Changes in Investment Pattern at Hdfc Bank

Declaration

SEEMA SETHI do hereby declare that the training report entitled "CHANGES IN

INVESTMENT PATTERN AT HDFC BANK AMBALA CANTT” submitted by

me for the partial fulfillment of degree of Master of Business Administration from

MAHARISHI DAYANAND UNIVERSITY, ROHTAK is having original work

conducted by me. The data and facts provided in the report are authentic to the best of

my knowledge.

I solemnly declare that the work done by me is original and no copy of it has been

submitted to any other university for award of any other degree, diploma, and

fellowship on similar topic.

SEEMA SETHI

A CKNOWLEDGEMENT

Heartfelt thanks to those who supported me…

It often happens that one is at loss of words when one is really thankful and sincerely

wants to express one's feeling of gratitude towards those for rendering helpful and

selfless service. A undertaken of study like this is never the outcome of effort of a

single person so I would be failing in duty if I don’t say a word of thank to all those

who have been the source of guidance, advice, co-operation and having taken pain in

acquainting me required information and data for the fulfillment of my project report

successfully.

I am earnestly grateful to Mr. Vijay Sethi (Manager of HDFC Bank) for providing

me an opportunity to undertake project work in their esteemed organization and

practical training, which will go long term in shaping my career.

I am deeply indebted to our Director Dr. M.K. Sehgal and all my faculty members of

the institute for their valuable contribution during the academic session and guidance in

preparation of this project report. I especially want to thank my guide Mr. Adarsh

Kumar Aggarwal (Faculty of Finance) for guiding, supporting, also for giving a very

patient hearing whenever I needed.

SEEMA SETHI

TABLE OF CONTENTS

(i) CERTIFICATE

(ii) DECLARATION

(iii) ACKNOWLEDGEMENT

(v) EXECUTIVE SUMMARY

INDEX

Chapter-1 INTRODUCTION

Chapter-2 RESEAECH METHODOLOGY

Chapter-3 INDUSTRY PROFILE

Chapter-4 COMPANY PROFILE

Chapter-5 CHANGES IN INVESTMENT PATTERN

Chapter-6 ANALYSIS AND INTERPRETATION

CONCLUSION

SUGGESTIONS

BIBLOGRAPHY

ANNEXURES

INDEX OF TABLES

TABLE1- HOLDERS OF DIFFERENT INVESTMENT SCHEMES

TABLE2- SATISFACTION FROM RETURN OF DIFFERENT INVESTMENTS

TABLE3- COMPARISON BETWEEN MUTUAL FUNDS AND FD’S

TABLE4- CONSIDERATION WHILE INVESTING IN DIFFERENT SCHEMES

TABLE5- HOLDERS OF MUTUAL FUNDS

TABLE6- SATISFACTION WITH RESULTS OF MUTUAL FUNDS

TABLE7- AWARENESS REGARDING REGULATION OF MUTUAL FUNDS

TABLE8- VIEWS REGARDING FUTURE OF MUTUAL FUNDS

TABLE9- REASONS FOR NOT INVESTING IN MUTUAL FUNDS

TABLE - SOURCES OF INFORMATION

INDEX OF GRAPHS

GRAPH1- HOLDERS OF DIFFERENT INVESTMENT SCHEMES

GRAPH2- SATISFACTION FROM RETURN OF DIFFERENT INVESTMENTS

GRAPH3- COMPARISON BETWEEN MUTUAL FUNDS AND FD’S

GRAPH4- CONSIDERATION WHILE INVESTING IN DIFFERENT SCHEMES

GRAPH5- HOLDERS OF MUTUAL FUNDS

GRAPH6- SATISFACTION WITH RESULTS OF MUTUAL FUNDS

GRAPH7- AWARENESS REGARDING REGULATION OF MUTUAL FUNDS

GRAPH8- VIEWS REGARDING FUTURE OF MUTUAL FUNDS

GRAPH9- REASONS FOR NOT INVESTING IN MUTUAL FUNDS

GRAPH10- PREFERENCE TOWARDS MUTUAL FUNDS

GRAPH 11- SOURCES OF INFORMATION

CHAPTER-1

INTRODUCTION

Introduction

Standing on the threshold of the economic revival of the Indian economy where the

recovery and growth are already knocking at our door to usher the new order with a

note of optimism. The potential of India as a market and as a manufacturing base

continues to attract more and more interest of the world at large. Undoubtedly, lot of

development is taking place in the investment pattern of the economy and its

multiplier impact would be there to be witnessed over a period of years.

Investment scenario is changing very rapidly. Emergence of modern instruments of

investment like Mutual Funds, Systematic Investment Plan, RBI Bonds, and

Infrastructure Bonds proves to be a better option for the investors in comparison to

the old instruments of investment such as fixed deposits, savings, recurring deposits

etc. This project deals with the thorough study of these modern instruments in respect

of their returns, liquidity, and tenure & safety aspect etc.

History Of Banking In India

Without a sound and effective banking system in India it cannot have a healthy

economy. The banking system of India should not only be hassle free but it should be

able to meet new challenges posed by the technology and any other external and

internal factors.

For the past three decades India's banking system has several outstanding

achievements to its credit. The most striking is its extensive reach. It is no longer

confined to only metropolitans or cosmopolitans in India. In fact, Indian banking

system has reached even to the remote corners of the country. This is one of the main

reason of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends

with the nationalization of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting

a draft or for withdrawing his own money. Today, he has a choice. Gone are days

when the most efficient bank transferred money from one branch to other in two days.

Now it is simple as instant messaging or dial a pizza. Money has become the order of

the day.

The first bank in India, though conservative, was established in 1786. From 1786 till

today, the journey of Indian Banking System can be segregated into three distinct

phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks

Nationalization of Indian Banks and up to 1991 prior to Indian banking sector

Reforms.

New phase of Indian Banking System with the advent of Indian Financial & Banking

Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and

Phase III.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan

shareholders. and Bengal Bank. The East India Company established Bank of Bengal

(1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and

called it Presidency Banks. These three banks were amalgamated in 1920 and

Imperial Bank of India was established which started as private shareholders banks,

mostly Europeans

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab

National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906

and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian

Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic

failures between 1913 and 1948. There were approximately 1100 banks, mostly

small. To streamline the functioning and activities of commercial banks, the

Government of India came up with The Banking Companies Act, 1949 which was

later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No.

23 of 1965). Reserve Bank of India was vested with extensive powers for the

supervision of banking in India as the Central Banking Authority.

During those day’s public has lesser confidence in the banks. As an aftermath deposit

mobilization was slow. Abreast of it the savings bank facility provided by the Postal

department was comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after

independence. In 1955, it nationalized Imperial Bank of India with extensive banking

facilities on a large scale especially in rural and semi-urban areas. It formed State

Bank of India to act as the principal agent of RBI and to handle banking transactions

of the Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on

19th July, 1969, major process of nationalization was carried out. It was the effort of

the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in

the country were nationalized.

Second phase of nationalization Indian Banking Sector Reform was carried out in

1980 with seven more banks. This step brought 80% of the banking segment in India

under Government ownership.

The following are the steps taken by the Government of India to Regulate Banking

Institutions in the Country:

1949: Enactment of Banking Regulation Act.

1955: Nationalization of State Bank of India.

1959: Nationalization of SBI subsidiaries.

1961: Insurance cover extended to deposits.

1969: Nationalization of 14 major banks.

1971: Creation of credit guarantee corporation.

1975: Creation of regional rural banks.

1980: Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector bank India rose to

approximately 800% in deposits and advances took a huge jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith and

immense confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in

its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee

was set up by his name which worked for the liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being

put to give a satisfactory service to customers. Phone banking and net banking is

introduced. The entire system became more convenient and swift. Time is given more

importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from

any crisis triggered by any external macroeconomics shock as other East Asian

Countries suffered. This is all due to a flexible exchange rate regime, the foreign

reserves are high, the capital account is not yet fully convertible, and banks and their

customers have limited foreign exchange exposure.

Nationalisation Of Banks In India

The nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi the

then prime minister. It nationalized 14 banks then. These banks were mostly owned

by businessmen and even managed by them.

Central Bank of India

Bank of Maharashtra

Dena Bank

Punjab National Bank

Syndicate Bank

Canara Bank

Indian Bank

Indian Overseas Bank

Bank of Baroda

Union Bank

Allahabad Bank

United Bank of India

UCO Bank

Bank of India

Before the steps of nationalization of Indian banks, only State Bank of India (SBI)

was nationalized. It took place in July 1955 under the SBI Act of 1955.

Nationalisation of Seven State Banks of India (formed subsidiary) took place on 19th

July, 1960.

The State Bank of India is India's largest commercial bank and is ranked one of the

top five banks worldwide. It serves 90 million customers through a network of 9,000

branches and it offers -- either directly or through subsidiaries -- a wide range of

banking services.

The second phase of nationalization of Indian banks took place in the year 1980.

Seven more banks were nationalized with deposits over 200 crores. Till this year,

approximately 80% of the banking segment in India was under Government

ownership.

After the nationalization of banks in India, the branches of the public sector banks

rose to approximately 800% in deposits and advances took a huge jump by 11,000%.

1955 : Nationalisation of State Bank of India.

1959 : Nationalisation of SBI subsidiaries.

1969 : Nationalisation of 14 major banks.

1980 : Nationalisation of seven banks with deposits over 200 crores.

Banking Sector : Growth & Evolution

The Indian Banking sector has undergone a sea of change in the past decade with the

Implementation of the ongoing banking sector reforms. The sector, over the years has

become more efficient with the implementation of prudential norms for asset

classification and improved thrust on technology advancement. The PSBs (Public

Sector Banks) still dominate the sector with 75% of the market share of business and

profits. The new private sector banks with their technology driven business model are

fast catching up with the PSBs. The last two years has seen banks book windfall gains

in treasury profits. With the interest rates hardening up, banks need to focus on core

profit growth. The retailisation of the banks’ balance sheet has seen banks improve

their asset mix with home loans, auto loans and personal loans

GROWTH & EVOLUTION OF THE FINANCIAL SECTOR

The financial sector is in a process of rapid transformation. Reforms are continuing as

part of the overall structural reforms aimed at improving the productivity and

efficiency of the economy. The role of an integrated financial infrastructure is to

stimulate and sustain economic growth.

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. 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 played a vital role to promote the foreign trade of the

country.

BANKING INDUSTRY

The Indian banking system has a large geographic and functional coverage. Presently

the total asset size of the Indian banking sector is 3US$ 270 billion while the total

deposits amount to US$ 220 billion with a branch network exceeding 66,000

branches across the country. Revenues of the banking sector have grown at 6 per cent

CAGR over the past few years to reach a size of US$ 15 billion. While commercial

banks cater to short and medium term financing requirements; national level and state

level financial institutions meet longer-term requirements.

Banking has grown into a technology concentrated and customer friendly model with

a focus on convenience. The sector is moving towards the emergence of financial

supermarkets in the form of universal banks providing a set of services ranging from

retail to corporate banking, industrial lending and investment banking. While

corporate banking is clearly the largest segment, personal financial services is the

highest growth segment.

The recent favorable government policies for enhancing limits of foreign investments

to 49 per cent among other key initiatives have encouraged such activity. Larger

banks will be able to muster sufficient capital to finance asset expansion and fund

investments in technology.

BUSINESS ENVIRONMENT AND LIKELY FUTURE

DIRECTION

In the banking industry, business, in simple terms is defined as the sum of the

deposits and advances as on a particular date. The business of scheduled commercial

banks is estimated to grow from Rs 21,644 billion in 2002-03 to Rs 32,229 billion by

2005-06 at a CAGR of 14.2 per cent, led by continued growth in retail finance,

gradual recovery in commercial credit, pick-up in agriculture credit and growth in

deposits.

Due to the slowdown in industrial growth, many corporate restructured themselves to

survive; hence, credit off take was low. With reduced avenues for investment of

surplus funds, banks turned to retail financing. The retail finance portfolio grew by

around 27 per cent during the same period.

I. Sources of funds of Scheduled Commercial Banks(SCBs)

Proportion of different sources of funds of SCBs

Deposits

Deposits consist of demand deposits (current account deposits), savings deposits and

term deposits. Firms maintain demand deposits to meet their day-to-day cash

requirements. The deposits of all scheduled banks are expected to grow from a level

of Rs 14,045 billion as of March 2003 to Rs 19,929 billion as of March 2006 at a

CAGR of 12.4 per cent. This will be driven by a growth of 8.5 per cent, 16.2 per cent

and 11.7 per cent in demand deposits, savings deposits and term deposits,

respectively.

Technology-driven products also taper growth in demand deposits. It’s estimated that

demand deposits will grow at a CAGR of 4.1 percent from Rs 1,668 billion as of

March 2003 to Rs 1,881 billion by end-March 2006, due to the introduction of newer,

technology-driven products/facilities. With the advent of new technology-driven

products such as electronic fund transfers, Real Time Gross Settlements (RTGS) and

Cash Management Systems (CMS), the clearing cycle has shortened. RTGS and CMS

allow quick transfer of funds to and from any part of the country. This will encourage

corporates/firms to reduce their balances in demand deposits, and probably slow

down their growth. Further, customer-friendly products that are introduced by banks

with the aid of technology (swipe-in and swipe-out) will divert some portion of

demand deposits towards fixed deposits.

Alternative investment products

Besides term deposits, investors have the option of investing in insurance, small

savings schemes, mutual funds etc. While the share of small savings schemes in total

investments has remained more or less stable, the share of insurance and mutual funds

in the total pie is increasing. This has led to a drop in the share of the bank liability

product from 68 per cent in 1998-99 to 57 per cent in 2002-03.

Borrowings

Borrowings are expected to grow at 7.1 per cent CAGR from Rs 912 billion as of

March 2003 to Rs 1,122 billion by end-March 2006, led by a strong growth in

advances. During 2000-01 to 2002-03, borrowings of scheduled commercial banks

grew by 22.9 per cent (5.4 per cent) CAGR.

Equity capital

Another source of funds for the banking sector is the equity capital. In the last 10

years, the total equity capital raised by banks has gone up, although it is not the main

source of funds for banks. With stricter capital adequacy norms and the growing loan

book size, banks will need to infuse more capital to maintain a healthy capital

adequacy ratio. Many of the public sector banks have reduced the government stake

by raising equity from the market. In 2002-03, the total amount raised by public

sector banks through equity was approximately Rs 7.7 billion. Hence, in order to

maintain a healthy capital adequacy ratio, going forward, and banks will embark on

infusing more equity capital. Equity capital is estimated to grow at CAGR of 2.5 per

cent in the next year.

II. Increasing credit deposit ratio to slow down the growth rate of

investments

The investments portfolio of banks is likely to grow at CAGR of 8.8 per cent during

2003-04 to 2005-06. With low credit off take, banks had no avenues to deploy funds.

