TOPIC-

Comparative analysis of investment alternatives (fixed deposit,

mutual funds & post offices schemes)

SUBMITTED TO-

MS. NITIKA SEHGAL.

SUBMITTED BY-
DEEPAK SHARMA
S
(1901), B-38.
REG
NO.-10906112.
MBA
(193) LSM
Contents-

Investment

Mutual funds. (MF)

Post offices schemes

Fixed deposit (FD)

Comparative analysis of MF, FD & post offices schemes.

Strategies regarding age & income for personal finance planning.

Analysis the impact of the budget.

Conclusion.
Investment
Investment is a term with several closely-related meanings in business management, finance and
economics, related to saving or deferring consumption. An asset is usually purchased, or
equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it.
Literally, the word means the "action of putting something in to somewhere else."

In this assignment we include three types of investment

1- Mutual funds.

2- Post offices schemes.

3- Fixed deposit.

Mutual Funds

Mutual Funds are among the hottest favorites with all types of investors. Investing in mutual
funds ranks among one of the preferred ways of creating wealth over the long term. In fact,
mutual funds represent the hands-off approach to entering the equity market. There are a wide
variety of mutual funds that are viable investment avenues to meet a wide variety of financial
goals. This section explains the various aspects of Mutual Funds.

A Mutual Fund is a trust that pools together the savings of a number of investors who share a
common financial goal. The fund manager invests this pool of money in securities, ranging from
shares and debentures to money market instruments or in a mixture of equity and debt,
depending upon the objectives of the scheme.
 Benefits of mutual funds-

 Professional expertise: Fund managers are professionals who track the market on an on-
going basis. With their mix of professional qualification and market knowledge, they are
better placed than the average investor to understand the markets.

 Diversification: Since a Mutual Fund scheme invests in number of stocks and/or

debentures, the associated risks are greatly reduced.

 Relatively less expensive: When compared to direct investments in the capital market,
Mutual Funds cost less. This is due to savings in brokerage costs, dmat costs, depository
costs etc.

 Liquidity: Investments in Mutual Funds are completely liquid and can be redeemed at
their Net Assets Value-related price on any working day.

 Transparency: You will always have access to up-to-date information on the value of
your investment in addition to the complete portfolio of investments, the proportion
allocated to different assets and the fund manager’s investment strategy.

 Flexibility: Through features such as Systematic Investment Plans, Systematic

Withdrawal Plans and Dividend Investment Plans, you can systematically invest or
withdraw funds according to your needs and convenience.

 SEBI regulated market: All Mutual Funds are registered with SEBI and function within
the provisions and regulations that protect the interests of investors. AMFI is the
supervisory body of the Mutual Funds industry

Types of Funds -

There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your age,
financial position, risk tolerance and return expectation. Whether as the foundation of your
investment program or as a supplement, Mutual Fund schemes can help you meet your financial
goals. The different types of Mutual Funds are as follows:
• Diversified Equity Mutual Fund Scheme: A mutual fund scheme that achieves the
benefits of diversification by investing in the stocks of companies across a large number
of sectors. As a result, it minimizes the risk of exposure to a single company or sector.

• Index Funds-: These funds invest in the stocks of companies, which comprise major
indices such as the BSE Sensex or the S&P CNX Nifty in the same weight age as the
respective indices.

• Hybrid mutual fund-:In the hybrid category, balanced funds tend to stick to a relatively
fixed allocation of stocks and bonds. Actively managed asset allocation funds tend to
have portfolios with a mix of stocks and bonds that responds to market conditions as
perceived by the fund manager. Passively managed asset allocation, life-cycle and target-
date funds generally have a stock-bond mix that changes over a lifetime, moving
progressively from aggressive to more conservative structures.

• Monthly Income Plan Scheme: A mutual fund scheme which aims at providing regular
income (not necessarily monthly, don't get misled by the name) to the unit holder, usually
by way of dividend, with investments predominantly in debt securities (up to 95%) of
corporate and the government, to ensure regularity of returns, and having a smaller
component of equity investments (5% to 15%)to ensure higher return.

• Income schemes: Debt oriented schemes investing in fixed income securities such as
bonds, corporate debentures, Government securities and money market instruments.

