TABLE OF CONTENTS CHAPTER 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 INTRODUCTION • • • • • • • Investment Investment Need Of An Investor Types Of Investment Avenues Evaluation Of Various Investment Avenues Attributes Of Investment Approaches To Investment Decision Making Common Errors In Investment Management TITLE PAGE No. 2-23 2 3 4 11 12 14 17 20 24-30 24 24 25 27 28 28 29 29 30 30 30

• Risks In Investment RESEARCH METHODOLOGY • • • • • • • • • • Introduction Statement Of The Peview Of Literature Need For Study Objectives Of The Study Scope Of Study Hypothesis Research Design Tools Of Data Collection Method Of Analysis

3 3.1 3.2 3.3

• Limitations Of Study INDUSTRY PROFILE • • Indian Financial Market Classification Of Financial Markets

31-63 31 34 35Page | 1

3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12

• • • • • • • • • •

Money Market Capital Market Distinction Between Primary Market And Secondary Market Distinction Between Capital Market And Money Market Stock Exchange Speculation In Stock Exchanges Stock Exchanges In India Regulations Of Stock Exchanges Role Of SEBI Emergence Of Financial Services Industry In

36 37 38 38 43 44 45 46 48

4 5 6

India ANALYSIS AND INTERPRETATION FINDINGS AND SUGGESTIONS CONCLUSION

51-76 77-80 81

BIBLIOGRAPHY ANNEXURE

82 83-85

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LIST OF TABLES

No. 1.1 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14

NAME Summary evaluation of various investment avenues Gender wise classification of Respondents Age wise classification of Respondents Classification of Respondents on the basis of their Marital Status Classification of Respondents on basis of Occupation Classification of Respondents on basis of Annual Income Classification of Respondents on basis of Education Level Classification of Respondents on basis Influence on Investment Decision Classification of Respondents on the basis of Regularity in making Investment Decisions Classification of Respondents on the basis of Objectives of Investment Plan Classification of Respondents on the basis of Factors Influencing an Investment Decision Classification of Respondents on basis of Preferred Investment Avenues Classification of Respondents on the basis of Industry preferred Classification of Respondents on the basis of Time Horizon for Investment Classification of Respondents on the basis of Knowledge about Financial Terms

PAGE NO. 11 51 52 53 54 55 56 57 58 59 60 61 62 63 64

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4.15 4.16 4.17 4.18 4.19 4.20 4.21

Classification of Respondents on basis of Sources of Investment Information Classification of Respondents on basis of Risk Tolerance Level Relationship between Gender and Risk Tolerance of Respondents Relationship between Age and Investment Avenues preferred by the Respondents Relationship between Income and Investment Avenues preferred by the Respondents Relationship between Age of Respondents and Time Horizon for investment Relationship between Age and Risk Tolerance of the Respondents

65 66 67 69 71 73 75

LIST OF CHARTS

No.

NAME

PAGE NO.Page | 4

1.1 1.2 3.1 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16

Various investment alternatives Relationship between Expected Return and Risk Classification of financial markets Gender wise classification of Respondents Age wise classification of Respondents Classification of Respondents on the basis of their Marital Status Classification of Respondents on basis of Occupation Classification of Respondents on basis of Annual Income Classification of Respondents on basis of Education Level Classification of Respondents on basis Influence on Investment Decision Classification of Respondents on the basis of Regularity in making Investment Decisions Classification of Respondents on the basis of Objectives of Investment Plan Classification of Respondents on the basis of Factors Influencing an Investment Decision Classification of Respondents on basis of Preferred Investment Avenues Classification of Respondents on the basis of Industry preferred Classification of Respondents on the basis of Time Horizon for Investment Classification of Respondents on the basis of Knowledge about Financial Terms Classification of Respondents on basis of Sources of Investment Information Classification of Respondents on basis of Risk Tolerance Level 66

4 13 34 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65

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4.17 4.18 4.19 4.20 4.21

Relationship between Gender and Risk Tolerance of Respondents Relationship between Age and Investment Avenues preferred by the Respondents Relationship between Income and Investment Avenues preferred by the Respondents Relationship between Age of Respondents and Time Horizon for investment Relationship between Age and Risk Tolerance of the Respondents

68 70 72 74 76

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EXECUTIVE SUMMARYInvesting 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. The objective of this study is to understand the investment characteristics of investors and their objectives of investment plan. We will also study the demographic information of investors, preferred investment avenues of investors, preferred sources of information influencing investment decisions, the risk tolerance level of the investors. This study on investor’s behaviour is an attempt to know the profile and the characteristics of the investors so as to understand their preference with respect to their investments. The main focus of the study is to discover the influence of demographic factors like gender and age on risk tolerance level of the investor. 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. 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. Even though this study has certain limitations but it will be helpful to mutual fund companies and other investment companies to understand individual behavior 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.Page | 7

CHAPTER 1 INTRODUCTIO N

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1.1 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 bePage | 9

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 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 writtts 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. 1.2 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.