Hence they parked them in investments. The investment to deposit ratio grew from 42

per cent in 1998 to 51 per cent in 2003 and is estimated to have been 50.5 per cent in

2004. With the expected increase in demand for commercial credit, banks would

prefer lending to the industrial sector than invest in government securities, as the

former yields higher returns. Also, to meet the demand for commercial credit, banks

would prune their investment portfolio. With the estimated slow down in investments,

the investment-deposit ratio is expected to taper to 46 per cent by March 2006.

III. Interest rates to harden in 2004-05

The benchmark 10-year yield on government securities is estimated to rise by 183

basis points (bps) during 2004-05 to 7.00 per cent by March 2005 from 5.17 per cent

as of end-March 2004. The benchmark yield is expected to go up further by 50 bps

during 2005-06 to touch 7.50 per cent by March 2006. Rising inflation and the

gradual increase in credit demand has led to a hardening of interest rates. Banks have

started moving to the short end of the curve with the rise in interest rates. In general,

the movement of interest rates depends on:

1.Growthinmoneysupply

2.Growth in credit off take

3.International interest rate.

4.Expected rate of inflation

5. Fiscal deficit, and the resultant borrowing programme of the

government

IV. Agri Credit

During 1999-2000 to 2002-03, agriculture credit recorded a CAGR of 19.2 per cent

from Rs 504.3 billion as of end-March 2000 to Rs 853.8 billion as of end-March

2003. The growth in agriculture credit has been steady due to low penetration of

agricultural credit in the rural areas and uneven agriculture output over the years. The

government has laid emphasis on improving the credit delivery to the agriculture

sector and thus improving agriculture production in the country. The Ministry of

Finance has advised all banks to increase their agriculture credit by 30 per cent over

the next 3 years, from 2004-05 to 2007-08. Further, several measures have been

initiated, like increasing the credit limit of the Kisan credit card scheme, special

agricultural credit plans, etc. The Reserve Bank of India has directed banks to

restructure / reschedule the overdue agriculture loans, waive margin money

requirement for agricultural loans up to Rs 50,000, etc. Agriculture credit had been

growing between 17-18 per cent during the last few years. Several banks have started

restructuring their operations to meet the targeted agricultural growth.

V.Retail finance

The net outstanding retail finance portfolio of the banks is expected to grow at a

CAGR of 36 per cent during the period 2003-04 to 2005-06, from Rs 1,051 billion as

of end-March 2003 to Rs 2,670 billion as of end-March 2006, driven by continued

growth in housing, commercial vehicles and car finance. The projected growth in the

outstanding retail finance in the next 3 years would be mainly driven by the following

factors.

1. Continued growth expected in housing finance, and cars and commercial vehicles

finance.

2. Increasing market share of banks vis-à-vis NBFCs in the retail finance pie.

3. Increasing tenures of the loans.

During 2000-01 to 2002-03, the retail finance portfolio of banks has grown at a

CAGR of 27 per cent from Rs 516.4 billion to Rs 1,051.4 billion. This steady growth

in retail finance portfolio was mainly on account of the following factors:

1. Focus of large public and private sector banks on disbursements to the household

sector for housing loans, commercial vehicles, cars and two wheelers

2. Increasing penetration of banks vis-à-vis NBFCs.

3. Lower interest rates, contributing to increase in demand, and rising tenure of car,

housing and commercial vehicle portfolio.

VI. Non Performing Assets

By March 2006, the gross NPA may come down to 5.82 per cent as against as 8.84

per cent as of March 2003, while net NPA may drop to 2.54 per cent from 4.42 per

cent during the same period. At the gross level, the gross NPAs, which stood at Rs

687.80 billion as on March 31, 2003, have fallen to Rs 669.15 billion as on March 31,

2004, but would rise thereafter to Rs 710.56 billion as in March 2006, with the

growth in advances. But it’s estimated that gross NPAs will fall further to 5.84 per

cent by end-March 2006.The prime drivers are:

1. Credit administration: Improved credit management, by improving the process of

credit appraisals, providing extensive training staff members undertaking appraisals,

putting in place an effective system of post disbursement monitoring of accounts.

2. Risk management: Increased focus on the improving risk management, with the aid

of information technology.

3. Improving corporate performance: Since March 2003, the corporate sector

performance has improved significantly, and we expect it to continue improving its

profitability in the current industrial upturn, which will help improve the risk profile

of loans given to the industrial sector.

The gross NPA of the scheduled commercial banks have fallen from 12.8 per cent as

of end-March 2000 to 8.8 per cent as of end-March 2003, while net NPAs had fallen

from 6.8 percent to 4.4 per cent during the same period. The primary drivers for the

improvement are:

1. Higher provisions: The falling interest rate and corresponding increase in profit on

sale of investments provided banks enough room to increase their provisioning / write

off of bad loans while maintaining profit growth.

2. Regulatory measures: Regulators introduced various measures, such as One Time

Settlement Scheme (OTS), Corporate Debt Restructuring (CDR) etc, which allowed

banks to restructure the bad loans or settle the bad loans at a discount. It also

prevented potential NPAs from becoming NPAs.

3. Legal reforms: Reforms in the legal systems, in the form of strengthening the Debt

Recovery Tribunal (DRT) and enactment of the Securities and Reconstruction of

Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002,

enabling banks to pressurize the defaulters to clear the over dues, and thus clean their

balance sheet.

4. Best practices: Banks started adopting best practices, and building strong credit risk

management to improve their loan portfolio.

GLOBAL BANKING SCENARIO

The first major trend is that of universal banking as a model with emphasis on retail

banking. Banks have begun to offer whole portfolio of services because they aim at

maximizing bank’s share of the customer’s wallet. Retail banking is less subject to

economic cycles than wholesale or investment banking which explains the emphasis

on retail banking within the model of universal banking.

The second trend is that of use of technology in reducing cost of operations. The

process has gone so far ahead that technology is no longer a differentiator between

banks.

The third trend is towards emergence of regulatory model in the form of Basel II

which reconciles the market based assessment of risk with the regulatory capital,

something which Basel I did not do. The expectation is that Banks with better risk

management would be permitted lower regulatory capital, allowing them more room

for growth, as compared to banks with weaker risk management.

Lastly, there is a renewed emphasis on effective corporate governance arising as a

response to the fiduciary nature of banking business, the need to raise capital from the

markets and stiffer legislation. Effective corporate governance would correct

information asymmetry, increase efficiency and enhance brand image.

The combined effect of all the above trends would be increased competition among

banks with tighter regulation, enabling the financial sector to yield higher value

addition per unit of capital employed and resulting in the financial sector accounting

for a higher share of gross domestic product, ranging between 8 to 10% in US, UK

and Australia as compared to 6.5% for India.

I. Indian Aspirations

In the context of these global trends, one can trace the sources of competitive

strengths of the Indian banking sector.

As far as the strengths are concerned

• There has been sufficient deregulation in the financial sector over the last decade to

induce elements of competition in the banking sector.

• Secondly, the Indian Banking sector has a longer experience of market economies

than say the counterparts in Eastern Europe.

• Thirdly, Indian players also have international presence.

• Fourthly, the growth of retail lending, over the last five years or so, if not the quality

of the portfolio, mirrors the international trend.

• Fifth, India has a large and untapped market. Over 60% of the household still do not

have access to banking services. This implies a considerable scope for

experimentation, innovation, and expansion which can develop into long term

competitive advantages for the sector.

• Lastly, the public ownership of roughly three fourth of the Indian Banking sector is,

for the moment, an effective shield which the banks can use to nurture their

competitive advantages.

However one can hardly be complacent, if one looks at Indian banking in terms of

cost structure, human resources, technology platforms, management systems and

corporate governance. There is certainly an efficient fringe in banking sector, but that

fringe is overshadowed by public sector banks which constitute the bulk. In case of

public sector banks, operating profit as a percentage of total assets is about 1

percentage point lower than that of foreign banks operating in India. In spite of a

series of VRS, the wage bill as percentage of total assets in case of public sector

banks is higher by about 1 percentage point as compared to the new private sector

banks which shows the scope for economies. In the area of technology, the haste to

implement core banking is not matched by a similar urgency to introduce modest but

more effective solutions relating to systems, procedures and customer interface. As

regards risk assessment and mitigation, freeing up of interest rates, more often that

not, has provided the managements a rationale to bypass risk based pricing of credit

altogether. As regards corporate governance, it is still looked at as a matter of

conscience rather than business necessity.

COMPETITOR ANALYSIS

Parameter - Capital adequacy ratio, Capital to risk-weighted assets ratio (CRAR)

As of March 2003, all scheduled commercial banks, except two banks, had their

CRAR above the stipulated norm of 9 %. Between March 2002 and March 2003, we

see a marked improvement in the nationalized banks. This was due to the increase in

profitability and the fresh capital raised by many banks. With the likely

implementation of new Capital Accord (Basel II), many banks, especially those

having a global presence, have been holding capital in excess of the stipulated norm.

From the sample of six banks listed below, we see that the capital adequacy ratio of

all banks, except ICICI Bank, has improved. The capital adequacy ratio of PSBs has

shown a significant improvement in comparison to that of the new private sector

banks on account of the aggressive lending strategy of new private sector banks in

comparison to the aggressive capital raising strategy of the public sector banks.

CRAR of top six banks

With the expected increase in demand for credit, banks will prefer to increase their

loan portfolio instead of investments. This will result in banks shifting their focus

from investments towards advances.

CRITICAL SUCCESS FACTORS FOR BANKING INDUSTRY

Critical success factors for banks today revolve around being more competitive in

their chosen markets, delivering products and service to their customers "anytime/any

where", effective enterprise information management and optimized use of their

technology and people resources. The open systems based, network computing model

best positions a bank to effectively address these "critical success factors", as opposed

to constantly expanding and re-engineering expensive and cumbersome mainframe-

centric legacy environments.

I. New Technologies supporting these CSF’s

1. Data warehousing: effective enterprise information management

The Banking Industry is data rich but information poor. Enterprise information

management can be best addressed by using data warehousing technologies and

disciplines. Data warehousing based solutions can be implemented the quickest and

the most cost-effectively on UNIX-based open systems platforms.

2. Thin client: the ideal network computing model

Sun is encouraging the industry to adopt the network computing model, and

incorporate Java as a core development component. A key component of this strategy

includes the network appliance, or Sun Ray. Because of their high utilization of

workstations that perform basically single or dual repetitive operational functions,

banks are ideally positioned to exploit the network computing model, utilizing the

network appliance.

3. Addressing the supply chain management challenge in banking

Delivering products quickly and "any time/any where" requires a bank to focus on its

channel delivery strategy and position itself to integrate its delivery channels in the

future. The Banking Industry has traditionally developed systems with a product or

line of business focus. This is changing to a customer relationship focus with

integrated delivery of products and services.

4.Embracethe‘Net’economy

The Internet has been identified as the next business frontier. While many banks have

approached it initially as a sales and marketing vehicle, its real potential exists as a

financial transaction medium and a customer support channel. The Internet can allow

a bank to reduce its cost of delivering retail services, like home banking, or corporate

services, like Cash Management, and thus expand its customer and fee revenue base.

“How can bank leverage their strengths to have a better future?”

Since the availability of funds is more and deployment is less, banks should evolve

new and attractive products and services to the customers. There should be rational

thinking in sanctioning loans, which will bring down the NPA’s.

The banking sector is made more attractive with differential interest rates. Banks

should also ensure that its funds are effectively utilized in the priority sector. Banks

should be given more autonomy and independence and the unions should play a

major role in building the banking industry.

Banks with their large customer base and good reputation can effectively counter the

threats from NBFC’s and mutual funds.

Internet banking is growing in India where banking is made more user friendly.

Banks with Their Intellectual Capital Should move towards Fee based activities.

With The emergence of IT, using its intellectual resources banks should be able to

attract funds and market their products nd services more effectively and efficiently.

The efficiency with which bank is able to manage the competitive forces will be

reflected in their financial statements.

OVERALL ASSESSMENT

I.Foreign Banks

During 1999-00 to 2002-03, foreign banks held on to their share of the business and

also maintained the highest spreads. Greater spreads and a high core fee income ratio

helped them in sustaining high operating expenses. They will continue to have a high

core fee income ratio, but are likely to face competition from other bank groups, who

are increasing their worldwide presence. Foreign banks have the lowest NPA ratios

and, with their stringent credit assessment norms, will continue to maintain them.

II.Other Scheduled Commercial Banks

Since these banks, especially the new private sector banks, are expanding their

operations, operating expenses will be high. But the benefits of these large

investments will accrue to them in the near future. The yield on carry business is

likely to improve with the gradual increase in credit demand from the commercial

sector. However, the improvement could be restricted due to the expected drop in the

yield on investments. Because of the aggressive lending strategy adopted by the new

private sector banks, the asset quality may deteriorate, although the banks will try to

maintain the net NPA ratio. Private sector banks have to concentrate on their credit

management systems to improve the asset quality.

III.Public Sector Banks

These banks need to rein in their operating costs by controlling manpower costs and

rationalizing operations. Investments in technology may result in surplus staff, which

can affect productivity (if the excess manpower is not utilized properly). The gradual

increase in commercial sector credit will enable a healthy growth in advances. Public

sector banks need to reduce their exposure to investments by focusing on the core

activity of lending. Moreover, these banks have started focusing on retail finance,

which will contribute to the growth in advances. The asset quality of the public sector

banks may improve on account of the expected improvement in credit management.

But PSBs need to improve and be aggressive in their communication and business

strategies to garner more customers, if they want to attain mass in the retail finance

segment

Budget 2004-05: Banking

The much-needed reforms in the banking sector have transformed the sector

drastically in the last few years. Falling interest rates as well as strengthening of the

hands of banks (Securitisation Act) have changed the dynamics of the Indian banking

sector itself. The new Securitisation Act has given more power to the banking sector

against defaulting borrowers. Further, changes to be implemented on the issue of

voting rights among private sector banks is likely to speed up the consolidation

process.

BUDGET MEASURES

The government has proposed to double credit to the agriculture sector in the next

three years.

There has been a significant emphasis on making credit available towards

infrastructure development.

Inter-institutional group comprising select banks and financial institutions

incorporated to ensure speedy conclusion of loan agreements for infrastructure

projects. Nearly Rs 400 bn will be kept aside by this consortium for infrastructure

support.

Task force to be set up to explore reforms in the cooperative banking sector.

Securitisation Act to be amended.

FDI in the insurance sector to be hiked from 26% to 49%.

BUDGET IMPACT

As per the common minimum program (CMP), the budget has focused a lot

on the need to improve credit to the agriculture sector and banks will be at the

forefront of disbursing credit. Vagaries of monsoons impact the agriculture

sector heavily and banks are vulnerable if monsoon fails. Also, the RBI has

released new guidelines for banks with regards to agricultural lending.

However, it is too early to ascertain the impact. The impact of these initiatives

by the government will only be apparent over the long-term.

Banks are likely to benefit from increased lending to the infrastructure sector.

This will come about in two ways i.e. direct equity participation and indirectly

(corporate borrowing for expanding capacity). While this would provide an

impetus to core advances of banks, the quality of such advances is likely to be

better. In this light, there is relatively less NPA risk.

