TABLE OF CONTENTS

CHAPTER TITLE PAGE No.

1 INTRODUCTION 2-23

1.1  Investment 2
1.2  Investment Need Of An Investor 3
1.3  Types Of Investment Avenues 4
1.4  Evaluation Of Various Investment Avenues 11
1.5 12
 Attributes Of Investment
1.6 14
 Approaches To Investment Decision Making
1.7 17
 Common Errors In Investment Management
1.8 20
 Risks In Investment
2 RESEARCH METHODOLOGY 24-30
2.1  Introduction 24
2.2  Statement Of The Problem 24
2.3  Review Of Literature 25
2.4  Need For Study 27
2.5 28
 Objectives Of The Study
2.6 28
 Scope Of Study
2.7 29
 Hypothesis
2.8 29
 Research Design
2.9 30
 Tools Of Data Collection
2.10 30
 Method Of Analysis
2.11 30
 Limitations Of Study
3 INDUSTRY PROFILE 31-63
 Indian Financial Market
3.1 31
 Classification Of Financial Markets
3.2  Money Market 34
3.3  Capital Market 35
3.4 36

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3.5  Distinction Between Primary Market And 37
Secondary Market
3.6  Distinction Between Capital Market And Money 38
Market
3.7  Stock Exchange 38
3.8  Speculation In Stock Exchanges 43
3.9  Stock Exchanges In India 44
3.10 45
 Regulations Of Stock Exchanges
3.11 46
 Role Of SEBI
3.12 48
 Emergence Of Financial Services Industry In
India
4 ANALYSIS AND INTERPRETATION 51-76

5 FINDINGS AND SUGGESTIONS 77-80

6 CONCLUSION 81

BIBLIOGRAPHY 82

ANNEXURE 83-85

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 LIST OF TABLES

PAGE
No. NAME
NO.

1.1 Summary evaluation of various investment avenues 11

4.1 Gender wise classification of Respondents 51

4.2 Age wise classification of Respondents 52

4.3 Classification of Respondents on the basis of their Marital Status 53

4.4 Classification of Respondents on basis of Occupation 54

4.5 Classification of Respondents on basis of Annual Income 55

4.6 Classification of Respondents on basis of Education Level 56

Classification of Respondents on basis Influence on Investment

4.7 57
Decision

Classification of Respondents on the basis of Regularity in making

4.8 58
Investment Decisions

Classification of Respondents on the basis of Objectives of Investment

4.9 59
Plan

Classification of Respondents on the basis of Factors Influencing an

4.10 60
Investment Decision

Classification of Respondents on basis of Preferred Investment

4.11 61
Avenues

4.12 Classification of Respondents on the basis of Industry preferred 62

Classification of Respondents on the basis of Time Horizon for

4.13 63
Investment

Classification of Respondents on the basis of Knowledge about

4.14 64
Financial Terms

Classification of Respondents on basis of Sources of Investment

4.15 65
Information

4.16 Classification of Respondents on basis of Risk Tolerance Level 66

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 4.17 Relationship between Gender and Risk Tolerance of Respondents 67

Relationship between Age and Investment Avenues preferred by the

4.18 69
Respondents

Relationship between Income and Investment Avenues preferred by

4.19 71
the Respondents

Relationship between Age of Respondents and Time Horizon for

4.20 73
investment

4.21 Relationship between Age and Risk Tolerance of the Respondents 75

LIST OF CHARTS

No. NAME PAGE NO.

1.1 Various investment alternatives 4

1.2 Relationship between Expected Return and Risk 13

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3.1 Classification of financial markets 34

4.1 Gender wise classification of Respondents 51

4.2 Age wise classification of Respondents 52

4.3 Classification of Respondents on the basis of their Marital Status 53

4.4 Classification of Respondents on basis of Occupation 54

4.5 Classification of Respondents on basis of Annual Income 55

4.6 Classification of Respondents on basis of Education Level 56

Classification of Respondents on basis Influence on Investment

4.7 57
Decision

Classification of Respondents on the basis of Regularity in making

4.8 58
Investment Decisions

Classification of Respondents on the basis of Objectives of

4.9 59
Investment Plan

Classification of Respondents on the basis of Factors Influencing an

4.10 60
Investment Decision

Classification of Respondents on basis of Preferred Investment

4.11 61
Avenues

4.12 Classification of Respondents on the basis of Industry preferred 62

Classification of Respondents on the basis of Time Horizon for

4.13 63
Investment

Classification of Respondents on the basis of Knowledge about

4.14 64
Financial Terms

Classification of Respondents on basis of Sources of Investment

4.15 65
Information

4.16 Classification of Respondents on basis of Risk Tolerance Level 66

4.17 Relationship between Gender and Risk Tolerance of Respondents 68

Relationship between Age and Investment Avenues preferred by the

4.18 70
Respondents

4.19 Relationship between Income and Investment Avenues preferred by 72

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 the Respondents
Relationship between Age of Respondents and Time Horizon for
4.20 74
investment