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By and large, most investors have eight common needs from their investments: i. ii. iii. iv. v. Security of original capital Wealth accumulation Tax Advantages Life cover Income

1.3 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,Page | 11

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. 1.3.1 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

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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. • 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. 1.3.2 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 onPage | 13

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

1.3.3 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 costefficiency, 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 longterm outlook seeking appreciation over a period of time.

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•

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 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.

1.3.4 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. 1.3.5 Equity Shares: Equities are a type of security that represents the ownership in a company. Equities are traded (bought and sold) in stock markets.Page | 15

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. 1.3.6 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: • 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, 182day 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.

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1.3.7 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 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. 1.3.8 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. 1.3.9 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 preagreed 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. FuturesPage | 17

contracts are special types of forward contracts in the sense that the former are standardized exchange traded contracts • 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.

1.4 EVALUATION OF VARIOUS INVESTMENT AVENUES Table 1.1: Summary evaluation of various investment avenues

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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 trade off 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. 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 thePage | 19

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. 1.5 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 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

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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: • • • • 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 quicklyPage | 21

• •

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. 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.

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1.6 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). 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 isPage | 23

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 � 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. MorePage | 24

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. 1.7 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: 1.7.1 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.Page | 25

1.7.2 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 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. 1.7.3 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.”

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1.7.4 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. Uncritically follow others because of the temptation to ride the bandwagon or lack of confidence in their own judgment. 1.7.5 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). 1.7.6 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. 1.7.7 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.Page | 27

1.7.8 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. 1.8 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. 1.8.1 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.Page | 28

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. 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. 1.8.2 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:

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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. 1.8.3 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

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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 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.

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CHAPTER 2 RESEARCH METHODOLOG YPage | 32

2.1 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 beenPage | 33

made to study the relationship between risk tolerance level and demographic characteristics of Indian investors. 2.2 STATEMENT OF THE PROBLEM This study on investor’s behaviour is an attempt to know the profile and the characteristics of the investors so as to understand their preference with respect to their investments. The main focus of the study is to discover the influence of demographic factors like gender and age on risk tolerance level of the investor. The study mainly concentrates on the factors that influence an individual investor before making an investment. It also studies the various patterns in which investors like to invest their money based on their risk tolerance level and other demographic factors like income level, occupation etc. 2.3 REVIEW OF LITERATURE 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.Page | 34

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 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’sPage | 35

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 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.2.4 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 preferPage | 36

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. 2.5 OBJECTIVES OF THE STUDY 2.5.1 Primary Objectives • • • • • • To study the investment characteristics of investors To study the objectives of investment plan of an investors To study the demographic information of investors

2.5.2 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

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•

To study the dependence/independences of the demographic factors (Gender, Age, income level) of the investor and his/her risk tolerance level

2.6 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. 2.7 HYPOTHESIS A hypothesis describes the relationship between or among variables. A good hypothesis is one that can explain what it claims to explain, is testable and has greater range, probability and simplicity than its rivals. There are two approach of hypothesis testing: 1) Classical or sampling theory statistics and 2) The Bayesian approach In the present dissertation chi square test has been used to find out the dependence/independence of various factors that influence investment decision. Hypothesis has been found between following factors: • • • • • Gender and risk tolerance of respondents Age and preferred investment avenues by the respondents Income and investment avenues preferred by the respondents Age of respondents and time horizon for investment Age and risk tolerance of the respondents

2.8 RESEARCH DESIGN

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Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. � Research type Many investors were reluctant to reveal their investment details especially the amount of money invested so, referral sampling method is used for this study. � Sample description The sample was drawn from the population of the potential investors from India. A survey was conducted to understand the investor’s behaviour with the help of questionnaire. It was carried out with a sample size of 250 investors. 2.9 TOOLS OF DATA COLLECTION Primary data: The data has been collected directly from respondent with the help of structured questionnaires. Secondary data: The secondary data has been collected from various magazines, journals, newspapers, text books and related websites. 2.10 METHOD OF ANALYSIS Statistical techniques like Chi square test, simple percentage method are used to analyze and interpret raw data. Chi square was used to show the dependency/independency of various factors. After collecting the data its variable having defined character, it was tabulated and analyzed with the help of charts and graphs in Microsoft Excel 2007. 2.11 LIMITATIONS OF STUDY • • • Sample size is small because of the time constraint Respondent may be hesitant to provide their investment details Behavior of investors doesn’t remain same for long timePage | 39

•

Time for the study is limited

CHAPTER 3

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INDUSTRY PROFILE

3.1 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

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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. 3.1.1 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 whichPage | 42

the SEBI came into prominence. The market loopholes had to be bridged by taking drastic measures. 3.1.2 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 demand and supply. The various other types of Indian markets help in the functioning of the wide India financial sector.3.1.3 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

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

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•

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

• • • • •

National and Global Market Relations Mutual Funds Insurance Loans Forex and Bullion

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.