Reforms in the banking sector in the form of amendments to the Securitisation

Act may strengthen the backbone of the financial sector.

A hike in the FDI in the insurance sector is likely to significantly raise

investments in the nascent insurance sector. Domestic banks like ICICI Bank,

ING Vysya, Kotak Bank and SBI who have joint ventures with international

insurance majors will be able to infuse more capital into their insurance

business. In the future, there may be an opportunity for these domestic banks

to unlock value from such investments as well.

CHAPTER-5

COMPANYPROFILE

Housing Finance Sector

Against the milieu of rapid urbanization and a changing socio-economic scenario, the

demand for housing has grown explosively. The importance of the housing sector in

the economy can be illustrated by a few key statistics. According to the National

Building Organization (NBO), the total demand for housing is estimated at 2 million

units per year and the total housing shortfall is estimated to be 19.4 million units, of

which 12.76 million units is from rural areas and 6.64 million units from urban areas.

The housing industry is the second largest employment generator in the country. It is

estimated that the budgeted 2 million units would lead to the creation of an additional

10 million man-years of direct employment and another 15 million man-years of

indirect employment.

Having identified housing as a priority area in the Ninth Five Year Plan (1997-2002),

the National Housing Policy has envisaged an investment target of Rs. 1,500 billion

for this sector. In order to achieve this investment target, the Government needs to

make low cost funds easily available and enforce legal and regulatory reforms.

Background

HDFC was incorporated in 1977 with the primary objective of meeting a social need

– that of promoting home ownership by providing long-term finance to households

for their housing needs. HDFC was promoted with an initial share capital of Rs. 100

million.

Business Objectives

The primary objective of HDFC is to enhance residential housing stock in the country

through the provision of housing finance in a systematic and professional manner,

and to promote home ownership. Another objective is to increase the flow of

resources to the housing sector by integrating the housing finance sector with the

overall domestic financial markets..

Organizational Goals

HDFC’s main goals are to a) develop close relationships with individual households,

b) maintain its position as the premier housing finance institution in the country, c)

transform ideas into viable and creative solutions, d) provide consistently high returns

to shareholders, and e) to HDFC is a professionally managed organization with a

board of directors consisting of eminent persons who represent various fields

including finance, taxation, construction and urban policy & development. The board

primarily focuses on strategy formulation, policy and control, designed to deliver

increasing value to shareholders.

BOA

RD

OF

DIR

ECT

ORS

Mr.

Deepa

k S

Parekh

(Chair

man)

Mr.

Keshu

b

Mahin

dra

(Vice

Chair

man)

Mr.

Shirish

B

Patel

Mr. B

S

Mehta

Mr. D

M

Suktha

nkar

Mr. D

N

Ghosh

4

Dr. S

A

Dave

Mr. S

Venkit

arama

nan

Dr.

Ram S

Tarnej

a

Mr. N

M

Munje

e

Mr. D

M

Satwal

ekar

Ms.

Renu

S.

Karna

d

(Execu

tive

Direct

or)

Mr. K

M

Mistry

(Mana

ging

Direct

or)

2

ORGANISATION STRUCTURE

DR.D.S Parikh

(chairman)

MR.Keshub mahindra

(Vice Chairman)

Mr.Renu S.Karnad(Executive Director)

Mr. Mistry(Managing Director)

Mr.Shirish

B Patel

(BOD)

Mr. Mehta(BOD)

Mr. Sukthankar(BOD)

Mr. D.N Ghosh(BOD)

Mr.S.A Dave(BOD)

Mr. S Venkitaramanan(BOD)

Mr. Rama Tarneja(BOD)

AWARDS AND ACCOLADES

o HDFC Ranked as ‘India’s Third Best Managed Company’ by Finance

Asia – 2005

o Mr. Deepak Parikh awarded the 'Hall of Fame' award by Outlook Money

magazine.

o HDFC receives the 'Dream Home' award for the best Housing Finance

company for 2004 from Outlook Money magazine

o Awards galore by HDFC at the 44th ABCI Awards!!!

o 5th Best Company to work for in India, ranked by Business Today in

November 2004

o Economic Times Corporate Citizen of the Year Award, November 2004

o Rated by Deutsche Bank as one of the top 5 banks/Financial Institutions in

Asia in October 2004

o Ranked among the Top 20 companies to deliver healthiest returns to

shareholders, Outlook Money Magazine - September 2004

o 1st Prize at the New York Festival's Gold Midas Awards for

Environmental Communication Ad in August 2004

o Features in the Forbes list of Top 20 Leading Indian Companies in May 2004.

o One of the Top 10 Investor Friendly Companies, ranked by Business Today in

March 2004.

o HDFC Ranked No. 3 - 'India's Best Managed Companies' by Finance

Asia

o Clean Sweep by HDFC at the 43rd ABCI Awards!!!

o National Award for Excellence In Corporate Governance by The

Institute of Company Secretaries of India

o 2nd Best Company for Corporate Governance in India by the Asset

magazine.

o The Economic Times Lifetime Achievement Award - 2003. (For Mr.

Deepak Parikh - Chairman, HDFC Ltd. )

o One of the Top Ten - Most Admired Companies in India ' - 2003 by Business

Barons

o One of the Top Ten - Most Admired CEOs in India ' - 2003 by Business

Barons ( for Mr. Deepak Parikh )

o India's Second Best Managed Company - 2003 by Finance Asia.

o India's Biggest Wealth Creator in the banking and financial serives by the

fourth Business Today - Stern Steward Survey.

o One of the Top Ten - Most Respected Companies in India' by Business

world.

o Highest rating for ' Governance and Value Creation ' by CRISIL.

o One among the top ten ' Company Leaders in India' by the Far Eastern

Economic Review Survey.

o Best Managed Financial Institution in India' by fox Pitt Survey.

HDFC BANK LIMITED - A PROFILE

Background

The Housing Development Finance Corporation Limited (HDFC) was amongst the

first to receive an ‘in principle’ approval from the Reserve Bank of India (RBI) to set

up a bank in the private sector, as part of the RBI’s liberalisation of the Indian

Banking Industry in 1994. The bank was incorporated in August 1994 in the name of

‘HDFC Bank Limited’, with its registered office in Mumbai, India. HDFC Bank

commenced operations as a Scheduled Commercial Bank in January 1995.

Promoter

HDFC is India’s premier housing finance company and enjoys an impeccable track

record in India as well as in international markets. Since its inception in 1977, the

Corporation has maintained a consistent and healthy growth in its operations to

remain the market leader in mortgages. Its outstanding loan portfolio covers well over

a million dwelling units. HDFC has developed significant expertise in retail mortgage

loans to different market segments and also has a large corporate client base for its

housing related credit facilities. With its experience in the financial markets, a strong

market reputation, large shareholder base and unique consumer franchise, HDFC was

ideally positioned to promote a bank in the Indian environment.

Business Focus

HDFC Bank’s mission is to be a World-Class Indian Bank. The objective is to build

sound customer franchises across distinct businesses so as to be the preferred provider

of banking services for target retail and wholesale customer segments, and to achieve

healthy growth in profitability, consistent with the bank’s risk appetite. The bank is

committed to maintain the highest level of ethical standards, professional integrity,

corporate governance and regulatory compliance. HDFC Bank’s business philosophy

is based on four core values - Operational Excellence, Customer Focus, Product

Leadership and People.

Capital Structure

The authorized capital of HDFC Bank is Rs.450 crore (Rs.4.5 billion). The paid-up

capital is Rs.309.9 crore (Rs.3.09 billion). The HDFC Group holds 22.2% of the

bank’s equity and about 19.5% of the equity is held by the ADS Depository (in

respect of the bank’s American Depository Shares (ADS) Issue). Roughly 31.7% of

the equity is held by Foreign Institutional Investors (FIIs) and the bank has about

190,000 shareholders. The shares are listed on the The Stock Exchange, Mumbai and

the National Stock Exchange. The bank’s American Depository Shares are listed on

the New York Stock Exchange (NYSE) under the symbol “HDB”.

Times Bank Amalgamation

In a milestone transaction in the Indian banking industry, Times Bank Limited

(another new private sector bank promoted by Bennett, Coleman & Co./Times

Group) was merged with HDFC Bank Ltd., effective February 26, 2000. As per the

scheme of amalgamation approved by the shareholders of both banks and the Reserve

Bank of India, shareholders of Times Bank received 1 share of HDFC Bank for every

5.75 shares of Times Bank. The acquisition added significant value to HDFC Bank in

terms of increased branch network, expanded geographic reach, enhanced customer

base, skilled manpower and the opportunity to cross-sell and leverage alternative

delivery channels.

Distribution Network

HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable

network of over 495 branches spread over   218 cities across India. All branches are

linked on an online real-time basis. Customers in over 120 locations are also serviced

through Telephone Banking. The Bank’s expansion plans take into account the need

to have a presence in all major industrial and commercial centres where its corporate

customers are located as well as the need to build a strong retail customer base for

both deposits and loan products. Being a clearing/settlement bank to various leading

stock exchanges, the Bank has branches in the centers where the NSE/BSE have a

strong and active member base.

The Bank also has a network of about over 1054 networked ATMs across these cities.

Moreover, HDFC Bank’s ATM network can be accessed by all domestic and

international Visa/MasterCard, Visa Electron/Maestro, Plus/Cirrus and American

Express Credit / Charge card holders.

Management

Mr. Jagdish Capoor took over as the bank's Chairman in July 2001. Prior to this, Mr.

Kapoor was a Deputy Governor of the Reserve Bank of India.

The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25

years, and before joining HDFC Bank in 1994 was heading Citibank's operations in

Malaysia.

The Bank's Board of Directors is composed of eminent individuals with a wealth of

experience in public policy, administration, industry and commercial banking. Senior

executives representing HDFC are also on the Board.

Senior banking professionals with substantial experience in India and abroad head

various businesses and functions and report to the Managing Director. Given the

professional expertise of the management team and the overall focus on recruiting

and retaining the best talent in the industry, the bank believes that its people are a

significant competitive strength.

Technology

HDFC Bank operates in a highly automated environment in terms of information

technology and communication systems. All the bank’s branches have online

connectivity, which enables the bank to offer speedy funds transfer facilities to its

customers. Multi-branch access is also provided to retail customers through the

branch network and Automated Teller Machines (ATMs). The Bank has made

substantial efforts and investments in acquiring the best technology available

internationally, to build the infrastructure for a world class bank. In terms of software,

the Corporate Banking business is supported by Flexible, while the Retail Banking

business by Fin ware, both from i-flex Solutions Ltd. The systems are open, scaleable

and web-enabled.

The Bank has prioritized its engagement in technology and the internet as one of its

key goals and has already made significant progress in web-enabling its core

businesses. In each of its businesses, the Bank has succeeded in leveraging its market

position, expertise and technology to create a competitive advantage and build market

share.

Business Profile

HDFC Bank caters to a wide range of banking services covering both commercial and

investment banking on the wholesale side and transactional / branch banking on the

retail side. The bank has three key business segments:

a) Wholesale Banking Services

The Bank’s target market is primarily large, blue-chip manufacturing companies in

the Indian corporate sector and to a lesser extent, small & mid-sized corporate and

agri-based businesses. For these customers, the Bank provides a wide range of

commercial and transactional banking services, including working capital finance,

trade services, transactional services, cash management, etc. The bank is also a

leading provider of structured solutions, which combine cash management services

with vendor and distributor finance for facilitating superior supply chain management

for its corporate customers. Based on its superior product delivery / service levels and

strong customer orientation, the Bank has made significant inroads into the banking

consortia of a number of leading Indian corporate including multinationals,

companies from the domestic business houses and prime public sector companies. It

is recognized as a leading provider of cash management and transactional banking

solutions to corporate customers, mutual funds, stock exchange members and banks.

c) Treasury

Within this business, the bank has three main product areas - Foreign Exchange and

Derivatives, Local Currency Money Market & Debt Securities, and Equities. With the

liberalization of the financial markets in India, corporate need more sophisticated risk

management information, advice and product structures. These and fine pricing on

various treasury products are provided through the bank’s Treasury team. To comply

with statutory reserve requirements, the bank is required to hold 25% of its deposits

in government securities. The Treasury business is responsible for managing the

returns and market risk on this investment portfolio.

b) Retail Banking Services

The objective of the Retail Bank is to provide its target market customers a full range

of financial products and banking services, giving the customer a one-stop window

for all his/her banking requirements. The products are backed by world-class service

and delivered to the customers through the growing branch network, as well as

through alternative delivery channels like ATMs, Phone Banking, Net Banking and

Mobile Banking.

The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank

Plus and the Investment Advisory Services programs have been designed keeping in

mind needs of customers who seek distinct financial solutions, information and

advice on various investment avenues. The Bank also has a wide array of retail loan

products including Auto Loans, Loans against marketable securities, Personal Loans

and Loans for Two-wheelers. It is also a leading provider of Depository Participant

(DP) services for retail customers, providing customers the facility to hold their

investments in electronic form.

HDFC Bank was the first bank in India to launch an International Debit Card in

association with VISA (VISA Electron) and issues the Master card Maestro debit card

as well. The Bank launched its credit card business in late 2001. By March 2005, the

bank had a total card base (debit and credit cards) of 4.2 million cards. The Bank is

also one of the leading players in the “merchant acquiring” business with over 42,000

Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant

establishments. The Bank is well positioned as a leader in various net based B2C

opportunities including a wide range of internet banking services for Fixed Deposits,

Loans, Bill Payments, etc.