• Floating-Rate Debt Fund :A fund comprising of bonds for which the interest rate is
adjusted periodically according to a predetermined formula, usually linked to an index.

• Gilt Funds - These funds invest exclusively in government securities.

• Balanced Funds: 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. They generally invest 40-60% in equity
and debt instruments.

• Fund of Funds: A Fund of Funds (FoF) is a mutual fund scheme that invests in other
mutual fund schemes. Just as fund invests in stocks or bonds on your behalf, a FoF
invests in other mutual fund schemes.

RETURN IN MUTUAL FUND

Advantage Particulars
S. No.
Mutual Funds invest in a well-diversified
Portfolio portfolio of securities which enables investor to
1.
Diversification hold a diversified investment portfolio (whether
the amount of investment is big or small).
Fund manager undergoes through various
Professional research works and has better investment
2.
Management management skills which ensure higher returns to
the investor than what he can manage on his own.
Investors acquire a diversified portfolio of
securities even with a small investment in a
3. Less Risk
Mutual Fund. The risk in a diversified portfolio is
lesser than investing in merely 2 or 3 securities.
Due to the economies of scale (benefits of larger
Low Transaction volumes), mutual funds pay lesser transaction
4.
Costs costs. These benefits are passed on to the
investors.
An investor may not be able to sell some of the
shares held by him very easily and quickly,
5. Liquidity
whereas units of a mutual fund are far more
liquid.
Mutual funds provide investors with various
schemes with different investment objectives.
Investors have the option of investing in a
6. Choice of Schemes scheme having a correlation between its
investment objectives and their own financial
goals. These schemes further have different
plans/options
7. Transparency Funds provide investors with updated
information pertaining to the markets and the
 schemes. All material facts are disclosed to
investors as required by the regulator.
Investors also benefit from the convenience and
flexibility offered by Mutual Funds. Investors can
switch their holdings from a debt scheme to an
8. Flexibility equity scheme and vice-versa. Option of
systematic (at regular intervals) investment and
withdrawal is also offered to the investors in
most open-end schemes.
Mutual Fund industry is part of a well-regulated
investment environment where the interests of
9. Safety the investors are protected by the regulator. All
funds are registered with SEBI and complete
transparency is forced.

RISK-
S. No. Disadvantage Particulars
Investor has to pay investment management
Costs Control Not in fees and fund distribution costs as a percentage
1. the Hands of an of the value of his investments (as long as he
Investor holds the units), irrespective of the performance
of the fund.
The portfolio of securities in which a fund
invests is a decision taken by the fund manager.
No Customized Investors have no right to interfere in the
2.
Portfolios decision making process of a fund manager,
which some investors find as a constraint in
achieving their financial objectives.
Many investors find it difficult to select one
option from the plethora of
Difficulty in Selecting
funds/schemes/plans available. For this, they
3. a Suitable Fund
may have to take advice from financial
Scheme
planners in order to invest in the right fund to
achieve their objectives.

Risk in mutual funds-

 Interest Rate Risk: The risk borne by fixed-interest securities, and by borrowers with
floating rate loans, when interest rates fluctuate. When interest rates rise, the market
value of fixed-interest securities declines and vice versa.

 Credit Risk: Credit risk involves the loss arising due to a customer’s or counterparty’s
inability or unwillingness to meet commitments in relation to lending, trading, hedging,
settlement and other financial transactions.

 Capital Market Risk : Capital Market Risk is the risk arising due to changes in the
Stock Market conditions.