3.2 CLASSIFICATION OF FINANCIAL MARKETS

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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. • 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)

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•

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. 3.3 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. 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,Page | 46

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. 3.4 CAPITAL MARKET Capital Market may be defined as a market dealing in medium and longterm funds. It is an institutional arrangement for borrowing medium and longterm 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. 3.4.1 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

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such as ONGC, GAIL, NTPC and the private sector companies like Tata Consultancy Services (TCS), Biocon, Jet-Airways and so on. 3.4.2 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. After having a brief idea about the primary market and secondary market let see the difference between them. 3.5 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.

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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. 3.6 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). 3.7 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 “Page | 49

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”. 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. 3.7.1 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,Page | 50

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 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.

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�

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.

�

3.7.2 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.

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�

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. (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 sectorPage | 53

undertakings (PSUs) are found to be on offer quite frequently and are generally successful. 3.7.3 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. 3.8 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.

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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 longterm 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 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.

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3.9 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, 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.

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3.10 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 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. 3.11 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;Page | 57

�

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; 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 undersubscribed. 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 ContractsPage | 58

(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 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. 3.12 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, there has been a broadening and

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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-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.

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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.

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CHAPTER 4 ANALYSIS & INTERPRETATIO NPage | 62

Data analysis and interpretation Table 4.1: Gender wise classification of Respondents Gender Number of Percentage (%) 80 20 100

Respondents Male 200 Female 50 Total 250 Interpretation:

Table 4.1 shows the Gender wise classification of Respondents. It was found that 80% of the Respondents are men and the rest are females. Generally males bear the financial responsibility in Indian society, and therefore they have to make investment decisions to fulfil the financial obligations. On the other hand females are not involved in such activities as majority of them are busy with their household activities. Also there are very less houses which depend on a female income most of them are male dominated households. Hence investment activities are more seen in males than females.

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Figure 4.1: Gender wise classification of Respondents Table 4.2: Age wise classification of Respondents Age( in years) Below 35years 36-50years 51-60years above 60years Total Interpretation: Table 4.2 shows the Age wise classification of Respondents. When it comes to age, it was found that 37% are young i.e. of age group below 35 years and 53% of them are in the age group of 35 to 50. Other than these 7% of them belong to age group of 51 to 60 and rest them belongs to age group above 60. This shows that age group of 35 years an above are more interested in investments while people above 51 years make less investments as most of them would retire at age of 60 and would start planning for retirement. Number of Respondents 92 133 17 8 250 Percentage (%) 36.7 53.3 6.7 3.3 100

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Figure 4.2: Age wise classification of Respondents

Table 4.3: Classification of Respondents on the basis of their Marital Status Marital status Single Married Total Interpretation: Table 4.3 shows classification of Respondents on the basis of their Marital Status. It was found that marital status of 78% of the Respondents was found to be married and the rest 22% are unmarried. This is because a married individual is considered to have dependents so they are involved in making financial investments. Whereas Respondents who are unmarried mostly invest to generate wealth but they do not have any financial responsibility. Number of Respondents 55 195 250 Percentage (%) 22 78 100

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Figure 4.3: Classification of Respondents on the basis of their Marital Status

Table 4.4: Classification of Respondents on basis of Occupation Occupation Government Employee Businessman Private Sector Student Others Total Interpretation: Table 4.4 shows classification of Respondents on basis of Occupation. From the above graph indicates that 36% of the Respondents are working in private sector, 29% of them are government employees, 28% of them are self employed, 2% of them are students and rest are working in other sectors. Number of Respondents 73 70 90 5 12 250 Percentage (%) 29 28 36 2 5 100

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Respondents who work in private sectors are involved in investments as the income would be lesser in private sectors.