RATINGS/AWARDS

a) Credit Rating

HDFC Bank has its deposit programmes rated by two rating agencies - Credit

Analysis & Research Limited. (CARE) and Fitch Ratings India Private Limited. The

Bank’s Fixed Deposit programme has been rated ‘CARE AAA (FD)’ [Triple A] by

CARE, which represents instruments considered to be “of the best quality, carrying

negligible investment risk”. CARE has also rated the Bank’s Certificate of Deposit

(CD) programme “PR 1+” which represents “superior capacity for repayment of short

term promissory obligations”. Fitch Ratings India Pvt. Ltd. (100% subsidiary of Fitch

Inc.) has assigned the “TAAA (ind)” rating to the Bank’s deposit programme, with

the outlook on the rating as “stable”. This rating indicates “highest credit quality”

where “protection factors are very high”. HDFC Bank also has its long term

unsecured, subordinated (Tier II) Bonds of Rs.4 billion rated by CARE and Fitch

Ratings India Private Limited. CARE has assigned the rating of “CARE AAA” for

the Tier II Bonds while Fitch Ratings India Pvt. Ltd. has assigned the rating

“AAA(ind)” with the outlook on the rating as “stable”. In each of the cases referred to

above, the ratings awarded were the highest assigned by the rating agency for those

instruments.

b) Corporate Governance Rating

The bank was one of the first four companies, which subjected itself to a Corporate

Governance and Value Creation (GVC) rating by the rating agency, The Credit

Rating Information Services of India Limited (CRISIL). The rating provides an

independent assessment of an entity’s current performance and an expectation on its

“balanced value creation and corporate governance practices” in future. The bank has

been assigned a ‘CRISIL GVC Level 1’ rating which indicates that the bank’s

capability with respect to wealth creation for all its stakeholders while adopting sound

corporate governance practices is the highest.

c) Awards and Accolades

Over the years, HDFC Bank has received recognition and awards from various

leading organisations and publications, both domestic and international. In June 2005,

HDFC Bank won Asia money magazine’s “Best Domestic Commercial Bank Award

2005” for India. The Bank was awarded The Asian Banker’s, “Excellence in Retail

Banking Risk Management Award for 2004”, a pan-Asia recognition of the bank’s

risk management abilities. The Asset (Triple A Country Awards) rated HDFC Bank

as the “Best Domestic Bank in India – 2004” and “Best Domestic Bank in India –

2003”. Forbes Global again named the Bank in its listing of ‘Best Under a Billion,

100 Best Smaller Size Enterprises in Asia/Pacific and Europe”, in its November 2004

issue. The Bank was rated as the “Best Overall Local/Domestic Bank – India” in the

Corporate Cash Management Poll conducted by the Hong Kong based Asia money

magazine. The said magazine also awarded the Bank with the titles of “Overall Most

Improved Company for Best Management Practices in India” in the Best Managed

Companies poll 2004, “Best Local Cash Management Bank”, Best Overall Domestic

Trade Finance Services Award”, and also awarded the Managing Director, Mr.

Aditya Puri as the “Best Chief Executive Officer in India”. In May 2004, the Bank

also won the “Operational Excellence in Retail Financial Services – India” award as

part of the Asian Banker Excellence in Retail Financial Services Program 2003.

HDFC Bank was selected by Finance Asia as the “Best Local Bank – India 2003”,

“Best Local Bank in India 2002”, “Best Domestic Commercial Bank – India 2001”,

“Best Domestic Commercial Bank – India 2000” and “Best Domestic Commercial

Bank – India 1999”. Euro money rated HDFC Bank as “Best Bank in India 2002”,

“Best Bank – India 2001”, “Best Domestic Bank – India 2000” and “Best Bank –

India 1999”. For its use of information technology the bank has been recognized as a

“Computerworld Honors Laureate” and awarded the 21st Century Achievement

Award in 2002 for Finance, Insurance & Real Estate category by Computer world,

Inc., USA.

Closer home, HDFC Bank was selected as the “Best Bank in India” for the second

consecutive year in 2004 by Business Today. The Bank was selected by Business

World as "one of India's Most Respected Companies" as part of The Business World

Most Respected Company Awards 2004. In the FE-E&Y Best Banks Survey for

2002-03, HDFC Bank was selected as the number one new generation private-sector

bank. Outlook Money Awards selected HDFC Bank as the “Best Bank – Private

Sector 2003-04” in February 2004. HDFC Bank was ranked India’s Best Bank – 2003

by Business Today and as Best Bank for the year 2000 by Business India. It was also

the winner of The Economic Times Award – Corporate Excellence for Emerging

Company of the Year 2000-01. HDFC Bank was awarded the Best IT User award

2003 (category: Banking) as part of the IT User Awards 2003 conferred by

Economictimes.com & Nasscom.

Product Profile

Savings, Fixed Deposits, Current and Demat Accounts

Savings Account: Apart from the usual facilities, you get a free ATM Card, Inter-

branch banking, Net-Banking, Bill-Pay, Phone-Banking, Debit Card and Mobile-

Banking, among others.

HDFC Bank Preferred: A preferential Savings Account where you are assigned

a dedicated Relationship Manager, who is your one-point contact. You also get

privileges like fee waivers, enhanced ATM withdrawal limit, priority locker

allotment, free Demat Account and lower interest rates on loans, to name a few.

Sweep-In Account: A fixed deposit linked to your Savings Account. So, even if

your Savings Account runs a bit short, you can issue a cheque (or use your ATM

Card). The money is automatically swept in from your fixed deposit into your

Savings Account.

Super Saver Account: Gives you an overdraft facility up to 75% of your Fixed

Deposit. In an emergency, you can access your funds while your Fixed Deposit

continues to earn high interest.

HDFC Bank Plus: Apart from Regular and Premium Current accounts we also

have HDFC Bank Plus, a Current Account and then some more. You can transfer up

to Rs. 50 lakh per month at no extra charge, between the four metros. You can also

avail of cheque clearing between the four metros, get cash delivery/pickup upto Rs.

25,000/-, home delivery of Demand Drafts, at-par cheques, outstation cheque

clearance facility, etc.

Demat Account: Conduct hassle-free transactions on your shares. You can also

access your Demat Account on the Internet.

Innovative services for your convenience...

Phone-Banking: 24-hour automated banking services with 39 PhoneBanking

numbers available.

ATM 24-hour banking: Apart from routine transactions, you can also pay your

utility bills and transfer funds, at any of our ATMs across the country all year round.

Inter-city/Inter-branch Banking: Access your account from any of our

495 branches in 218 cities.

Net-Banking: Access your bank account from anywhere in the world, at anytime,

at your own convenience. You can also view your Demat Account through Net

Banking.

International Debit Card: An ATM card you can shop with all over the country

and in over 140 countries with. You can spend in any currency, and pay in Rupees.

Mobile-Banking: Access your account on your mobile phone screen at no airtime

cost. Use SMS technology to conduct your banking transactions from your cellphone.

BillPay: Pay your telephone, electricity and mobile-phone bills through our ATMs,

Internet, phone or mobile phone. No more standing in long queues or writing

cheques.

Loans for every need

Now, our loans come to you in easy-to-pay monthly installments, and are available

with easy documentation and quick delivery.

Personal Loans: Take a loan of up to Rs. 3 lakh for a wedding, education,

purchase of a computer or an exciting holiday.

New Car Loans and Used Car Loans: Finance up to 90% of the cost of a car,

new or used! And the loans come to you with easy documentation and speedy

processing at attractive interest rates.

Loans Against Shares: Get an overdraft up to Rs. 10 lakh at an attractive interest

rate against physical shares, up to 50% of the market value of your shares. In case of

Demat Shares, you can get a Loans Against Shares of up to 65% of the market value

of your shares, till Rs. 20 lakh.

Two Wheeler & Consumer Loans: To help you buy the best durables for

your home.

Demat Account: Protect your shares from damage, loss and theft, by maintaining

your shares in electronic form. You can also access your demat account on the

internet.

Current Account: Get a personalised cheque book, monthly account statements,

inter-branch banking and much more.

Mutual Funds: Apart from a wide choice of mutual funds to suit your individual

needs, you benefit from expert advice on choosing the right funds based on in-depth

market analysis.

International Credit Card: Get an option of Silver, Gold, or Health Plus Credit

card, accepted worldwide from a world-class bank. If you have outstanding balance

on your other credit card, you can transfer that balance to this card at a lower interest

rate.

NRI Services: A comprehensive range, backed by unmatched features and world-

class service, ensures NRIs all the banking support they need.

Forex Facilities: Avail of foreign currency, travellers cheques, foreign exchange

demand drafts, to meet your travel needs.

Insurance*: HDFC Bank now brings you Life Insurance and Pension Solutions

like Risk Cover Scheme, Savings Scheme, Children’s Plan and Personal Plan from

HDFC Standard Life Insurance Co. Ltd.

Management Hierarchy

Board of directors :

Mr. Jagdish Kapoor, chairman

Mr. Aditya Puri, Managing Director

Mr. Keki Mistry

Dr. (Mrs.) Amla Samanta

Mr. Anil Ahuja

Dr. Venket Rao Gadwal

Mr. Vineet Jain

Mrs. Renu Karnad

Mr. Arvind Pande

Mr. Rajan Kapur

Mr. Bobby Parekh

Mr. Ashim Sama

SENIOR MANAGEMENT TEAM

A.Parthasarathy

A Rajan

Abhay Aima

Bharat Shah

C.N.Ram

G.Subramanian

Harish Engineer

Neeraj Swaaroop

Paresh Sukthankar

Samir Bhatia

Sudhir M Joshi

Vinod G Yennamadi

VICE PRESIDENT (LEGAL)&COMPANY SECRETARY

Sanjay Dongre

SWOT ANALYSIS

Strengths:

1. HDFC is an old and well renowned bank with well qualified employees

2. HDFC is a leading bank in regard to home loans as compared to any private or

public sector bank.

3. According to the recent news in the economic times HDFC bank beats SBI as

the most valuable financial firm.

Weaknesses:

1. The direct selling agents are posing a threat to the reputation of the firm by

not disclosing the complete information about their services.

2. The staff does not provide complete information to employees regarding the

penalties involved.

Opportunities:

1. HDFC bank is going global to the Arabian countries.

2. Awareness of the e-age services and greater demand of credit cards are posing

greater opportunities.

Threats:

1. The opening up of another private sector bank, ICICI in the city.

2. The merger of the public sector banks thus making them stronger and efficient

as compared to the private sector banks.

3. The private sector banks are facing stiff and tough competition from the

foreign banks.

The faith of the people towards the public sector banks makes them all the more

reluctant to switch over to a private bank.

CHAPTER-2

RESEARCH METHODOLOGY

RESEARCH METHODOLOGY

Type of Research:

The type of research is analytical. Analytical research includes journals magazinies,

internet and fact finding enquiries of different kinds. The major purpose of analytical

research is description of the state of affairs as it exists at present. In social science

and business research we quite often use the term Ex post facto research for analytical

research studies. The main characteristic of this method is that the researcher has no

control over the variables; he can only report what has happened or what is

happening.

Research Design:

As the research type is descriptive, so we will be using Analytical Research Design to

do our Research work. The methodology of study will be through

journals,internet,magazines.

Source of Data Sampling Plan:

Secondary data. Secondary data was collected from the bank’s annual report,

brochures and its website.

Methods of data col lect ion:

Secondary Data: For secondary data the methods used for data collection are as

follows:

Internet, newspapers, bank’s manual, brochures etc.

Objectives of the study:

1. To assess the trends towards the investment pattern.

2. To study the traditional instruments of investments at HDFC BANK such as Fixed Deposits, Recurring Deposits , saving account,current account etc.

3. Modern instruments of investments such as Mutual funds, SIP, ULIPetc. At HDFC

4. Fixed deposits. Vs RD

Limitat ions of the s tudy:

o The constraint of time available for carrying out this study is limited.

o The findings of the research are limited to a particular area & cannot be

applied to all places.

o As the human behavior is not constant so the results collected through

Questionnaire may or may not apply to future period of time.

o Human Bias can also be considered as an important limitation of the research.

CHAPTER-4

INDUSTRY

PROFILE

CHAPTER-5

“CHANGES ININVESTMENT

PATTERN”

CHANGES IN INVESTMENT PATTERN

Investment scenario is changing very rapidly. Emergence of modern instruments of

investment like Mutual Funds, Systematic Investment Plan, RBI Bonds, and

Infrastructure Bonds proves to be a better option for the investors in comparison to

the old instruments of investment such as fixed deposits, savings, recurring deposits

etc. This project deals with the thorough study of these modern instruments in respect

of their returns, liquidity, and tenure & safety aspect etc.

Investments have become a key complexity because of the following reasons:

-Interest rates falling.

-Equity markets violate.

-All usual choices look the same.

One of the most important question in today’s scenario is that where would a person

like his / her money to be i.e. what are the factors which a person look for before

investing:

a) Investments opportunities to optimize returns.

b) Focus on tax-free returns.

c) Protect income flows.

d) Preserve capital.

CHAPTER-6

CRITICAL ANALYSIS OF

TRADITIONAL AND MODERN

INVESTMENTS

INSTRUMENTS

TRADITIONAL INSTRUMENTS OF INVESTMENT

The traditional instruments of investment were:

6.1FIXED DEPOSITS

6.2RECURRING DEPOSITS

6.3NSC’s(National Saving Certificates)

6.4TIME DEPOSIT

6.5POST OFFICE MONTHLY INCOME SCHEMES

6.1 FIXED DEPOSITS

A fixed deposit 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. 

Bank fixed deposits are one of the most common savings scheme open to an average

investor. Fixed deposits also give a higher rate of interest than a savings bank

account.  The facilities vary from bank to bank. Some of the facilities offered by

banks are overdraft (loan) facility on the amount deposited, premature withdrawal

before maturity period (which involves a loss of interest) etc. Bank deposits are fairly

safer because banks are subject to control of the Reserve Bank of India.

In this category we include deposits, which are made with the bank for a fixed period.

The deposit of specifies the period at the time of making the deposit. These deposits

are repayable after the maturity/expiry of the specified period. The depositor,

depending upon his requirements instructs the bank to keep the deposit for a certain

period. For example, if the depositor knows that he is not going to need the money for

the next three years, he may ask the bank to prepare a fixed deposit receipt for a

period of three years. On the other hand, if he requires the money after say nine

months or so, he may request the bank to prepare the fixed deposit receipt for a

shorter period. As the date of repayment of the fixed deposits is determined in

advance, the bank need not keep more cash reserves against it and can utilize such

amount profitably elsewhere. Since the depositor parts with liquidity for a definite

period, the bank offers higher rate of interest on fixed deposits. Some years ago fixed

deposits are very popular among the depositors and constitute more than half of the

total bank deposits.

6.1.1 The joy of fixed returns

Fixed deposits remain the most popular instrument for financial savings in India.

They are the middle path investments with adequate returns and sufficient liquidity.

There are basically three avenues for parking savings in the form of fixed deposits.

The most common are bank deposits. For nationalized banks, the yield is generally

low with a maximum interest of 10 to 10.5% per annum for a period of three years or

more. As opposed to that, NBFCs and company deposits are more attractive.          

The idea is to select the right company to minimize the risk. Company deposits as a

saving instrument have declined in popularity over the last three years. The major

reasons being the slowdown in economy resulting in default by some companies.

Also, some NBFCs simply vanished with the depositors' money.

All that is likely to change for the better. Corporate performance is likely to improve

and stricter control by RBI should improve NBFCs record. But one still needs to be

selective.

6.1.2 Features

Bank deposits are fairly safe because banks are subject to control of the Reserve Bank

of India (RBI) with regard to several policy and operational parameters. The banks

are free to offer varying interests in fixed deposits of different maturities. Interest is

compounded once a quarter, leading to a somewhat higher effective rate.  

The minimum deposit amount varies with each bank. It can range from as low as Rs.

100 to an unlimited amount with some banks. Deposits can be made in multiples of

Rs. 100/-. 

Before opening a FD account, try to check the rates of interest for different banks for

different periods. It is advisable to keep the amount in five or ten small deposits

instead of making one big deposit. In case of any premature withdrawal of  partial

amount, then only one or two deposit need be prematurely encashed. The loss

sustained in interest will, thus, be less than if one big deposit were to be

encashed. Check deposit receipts carefully to see that all particulars have been

properly and accurately filled in. The thing to consider before investing in an FD is

the rate of interest and the inflation rate. A high inflation rate can simply chip away

your real returns.

o Interest for re-investment is calculated every quarter, and the Principal is

increased to include interest earned during the previous quarter.

o Tax at source is deducted as per the Income Tax regulations prevalent

from time to time.