4.21 Relationship between Age and Risk Tolerance of the Respondents 76

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 EXECUTIVE SUMMARY
Investing money is a crucial and deciding the avenues where to invest
needs a lot of planning. In India people are more conservative and hence prefer
investments that are less risky. Similarly there are other demographic factors like
age, income level, gender which affect their decision. As the availability of
financial products increase, perception of investors towards such avenues
changes over a period of time. It becomes important for a marketer to understand
the perception of investors towards investment avenues to successfully pitch the
product.
The objective of this study is to understand the investment characteristics
of investors and their objectives of investment plan. We will also study the
demographic information of investors, preferred investment avenues of investors,
preferred sources of information influencing investment decisions, the risk
tolerance level of the investors.
This study on investor’s behaviour is an attempt to know the profile and
the characteristics of the investors so as to understand their preference with
respect to their investments. The main focus of the study is to discover the
influence of demographic factors like gender and age on risk tolerance level of
the investor. Here we also look upon other factors that influence them while
making investment decisions. Innovations in financial products like derivatives,
unit linked insurance products, fund of funds likewise are not easily understood
by the investor.
Based on previous research in related areas, a questionnaire was
constructed to measure the investment pattern of individuals on the basis of
demographic characteristics and the risk tolerance of investors was also
calculated. Even though this study has certain limitations but it will be helpful to
mutual fund companies and other investment companies to understand individual
behavior of investors so that they could build suitable investment options for
them individually. Also this study will help the investor to decide the areas where
they could invest.

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 CHAPTER 1

INTRODUCTION

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1.1 INTRODUCTION TO INVESTMENT
The money one earns is partly spent and the rest is saved for meeting future
expenses, instead of keeping savings idle one may like to use savings in order to
get returns on it in the future, this is called as investment. In an economic sense,
an investment is the purchase of goods that are not consumed today but are
used in the future to create wealth. In finance, an investment is a monetary asset
purchased with the idea that the asset will provide income in the future or
appreciate and be sold at a higher price. Mere earning will not help one to secure
the future, so it becomes important to invest.
One of the important reasons why one needs to invest wisely is to meet the
cost of Inflation. Inflation is the rate at which the cost of living increases. The cost
of living is simply what it costs to buy the goods and services you need to live.
Inflation causes money to lose value because it will not buy the same amount of
a good or a service in the future as it does now or did in the past. The sooner one
starts investing the better. By investing early one allow one’s investments more
time to grow, whereby the concept of compounding increases one’s income, by
accumulating the principal and the interest or dividend earned on it, year after
year.
The dictionary meaning of investment is to commit money in order to earn a
financial return or to make use of the money for future benefits or advantages.
People commit money to investments with expectations to increase their future
wealth by investing money to spend in future years. For example, if you invest
Rs. 1000 today and earn 10% over the next year, you will have Rs.1100 one year
from today.
An investment can be described as perfect if it satisfies all the needs of all
investors. So, the starting point in searching for the perfect investment would be
to examine investor needs. If all those needs are met by the investment, then
that investment can be termed the perfect investment. Most investors and
advisors spend a great deal of time understanding the merits of the thousands of
investments available in India. Little time, however, is spent understanding the

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needs of the investor and ensuring that the most appropriate investments are
selected for him.
Before making any investment, one must ensure to:
 Obtain written documents explaining the investment
 Read and understand such documents
 Verify the legitimacy of the investment
 Find out the costs and benefits associated with the investment
 Assess the risk-return profile of the investment
 Know the liquidity and safety aspects of the investment
 Ascertain if it is appropriate for your specific goals
 Compare these details with other investment opportunities available
 Examine if it fits in with other investments you are considering or you have
already made
 Deal only through an authorized intermediary
 Seek all clarifications about the intermediary and the investment
 Explore the options available to you if something were to go wrong, and then,
if satisfied, make the investment.