Figure 4.4: Classification of Respondents on basis of Occupation Table 4.5: Classification of Respondents on basis of Annual Income Annual Income Below 2 Lakhs 2 Lakhs – 4 Lakhs 4 Lakhs – 6 Lakhs 6 Lakhs – 8 Lakhs above 8 Lakhs Total Interpretation: Table 4.5 shows the classification of Respondents on basis of Annual Income. It was found that 48% of Respondents with annual earnings above 8 Lakhs are interested in investments because their savings are more which they invest to generate wealth, 23% of them are earning 4 to 6 Lakhs annually, the other 25% are earning between 6 to 8 Lakhs in a year, 4% of them earn 2 to 4 Lakhs in an year but there were no respondents with annual income below 2 Lakhs as they do not have savings to invest.Page | 67

Number of Respondents 0 10 58 61 121 250

Percentage (%) 0 4 23.3 24.3 48.4 100

Figure 4.5: Classification of Respondents on basis of Annual Income Table 4.6: Classification of Respondents on basis of Education Level Education Level Under Graduate Graduate Post Graduate and above Total Interpretation: Table 4.6 shows the classification of Respondents on basis of Education Level. It indicates that 47% of the Respondents covered in the study are postgraduates; 43% Respondents are graduates and 10% of the Respondents are undergraduates. Investors with post graduate degree would be more exposed to market situation which make them more interested in investments. Also graduates would have fair knowledge about investments. Whereas Respondents who are undergraduates mostly do not invest due to unfamiliarity to investment avenues or unavailability if information about investments. Number of Respondents 25 108 117 250 Percentage (%) 10 43.3 46.6 100

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Figure 4.6: Classification of Respondents on basis of Education Level Table 4.7: Classification of Respondents on basis Influence on Investment Decision Investment Decisions are Taken on own initiative Taken on own initiative but with help from an expert Made by expert on investors behalf Total Interpretation: Table 4.7 shows classification of Respondents on basis Influence on Investment Decision. It was found that most Respondents tend not to depend upon expert advice and help while making investment decisions. However, the majority of the Respondents i.e. 74% make investment decisions without the help and advice from experts; only 18% investors consult some experts, for advice in investment decisions. And the rest of them allow the expert to take decision on their behalf. Number of Respondents 185 45 20 250 Percentage (%) 74 18 8 100

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Figure 4.7: Classification of Respondents on basis Influence on Investment Decision Table 4.8: Classification of Respondents on the basis of Regularity in making Investment Decisions Regularity of Investment Decisions Frequently Seldom Total Interpretation: Table 4.8 shows the classification of Respondents on the basis of Regularity in making Investment Decisions. Most of the Respondents i.e. 59% of total sample make investment decisions on a regular basis while rest 41% does not invest regularly. Those who are familiar with the working of investments would invest more frequently than those who do not have much knowledge about investments. Number of Respondents 148 102 250 Percentage (%) 59.3 40.7 100

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Figure 4.8: Classification of Respondents on the basis of Regularity in making Investment Decisions

Table 4.9: Classification of Respondents on the basis of Objectives of Investment Plan Objective of investment Plan Preserve capital and generate income Generate moderate capital growth with some income Generate aggressive capital growth over long-term Generate long-term capital growth Total Interpretation: 27 250 11.1 100 Number of Respondents 105 77 41 Percentage (%) 42 30.6 16.3

Table 4.9 shows the classification of respondents on the basis of Objectives of Investment Plan. Based on this table, we can conclude that the investor’sPage | 71

objective of investment plan is capital appreciation or balance of capital appreciation and current income. It is clear that investors invest to accumulate wealth rather as an avenue to supplement their income.

Figure 4.9: Classification of Respondents on the basis of Objectives of Investment Plan Table 4.10: Classification of Respondents on the basis of Factors Influencing an Investment Decision Factors Influencing an Investment Decision Risk Rate of return Tax shelter Marketability Convenience Total Interpretation: Number of Respondents63 90 35 43 20 25 36 14 17 8

Percentage (%)

250

100

Table 4.10 shows the classification of Respondents on the basis of Factors considered before making an Investment. Out of all majorities of the Respondents i.e. 36% prefer to invest where there is high return. 25% of the Respondents look for risk involved in the investment, 14% of the Respondents invest in those avenues wherein they will get tax benefit. 17% of Respondents look for marketability and the rest look for ease with which the investment can be made.Page | 72

Figure 4.10: Classification of Respondents on the basis of Factors Influencing an Investment Decision Table 4.11: Classification of Respondents on basis of Preferred Investment Avenues Investment Avenues Fixed Deposits Insurance schemes Equities Mutual Funds schemes Real estate Commodities/ Derivatives Total Interpretation: Number of Respondents 67 64 11 60 24 24 250 Percentage (%) 26.8 25.6 4.4 24 9.6 9.6 100

Table 4.11 shows classification of Respondents on basis of Preferred Investment Avenues. It can be concluded that the Respondents prefer FD’s/Bonds/PPFs avenues than insurance schemes next to mutual funds, equities and derivatives. It was interesting to know that Indian individual investors still prefer to invest their surplus amount in risk free investment avenues next to insurances schemes. It confirms that Indian investors are conservative investors.