Note: Interest rates are subject to change from time to time. Request you to clear your

cache to see the updated interest rates. The bank will give applicable interest rates as

on the date of receipt of the funds.

6.1.3 Returns

 The rate of interest for Bank Fixed Deposits varies between 4 and 11 per

cent, depending on the maturity period (duration) of the FD and the

amount invested. Interest rate also varies between each bank. A Bank FD

does not provide regular interest income, but a lump-sum amount on its

maturity. Some banks have facility to pay interest every quarter or every

month, but the interest paid may be at a discounted rate in case of

monthly interest.  The Interest payable on Fixed Deposit can also be

transferred to Savings Bank or Current Account of the customer. The

deposit period can vary from 15, 30 or 45 days to 3, 6 months, 1 year, 1.5

years to 10 years. 

Duration Interest rate (%) per annum

5-30 days 4 -7 %

30-45 days 5-8 %

46-90 days 6-8 %

91-180 days 6.5-9.5 %

181-365 days 7-9.5 %

1-1.5 years 8.5-10.25 %

1.5-2 years 8.5-10.5 %

2-3 years 9-10.5 %

3-5 years 9.5-10.5 %

5 years 9.5-11 %

6.1.4 How to apply 

One can get a bank FD at any bank, be it nationalised, private, or foreign. You have

to open a FD account with the bank, and make the deposit. However, some banks

insist that you maintain a savings account with them to operate a FD. When a

depositor opens an FD account with a bank, a deposit receipt or an account statement

is issued to him, which can be updated from time to time, depending on the duration

of the FD and the frequency of the interest calculation. Check deposit receipts

carefully to see that all particulars have been properly and accurately filled in. 

We present a few pointers, which FD investors must consider at the

time of investment,

1.Safety

FDs have conventionally been the premier choice for investors with a low risk

appetite; assured returns is the key factor, which attracts investors towards deposits.

Stick to FDs of the highest credit rating i.e. those with a “AAA” rating even if their

rates seem modest vis-à-vis those offered by company deposits.

Company deposits are unsecured in nature and investing in them would imply taking

on disproportionately higher risk. If as an investor you are open to investing in

instruments involving higher risk levels, market linked instruments like mutual funds

may not be a bad deal.

2.Tenure

Short tenured fixed deposits continue to be your best bet. With interest rates on the

ascent, a further hike in rates offered by fixed deposits cannot be ruled out. Locking

your investments in longer tenured instruments may lead to an opportunity loss. Even

if a 3-Yr FD looks like a lucrative proposition as compared to one, which runs over a

year or so, pick the short tenured one. In a rising rate scenario, you could be more

than compensated for the lower returns at present.

3.Liquidity

Find out how your FD fares on the premature encashment front i.e. how easily can

your investments be liquidated. Also enquire about the penalty clause.

4. Some Additional Benefits

FD’S from reputed entities offer additional benefits e.g. they can be used as collateral

security against which loans can be raised.

Benefits of Company Fixed Deposits   as an investment avenue

Advantages 

Bank deposits are the safest investment after Post office savings because all bank

deposits are insured under the Deposit Insurance & Credit Guarantee Scheme of

India. It is possible to get a loans up to75- 90% of the deposit amount from banks

against fixed deposit receipts. The interest charged will be 2% more than the rate of

interest earned by the deposit. With effect from A.Y. 1998-99, investment on bank

deposits, along with other specified incomes, is exempt from income tax up to a limit

of Rs.12, 000/- under Section 80L.  Also, from A.Y. 1993-94, bank deposits are

totally exempt from wealth tax. The 1995 Finance Bill Proposals introduced tax

deduction at source (TDS) on fixed deposits on interest incomes of Rs.5000/- and

above per annum.

Company Fixed Deposit’s are non-transferable that means there is no fear of

FD receipt being stolen. In case it falls into wrong hands, it cannot be

misused. The FD holder in such a case should write to the company, which

shall issue duplicate deposit receipt upon execution of an indemnity and

cancel the previous one.

No income tax is deducted at source if the interest income is up to Rs 5000/-in

one financial year.One can spread his investment in more than one company,

so that interest from one company does not exceed Rs. 5000.-

Further, advantage of investing in company fixed deposits is that one can

analyses the company before investing in it because companies accepting

deposits are old-established reputed companies with proven track records.

It is also important that company fixed deposit should be made for short

term, i.e., tenure should be for 1-3 years depending upon the rate of interest.

This will help the investor to switch to other company if need be

Recently, nomination facility has been introduced in company fixed deposits.

6.1.7 History of Company Fixed Deposits in India

Company Fixed Deposit market in India has an interesting phase of evolution.  It

basically grew out of the need of Corporate Sector for raising short-term finance and

requirements of small investors to earn superior returns as compared to returns

offered by the Banks.  The concept of company fixed deposits was started in India in

1964 by Bajaj Capital Ltd.by launching first ever Company Fixed Deposit of Oberoi

Group - East India Hotels Ltd.(now EIH Ltd.).The success of East India Hotels

prompted others private and public sector companies which started accepting deposits

from public.

Since then company deposit market has grown by leaps and bounds.  Today,

company deposit market has grown to approximately Rs.25,000 crores. Hundreds of

top companies belonging to reputed industrial houses like Tata, Birla, Escorts, Godrej

etc. and government companies like HUDCO are accepting deposits from public. The

numbers of depositors have increased to around 5 million. 

The benefits of company deposit are numerous like superior returns from reputed

companies, fixed and assured returns, premature encashment, simplicity of

transactions, TDS benefits, wide choice, All these features have made company

deposits a preferred instrument of investment.

WHERE NOT TO INVEST

Companies which pay a rate of interest higher than 14%

Companies, which are not paying regular dividends to their shareholders.

New companies belonging to first generation of promoters, which have yet to

prove their credit worthiness.

It is best to avoid private limited companies, and partnership firms and other un-

incorporated bodies. Such companies are under no obligation to publish their

balance sheets working results and it is, therefore, very difficult to judge their

performance.

Companies whose balance sheets show accumulated losses.

Companies with a poor liquidity position and below investment grade rating.

How to choose a company for making deposit

There are many companies operating in Company Deposit market. Investors,

however, have to be careful while selecting a company for investing their hard earned

money. Following is a checklist for selecting good companies:

1. Credit Rating/ Reputation and Size of Industrial Group

The first thing to check out is the rating of the deposit scheme. Investors should

avoid those companies, which have below ‘A’ rating. In case of manufacturing

companies, it’s however not mandatory to get rating. In this case investor should

look at the background of promoters and financial track record. In manufacturing

companies, reputation and size of industrial group to which the company belongs

is the key criteria for safety and reliability.

The whole procedure of making investment in company deposits can be described

in two words; it is simple and liquid. It is simple for depositor to put in and get

back his money anytime after 6 months. It is also simple for company to raise

money in form of fixed deposits.

2. Don't put all your eggs in one Basket

The deposits should be spread over a large number of companies engaged in

different industries. In this way an investor will be able to diversify his risk

among various Industries/ Companies. Investors should not put more than 10% of

their total portfolio in one particular company.

Period of Deposit

Ideally the investment should be for 1 to 3 years depending upon the

rate of interest.

3. Periodic Review of the Companies

The performance of the companies should be reviewed at maturity i.e., whether to

renew or reshuffle, the deposit. A watch should also be kept over the companies

by checking their share prices, annual reports and other news reported in the

commercial columns of daily papers.

Persons who can open an account

I) An account may be opened by

a) A single adult; or

b) Two adults jointly, the amount due on the account being payable-

i) To both jointly or survivor, or

ii) to either of them or survivor, or

c). A guardian on behalf of a minor or a person of unsound mind; or

d).A minor who has attained the age of ten years, in his own name.

RECURING DEPOSITS

The Recurring deposit in Bank is meant for someone who want 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. 

6.2.1 Features 

The minimum investment of Recurring Deposit varies from bank to bank but usually

it begins from Rs 100/-. There is no upper limit in investing. The rate of interest

varies between 7 and 11 percent depending on the maturity period and amount

invested. The interest is calculated quarterly or as specified by the bank. The period

of maturity ranging from 6 months to 10 years.  

The deposit shall be paid as monthly installments and each subsequent monthly

installment shall be made before the end of the calendar month and shall be equal to

the first deposit. In case of default in payment, a default fee is chargeable for delayed

deposit at the rate of Rs. 1.50/- for every Rs. 100/- per month for deposits up to 5

years and Rs. 2/- per Rs. 100/- in case of longer maturities.

Since a recurring deposit offers a fixed rate of return, it cannot guard against inflation

if it is more than the rate of return offered by the bank. Worse, lower the gap between

the interest rate on a recurring deposit and inflation, lower your real rate of return.

Premature withdrawal is also possible but it demands a loss of interest. 

6.2.2 Returns

The rate of interest varies between 7 and 11 percent depending on

the maturity period and amount invested. The interest is calculated

quarterly or as specified by the bank. 

Amount invested per month Maturity amount in 2 years 

(5%interest)

Rs 100 Rs 2626

Rs 500 Rs 13,132

Rs 750 Rs 19,698

Rs 3000 Rs 78,792

6.2.3 Advantages  

Some Nationalised banks are giving more facilities to their customer, State Bank of

India give Free Roaming Recurring Deposit facility to their customers.  They can

transfer their account to any branch of SBI free. Tax benefit on the interest earned on

Recurring Deposit up to Rs 12000 Tax Deductible at source if the interest paid on

deposit exceeds Rs 5000/-per customer, per year, per branch.

6.2.4 How to open an Account

A Recurring Bank Deposit account can be opened at any branch of a bank that offers

this facility. However, some banks insist that you maintain a savings bank account

with them to operate a Recurring Bank Deposit account. The terms and conditions

vary from bank to bank. When a depositor opens a Recurring Bank Deposit account

with a bank, a pass-book or an account statement is issued to him.

These are fixed deposits with a difference.

How it works

In a normal fixed deposit, you put in an amount and, after a specific period of time,

you are free to withdraw it. Meanwhile, you do not touch the money or add to it.

A recurring deposit works on a similar principle. The difference is: instead of

putting in a bulk amount, you put in a specified amount (which you decide when

you open your recurring account) every month. This could be a small amount that

will not pinch your pocket or make a dent in your lifestyle

At the end of the tenure, you get a nice amount. And the interest that you earn -- to a

maximum of Rs 12,000 per year -- is exempt from tax (under Section 80L of the

Income Tax Act, 1961).

There are two ways you can open a recurring deposit:

1. With your bank. 

How it works

Your bank automatically deducts a fixed amount from your savings account.

So, every month, when your salary cheque is put in your account, your bank

will debit the amount you initially agreed upon and credit it to your recurring deposit

account.

If you tell them to put in Rs 1,000 every month, this amount will automatically move

from your savings account to your recurring deposit account. So with no effort on

your part, at the end of 12 months, you will have Rs 12,000 to which you can add the

interest the bank will give you.

With banks, you determine beforehand how much you would like to put in every

month and that is how it stays -- you cannot change that figure till the end of your

recurring term. So if you fix it at Rs 1,000 every month, that is the amount that will

move to your recurring account -- nothing more, nothing less.

What you should know

o Though banks score high on convenience, they offer lower returns. The

rates vary from three percent to seven percent per annum.

o Banks offer you flexibility, in that you can start with a term that is as low

as one year onwards.

2. With the local post office

How it works

You can put in amounts as low as Rs 10 per month. There is no upper limit.

The post office deposit will give you 7.5 per cent per annum.

What you should know

o The post office scheme is for five years.

o You have to make a trip every month to your post office to deposit your

amount.

So, as far as recurring deposit options are concerned, you will either make a trip

to your local post office or tell your local bank that you would like a recurring

deposit option. The tenure of the deposit, the interest rate and the minimum

amount to be regularly deposited will vary from bank to bank.

6.3.Time Deposit  

6.3.1 What is Time Deposit A Post-Office Time Deposit Account (RDA) is a 

banking service similar to a Bank Fixed Deposit  offered by Department of post,

Government of India at all post office counters in the country. The scheme is meant

for those investors who want to deposit a lump sum of money for a fixed period; say

for a minimum period of one year to two years, three years and a maximum period of

five years. Investor gets a lump sum (principal + interest) at the maturity of the

deposit. Time Deposits scheme return a lower, but safer, growth in investment. 

6.3.2 Features Time Deposits can be made for the periods of 1 year, 2 years, 3

years and 5 years. The minimum investment in a post-office Time deposit is Rs 200

and then its multiples and there is no prescribed upper limit on your investment. 

Account may be opened by an individual, Trust, Regimental Fund and Welfare

Fund.  

The account can be closed after 6 months but before one year of opening the account.

On such closure the amount invested is returned without interest.  2 year, three year

and five year accounts can be closed after one year at a discount. They involve a loss

in the interest accrued for the time the account has been in operation.

Interest is payable annually but is calculated on a quarterly basis at the prescribed

rates. Post maturity interest will be paid for a maximum period  of 24 months at the

rate applicable to individual savings account.  

One can take a loan against a time deposit with the balance in your account pledged

as security for the loan.

6.3.3 Returns This investment option pays annual interest rates

between 6.25 and 7.5 per cent, compounded quarterly. Time

deposit for 1 year offers a coupon rate of 6.25%, 2-year deposit

offers an interest of 6.5%,  3 years is 7.25% while a 5-year Time

Deposit offers 7.5% return.

Duration of Account Quarterly Compound Interest

1year

2 years

3 years

5 years

6.25%

6.5%

7.25%

7.5%

6.3.4 Advantages In this scheme your investment grows at a pre- determined rate

with no risk involved. With a Government of India-backing, your principal as well as

the interest accrued is assured under the scheme. The rate of interest is relatively high

compared to the 4.5% annual interest rates provided by banks. Although the amount

invested in this scheme is not exempted as per section 88 of Income Tax, the amount

of interest earned is tax free under Section 80-L of Income Tax Act.

6.3.5 How to start a Time Deposit A Time Deposit account can be opened at

any post-office in the country. Account may be opened by an individual, i.e., Single,

Joint A/B (not more than two adults) Trust, Regimental Fund and Welfare Fund. On

opening a Time Deposit, you will receive an account statement stating the amount

deposited and the duration of the account. The account can be closed after 6 months

of opening the account. On such closure the amount invested is returned with/without

interest depending on the time the deposit was maintained.

6.4. National Savings Certificates

6.4.1 What is National Savings Certificate National Savings Certificates

(NSC) are certificates issued by Department of post, Government of India and are

available at all post office counters in the country. It is a long term safe savings

option for the investor. The scheme combines growth in money with reductions in tax

liability as per the provisions of the Income Tax Act, 1961. The duration of a NSC

scheme is 6 years.  