 Call Risk. The possibility that falling interest rates will cause a bond issuer to redeem—
or call—its high-yielding bond before the bond's maturity date.
 Country Risk. The possibility that political events (a war, national elections), financial
problems (rising inflation, government default), or natural disasters (an earthquake, a
poor harvest) will weaken a country's economy and cause investments in that country to
decline.
 Credit Risk. The possibility that a bond issuer will fail to repay interest and principal in
a timely manner. Also called default risk.
 Currency Risk. The possibility that returns could be reduced for Americans investing in
foreign securities because of a rise in the value of the U.S. dollar against foreign
currencies. Also called exchange-rate risk.
 Income Risk. The possibility that a fixed-income fund's dividends will decline as a result
of falling overall interest rates.
 Industry Risk. The possibility that a group of stocks in a single industry will decline in
price due to developments in that industry.
 Inflation Risk. The possibility that increases in the cost of living will reduce or eliminate
a fund's real inflation-adjusted returns.
 Interest Rate Risk. The possibility that a bond fund will decline in value because of an
increase in interest rates.
 Manager Risk. The possibility that an actively managed mutual fund's investment
adviser will fail to execute the fund's investment strategy effectively resulting in the
failure of stated objectives.
 Market Risk. The possibility that stock fund or bond fund prices overall will decline
over short or even extended periods. Stock and bond markets tend to move in cycles, with
periods when prices rise and other periods when prices fall.
 Principal Risk. The possibility that an investment will go down in value, or "lose
money," from the original or invested amount.
Maturity in mutual Fund

Depending upon the maturity period a Mutual Fund scheme can be classified into open-ended
scheme and close-ended scheme.
Open-ended Fund/ Scheme
An open-ended fund or scheme is one that is available for subscription and repurchase on a
continuous basis. These schemes do not have a fixed maturity period. Investors can
conveniently buy and sell units at Net Asset Value (NAV) related prices that are declared on a
daily basis. The key feature of open-end schemes is liquidity.

Close-ended Fund/ Scheme

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open
for subscription only during a specified period at the time of launch of the scheme. Investors
can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell
the units of the scheme on the stock exchanges where the units are listed. In order to provide an
exit route to the investors, some close-ended funds give an option of selling back the units to the
mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that
at least one of the two exit routes is provided to the investor i.e. either repurchase facility or
through listing on stock exchanges. These mutual funds schemes disclose NAV generally on
weekly basis.

Post offices schemes-

Indian Post offers several Savings Schemes which are safe, (earlier tax rebates, now are
interests earned in these schemes are taxed under the income head of Income from Other
Sources) and relatively more interest rates than bank deposits.

Investments in Post Office Schemes

- These schemes are offered by the Government of India.

- Safe, secure and risk-free investment options.
- No Tax Deduction at Source (TDS).
- Nomination facility is available.
- Nomination can be changed at any time
- These instruments are transferable to any part of India.
- Attractive rates of interest.
Post Office Schemes:
- Post Office Monthly Income Scheme
- Post Office Time Deposit Scheme
- Post Office Savings Account
- National Savings Certificate
- Kisan Vikas Patra

Govt. schemes offered through Post Offices and Nationalized Banks:

- Public Provident Fund
- Senior Citizen's Savings Scheme

SCHEME Interest Payable,Investment LimitsSalient features and maturity

Rates, Periodicityand Denominations stage.
etc.
Post Office Cheque facility available. Interest
3.5% per annumMinimum INR 50/-.
Savings Tax Free.
Account on individual/ jointMaximum INR
accounts. 1,00,000/- for an
individual account. INR
2,00,000/- for joint
account.
5-
On maturity INRMinimum INR 10/- perOne withdrawal upto 50% of the
YearPost
Office 10/- accountmonth or any amount inbalance allowed after one year. Full
Recurring fetches INRmultiples of INR 5/-. Nomaturity value allowed on R.D.
Deposit 728.90/-. Can bemaximum limit. Accounts restricted to that of INR.
Account
continued for 50/- denomination in case of death
another 5 years on of depositor subject to fulfillment of
year to year basis. certain conditions. 6 & 12 months
advance deposits earn rebate.
Rate of interest
7.5% (quarterly
compounded).
PostOffice
Interest payableMinimum INR 200/- andAccount may be opened by
Time
Deposit annually butin multiple thereof. Noindividual. 2,3 & 5 year account can
Account calculated maximum limit. be closed after 1 year at discount.
quarterly. Account can also be closed after six
months but before one year without
Period Rate
interest. The investment under this
1yr. A/c scheme qualify for the benefit of
6.25% Section 80C of the Income Tax Act,
1961 from 1.4.2007.
 2yr. A/c
6.50%