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Figure 4.11: Classification of Respondents on basis of Preferred Investment Avenues Table 4.12: Classification of Respondents on the basis of Industry preferred Industry Financial Corporations Cement Automobile IT Banking Telecommunication Agriculture Manufacturing Others Total Interpretation: Table 4.12 shows the classification of Respondents on the basis of Industry preferred by them for Investing. It is found that 21% of Respondents prefer financial service, 18% of them prefer IT sector, 10% of them prefer automobile industry, 9% of them prefer manufacturing and telecommunication each, 7% of them prefer banking followed by cement and agriculture industries and rest 19% Number of Respondents 53 13 25 45 18 23 5 23 48 250 Percentage (%) 21 5 10 18 7 9 2 9 19 100

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prefer other industries to invest their funds. Majority of Respondents prefer financial services to invest because it stable industry and fetch more returns.

Figure 4.12: Classification of Respondents on the basis of Industry preferred Table 4.13: Classification of Respondents on the basis of Time Horizon for Investment Investment Time Horizon Below 1year 1-3 years 4-9 years Above 10 years Total Interpretation: Table 4.13 shows the classification of Respondents on the basis of Time Horizon for Investment. From the above table we can interpret that majority of the Respondents i.e. 46% of the total sample invest for less than 1 year, 33% of them invest for time period of 1 to 3 years, 19% of them invest for period of 4 to 9 years and the rest of them i.e. 2% of them invest for long term i.e. more than 10 years. It is found that most of the Respondents want to make money quickly hence they invest for a short period of below 1year. Number of Respondents 115 82 48 5 250 Percentage (%) 46 33 19 2 100

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Figure 4.13: Classification of Respondents on the basis of Time Horizon for Investment Table 4.14: Classification of Respondents on the basis of Knowledge about Financial Terms Knowledge about Financial Terms Excellent Very good Average Good Satisfactory Total Interpretation: Number of Respondents 107 70 38 27 8 250 Percentage (%) 42.7 27.8 15.1 11.3 3.1 100

Table 4.14 shows classification of Respondents on the basis of Knowledge about Financial Terms. Majority of the Respondents have excellent knowledge of financial terms, 28 % have good knowledge, 15% have average knowledge, 11 % have good knowledge rest 3% have fair knowledge about investment.

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Figure 4.14: Classification of Respondents on the basis of Knowledge about Financial Terms Table 4.15: Classification of Respondents on basis of Sources of Investment Information Sources of Investment Information News Paper/ Magazines Electronic Media (T.V) Peer group/ Friends Broker/ Financial Advisor Internet Total Interpretation: Number of Respondents 75 25 44 50 46 250 Percentage (%) 30 10 17.6 20 18.4 100

Table 4.15 shows the classification of Respondents on basis of Sources of Investment Information. Most of the Respondents get their information related to investment through print media (News paper/ Business news paper/ Magazines) next to electronic media (TV- NDTV Profit, CNBC and some business news channels). This could be because print media is easy and readily accessible investment information when compared to the other sources of investment

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information whereas some other Respondents prefer brokers to get information about investment.

Figure 4.15: Classification of Respondents on basis of Sources of Investment Information Table 4.16: Classification of Respondents on basis of Risk Tolerance Level Risk Tolerance Level Low (Category A) Medium (Category B) High (Category C) Total Interpretation: No. of Respondents 102 63 85 250 Percentage (%) 41 25 34 100

Table 4.16 shows the classification of Respondents on basis of Risk Tolerance Level. From the table 4.16 we can conclude that 41% of Respondents are preferring portfolio with less risk, 34% of them prefer highly risky portfolio with high returns and rest of them i.e. 25 % prefer portfolio with moderate risk. Indian investors are still conservative in nature and avoid taking huge risk while investing their funds.

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Figure 4.16: Classification of Respondents on basis of Risk Tolerance Level

HYPOTHESIS: The relationship between important factors has been analyzed with the help of Chi-Square Test. The following pairs have been analyzed: a) Gender and Risk Tolerance: Gender and the Risk Tolerance Level of an investor are two independent attributes. The relationship between the Gender and Risk Tolerance of investors can be presented with the help of following table and diagram: Table 4.17: Relationship between Gender and Risk Tolerance of Respondents Gender/ Risk Tolerance Level Male Female Total Low risk 80 22 102 Moderate risk 52 12 64 High risk 68 16 84 Total 200 50 250Page | 79

Interpretation: Table 4.17 shows the relationship between Gender and Risk Tolerance of Respondents. Let us consider, H0: Gender and Risk Tolerance of Respondents are independent. H1: Gender and Risk Tolerance of Respondents are dependent . Conducting chi square test at 5% level of significance, it is found that χ 2 = 0.2658 as the �omputed value whi�h is very less than the table value 5.991 so we a��ept H0. Hen�e we �an �on�lude that Gender and Risk Toleran�e of an investor are two independent attributes. Generally, it is �onsidered that women tend to be risk averse in �omparison with men.