1.2 INVESTMENT NEEDS OF AN INVESTOR

Investing money is a stepping stone to manage spending habits and prepare for
the future expenses. Most people recognize the need to put their money away for
events or circumstances that may occur in future. People invest money to
manage their personal finances some of them invest to plan for retirement, while
others invest to accumulate wealth. Each one has a different need and each of
them expect something from their money in future.
By and large, most investors have eight common needs from their investments:
i. Security of original capital
ii. Wealth accumulation
iii. Tax Advantages
iv. Life cover
v. Income
1.3 TYPES OF INVESTMENT AVENUES

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 Figure 1.1: Various investment alternatives
Source: Investment analysis and portfolio management
Author: Prasanna Chandra

Figure 1.1 shows various investment alternatives which are explained

below. One can invest money in different types of Investment instruments. These
instruments can be financial or non-financial in nature. There are many factors
that affect one’s choice of investment. Millions of Indians buy fixed deposits, post
office savings certificates, stocks, bonds or mutual funds, purchase gold, silver,
or make similar investments. They all have a reason for investing their money.
Some people want to supplement their retirement income when they reach the
age of 60, while others want to become millionaires before the age of 40. We will
look at various factors that affect our choice of an investment alternative, let us
first understand the basics of some of the popular investment avenues.
1.3.1 Non marketable Financial Assets: A good portion of financial assets is
represented by non-marketable financial assets. These can be classified into the
following broad categories:
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 Bank Deposits: The simplest of investment avenues, by opening a bank
account and depositing money in it one can make a bank deposit. There are
various kinds of bank accounts: current account, savings account and fixed
deposit account. The interest rate on fixed deposits varies with the term of the
deposit. In general, it is lower for fixed deposits of shorter term and higher for
fixed deposits of longer term. Bank deposits enjoy exceptionally high liquidity.
 Post Office Savings Account: A post office savings account is similar to a
savings bank account. The interest rate is 6 percent per annum.
 Post Office Time Deposits (POTDs): Similar to fixed deposits of commercial
banks, POTD can be made in multiplies of 50 without any limit. The interest
rates on POTDs are, in general, slightly higher than those on bank deposits.
The interest is calculated half-yearly and paid annually.
 Monthly Income Scheme of the Post Office (MISPO): A popular scheme of
the post office, the MISPO is meant to provide regular monthly income to the
depositors. The term of the scheme is 6 years. The minimum amount of
investment is 1,000. The maximum investment can be 3, 00,000 in a single
account or 6, 00,000 in a joint account. The interest rate is 8.0 percent per
annum, payable monthly. A bonus of 10 percent is payable on maturity.
 Kisan Vikas Patra (KVP): A scheme of the post office, for which the
minimum amount of investment is 1,000. There is no maximum limit. The
investment doubles in 8 years and 7 months. Hence the compound interest
rate works out to 8.4 percent. There is a withdrawal facility after 2 ½ years.
 National Savings Certificate: Issued at the post offices, National Savings
Certificate comes in denominations of 100, 500, 1,000, 5,000 and 10,000. It
has a term of 6 years. Over this period Rs. 100 becomes Rs. 160.1. Hence
the compound rate of return works out to 8.16 percent.
 Company Deposits: Many companies, large and small, solicit fixed deposits
from the public. Fixed deposits mobilized by manufacturing companies are
regulated by the Company Law Board and fixed deposits mobilized by finance
company (more precisely non-banking finance companies) are regulated by
the Reserve Bank of India. The interest rates on company deposits are higher
than those on bank fixed deposits, but so is risk.

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 Employee Provident Fund Scheme : A major vehicle of savings for salaried
employees, where each employee has a separate provident fund account in
which both the employer and employee are required to contribute a certain
minimum amount on a monthly basis.
 Public Provident Fund Scheme: One of the most attractive investment
avenues available in India. Individuals and HUFs can participate in this
scheme. A PPF account may be opened at any branch of State Bank of India
or its subsidiaries or at specified branches of the other public sector banks.
The subscriber to a PPF account is required to make a minimum deposit of
100 per year. The maximum permissible deposit per year is 70,000. PPF
deposits currently earn a compound interest rate of 8.0 percent per annum,
which is totally exempt from taxes.

1.3.2 Bonds: Bonds are fixed income instruments which are issued for the
purpose of raising capital. Both private entities, such as companies, financial
institutions, and the central or state government and other government
institutions use this instrument as a means of garnering funds. Bonds issued by
the Government carry the lowest level of risk but could deliver fair returns. Many
people invest in bonds with an objective of earning certain amount of interest on
their deposits and/or to save tax. Bonds are considered to be a less risky
investment option and are generally preferred by risk-averse investors. Bond
prices are also subject to market risk. Bonds may be classified into the following
categories:
 Government securities: Debt securities issued by the central government
state government and quasi government agencies are referred as gilt edge
securities. It has maturities ranging from 3-20 years and carry interest rate
that usually vary between 7 to 10 percent.
 Debentures of private sector companies: Debentures are viewed as a
mixture of having a shareholding and a fixed interest loan. Debenture
holders are normally entitled to a return equivalent to a fixed percentage of
their initial investment. The security inherent in debentures makes them a
safer investment than shares.

