment Avenues. Majority people are expecting

something more from the Investment Avenues. So, finally some are satisfied and

some are not satisfy with Investment Avenues.

Major investors prefer the Oil & gas sector as a first rank on the basis of Market

trend, Profitability, industry condition and economic condition also important factor

while selecting the Sector and investors have also considered Price Earnings Ratio,

Earning per Share and Dividend as a most important factor while selecting a

company under these selected sectors.

96
BIBLIOGRAPHY

vi
 BIBLIOGRAPHY

 Abdisalam Ali Ibrahim Rustam Rahmatovich Vosilov (2008), ―Financial Risk

Tolerance: Differences Between Women and Men‖, Bachelor‘s Thesis, Fall

Semester 2008, Umeå School of Business, Umeå University.

 Ajmi Jasim (2008), ―Risk Tolerance of Individual Investors in an Emerging

Market‖, International Research Journal of Finance and Economics, No. 17, ISSN

1450-2887.

 Chitra K and Sreedevi V R (2011), ―Does personality Traits Influence the Choice

of Investment?‖, The Icfai University Journal of Behavioral Finance, Vol. 8, No.

2, pp. 47-57.

 Davar Yesh Pal and Gill Suveera (2009), ―Antecedents of Households‘

Investment Decision-Making process: A study of the Indian Households‖, South

Asian Journal of Management, Vol. 16, No. 4,pp. 44-75.

 Felton James, Gibson Bryan and Sanbonmatsu David (2003), ―Preference for Risk

in Investing as a Function of Trait Optimism and Gender‖, The Journal of

Behavioral Finance, Vol. 4, No. 1, pp. 33-40.

 Gupta L C, Gupta C P and Jain N (2001), ―Indian Households‘ Investment

Prefernces: A Survey‖, Society of Capital Market Research and Development,

Alankrit printers, New Delhi.

 Kahneman D and Riepe M W (1998), ―Aspects of Investor Psychology‖,

Journal of Portfolio Management, Vol. 24, No. 4, pp. 52-65.

 Nagpal Sushant and Bodla B S (2009), ―Impact of Investors‘ lifestyle on Their

Investment Pattern: An Empitical Study‖, The Icfai University Journal of

Behavioral Finance, Vol. 6, No. 2, pp. 28-51

vii
 Rajarajan V (2000), ―Investor‘s Lifestyles and Investment Characteristics‖,

Finance India, Vol. XIV, No. 2, pp. 465-478.

 Shapira Zur and Venezia Itzhak (2001), ―Patterns of Behaviour of

Professionally Managed and Independent Investors‖, Journal of Banking and

Finance, Vol. 25, No. 8, pp. 1573-1587.

 Singh Jaspal and Chander Subash (2004), ―An Empirical Analysis of

Perceptions of Investors towards Mutual Funds‖, Finance India, Vol. 18, No. 4,

pp. 1673-1692.

 Srivastava A (2007), ―An Analysis of Behavior of Investors in India‖, The Icfai

University Journal of Behavioral Finance, Vol. 4, No. 2, pp. 43-52.

 Terrence Hallahan, Robert Faff and Michael McKenzie (2003), Journal of

Multinational Financial Management, Vol. 13, Nos. 4-5, pp. 483-502.

 Verma M (2008), ―Wealth Management and Behavioral Finance: The effect

of Demographics and Personality on Investment Choice among Indian

Investors‖, The Icfai University Journal of Behavioral Finance, Vol. 5, No. 4,

pp. 31-57.

viii
ANNEXURE

ix
 QUESTIONNAIRE

1. Do you investing in Any Investment Avenues?

[ ] Yes [ ] No

2. If you want to invest, which investment option will provide the best
returns?

[ ] Equity Share [ ] IPO [ ] Mutual Funds

[ ] Bonds [ ] Fixed Deposits [ ] If any other
_________

3. Which factors motive you investing in Investment Avenues?

[ ] Return [ ] Liquidity [ ] Safety

[ ] Capital Appreciation [ ] If any other please specify _____________

4. How much percentage of your income you invest in Investment Avenues?

[ ] Less than 5% [ ] 5%-10% [ ] 10%-15%

[ ] 15%-20% [ ] 20%- 25% [ ] More than 25%

5. How do you trade in Investment Avenues?

[ ] Intraday [ ] Delivery [ ] Speculation [ ] Arbitragers

[ ] Hedging [ ] If any other please specify _____________
6. What is the time horizon for investing in Investment Avenues?

[ ] Less than 1 Months [ ] 1 to 3 Months [ ] 3 to 6

Months
[ ] 6 to 12 Months [ ] More than 12 Months

7. What is the rate of return expected by you from Investment Avenues in a

year?

[ ] 5% – 10 % [ ] 10% – 15 % [ ] 15% – 20%

[ ] 20% – 25% [ ] 25% –30% [ ] 30% above

x
8. Are you satisfied with the current performance of the Investment

Avenues in terms of expected return?

[ ] Fully Satisfied [ ] Satisfied [ ] Neutral

[ ] Unsatisfied [ ] Fully Unsatisfied

9. Who advise you to enter in Investment Avenues?

[ ] Friends [ ] Relatives [ ] Advisers [ ] Media

[ ] Research Report [ ] Magazines [ ] If any other ___________

10. Which Factors do you consider most important while selecting the

Sectors?

[ ] Market Trend [ ] Profitability [ ] Economic Condition

[ ] Industry Condition [ ] well established Companies under Sectors

[ ] Government Policy [ ] If any other please specify _____________

11. Which Sector do you prefer the most? (Give 1 to 5 Orders in given boxes)

Oil & Gas Sector Infrastructure Sector

Banking Sector Automobile Sector

IT Sector If any other please specify _____________

xi
12. Mention the most important factors for selecting a company of your

choice.

[ ] Earning Per Share [ ] Dividend [ ] Broker‘s advise [ ]

Market capitalization [ ] Performance of company [ ] P.E. Ratio [ ]

If any other _____________

13. If any Suggestion from your side, then please specify.

__________________________________________________________________
__________________________________________________________
-: Personal Information:-

Name: _______________________________________________
Address: _______________________________________________
_______________________________________________

E-mail ID: …………………………………..………………………………

Contact No.: …………………………………..

Gender [ ] Male [ ] Female

Age:

[ ] 21 TO 30 Years [ ] 31 TO 40 Years [ ] 41 TO 50 Years

[ ] 51 TO 60 Years

Occupation:
[ ] Business [ ] Service [ ] Employee

Income (Yearly):
[ ] Less than 100000 Rs. [ ] 100000 to 200000 Rs. [ ] 200000 to 300000 Rs.

[ ] 300000 to 400000 Rs. [ ] 400000 to 500000 Rs. [ ] Above 500000 Rs.

xii