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What are the risks and returns associated with investments?

Every investment carries risk. The difference is a matter of degree. For instance, equities
carry higher risk - i.e the risk of share prices falling is as high as the extent of their returns
going up. It helps to understand the risks involved before you invest. Here’s a
snapshot of risks and returns associated with various investments.

RISK- RETURN TABLE OF VARIOUS INSTRUMENTS AVAILABLE

NOTE :'Transaction ease" would be the convenience you experience while completing the entire investment transaction including receipt of title documents (although confirmation of the investment might take lesser time). The number of days mentioned are only indicative.

What is an FD ?

A company fixed deposit is similar to a deposit placed in a bank or any other financial
institution. Deposits are commonly referred to as fixed income securities as they earn a fixed return. However,
unlike unsecured bonds, deposits are not negotiable. Interest on company deposits is fully taxable whereas interest on bank deposits is exempt from income tax under section 80L. No tax is deducted at source upto an interest income of Rs.2500/- per annum. Moreover, if the depositor submits form 15H , no tax is deducted at source,
even if the interest amount exceeds Rs.2500/- per annum

What is Form 15H?

In case the tax liability of an Individual/ Trust Depositor/ Co-operative Society is NIL for the
Financial Year, the depositor may submit Form 15H to the company. In this form,  the depositor
self-declares that his/ her tax liability is "Nil" for the Financial Year by affixing his/ her signature. On submission of this form, tax will not be deducted at source during interest payout.The depositor must submit this declaration every Financial Year to continue to receive TDS-free interest..

What is Credit Rating ?

Credit rating is an independent opinion by an external agency on the credit-worthiness of an issuer of debt instruments. Denoted by symbols, it gives a fair indication of the financial ability of the
borrower of funds to repay the principal and make timely interest payments. It does not rate or
recommend the willingness of the borrower to repay. In India,  four institutions are permitted to
rate issuers and these  are :

• CRISIL - Credit Rating & Information Services of India Limited      

• ICRA - Investment & Cedit Rating Agency of India Limited

• CARE - Credit Analysis & Research Evaluation  Limited

• DUFF & PHELPS

The common symbols for Credit Ratings are:

Wherever  a suffix  "+" (plus) or "-" (minus) is appended after the rating symbol, it is to indicate a slightly higher or lower ranking of the companies within the same rating category.


What is a Bond?

A Bond is a debt instrument floated by an issuer . It is a fixed interest-bearing investment which promises payment or accrual of interest at regular intervals as well as payment of the redemption amount on maturity. Bonds are also traded on stock exchanges which  imparts liquidity to the instrument.

Bonds are sold in the market at a premium (price greater than principal value) or at a discount (price lower than the principal value). The investor’s decision to buy a bond at a particular price should take into the account the yield to maturity (YTM) on the bond and the risk of timely payment of interest and principal.

Credit ratings issued by approved rating agencies such as CRISIL, ICRA and CARE would help an investor understand the risks associated with bonds and debentures besides other fixed income instruments.

KNOW YOUR BONDS

Principal Value : The initial amount the institution borrows from the lenders. It is the value of the bond on which interest is calculated. The Principal Value of a bond may be issued in multiples of Rs.100, Rs.500, Rs.1000 etc.

Redemption Value : The amount an institution  agrees to repay at the time of maturity.

Market Price : The amount the buyer pays when he purchases the bond from the exchanget. It includes accrued interest, i.e. interest from the date of last interest payment to the date of purchase of the bond.

Adjusted Market Price : The market price adjusted for premium on redemption,discount,etc.

Coupon Rate : The specific interest rate payable per annum on the bond. The interest amount payable to the bondholder is the principal value multiplied by the coupon rate.

Maturity Date : The date on which the institution will repay the redemption value of the bond.

Yield to Maturity (YTM): The average compounded rate of return which an investor will earn on the bond if he buys it today and holds it till maturity.

What is a Mutual Fund?

A mutual fund is a professionally managed fund comprising of a diversified  portfolio of securities. Mutual funds pool the investments of a group of individuals for achieving a profitable return. This achieves an  improved  diversification compared with what an individual investor could manage  on his/her own. Since  the portfolio is diversified,  the risk is spread  and hence minimised. Mutual funds are of   two  kinds - open ended schemes and close ended schemes.

What are Open Ended Schemes?

An open ended scheme is a mutual fund scheme in which an investor can buy and sell units on a daily basis, wherein the scheme has perpetual existence. Open Ended Schemes give you "anytime" liquidity - you can enter and exit at the NAV (Net Asset Value) based prices with a nominal charge. Unlike Close ended Schemes, they are not listed on the stock market as the mutual fund itself buys and sells units on an ongoing basis.

What are Close Ended Schemes?

A close ended scheme has a fixed corpus and runs for a limited tenure. On the expiry of the tenure, the fund sells off the entire corpus and distributes the proceeds to the various unit holders. The units are issued like those of any other company’s new issue, and are listed and quoted at the stock exchanges. The prices of close ended fund units are determined by demand and supply and not by NAV as is in the case of open ended fund units.

How many cateogories of mutual funds are available?

Income Fund: An Income fund is established to maximise the current income (i.e interest and dividend) of investors. These funds primarily invest in fixed income securities such as debentures, bonds & preference shares. In turn, there are two types of income funds, viz., dividend option (which offers regular payouts) and re-investment option (which re-invests your dividends).

Growth Fund : A Growth fund carries the principal objective of capital appreciation of the investment over a period of time. The investment is made in equity stocks which have above-average growth potential. This is a high risk investment fund with high capital gain potential, but with low current income assurance.

Balanced Funds : Balanced funds are mutual funds whose assets comprise a judicious mixture of stocks and bonds. Such funds carry modest risk and secure a reasonable return. By investing in equities, bonds and debentures, a balanced fund strikes a `balance' between capital appreciation and regular returns.

What is Net Asset Value ?

The Net Asset Value of a mutual fund scheme is simply the per unit market value of all the assets of the scheme. The per unit NAV of a scheme can be calculated as follows :

(Market Value of all investments + Receivables + Accrued Income - Accrued liabilities + Accrued Expenses) divided by Number of units outstanding