3yr. A/c
7.25%

5yr. A/c
7.50%
PostOffice
8% per annumIn multiples of INRMaturity period is 6 years. Can be
Monthly
Income payable i.e. INR1500/- Maximum INRprematurely encashed after one
Account 80/- will be paid4.5 lakhs in singleyear but before 3 years at the
every month on aaccount and INR 9 lakhsdiscount of 2% of the deposit and
deposit of INRin joint account. after 3 years at the discount of 1%
12000/-. of the deposit. (Discount means
deduction from the deposit.) A
bonus of 5% on principal amount is
admissible on maturity in respect of
MIS accounts opened.
15year
8% per annumMinimum INR. 500/-Deposits qualify for deduction from
Public
Provident (compounded Maximum INR. 70,000/-income under Sec. 80C of IT Act.
Fund yearly). in a financial year.Interest is completely tax-free.
Account Deposits can be made inWithdrawal is permissible every
lumpsum or in 12year from 7th financial year. Loan
installments. facility available from 3rd Financial
year. No attachment under court
decree order.
KisanVikas
Money doubles in 8No limit on investment.A single holder type certificate may
Patra
years & 7 months.Available inbe issued to an adult for himself or
Facility fordenominations of INR.on behalf of a minor or to a minor,
premature 100/-, INR. 500/-, INR.can also be purchased jointly by
encashment. 1000/-, INR. 5000/-,two adults.
INR. 10,000/-, in all
Rate of interestPost Offices and INR.
8.4% 50,000/- in all Head
(compounded Post Offices.
yearly)
National
8% InterestMinimum INR. 100/- NoA single holder type certificate can
Savings
Certificate compounded sixmaximum limit availablebe purchased by an adult for
(VIII monthly butin denominations of INR.himself or on behalf of a minor or
issue) payable at100/-, 500/-, 1000/-,to a minor. Deposits quality for tax
maturity. INR.5000/- & INR. 10,000/-. rebate under Sec. 80C of IT Act.
100/- grows to INR
160.10 after 6 The interest accruing annually but

years. deemed to be reinvested will also

qualify for deduction under Section
80C of IT Act.
Senior
9% per annum,There shall be only oneMaturity period is 5 years. A
Citizens
Savings payable from thedeposit in the account indepositor may operate more than a
Scheme date of deposit ofmultiple of INR.1000/-account in individual capacity or
31st March/30thmaximum not exceedingjointly with spouse. Age should be
Sept/31st rupees fifteen lakh. 60 years or more, and 55 years or
December in the more but less than 60 years who
first instance & has retired on superannuation or
thereafter, interest otherwise on the date of opening of
shall be payable on account subject to the condition
31st March, 30th that the account is opened within
June, 30th Sept one month of receipt of retirement
and 31st benefits. Premature closure is
December. allowed after one year on deduction
of 1.5% interest & after 2 years 1%
interest. TDS is deducted at source
on interest if the interest amount is
more than INR 10,000/- p.a. The
investment under this scheme
qualify for the benefit of Section
80C of the Income Tax Act, 1961
from 1.4.2007.

Fixed Deposits-
These are also one of the investment instrument which guarantees assured returns as you
would be having a lock in period in this i.e. you cannot withdraw your money prior
that stipulated period and you get fixed and pre decided amount when your lock in
period is expired.
Current rate of return is 6-8% on principal depending upon the institution you are
opening
A fixed deposit is an investment account comprising a single deposit, for a fixed term at a
guaranteed fixed rate of interest. It can be used for both short and long term investment
purposes. A fixed deposit account allows you to deposit your money for a set period of time,
thereby earning you a higher rate of interest in return. Fixed deposits also give you a higher
rate of interest than a savings bank account.

Fixed deposit is one of the oldest & most common methods of Investing. FDs look great
because you get a decent risk-adjusted return and your principal is protected. Fixed deposits
help you to secure your hard earned money for a long duration. Fixed deposit is a financial
instrument for you to deposit your money for a fixed duration ranging from 15 days to 5
years.

A regular fixed deposit can earn you an interest up to 8.75% and senior citizens who opt for such
a fixed deposit scheme are eligible for an additional 0.5 % increase.