6.4.2 Features NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs

5,000 and Rs 10,000 for a maturity period of 6 years. There is no prescribed upper

limit on investment.

o Individuals, singly or jointly or on behalf of minors and trust can purchase a NSC

by applying to the Post Office through a representative or an agent. 

o One person can be nominated for certificates of denomination of Rs. 100- and

more than one person can be nominated for higher denominations.

o The certificates are easily transferable from one person to another through the

post office. There is a nominal fee for registering the transfer. They can also be

transferred from one post office to another.

o One can take a loan against the NSC by pledging it to the RBI or a scheduled

bank or a co-operative society, a corporation or a government company, a housing

finance company approved by the National Housing Bank etc with the permission

of the concerned post master.

o Though premature encashment is not possible under normal course, under sub-

rule (1) of rule 16  it is possible after the expiry of three years from the date of

purchase of certificate.

Tax benefits are available on amounts invested in NSC under section 88, and

exemption can be claimed under section 80L for interest accrued on the NSC.

Interest accrued for any year can be treated as fresh investment in NSC for that

year and tax benefits can be claimed under section 88. 

6.4.3 Return It is having a high interest rate at 8% compounded

half yearly. Post maturity interest will be paid for a maximum

period of 24 months at the rate applicable to individual savings

account. A 1000 rs denomination certificate will increase to

1601Rs. on completion of 6 years.

Interest rates for the NSC Certificate of Rs 1000

YEAR RATE OF INTEREST

1 year Rs 81.60

2 year Rs 88.30

3 year Rs95.50

4 years Rs103.30

5 years Rs 111.70

6 years Rs 120.80

6.4.4 Advantages  Tax benefits are available on amounts invested in NSC under

section 88, and exemption can be claimed under section 80L for interest accrued on

the NSC. Interest accrued for any year can be treated as fresh investment in NSC for

that year and tax benefits can be claimed under section 88. NSCs can be transferred

from one person to another through the post office on the payment of a prescribed fee.

They can also be transferred from one post office to another. The scheme has the

backing of the Government of India so there are no risks associated with your

investment.

6.4.5 How to start   Any individual or on behalf of minors and trust

can purchase a NSC by applying to the Post Office through a

representative or an agent. Payments can be made in cash, cheque

or DD or by raising a debit in the savings account held by the

purchaser in the Post Office. The issue of certificate will be subject

to the realization of the cheque, pay order, DD. The date of the

certificate will be the date of realization or encashment of the

cheque. If a certificate is lost, destroyed, stolen or mutilated, a

duplicate can be issued by the post-office on payment of the

prescribed fee.

6.5 Post Office Monthly Income Scheme 

6.5.1 What is post office monthly income scheme?

The post-office monthly income scheme (MIS) provides for monthly payment of interest income to

investors. It is meant for investors who want to invest a sum amount initially and earn interest on a

monthly basis for their livelihood.  The MIS is not suitable for an increase in your investment. It is meant

to provide a source of regular income on a long term basis. The scheme is, therefore, more beneficial for

retired persons. 

6.5.2 Features Only one deposit is available in an account. Only individuals can open the account;

either single or joint.( two or three). Interest rounded off to nearest rupee i.e, 50 paise and above will be

rounded off to next rupee. The minimum investment in a Post-Office MIS is Rs 1,000 for both single and

joint accounts. The maximum investment for a single account is Rs 3 lakh and Rs 6 lakh for a joint

account. The duration of MIS is six years.  

6.5.3 Returns The post-office MIS gives a return of 8% plus a bonus of 10 per cent

on maturity. However, this 10 per cent bonus is not available in case of premature

withdrawals. The minimum investment in a Post-Office MIS is Rs 1,000 for both

single and joint accounts

Deposit Rs Monthly Interest

Amount returned on

maturity

5,000

10,000

50,000

1,00,000

2,00,000

3,00,000

6,00,000

33

66

333

667

1333

2000

4000

5,500

11,000

55,000

1,10,000

2,20,000

3,30,000

6,60,000

6.5.4 Advantages Premature closure of the account is permitted any time after the expiry of a period

of one year of opening the account. Deduction of an amount equal to 5 per cent of the deposit is to be

made when the account is prematurely closed. Investors can withdraw money before three years, but a

discount of 5%. Closing of account after three years will not have any deductions. Monthly interest can

be automatically credited to savings account provided both the accounts standing at the same post office. 

The interest income accruing from a post-office MIS is exempt from tax under Section 80L of the

Income Tax Act, 1961. Moreover, no TDS is deductible on the interest income. The balance is exempt

from Wealth Tax.

6.5.5 How to Open You can buy a post office MIS at any post-office in India. When you open an

MIS, you will get a certificate issued by the post office. In addition, the investor is provided with a

passbook to record his transactions against his MIS.

MODERN INSTRUMENTS OF INVESTMENT

1. MUTUAL FUNDS2. SIP (Systematic investment plan)3. RBI Bonds4. Infrastructure Bonds

1.MUTUAL FUNDS

1.1 Introduction

Different investments avenues are available to investors. Mutual funds also offer

good investment opportunity to the investors. Like all investments, they also carry

certain risks. The investors should compare the risks and expected yields after

adjustments of tax on various instruments while taking investment decisions. The

investors may seek advice from experts and consultants including agents and

distributors of mutual funds schemes while making investment decisions.

With objectives to make the investors aware of functioning of mutual funds, an

Attempt has been made to provide information in question-answer format which may

help the investors in taking investments decisions.

1.2 Definition of mutual fund

Mutual fund is a mechanism for pooling the resources by issuing units to the investors

and investing funds in securities in accordance with objectives as disclosed in offer

document.

Investments in securities are spread across a wide cross-section of industries and

sectors and thus the risk is reduced. Diversification reduces the risk because4 all

stocks may not move in the same direction bin the same proportion at the same time.

mutual fund issues units to the investors in accordance with quantum of money

invested by them. Investors of mutual funds are known as unit holders.

The investors in proportion to their investments share the profits or losses.

The mutual funds normally come out with a number of schemes with different

investments objectives, which are launched from time to time. A mutual fund is

required to be registered with Securities and Exchange Board of India (SEBI), which

regulates securities markets before it can collect funds from the public.

1.3 History of Mutual Fund in India and role of SEBI in mutual funds industry

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early

1990’s, Government allowed public sector banks and institutions to set up mutual

funds. In the year 1992, Securities and exchange Board of India (SEBI) Act was

passed. The objectives of SEBI are- to protect the interest of investors in securities

and to promote the development of and to regulate the securities market.

As far as mutual funds are concerned, SEBI formulates policies and regulates the

mutual funds to protect the interest of the investors. SEBI notified regulations for the

mutual funds in 1993.Therefore, mutual funds sponsored by private sector entities

were allowed to enter the capital market. The regulations were fully revised in 1996

and have been amended therefore from time to time. SEBI has also issued guidelines

to the mutual funds from time to time to protect the interests of investors.

All mutual funds whether promoted by public sector or private sector entities

including those promoted by foreign entities are governed by the same set of

Regulations. There is no distinction in regulatory requirements for these mutual funds

and all are subject to monitoring and inspections by SEBI. The risks associated with

the schemes launched by the mutual funds sponsored by these entities are of similar

type. It may be mentioned here that Unit Trust of India (UTI) is not registered with

SEBI as a mutual fund (as on January 15, 2002)

1.4 Mutual fund set up

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset

Management Company (AMC) and custodian. The trust is established by a sponsor or

more than one sponsor who is like promoter of a company. The trustees of the mutual

fund hold its property for the benefits of the unit holders. Asset Management

Company (AMC) approved buy SEBI manages the funds by making investments in

various types of securities. A custodian, who is registered with SEBI, holds the

securities of various schemes of the fund in its custody. The trustees are vested with

the general power of superintendence and direction over AMC. They monitor the

performance and compliance of SEBI Regulations by the mutual fund.

SEBI Regulations require that at least two thirds of the directors of trustee company

or board of trustee must be independent i.e. they should not be associated with the

sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds

are required to be registered with SEBI before they launch any schemes. However,

Unit Trust of India (UTI) is not registered with SEBI (as on January 15, 2002).

1.5 Net Asset Value (NAV) Of Schemes

The performance of a particular scheme of a mutual fund is denoted by net asset

value (NAV).

Mutual funds invest the money collected from the investors in securities markets. In

simple words, Net Asset Value is the market value of the securities held by the

schemes. Since market value of securities changes every day, NAV of a scheme also

varies on day-to-day basis. The NAV per unit is the market value of securities of a

scheme divided by the total number of units of the schemes on any particular date.

For example, if the market value of securities of a mutual fund schemes is Rs 200

lakes and the mutual fund has issued 10 lakes units of Rs. 10 each to the investors,

then the NAV per units of the fund is Rs.20. NAV is required to be disclosed by the

mutual funds on a regular basis- daily or weekly –depending on the type of scheme.

1.6 Different types of mutual fund schemes

1.6(1)Schemes according to Maturity Period:

A mutual fund schemes can be classified into open-ended schemes or close-ended scheme depending on its maturity period.

o Open- ended Fund/ Scheme

An open –ended fund or scheme is one that is available for subscription and

repurchase on a continuous basis. These schemes do not have a fixed maturity

period. Investors can conveniently buy and sell units at Net Asset Value (NAV)

related prices which are declared on a daily basis. The key feature of open-end

schemes is liquidity.

o Close –ended Fund/Schemes

A close –ended fund or schemes has a stipulated maturity period e.g. 5-7 years.

The fund is open for subscription only during a specified period at the time of

launch of the scheme. Investors can invest in the schemes at the time of the initial

public issue and therefore they can buy or sell the units of the scheme on the stock

exchange where the units are listed. In order to provide an exit route to the

investors, some close-ended funds give an option of selling back the units to the

mutual fund through periodic repurchase at NAV related prices. SEBI

Regulations stipulate that at least one of the two exit routes is provided to the

investor i.e. either repurchase facility or through listing on stock exchanges. This

mutual funds scheme discloses NAV generally on weekly basis.

1.6(2)Schemes according to Investment Objective: Schemes can also be classified as growth scheme, income scheme, or balanced

scheme considering its investment objective. Such schemes may be open-ended or

close-ended schemes as described earlier. Such schemes may be classified mainly as

follows:o Growth /Equity Oriented Scheme

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. The investors

must indicate the option in the application form. The mutual funds also allow the

investors to change the options at later date. Growth schemes are good for

investors having a long-term outlook seeking appreciation over a period of time.

o Income/ Debt Oriented Scheme

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 Fund

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.

MONEY Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity,

preservation of capital and moderate income. These schemes invest exclusively in

safer short-term instruments such as treasury bills, certificates of deposit, commercial

paper and inter-bank call money, government securities, etc. Returns on these

schemes fluctuate much less compared to other funds. These funds are appropriate for

corporate and individual investors as a means to park their surplus funds for short

periods.

Gilt Fund

These funds invest exclusively in government securities. Government securities have

no default risk. NAVs of these schemes also fluctuate due to change in interest rates

and other economic factors as is the case with income or debt oriented schemes.

Index Funds

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive

index, S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in the

same weight age comprising of an index. NAVs of such schemes would rise or fall in

accordance with the rise or fall in the index, though not exactly by the same

percentage due to some factors known as “tracking error” in technical terms.

Necessary disclosures in this regard are made in the offer document of the mutual

fund scheme. There are also exchange traded index funds launched by the mutual

funds, which are traded in the stock exchanges.

Sector Specific funds/ schemes

These are the funds/schemes, which invest in the securities of only those sectors or

industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast

Moving Consumer Goods (FMCG),Petroleum stocks, etc. the returns in these funds

are dependent on the performance of the respective sectors/industries. While these

funds may gibe higher returns, they are more risky compared to diversified funds.

Investors need to keep a watch on the performance of those sectors/ industries and

must exit at an appropriate time. They may also seek advice of an expert.

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the

Income Tax Act, 1961 as the Government offers tax incentives for investment in

specified avenues. E.g. Equity Linked Savings Schemes (ELSS). Pension schemes

launched by the mutual funds also offer tax benefits. These schemes are growth

oriented and invest pre-dominantly in equities. Their growth opportunities and risks

associated are like any equity-oriented scheme.

Load or no–load Fund

A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each

time one buys or sells units in the fund, a charge will be payable. This charge is used

by the mutual fund for marketing and distribution expenses. Suppose the NAV per

unit is Rs. 10. if the entry as well as exit load charged is 1%, then the investors who

buy would be required to pay Rs. 10.10 and those who offer their units for

repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should

take the loads into consideration while making investment as these affect their

yields/returns. However, the investors should also consider the performance track

record and service standards of the mutual fund, which are more important. Efficient

funds may give higher returns in spite of loads.

A no-load fund is one that does not charge for entry or exit. It means the investors can

enter the fund/ scheme at NAV and no additional charges are payable on purchase or

sale of units.

Sales or repurchase/ redemption price

The price or NAV a unit holder is charged while investing in an open-ended scheme

is called sales price. It may include sales load, if applicable.

Repurchase or redemption price is the price or NAV at which an open-ended scheme

purchases or redeems its units from the unit holders. It may include exit load, if

applicable.

Assured return scheme

Assured return schemes are those schemes that assure a specific return to the unit

holders irrespective of performance of the scheme.

A scheme cannot promise returns unless such returns are fully guaranteed by the

sponsor or AMC and this is required to be disclosed in the offer document.

Investors should carefully read the offer document whether return is assured for the

entire period of the scheme or only for a certain period. Some schemes assure returns

one year at a time and they review and change it at the beginning of the next year.

1.7 Ways to invest in a scheme of a mutual fund

Mutual funds normally come out with an advertisement in newspapers publishing the

date of launch of the new schemes. Investors can also contact the agents and

distributors of mutual funds who are spread all over the country for necessary

information and application forms. Forms can be deposited with mutual funds

through the agents and distributors who provide such services. Now a day, the post

offices and banks also distribute the units of mutual funds. However, the investors

may please note that the mutual funds schemes being marketed by banks and post

offices should not be taken as their own schemes being marketed by banks and post

offices should not be taken as their own schemes and no assurance of returns is given

to them. The only role of banks and post offices is to help in distribution of mutual

funds schemes to the investors.

Investors should not be carried away by commission. /gifts given by agents/

distributors for investing in a particular scheme. On the other hand they must consider

the track record of the mutual fund and should take objective decisions.

1.8 Can non-resident Indians (NRIs) invest in mutual funds or not

Yes, non-resident Indians can also invest in mutual funds. Necessary details in this

respect are given in the offer documents of the schemes. also help in this regard.

1.9 Procedure to fill up the application form of a mutual fund schem e

An investor must mention clearly his name, address, number of units applied for and

such other information as required in the application form. He must give his bank

account number so as to avoid any fraudulent encashment of any cheque / draft issued

by the mutual fund at a later date for the purpose of dividend or repurchase. Any

changes in the address, bank account number, etc at a later date should be informed to

the mutual fund immediately.