Figure 4.17: Relationship between Gender and Risk Toleran�e of Respondents

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b) Age and Investment Avenues: Age of investor and the Investment Avenues preferred by an investor are two independent attributes. The relationship between the Age and Investment Avenues preferred by the investors �an be presented with the help of following table and diagram: Table 4.18: Relationship between Age and Investment Avenues preferred by the Respondents

Interpretation:Page | 81

Table 4.18 shows the relationship between Age and Investment Avenues preferred by the Respondents. Let us take, H0: Age and Preferred Investment Avenues by investors are independent. H1: Age and Preferred Investment Avenues by investors are dependent . Condu�ting �hi square test at 5% level of signifi�an�e, it is found that χ 2 = 3.889 i.e. 4 approx but the �omputed value is very less than the table value 24.996 so we a��ept H0. Hen�e null hypothesis stands and we �an �on�lude that age and preferred investment avenues by the investors are two independent attributes of the investor.

Figure 4.18: Relationship between Age and Investment Avenues preferred by the Respondents

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�) In�ome and Investment Avenues: There is no signifi�ant relationship between the In�ome of an investor and the Investment Avenues preferred by the investors. The relationship between In�ome and Investment Avenues preferred by the investors �an be presented with the help of following table and diagram: Table 4.19: Relationship between In�ome and Investment Avenues preferred by the Respondents

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Interpretation: Table 4.19 shows the relationship between In�ome and Investment Avenues preferred by the Respondents. Let us �onsider, H0: There is no signifi�ant relationship between In�ome and Investment Avenues preferred by investors. H1: There is signifi�ant relationship between In�ome and Investment Avenues preferred by investors. Condu�ting �hi square test at 5% level of signifi�an�e, it is found that χ 2 = 1.499662 but the �omputed value is very less than the table value 31.410 so we a��epts H0. Hen�e the null hypothesis stands and we �an �on�lude that there is no signifi�ant relationship between In�ome and Investment Avenues preferred by the investors.

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Figure 4.19: Relationship between In�ome and Investment Avenues preferred by the Respondents

d) Age and Time Horizon: The relationship between Age of investors and Time Horizon for investment �an be presented with the help of following table and diagram: Table 4.20: Relationship between Age of Respondents and Time Horizon for investment Age/Page | 85

Investment Below 1 1-3 years Time Horizon Below 35years 36-50years 51-60years above 60years Total Interpretation: year 43 62 7 3 115 31 44 5 2 82

4-9 years

Above 10 Total years

17 25 4 2 48

1 2 1 1 5

92 133 17 8 250

Table 4.20 shows the relationship between Age of Respondents and Time Horizon for investment. Let us take, H0: Age of investors and Time Horizon for investment has no signifi�ant relation H1: Age of investors and Time Horizon for investment has a signifi�ant relation Condu�ting �hi square test at 5% level of signifi�an�e, it is found that χ 2 = 7.047 as the �omputed value whi�h is very less than the table value 16.919 so we a��ept H0. Hen�e null hypothesis stands and we �an �on�lude that Age of investors and Time Horizon has no signifi�ant relation with ea�h other.

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Figure 4.20: Relationship between Age of Respondents and Time Horizon for Investment

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e) Age and Risk Toleran�e: The relationship between Age and Risk Toleran�e of the investors �an be presented with the help of following table and diagram: Table 4.21: Relationship between Age and Risk Toleran�e of the Respondents Age/ risk toleran�e level Below 35 years 35-50 years 51-60 years Above 60 years Total Interpretation: Table 4.21 shows the relationship between Age and Risk Toleran�e of the Respondents. Let us �onsider, H0: Age and Risk Toleran�e of the investors is independent. H1: Age and Risk Toleran�e of the investors is dependent. Condu�ting �hi square test at 5% level of signifi�an�e, it is found that χ 2 = 0.3333 as the �omputed value whi�h is very less than the table value 12.592 so we a��ept H0. Hen�e null hypothesis stands and we �an �on�lude that Age and Risk Toleran�e of the Respondents are two independent attributes of the investor. Low risk 38 55 6 3 102 Moderate risk 23 33 5 2 63 31 45 6 3 85 92 133 17 8 250 High risk Total

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Figure 4.21: Relationship between Age and Risk Toleran�e of the Respondents

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CHAPTER 5 FINDINGS & SUGGESTION S

