INVESTMENT ALTERNATIVES

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INVESTMENT ALTERNATIVES
Chapter 2
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ALTERNATIVES IN INVESTMENTS

• Investment avenues are the outlets of funds.
  There are varieties of investment avenues or
  alternatives. The investors are free to select
  any one or more alternative avenues depending
  upon their needs.
• All categories of investors are equally
  interested in safety, liquidity, and reasonable
  return on the funds invested by them.

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DEPOSITS WITH BANKS

• Investment of surplus money in bank deposits is
  quite popular among the investors (particularly
  among salaried persons). Banks collect working
  capital for their business through deposits
  called bank deposits.
• The deposits are given by the customers for
  specific period and the bank pays interest on
  them. The deposits can be accepted from the
  individuals, institutions and even business
  enterprises. The business and profitability of
  banks depend on deposit collection. For
  depositing money in the bank, an investor /
  depositor has to open an account in the bank.

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DIFFERENT TYPES OF DEPOSITS ACCOUNTS

• Savings Bank Account
• A Saving Bank account (SB Account) is meant to
  promote the habit of saving among the people. It
  also facilitates safekeeping of money. In this
  scheme fund is allowed to be withdrawn whenever
  required, without any condition. Hence a savings
  account is a safe, convenient and affordable way
  to save your money.

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• Fixed Deposits Account
• A fixed deposits is meant for those investors
  who want to deposit a lump sum of money for a
  fixed period, say for a minimum period of 15 days
  to five years and above, thereby earning a higher
  rate of interest in return. Investor gets a lump
  sum (principal Interest) at the maturity of the
  deposit.

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• Recurring Deposit Account
• The Recurring deposit in bank is meant for
  someone who wants to invest a specific sum of
  money on a monthly basis for a fixed rate of
  return. At the end, you will get the principal
  sum as well as the interest earned during that
  period. The scheme, a systematic way for long
  term savings, is one of the best investment
  option for the low income groups.

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ADVANTAGES OF BANK DEPOSITS

• Investment is reasonably safe and secured with
  adequate liquidity.
• Banks offer reasonable rate of return on the
  investment made and that too in a regular manner.
• Banks offer loan facility against the investment
  made.
• Procedures and formalities involved in a bank
  investment are limited, simple and quick.
•  
• Banks offer various services and facilities to
  their customers.

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LIMITATIONS/DEMERITS OF BANK DEPOSITS

• The rate of return in the case of bank investment
  is low as compared to other avenues of
  investment.
•  
• The return on the investment is not adequate even
  to protection against the present inflation rate
  in the country.
• Capital appreciation is not possible in bank
  investment.

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MONEY MARKET INSTRUMENTS

• Money market is a market for borrowing and
  lending for short periods. It is one constituent
  of capital market. However, it is basically
  concerned with short-term investment. Money
  market securities are fixed income securities
  similar to gilt-edged securities, preference
  shares and debentures.

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• Institutional investors with huge surplus funds
  purchase money market securities for short term
  investments. A money market security is a debt
  instrument of short period maturity. Money market
  securities are as explained below
• Treasury bills
• GILT Edged securities
• Commercial paper
• Certificate of Deposits.

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COMPANY DEPOSITS / PUBLIC DEPOSITS

• In order to meet temporary financial needs,
  companies accept deposits from the investors.
  Such deposits are called public deposits or
  company fixed deposits and are popular
  particularly among the middle class investors.
• At present along with private sector companies,
  even public sector companies and public utilities
  also accept such deposits in order to meet their
  working requirements. This source is popular and
  used extensively by the companies.

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Advantages of Company Deposits / Public Deposits

•  Public deposits are available easily and
  quickly, provided that company enjoys public
  confidence.
• This method of financing is simple and cheaper
  than obtaining loans from commercial banks. This
  makes public deposits attractive and agreeable to
  companies and also to depositors.
• Public deposits enable the companies to trade on
  equity and pay higher dividends on equity shares.
• The depositors receive interest in their
  deposits. This rate is higher than the interest
  rate offered by the banks. The interest rate is
  also paid regularly by reputed companies.

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BONDS AND DEBENTURES

• In addition to company deposits, it is possible
  to purchase bonds and debentures of joint stock
  companies for investment purpose. Both represent
  creditorship securities. Debentures indicates
  loan given to the company at a specific rate of
  interest and on certain terms and conditions.
  Debentures are more popular than shares due to
  the safety and security available. Companies
  issue different types of debentures for the
  convenience of investors.

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ADVANTAGES OF BONDS

• Easy transferability by endorsement and delivery
• Safety and security due to government backing
• Attractive interest and other favourable terms
  and conditions including wide choice as regards
  selection of bonds.
• Investment exempted for wealth tax
• Maturity period from 5 years to 25 years.
• Listing on nearby stock exchange
• Simple procedure for investment