1.10 Factors an investor look into an offer document

Am abridged offer document, which contains very useful information, is required to

be given to the prospective investor by the mutual fund. The application form for

subscription to a scheme is an integral part of the offer document. SEBIhas prescribed

minimum disclosures in the offer document. An investor, before investing in a

scheme, should carefully read the offer document. Due care must be given to portions

relating to main features of the scheme, risk factors, initial issue expenses and

recurring expenses to be scheme, entry or exit loads, sponsor’s track record,

educational qualification and work experience of key personnel including fund

managers, performance of other schemes launched by the mutual fund in the past,

pending litigations and penalties imposed, etc.

1.11 The investor gets certificate or statement of account after investing in a mutual fund after the following period

Mutual funds are required to dispatch certificates or statements of

accounts within six weeks from the date of closure of the initial

subscription of the scheme. In case of close-ended schemes, the investors

would get either a demat account statement or unit certificates as these

are traded in the stock exchanges. In case of open-ended schemes, a

statement of account is issued by the mutual fund within 30 days from

the date of closure of initial public offer of the scheme. The procedure of

repurchase is mentioned in the offer document.

1.12 Can a mutual fund change the nature of the scheme from the one specified in the offer document or not

Yes, however, no change in the nature or terms of the scheme, known as fundamental

attributes of the scheme e.g. structure, investment pattern, etc. can be carried out

unless a written communication is sent to each unit holder and an advertisement is

given in one English daily having nationwide circulation and in a newspaper

published in the language of the region where the head office of the mutual fund is

situated. The unit holders have the right to exit the scheme at the prevailing NAV

without any exit load if they do not want to continue with the scheme. The mutual

funds required similar procedure while converting the scheme form close-ended to

open-ended scheme and in case of change in sponsor.

1.13 Ways in which an investor come to know about the changes, if any, which may occur in the mutual fund

There may be changes from time to time in a mutual fund. The mutual funds are

required to inform any material changes to their unit holders. Apart from it, many

mutual funds send quarterly newsletters to their investors.

At present, offer documents are required to be revised and updated at least once in

two years. In the meantime, new investors are informed about the material changes by

way of addendum to the offer document till the time offer document is revised and

reprinted.

1.14 Ways to know the performance of a mutual fund scheme

The performance of a schemer is reflected units net asset value (NAV), which is

disclosed on daily basis in case of open-ended schemes and on weekly basis in case

of close-ended schemes. The NAVs of mutual funds are required to be published in

newspapers. The NAVs are also available on the web sites of mutual funds. All

mutual funds are also required to put their NAVs on the web site of Association of

Mutual Funds in India (AMFI) www. Amfiindia.com and thus the investors can

access NAVs of all mutual funds at on e place.

The mutual funds are also required to publish their performance in the form of half-

yearly results which also include their returns/ yields over a period of time i.e. last six

months, 1 year, 3 year, 5 year and since inception of schemes. Investors can also look

into other details like percentage of expenses of total assets as these have an affect on

the yield and other useful information in the same half yearly format.

The mutual funds are also required to send annual report or abridged annual report to

the unit holders at the end of the year.

The financial newspapers on a weekly basis are publishing various studies on mutual

fund schemes including yields of different schemes. Apart from these, many research

agencies also publish research reports on performance of mutual funds including the

ranking of various schemes in terms of their performance. Investors should study

these reports and keep themselves informed about the performance of various

schemes of different mutual funds.

Investors can compare the performance of their schemes with those of other mutual

funds under the same category. They can also compare the performance of equity-

oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty,

etc. On the basis of performance of the mutual funds, the investors should decide

when to enter or exit from a mutual fund scheme.

1.15 Ways to know where the mutual fund scheme has invested

money mobilized from the investors

The mutual funds are required to disclose full portfolios of all of their schemes on

half-yearly basis, which are published in the newspapers. Some mutual funds send the

portfolios to their unit holders.

The scheme portfolio shows investment made in each security i.e. equity, debentures

money market instruments, government securities, etc. and their quantity, market

value and % to NAV. These portfolio statements also required disclosing illiquid

securities in the portfolio, investment made in rated and unrated debt securities, non-

performing assets (NPAs), etc.

Some of the mutual funds send newsletters to the unit holders on quarterly basis,

which also contain portfolios of the schemes.

1.16 Ways to choose a scheme for investment from a number of schemes available

As already mentioned, the investors must read the offer document of the mutual fund

scheme very carefully. They may also look into the past track record of performance

of the scheme or other schemes of the same mutual fund. They may also compare the

performance with other schemes having similar investment objectives. Though past

performance of a scheme is not an indicator of its future performance and good

performance in the past may or may not be sustained in the future, this is one of the

important factors for making investment decision. In case of debt-oriented schemes,

apart from looking into past returns, the investors should also see the quality of debt

instruments, which is reflected in their rating. A scheme with lower rate of return but

having investments in better-rated instruments may be safer. Similarly, in equities

schemes also, investors may look for quality of portfolio. They may also seek advice

of experts.

1.17 The higher net worth of the sponsor a guarantee for better returns or not

In the offer document of any mutual fund scheme, financial performance including

the net worth of the sponsor for a period of three years is required to be given. The

only purpose is that the investors should know the track record of the company,

which has sponsored the mutual fund. However, higher net worth of the sponsor does

not mean that the scheme would give better returns or the sponsor would compensate

in case the NAV falls.

1.18 An investor look out for information on mutual funds through:

Almost all the mutual funds have their own web sites. Investors can also access the

NAVs, half-yearly results and portfolios of all mutual funds at the web site of

Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also

published useful literature for the investors.

Investors can log on to the web site of SEBI www.sebi.gov.in and go to “Mutual

Funds” section for information on SEBI regulations and guidelines, data on mutual

funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc.

Also, in the annual reports of SEBI available on the web site, a lot of information on

mutual funds is given.

There are a number of other web sites, which give a lot of information of various

schemes of mutual funds including yields over a period of time. Many newspapers

also publish useful information on mutual funds on daily and weekly basis. investors

may approach their agents and distributors to guide them in this regard.

1.19After mutual fund scheme is wound up, money invested becomes

In case of winding up of a scheme, the mutual funds pay a sum based on prevailing

NAV after adjustments of expenses. Unit holders are entitled to receive a report on

winding up from the mutual funds, which gives all necessary details.

MUTUAL FUND Vs FD

From the very beginning, people find it very convenient to invest their money in fixed

deposits. But have we ever noticed the results that we get after investing in fixed

deposits that is our money get blocked till the completion of that fixed period of time.

Moreover the fixed and less return that we get after the completion of that fixed

period are also taxable. On the other hand the emergence of Mutual funds as a

strongest tool of investment gets unnoticed and most of the people have never made

efforts to increase their awareness regarding this particular investment option. People

are still unaware that there is a big margin in between the returns that we get while

investing in fixed deposits & Mutual funds. Fixed deposits provide us with a 5.5%

rate of return while Mutual funds gives us up to 12-14%. Availability of tax rebate is

also a big feature of Mutual fund investment. Along with it, we can have our invested

amount back whenever we feel like without any condition of time I.e. Liquidity. Risk

is also substantially reduced while investing in Mutual funds because Mutual funds

provides you for investing in not just one particular investment but in a combination

of investments like some money in equity shares, some in government securities,

some in Bonds so on while investing in Fixed deposits provides you for holding all

your money in just one investment which is more risk prone. For e.g.: It might happen

that price of equity shares may decline but at the same time the price in debt market

may be stable which is being offered by Mutual funds.

2.SYSTEMATIC INVESTMENT PLAN

2.1 What is Systematic investment plan?

Systematic Investment Plan is a feature specifically designed for those who are

interested in building wealth over a long-term and plan out a better future for

themselves and their family.

Anyone can enroll for this facility by starting an account with (minimum investment

amount) and giving 4/6 post-dated cheques of periodic investment based on one’s

convenience

2.2 Features :

Disciplined approach to investment

- Periodic & regular investment outflow.

Rupee cost averaging

- Buy more when NAV is low & less when NAV is

& less when NAV is high.

-Help overcome market volatility.

Power of compounding

- Longer the period, the more wealth you accumulate

No entry load

Minimum investment of Rs1000/- through a standing instruction.

2.3 BENEFITS OF A MONTHLY INVESTMENT PLANS THE HDFC Mutual fund systematic investment plan (SIP) is similar to a recurring

deposit. Every month an amount you choose is invested in a mutual fund scheme of

your choice. You’ll be amazed to learn about the many benefits of investing through

HDFC MF SIP.

o Become a disciplined investor

Being disciplined –it’s the key to investing success. with the HDFC MF Systematic

investment plan you commit an amount of your choice(minimum of Rs 500&in

multiples of Rs 100 thereof)to be invested in one of the schemes. think of each SIP

Payment as laying a brick. one by one, you’ll see them transform into a building. It’s

as simple as giving at least 6 post-dated monthly cheques to us for a fixed amount in a

scheme of your choice. It’s the perfect solution for irregular investors.

o Reach your financial goals

Imagine you want to buy a car a year from now, but you don’t know where the down

payment will come from. The HDFFC SIP is a perfect tool for people who have a

specific future financial requirement. By investing an amount of your choice every

month, you can plan for and meet financial goals, like funds for a child’s education ,a

marriage in the family or a comfortable post retirement life.

o Do all this effortlessly

Investing with HDFC MF SIP is easy. Simple give us post dated Cheques for an

amount of your choice (minimum of Rs. 500 and in multiples Of Rs 100

there of) and we’ll invest the money every month in a fund of your choice. The plans

are completely flexible. You can invest for a minimum of six months, or for as long

as you want. You can also decide to invest quarterly and will need to invest for a

minimum of two quarters.

With the HDFC MF SIP no loads are charged for investment up to Rs 1 lakh (per

investor, per due date, per scheme/plan/option). You can even change your monthly

investment amount.

All you have to do after that is sit back and watch your investments accumulate.

o Grow your investments with compounded benefits

It is far better to invest a small amount of money regularly,rather than save up to

make one large investment. This is because while you are saving the lump-sum ,

your saving may not earn much interest.

With HDFC MF SIP , each amount you invests grow through compounding benefits

as well.That is, the interest earned on your investment also earns interest. The

following example illustrates this:

Imagine Neha is 20 years old when she starts working. Every month she saves and

invests Rs 5,000 till she is 25 years old. The total investment made by her over 5

years is Rs. 3 lakhs.

Arjun also starts working when he is 20 years old.But he dosen’t invest monthly. He

gets a large bonus of Rs. 3 lakhs at 25 and decides to invests the entire amount.

Both of them decides not to withdraw these investments till they turn 50. At

50,Neha’s investments have grown to Rs.46,68,273 where as Arjun’s investments

have grown to Rs.36,17,084.

Neha’s small contribution to a SIP and her decision to start investing earlier than

Arjun have made her wealthier by over Rs.10 lakhs.

(Figures based on 10% p.a. interest compounded monthly)

3.RBI BONDS

3.3 What are RBI Bonds?

RBI Bonds are tax saving bonds that have a special provision that allows the investor

to save on tax. These Bonds are instruments that are issued by the RBI, and currently

has two options – one carrying an 8% rate of interest p.a., which is taxable and the

other one carries a 6.5% (tax-free) interest p.a. The interest is compounded half-

yearly and there is no maximum limit for investment in these bonds. The maturity

period of the 8%(taxable) bond is 6 years and that of the 6.5%(tax-free) bond is 5

years. Application forms for RBI Bonds are available and accepted at all branches of

the Reserve Bank of India, designated branches of the SBI, and designated branches

of nationalised banks across the country.

INVESTMENT

The minimum investment on RBI Savings Bonds is Rs 1,000. You can apply in

multiples of Rs 1,000 thereafter. There is no prescribed upper limit to your

investment in this instrument.

3.3INTEREST RATES

Under the cumulative option of the 6.5%(tax-free) RBI Relief Bond issued at a face

value of Rs 1,000 would be redeemed at Rs 1,377 on maturity (after 5 years). And in

case of the cumulative option of the 8% (taxable) RBI Relief Bond issued at a face

value of Rs 1,000 would be redeemed at Rs 1,601 on maturity (after 6 years).

You can opt to receive interest either on a half-yearly basis or on maturity of the

instrument, along with the principal invested. If you opt to receive interest on a half-

yearly basis, you will receive interest every six months from the date of issue of the

bond up to 30th June or 31st December, whichever is earlier. Interest is paid on 1st

July and 1st January each year.

3.4 MATURITY

The period of holding of 6.5 per cent (tax-free) RBI Relief Bond is 5 years from the

date of issue. And for the 8 per cent (taxable) RBI Relief bond, the maturity period is

6 years. The bonds are repayable on the expiration of the maturity.

3.5 PREMATURE WITHDRAWL

While the 8 per cent taxable Savings Bond cannot be redeemed prematurely and must

be held for the entire duration (6 years), the 6.5 per cent tax-free Savings bond can be

redeemed before the maturity period of 5 years. In this case, after a minimum lock in

period of 3 years from the date of issue, an investor can surrender the bond any time

after the 6th half year but redemption payment will be made on the following interest

payment due date. Thus the effective date of premature encashment will be 1st July

and 1st January every year. However, 50% of the interest due and payable for the last

six months of the holding period will be recovered in such cases both in respect of

cumulative and non-cumulative Bonds.

3.6LOAN FACILITY

RBI Savings Bonds are not eligible as collateral for loans from banks, financial

institutions and Non-Banking Financial Company (NBFC) etc.

3.7TRANSFERRABLE:

RBI Savings Bonds are not tradable in the secondary market. The Bonds in the form

of Bond Ledger Account and Stock Certificate are not transferable except by way of

gift to a relative by execution of appropriate Transfer Form and execution of an

affidavit by the holder.

3.8 DETERMINATION OF MARKET VALUE OF RBI SAVINGS

BONDS

Market value of RBI Relief Bonds is determined on the basis of prevailing (6.5 p

per cent and 8 per cent, as applicable) interest rates and market conditions.

3.9MODE OF HOLDING:

RBI Savings Bonds can be held at the credit of the holder in an account called BLA

or in the form of PN. The bond can be held in demat form, i.e., a certificate of holding

will be issued to the holder of bonds in the BLA. The bonds in the form of BLA are

issued and held with the public debt offices of the RBI or any branch of a scheduled

bank authorized by the RBI. The bonds in the form of PN are issued only at the

offices of RBI. However, bonds issued in one form will not be eligible for conversion

into the other.

3.10 TAX IMPLICATIONS:

In case of the 6.5 per cent RBI Savings Bond, the interest received is

completely exempt from income tax as per the provisions of the

Income Tax Act, 1961. But, In case of the 8 per cent RBI Savings

Bond, the interest will be taxable under the Income-Tax Act, 1961

as applicable according to the relevant tax status of the bondholder.

RBI Savings Bonds are exempt from Wealth Tax. However, there is

no tax benefit on the amount invested in these bonds.