Benefits of Fixed deposits –

With fixed deposits or FDs as they are popularly known, a person can invest an amount for a
fixed duration. The banks provide interest rates depending on this loan amount and the tenure of
deposit.
1) The option to withdraw the deposit at any time before maturity without any difficulty
2) Fixed deposit is secure form of investment that means your money would be 100% safe.
3)You can avail loans up to 85% of the principal
4)Variable deposit periods ranging from 6 months to 120 months
5)You get interest once in 6 months
A minimum opening deposit of R1000.00 is required. Deposit can be made in multiples of
Rs.100/-
You can choose how frequently you want to receive your interest payments:

• Maturity
• Yearly
• Half-yearly
• Quarterly
• Monthly
The banks may not always tell you the full story. Therefore it is important for us to delve deep
into any Fixed deposit Rate of interest and make the right choice.

Benefits:

 Safety: FDs have conventionally been the premier choice for investors with a low risk
appetite; assured returns is the key factor which attracts investors towards deposits. Stick
to FDs of the highest credit rating i.e. those with a “AAA” rating even if their rates seem
modest vis-à-vis those offered by company deposits. The fixed deposits of reputed banks
and financial institutions regulated by RBI (Reserve Bank of India) the banking regulator
in India is very secure and considered as one of the safest investment methods.

 Regular Income:
Fixed deposits earn fixed interest rates for their entire tenure, which is usually
compounded quarterly. So, those who want an income on a regular basis can invest into
fixed deposits and use the interest rate as their income. This makes a fixed deposit very
popular way of investing money for retirees

 Saves Tax: With the directives of the income tax department stating that investment in
fixed deposits up to a maximum of Rs.100, 000 for 5 years are eligible for tax deductions
under section 80 C of income tax act; fixed deposits have again become popular. Fixed
deposits save tax and give high returns on invested money.

 Liquidity: Find out how your FD fares on the pre-mature encashment front i.e. how
easily can your investment be liquidated. Also enquire about the penalty clauses, e.g. do
you suffer a loss of interest and/or principal amount. Compare how various fixed deposits
rank on this parameter and pick the best deal; thereby try to minimize the impact of
illiquidity which is typically associated with fixed deposits.

Precautions:
there are some Precautions that should take while making such investments.

 Company Fixed Deposits:

Company fixed deposits are not considered as safe as fixed deposits from leading banks
 and financial institutions regulated by the RBI. So, if a company runs into losses or goes
bankrupt the money invested into its fixed deposit can be lost. To lure investors, such
companies offer a fixed deposit interest rate which is much higher than those offered by
banks. Before investing in any company fixed deposit it is advised to check the
credentials of the company.

 Premature ending of Fixed Deposits:

Banks will impose a penalty if you break your fixed deposit before the maturity period.
Make sure you get the facts right about this thing. How the bank calculates this penalty
and what’ll charge will it levy when you break a fixed deposit should be noted carefully.

Comparative analysis of mutual funds, fixed deposit & post offices schemes-

Mutual funds

• Mutual funds can give dividend more than 15%. If your horizon is fairly long like 5 yrs.

• This is tax free.

• Good liquidity. If you want money back you will get within 2 days as per the NAV of
the scheme.

• If you have large amount like 4 - 5 Lakh it is good place to keep.

• On longer duration MFs have given good gains.

• . The amount invested would have a risk involved.

• The risk factor can be decided with the 3 available categories as "No Risk Fund"
"Balanced Fund" and "High Risk Fund"
• There is no guarantee given by the funders for the amount invested.
• The amount invested would not have a guaranteed small percentage of appreciation. This
may be quite high also.
• As Indian Economy is growing very rapidly every day, the funds can be expected to give
good return in the long term investment like 3 years lock in.

Fixed deposit

• Banks give today 6 to 9 % rate on FDs.

• This is taxable. If you are taxpayer you will get cut of 20% on interest.
 • If you need money back (liquidity) you may get money after about 2 days with 1 or 2%
reduced rate.

• For large amounts it will not be attractive since it will attract taxes.

• If investing for long period it is giving lesser gains.

• The amount invested would not have any risk involved.

• The amount would be appreciated with a very minimal percent within the investment
time.

• There is no depreciation in the amount.

• Here, there would be a guarantee given for our amount and can be with drawn with the
appreciated value.

Post office

• Rates are 8% on FD.

• This is taxable.

• Liquidity is poorer than banks.

• Post office operations are not user friendly.