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5.1

FINDINGSIn the present proje�t, an attempt is made to study the investment �hara�teristi�s of Indian investors. Based on the data �olle�ted and analysed about the investment preferen�es of the investors, the following findings are given. • • The study reveals that male investors dominate the investment market in India. It is found that most of the investors belong to the age group of below 35 years and 35 to 50 years indi�ating youngsters and the middle aged people are predominant in the finan�ial investment se�tor. • • • Most of the investors possess higher edu�ation qualifi�ation like graduation and above. Majority of respondents are working in private se�tor organisations as �ompared to government organisations. As per the general per�eption, it is found respondents with higher in�ome groups like in�ome above 8 Lakhs were found to invest more be�ause of their large portions of savings. • • • • • • • The investor’s de�isions are based on their own initiative. Spe�ifi� investmt pattern was noted in a majority of the people who parti�ipated in the study. Respondents usually prefer to invest frequently. The obje�tive of investment was either �apital appre�iation or balan�e of �apital appre�iation and �urrent in�ome. Investors usually invest their funds so as to earn wealth. Investors prefer to invest their funds in avenues like PPF/FD/Bonds next to insuran�e and mutual funds s�heme. Most preferred industries for investment are finan�ial servi�es banking and information te�hnology.Page | 91

•

Most of the respondents preferred to invest for a short period that is less than 1 year. Some of them preferred to invest for a time period of 1-3 years.

•

With referen�e to the obje�tive of investment, most of the respondents preferred high returns, followed by risk, tax shelter, �onvenien�e and marketability.

•

Most of the investors get their information related to investment through print media like business newspapers and magazines while others prefer to get information from brokers and ele�troni� media like TV.

• • • • • • • • •

Most of the investors prefer to invest in to less risky investments. Very less proportion of respondents preferred risky portfolios. Indian investors are �onservative in nature and prefer to invest in less risky avenues. Majority of the investors have moderate knowledge about finan�ial terms related to investment. Gender and the risk toleran�e level of the investor are independent attributes of the investor. It is found from the analysis of data that in�rease in age de�rease the risk toleran�e level. It is revealed from the study that age of investors independent of preferred investment avenue. In�ome of investors and investment avenues preferred by them are two independent attributes of the investor. Age of investors and time horizon for whi�h they invest are two independent attributes of the investor. Age and risk toleran�e of the investors are two independent attributes of the investor.

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5.2

SUGGESTIONS

The traditional finan�e theories assume that investors are rational but they are unable to explain the behaviour and pri�ing of the sto�k market �ompletely. Despite loads of information popping from all dire�tions, it is not the �al�ulations of finan�ial wizards, or �ompany’s performan�e or widely a��epted �riterion of sto�k performan�e but the investor’s irrational emotions like over�onfiden�e, fear, risk aversion, et�., seem to de�isively drive and di�tate the fortunes of the market. Many resear�h studies have validated the relationship between a dependent variable i.e., risk toleran�e level and independent variables su�h as demographi� �hara�teristi�s of an investor. Hen�e, in the present proje�t report an attempt has been made to study the relationship between risk toleran�e level and demographi� �hara�teristi�s of Indian investors. Based on the analysis of data, the following suggestions are given. • It is evident from the study that investors’ la�k knowledge of the pros and �ons of various investment avenues. Hen�e it is suggested that investors are to be edu�ated about various investment avenues, sele�tion of s�hemes based on their obje�tives, their risk toleran�e, importan�e of diversifi�ation and so on to whi�h will in turn help in effi�ient investment rather impulsive. • The analysis of data �learly indi�ates that the investors’ investment behaviour is independent of their demographi� fa�tors. Therefore it is suggested that the s�hemes �an be designed based on mat�hing the obje�tives of the investment rather based on demographi� fa�tors in order to motivate investors. • The primary obje�tive of most of the respondents is maximise return through �apital appre�iation as well as regular returns. Hen�e, the investment avenues that offer �apital appre�iation and dividend in�ome like equity shares are more attra�tive to the investors. Therefore various s�hemes �an be designed that in�ludes equity investment.

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•

Most of the respondents hesitate to invest their money through online mode, so it is preferred to �onta�t the investors through the distributors and finan�ial advisers besides online servi�es.

•

All the investors prefer to maximise their returns and minimise the risk. Even now fixed deposits and insuran�e s�hemes are more famous among Indian investors. It is suggested that the investors have �arefully �onstru�t their portfolios after doing fundamental analysis and through proper diversifi�ation.

•

It always better that the investors follow a systemati� investment pro�ess to invest their money. Investment avenues are to be �hosen based on their obje�tives and risk preferen�es whi�h would result in risk return trade off.