With most investment avenues such as stocks, deposits in banks and NBFCs losing their

sheen, investors are seen with a sigh of relief by heading towards bonds issued by the

Reserve Bank of India. Currently there are two such bonds available in the market, the

already existing 8% relief bonds and the recently launched 7% savings bonds. Both

these bonds offer a moderate rate of return and are a safe haven to lock one’s funds

with.

4. INFRASTRUCTURE BONDS

4.1What are Infrastructure Bonds?

4.1 Infrastructure bonds provide tax-saving benefits under Section 88 of the Income Tax

Act, 1961, up to an investment of Rs.1,00,000, subject to the bonds being held for a

minimum period of three years from the date of allotment.

Investments in infrastructure bonds from various financial institutions qualify for a tax

rebate under Section 88 of the Income Tax Act. The maximum investment limit to claim

rebate under Section 88 has now been enhanced to Rs 1 lakh, subject to a minimum

investment of Rs 30,000 in infrastructure bonds. An attractive feature of infrastructure

bonds is that the lock-in period is only three years. ICICI and IDBI are the major players

in this segment; others like the Rural Electrification Corporation Ltd. have also received

the permission to come up with the issues.

4.2 Pluses

The minimum lock-in period of only three years makes this scheme attractive for

people who do not want their money locked in for too long.

4.3 Minuses

Deduction on account of interest on infrastructure bonds under section 80L is not

available.

Returns on investments in these bonds work out to much lower than the returns

offered by Public Provident Fund (PPF) and National Savings Certificates

(NSC). In fact, with the falling interest rates the return on infrastructure bonds

has also fallen, to the extent that investing in this instrument doubts one's

financial prudence.

Infrastructure bonds, though they offer you an additional rebate on the investment under

section 88, do not make financial prudence any longer. Though it has a lock-in period of

as low as three years (the lowest among various other tax saving instruments), the rate

of interest is very near to what one would get on a one-year fixed deposit with banks.

Moreover, deduction under section 80L is not available here. It makes more sense to pay

tax and use the money to generate better returns than to lock the amount for three years

and lose out to inflation.

Infrastructure bonds are essentially for those who do not care to study better investment

avenues and would be satisfied with bank fixed deposits. Moreover, they being issued

by infrastructure companies (and not the government) are quite unsecured. Some study

in the financial markets can be well worth the effort.

 Tax planning? Try infrastructure bonds

For most investors who are conducting their annual tax-planning exercise, claiming tax

benefits under Section 88 of the Income Tax Act means utilising conventional options

which include taking insurance and investing in Public Provident Fund and National

Savings Certificate.

From the total Rs 100,000 that can be claimed as rebates, the aforementioned avenues

account for only Rs 70,000; the balance Rs 30,000 is reserved for investments in

infrastructure bonds amongst others.

These investments are in the form of shares/bonds/debentures and are issued by public

financial institutions like IDBI and ICICI Bank. Also they are subject to a 3-year lock-in

period and any redemption prior to this tenure nullifies the tax benefits claimed at the

time of making the investment.

Small savings with big tax benefits!

How to invest and save tax

In case a sale/redemption is made prior to the 3-year period, the tax rebate previously

claimed is treated as investor's income for the year of sale.

So how good an option are infrastructure bonds and should investors contemplate using

the same.

Let's perform a cost-benefit analysis to answer this question. Unlike small savings

schemes that fall under the gamut of Section 88, returns offered by infrastructure bonds

are modest at best.

For the purpose of our study let's consider the previous issue of infrastructure bonds by a

leading public financial institution. Under the cumulative option, the following two

variants i.e. coupon rate 5.50% and 5.64%, respectively, were available:

Invest Rs 5,000 and get Rs 6,030 after 3 years and 6 months.

Invest Rs 5,000 and get Rs 6,580 after 5 years.

While the aforementioned scheme is not available at present, we have assumed that a

similar one will be made available shortly when the tax-planning season kicks in.

Another assumption is that inflation will continue to spiral northwards as a result

investors will be compensated with a coupon rate of 50 basis points above the previous

issue.

Hence the first option would carry a coupon rate of 6.00% while it would be 6.14% for

the second one.

If the tax benefits for both the options were factored in, the returns on a compounded

annualised growth rate (CAGR) basis would be as shown in Table 1.

Table 1: Are they good enough?

Annual Income Tax Rebate Effective Return*

                          3.5-Yr 5-Yr

Upto Rs 150,000 20% 12.98% 10.98%

Rs 150,000 – 500,000            

15%

11.04% 9.65%

Over Rs 500,000 Nil 6.00% 6.14%

Even after assuming a generous 50 basis point hike in the coupon rate which may not

fructify, the returns are far from impressive.

Now factor in the loss of liquidity, which is another dampener since liquidating these

investments before the 3-year lock-in would imply losing the tax rebates claimed.

Barring the tax breaks, one can safely conclude that the infrastructure bonds are far from

attractive.

The second option for investors is to pay up their tax liability and invest the balance sum

in alternate avenues. Hence an investor, who would have invested Rs 30,000 in

infrastructure bonds, will instead incur an additional tax liability of Rs 6,000 or Rs 4,500

depending on his tax bracket.

The balance (Rs 24,000 or Rs 25,500) should be invested in other investment avenues

like mutual funds. Returns of some of the top performers across categories have been

listed in Table 2.

Table 2: Risky but attractive!

Returns* 3-Yr 5-Yr

Diversified Equity Funds  

HDFC Top 200 50.84% NA

Franklin India Bluechip 45.89% 25.04%

Sundaram Growth 43.22% 18.66%

Balanced Funds

HDFC Prudence Fund 41.57% 21.45%

DSP ML Balanced 32.58% 13.02%

FT India Balanced 32.27% NA

At the outset we would like to state that historical returns (in case of mutual funds) have

been compared with future assured returns for infrastructure bonds. Investments in

mutual funds are market-linked and not assured; therefore historical returns may not be

repeated in the future. But a 3-year period indicates reasonably well, what they are

capable of delivering going forward.

Secondly the risks associated with mutual fund investing are exponentially higher vis-à-

vis those in infrastructure bonds.A large number of investors who are habituated to risk-

free investing might be unwilling to venture into market-linked products and rightly so.

Investments should be governed by investors' risk-appetite and not how attractive the

returns are However the motive behind investing in infrastructure bonds, i.e. to save

taxes, should not be so overbearing that it proves to be an infeasible proposition.

If you are an investor with an appetite for risk; paying the taxes and investing in a well-

diversified equity/balanced scheme may not be a bad proposition.

The solution probably lies in striking a balance between the two, i.e. the benefits of an

investment avenue that offers assured yet modest returns coupled with tax benefits on

one hand and a high risk-high return proposition on the other. Find out where you

priorities lie and get invested accordingl

CHAPTER-7

ANALYSIS

AND

INTERPRETATION

1. If you have invested in any investment scheme till yet, if yes,

then which –

Table1-

Response No. of respondents Percentage

Fixed deposits 20 40%

Savings 25 50%

Mutual funds 15 30%

Graph1-

05

1015202530

Fixeddeposits

Savings Mutualfunds

Responses

No

. o

f R

esp

on

den

ts

Series1

(HOLDERS OF DIFFERENT INVESTMENT SCHEMES)

Interpretation Out of 60 respondents, 20 respondents has invested in Fixed

deposits, 25 in Savings & 15 in Mutual Funds.

2. Please rate your satisfaction on the return, of the investment you have made on the scale of 1 to 10-

Table2-

Response No. of respondents

Percentage

Less than 5 35 70%More than 25 50%

Graph2-

0

10

20

30

40

More than 5 Less than 5

Responses

No

. o

f R

esp

on

den

ts

Series1

(SATISFACTION FROM RETURN OF DIFFERENT INVESTMENTS)

Interpretation: Out of 60 respondents, 25 respondents have given more than 5

points on the returns they get out of 10 & 35 have given less than 5 points.

3. Do you think that mutual fund is a better option than FD’S –?

Table3-

Response No. of respondents PercentageYes 40 80%No 20 40%

Graph3-

0

10

20

30

40

50

Yes No

Responses

No

.of

Res

po

nd

ents

Series1

(COMPARISON BETWEEN MUTUAL FUNDS AND FD’S)

Interpretation Out of 60 respondents , 40 respondents think that Mutual funds

is a better investment option than Fixed deposits& 20 think that Fixed deposits is

better.

4. What factor would you consider most important while investing in any investment scheme-

Table4-

Responses No. of respondents PercentageRisk 25 50%Returns 20 40%Tenure 15 30%

Graph4-

0

5

10

15

20

25

30

Risk Returns Tenure

Responses

No

. o

f R

esp

on

ses

Series1

(FACTORS TO BE CONSIDERED WHILE INVESTING IN SCHEMES)

Interpretation Out of 60 respondents, 25 respondents think that Risk is the

important factor to be considered while investing in an investment option ,20 of them

think that Returns is important & 15 think that Tenure is important.

5. Do you invest in mutual fund?

Table5-

Responses No. of respondents Percentage

Yes 15 30%No 45 90%

Graph5-

0

10

20

30

40

50

Yes No

Responses

No

. o

f re

spo

nd

ents

Series1

(HOLDERS OF MUTUAL FUNDS)

Interpretation Out of 60 respondents, 15 respondents have invested in

Mutual funds scheme & 45 respondents have not.

6. Are you satisfied with the results of mutual funds scheme?

Table6-

Responses No. of Respondents PercentageSatisfied 12 24%Unsatisfied 0 0Neither Satisfied nor unsatisfied

3 6%

Graph6-

02468

101214

Satisfied Neithersatisfied

norUnsatisfied

Responses

No

. o

f R

esp

on

den

ts

Series1

(SATISFACTION WITH RESULTS OF MUTUAL FUNDS)

Interpretation Out of 15 respondents who have invested in mutual funds, 13 are satisfied with the results & 3 respondents are neutral that is they are neither satisfied nor dissatisfied.

7. Are you aware that mutual fund industry is regulated by SEBI? Table7- Responses No. of Respondents PercentageYes 55 110%No 5 10%

Graph7-

0

10

20

30

40

50

60

Yes No

Responses

No

. o

f R

esp

on

den

ts

Series1

(AWARENESS REGARDING REGULATION OF MUTUAL FUNDS)

Interpretation Out of 60 respondents, 55 respondents are aware that Mutual fund industry is regulated by SEBI & 5 are unaware.

8 What do you think about the future of mutual fund in India? Is it?

Table8-

Responses No. of Respondents PercentageVery Bright 3 6%Bright 9 18%Very Bleak 0 0Bleak 1 2%Doesn’t Know 2 4%

Graph 8-

02468

10

Very B

right

Bright

Very B

leak

Bleak

Dosen't K

now

Responses

No

. o

f R

esp

on

den

ts

Series1

(VIEWS REGARDING FUTURE OF MUTUAL FUNDS)

Interpretation Out of 15 Respondents who have invested in Mutual funds,3

think that it has very bright future,9 think that it has bright future,1 think that it

has bleak future&2 doesn’t hold any opinion.

9. Why you have not invested in mutual fund?.

Table9-

Responses No. of Respondents Percentage

Lack of information 40 80%

High Risk 15 30%

Any other 5 10%

Graph 9-

0

10

20

30

40

50

Lack ofinformation

High Risk Any other

Responses

No

. o

f R

esp

on

den

ts

Series1

(REASONS FOR NOT INVESTING IN MUTUAL FUNDS)

Interpretation Out of 60 Respondents, 40 respondents have not invested in

mutual funds because of lack of information, 15 due of high risk& 5 due to any

other reason.

10.. Would you consider investing in mutual fund?

Table10- Responses No. of Respondents Percentage

Yes 10 20%

No 5 10%

Graph10-

0

2

4

6

8

10

12

Yes No

Responses

No

. o

f R

esp

on

den

ts

Series1

(PREFERANCE TOWARDS MUTUAL FUNDS)

Interpretation Out of 15 respondents who have not invested in mutual funds,10 would consider investing in it & 5 would not.

11. Which information do you rely on? Table11- Responses No. of Respondents PercentageNewspapers 35 70%Banks 40 80%Investment advisors 45 90%Friends/relatives 25 50%Self analysis 50 100%

Graph11-

0

10

20

30

40

50

60

News papers Relatives/Friends

Responses

No

. o

f R

esp

on

den

ts

Series1

(SOURCES OF INFORMATION)

Interpretation Most of the respondents rely on Self analysis before

investing in any investment scheme & then on Banks & Investment advisors.

CHAPTER-8

CONCLUSION

CONCLUSION:

At last to conclude my study at the HDFC Bank, Ambala Cantt, it was found that in

this new emerging business scenario people still are investing their hard earned cash

in Traditional instruments of investment like FD’s rather than in modern instruments

like Mutual Funds. This is very surprising and is due to the unawareness of people

regarding the latest available investment options. Also, people are not satisfied with

the low and taxable returns they are getting after a certain time period by investing in

fixed deposits but they have no other choice because people are unaware about

modern techniques of investment. After making them aware about the existence of

these techniques and their features they have shown keen interest in these. The factors

responsible for their unawareness are lack of qualitative efforts by banks, their rigid

ness in investing in traditional techniques& high risk & uncertainty in returns etc.

Thus a decision can be drawn is that demand of modern techniques can be introduced

by creating awareness in the minds of people regarding these investment

opportunities available.

CHAPER-9

SUGESTIONS

SUGGESTIONS

1) Awareness regarding Mutual funds scheme should be enhanced.

2) For Home loans and Personal loans separate counters should be made to avoid

confusion.

3) Advertising should be done to make people aware about the E-ages like phone

banking, net banking.

4) More ATM machines should be there in the city.

5) The bank needs to have dedicated, dynamic, self-contained and comprehensive

websites.

6) To ensure maximum profitability, bank need to adequately charge for each service

with proper cost-benefit analysis. Also due steps should be taken to charge for

such services in commensurate with other non-banking financial institutions,

nationalized and foreign banks.

7) The bank staff shall have to be imparted requisite technical and psychological

training for handling these services products and to offer the best of services to

valuable clients.

8) The bank may consider tapping and targeting big players, who do not have their

own pinup. The most important such target group is of NRIs.

BIBLIOGRAPHY

BIBLIOGRAPHY

BOOKS Jha S.M; Bank Marketing; Himalayan Publishing

House; 3rd edition; 1-12 Kothari C.R.; Research Methodology; Wishawa

Parkashan; 2nd edition; 68-84 Natrajan Gorden; Banking Theory law and

practice; Himalayan Publishing House;16th edition; 500-511

Shekhar &Shekhar; Banking theory and Practice; Vikas Publishing House Pvt. Ltd.; 18th edition; 348-372

WEBSITES www.hdfcbank.com www.pnb.com www. Finance. Indiamart.com www. tribuneindia.com www.ingvysyabank.com

Annual-report of HDFC (2004-05) Broachers of HDFCJournals

Economic and Political Weekly; A Sameeksha Trust Publication; March 19-25, 2005; Vol XL No 12; 1283-1289.