Strategies regarding age, income of an individual regarding there finance

planning-

Finance planning is all affected by various factors. We all have been thought how to earn money.
We go to college, learn skills, gain knowledge, specialize, get a job and start earning money. But
what’s more important is application of the money earned to fulfill our basic needs and meet our
life goals. It’s a very well known fact that by vigilant spending, saving & investing, one can meet
the needs and life goals effectively.
There are different financial planning strategies for different kinds of people. For example for a
young person is to invest in mutual funds because it gives long time gain. Or we can say that
mutual fund investment gives us long time benefits. And for a old age person it is more better to
invest in various post office schemes.
The financing planning is totally depending upon our income and expenditure. If a person earn
good income. And his financial position is affordable to taking risk then he should invest in the
mutual funds. Because in mutual funds there are more risk and more return. And there are
various others benefits of investing in mutual funds. On the other hand if a person earns average
income and his first basic need his money can meet is taking care of his day-to-day living
expenses like Food, Shelter, Clothing, Utilities etc. we should be in a position to meet them
under any kind of contingencies and emergencies. Contingencies and uncertainties
are important factors in financial planning. Contingencies are unforeseen events. During our
lifetime, we may face contingencies in many forms like loss or change of job, physical disability,
health problems, re-locating to new places, business losses or any natural disasters which affects
our living. The list can go on, though unwillingly. We need to be prepared financially. So for
avoiding these problems we invest some money in form of mutual funds, fixed deposit, and post
offices schemes.

Age Factor Income Investment Plan

Students 14-18 Nil (only pocket RDA (post office
money) scheme)
College students 18-23 Pocket money or MF, post office
part time job scheme (RDA).
Job holders 23-30 Fixed income MF, FDs
(Fresher’s)
Job holders 30-55 Fixed income MF, FDs, MIS
(Experienced)
Retired person 55 and above pensions Senior citizen
scheme
Any person 25-55 and above High income Mutual funds
Any person 25-55 and above Low income FD, RDA

Budget 2010 effects on fixed deposit, mutual funds & post

offices savings

On the heels of India's provident fund board hiking interest rates by a percentage point to 9.5 per
cent, the Reserve Bank of India (RBI) on signaled to domestic banks to raise fixed deposit rates
to compensate small savers for rising inflation. The move would also help banks garner
more funds to meet their lending needs."If bank credit is not to become a constraint to growth,
the real rates need to move in the direction of encouraging bank deposits," the RBI said, while
raising the key policy rate by up to 50 basis points for the fifth time this year.

This budget brings the smiles in people who are looking to invest their money bank deposits and
save the tax. This budget amends the existing restrictions on tax saving fixed deposits. Nowadays
most people prefer the mutual funds as the tax savings instrument because of their 3 years lock-
in period. Tax saving fixed deposit has the 5 years as the lock-in and it reduces the banks to get
more depositors.

• The lock-in period for the tax savings fixed deposit will be reduced to 3 years. At present
it is 5 years.
• As of now you can show only Rs.100000 in tax savings fixed deposit. It is expected to be
increased to Rs.200000 for the financial year 2010-11.
• If the interest earned on single branch exceeds Rs.10000, it is taxable and TDS is
deducted by the banker. This limit will be increased to Rs.25000.

Conclusion-
Now to discuss which one is better depends upon the risk that an individual can take because :

1) Mutual fund follows the policy of high risk and high returns whereas fixed deposit follows
low risk and low return as same condition in post offices.
2) Fixed deposit can give up to 8% of return whereas the returns given by mutual fund can be up
to 70% is kept for long duration.
3) Returns given by fixed deposit are always positive but in case of mutual fund it can be
positive or negative.
4) Fixed deposit of any fixed particular duration but mutual fund can be of lock in period and
non-lock in period also.

If we plan for a short term investment, then mutual funds is better then others. As it will have an
Exit load. Now coming to Recurring Deposit and Fixed Deposit, it totally depends on our
financial condition. If we have the amount that we wish to invest then go for Fixed Deposit else
go for a recurring deposit. Fixed Deposits will give you higher returns when compared to
Recurring deposits. Before investing it is necessary to study the rate of interest of all the banks
and select the one with higher rate of interest as well as having a good market reputation.

For higher returns long term investments are always better then short term investments.