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CHAPTER 6 CONCLUSION

CONCLUSIONPage | 95

Investment is putting money into something with the expe�tation of profit. More spe�ifi�ally, investment is the �ommitment of money or �apital to the pur�hase of finan�ial instruments or other assets so as to gain profitable returns in the form of interest, dividends, or appre�iation of the value of the instrument. Investment is involved in many areas of the e�onomy, su�h as business management and finan�e whether for households, firms, or governments. Investment �omes with the risk of the loss of the prin�ipal sum. The investment that has not been thoroughly analyzed �an be highly risky with respe�t to the investment owner be�ause the possibility of losing money is not within the owner�s �ontrol. This study has tried addressing the “Investment �hara�teristi�s of Indian investors”. Be�ause of time limit only 250 respondents are taken for the study. A survey was �ondu�ted to get knowledge of fa�tors whi�h influen�e Indian investor’s investment de�isions. This study was an attempt to understand the �hara�teristi�s of Indian investors. This study is limited to Indian investors only but the study �an be extended to other investors also. The study �an be extended to global investor’s investment behaviour. There is also a s�ope of a �omparative study whi�h �an be done between Indian investors investment behaviour with the global investors behaviour. Due to time limitation this study was restri�ted to only demographi� �hara�teristi�s but the study �an be done with �onsidering other fa�tors also.

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BIBLIOGRAPHY

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BIBLIOGRAPHYBooks • • C K Kothari, Resear�h Methodology, Wishwa Prakashan Publishing, 1996, Se�ond Edition Herbert B. Mayo, Investments, Chennai Mi�ro Print pvt. Ltd Chennai, 2006 • Punithavathi Pandyan, Se�urity Analysis and Portfolio Management , Tata M� Graw-Hill Publishing Company Ltd , New Delhi,2008 Third Edition • Prasanna Delhi,2008 • Prasanna Chandra, Finan�ial Management, Tata M� Graw –Hill Chandra, Investment Analysis And Port Folio

Management, Tata M� Graw-Hill Publishing Company Ltd , New

Publishing Company Ltd , New Delhi2007 Journals • •• •

Asian Journal Of Management Global Journal of Finan�e and Management Indian Journal of Finan�e The IUP Journal of Behavioural Finan�e, Barberis, N. and Thaler, R. H. (2002) A Survey of Behavioural Finan�e

•

Websites Referen�e• • •

www.indiafinan�e&investmentguide.�om www.wikipedia.org www.nseindia.�om

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• • •

www.�apitalmarkets.�om www.bseindia.�om www.finan�eindia.org/arti�le

ANNEXURE

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ANNEXUREQUESTIONNAIRE I am Chitra Raveendran student of MBA from A�harya Institute of Management and S�ien�es Bangalore, �ondu�ting a survey on “A Study on Investment �hara�teristi�s of Indian investors” as a part of my dissertation. I would request to kindly fill in this questionnaire and the information given by you will be kept highly �onfidential. (Please ti�k mark √ the �hoi�e from the option given below) PART – A 1) Name: 2) Gender: 3) Age Group: Below 35years 36-50years 51-60years above 60years Male Female

4) Please spe�ify your marital status? Single Married

5) What is your o��upation? Government Employee Businessman Self-Employed Student Private Se�tor

Others (please spe�ify) _____Page | 100

6) What is your annual in�ome? Below 2 Lakhs 6 Lakhs – 8 Lakhs 2 Lakhs – 4 Lakhs above 8 Lakhs 4 Lakhs – 6 Lakhs

7) Please mention your edu�ation level. Under Graduate PART – B 1) Whi�h of the following investments you have invested in? Fixed Deposits Mutual Funds s�hemes Commodities/ Derivatives 2) Please mention the list of industries you have invested in. a) __________________________________ b) __________________________________ �) __________________________________ d) __________________________________ 3) Whi�h of the following statements best des�ribes your main obje�tive of investment? To preserve �apital and generate in�ome To generate moderate �apital growth with some in�ome To generate aggressive �apital growth over long-term To generate long-term �apital growth 4) Your knowledge about finan�ial terms or aspe�ts of investments is: Ex�ellent Satisfa�tory 5) What is your investment time horizon?Page | 101

Graduate

Post Graduate and above

Insuran�e s�hemes Real estate

Equities

Very good

Average

Good

Below 1 year Above 10years

1year – 3 years

4years – 9years

6) How regularly do you make investment de�isions? Frequently Often

7) Your investment de�isions are Taken on own initiative Taken on own initiative but with help from an expert Made by expert on your behalf

8) Whi�h sour�e do you prefer to get investment information? News Paper/ Magazines Ele�troni� Media (T.V) Peer group/ Friends Broker/ Finan�ial Advisor Internet

9) What is your risk appetite? High Medium Low No Risk / Safe Investments

10) If you �ould �hoose only one of the three portfolios �hara�terized below, whi�h would you sele�t, given your investments are in Equities, Fixed deposits, �ash equivalents, alternative assets?Page | 102

Portfolio A(less risky): 25%, 50%, 25%, and 0% Portfolio B (balan�ed): 55%, 30%, 10%, and 5% Portfolio C (risky): 10%, 5%, 5%, 80%

Thank You

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