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 Preference shares: Investing in shares is safer and dividends are assured
every year.
 Savings bonds

1.3.3 Mutual funds: A mutual fund allows a group of people to pool their money
together and have it professionally managed, in keeping with a predetermined
investment objective. This investment avenue is popular because of its cost-
efficiency, risk-diversification, professional management and sound regulation.
There are three broad types of mutual fund schemes classified on basis of
investment objective:
 Equity schemes: The aim of growth funds is to provide capital appreciation
over the medium to long- term. Such schemes normally invest a major part of
their corpus in equities. Such funds have comparatively high risks. These
schemes provide different options to the investors like dividend option, capital
appreciation, etc. and the investors may choose an option depending on their
preferences. Growth schemes are good for investors having a long-term
outlook seeking appreciation over a period of time.
 Debt schemes: The aim of income funds is to provide regular and steady
income to investors. Such schemes generally invest in fixed income securities
such as bonds, corporate debentures, Government securities and money
market instruments. Such funds are less risky compared to equity schemes.
These funds are not affected because of fluctuations in equity markets.
However, opportunities of capital appreciation are also limited in such funds.
The NAVs of such funds are affected because of change in interest rates in
the country. If the interest rates fall, NAVs of such funds are likely to increase
in the short run and vice versa. However, long term investors may not bother
about these fluctuations.

 Balanced schemes: The aim of balanced funds is to provide both growth

and regular income as such schemes invest both in equities and fixed income
securities in the proportion indicated in their offer documents. These are
appropriate for investors looking for moderate growth. They generally invest
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 40-60% in equity and debt instruments. These funds are also affected
because of fluctuations in share prices in the stock markets. However, NAVs
of such funds are likely to be less volatile compared to pure equity funds.

1.3.4 Real Estate: Residential real estate is more than just an investment. There
are more ways than ever before to profit from real estate investment. Real estate
is a great investment option. It can generate an ongoing income source. It can
also rise in value overtime and prove a good investment in the cash value of the
home or land. Many advisors warn against borrowing money to purchase
investments. The best way to do this is to save up and pay cash for the home.
One should be able to afford the payments on the property when the property is
vacant, otherwise the property may end up being a burden instead of helping to
build wealth.

1.3.5 Equity Shares: Equities are a type of security that represents the
ownership in a company. Equities are traded (bought and sold) in stock markets.
Alternatively, they can be purchased via the Initial Public Offering (IPO) route, i.e.
directly from the company. Investing in equities is a good long-term investment
option as the returns on equities over a long time horizon are generally higher
than most other investment avenues. However, along with the possibility of
greater returns comes greater risk.

1.3.6 Money market instruments: The money market is the market in which
short term funds are borrowed and lent. These instruments can be broadly
classified as:
 Treasury Bills: These are the lowest risk category instruments for the short
term. RBI issues treasury bills [T-bills] at a prefixed day and for a fixed
amount. There are 4 types of treasury bills: 14-day T-bill, 91-day T-bill, 182-
day T-bill and 364-day T-bill.
 Certificates of Deposits: After treasury bills, the next lowest risk category
investment option is certificate of deposit (CD) issued by banks and financial

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 Institution (FI). A CD is a negotiable promissory note, secure and short term,
of up to a year, in nature. Although RBI allows CDs up to one-year maturity,
the maturity most quoted in the market is for 90 days.
 Commercial Papers: Commercial papers are negotiable short-term
unsecured promissory notes with fixed maturities, issued by well-rated
organizations. These are generally sold on discount basis. Organizations can
issue CPs either directly or through banks or merchant banks. These
instruments are normally issued for 30/45/60/90/120/180/270/364 days.
 Commercial Bills: Bills of exchange are negotiable instruments drawn by the
seller or drawer of the goods on the buyer or drawee of the good for the value
of the goods delivered. These are called as trade bills and when they are
accepted by commercial banks they are called as commercial bills. If the bill
is payable at a future date and the seller needs money during the currency of
the bill then the seller may approach the bank for discounting the bill.

1.3.7 Life insurance policies: Insurance is a form of risk management that is

primarily used to hedge the risk of a contingent loss. Insurance is defined as the
equitable transfer of the risk of a loss, from one entity to another, in exchange for
a premium. An insurer is a company that sells insurance; insured or the
policyholder is a person or entity buying the insurance. The insurance rate is a
factor that is used to determine the amount which is to be charged for a certain
amount of insurance coverage, and is called the premium. It can be classified as:
 Money-back Insurance: Money-back Insurance schemes are used as
investment avenues as they offer partial cash-back at certain intervals. This
money can be utilized for children’s education, marriage, etc.
 Endowment Insurance: These are term policies. Investors have to pay the
premiums for a particular term, and at maturity the accrued bonus and other
benefits are returned to the policyholder if he survives at maturity.

1.3.8 Bullion Market: Precious metals like gold and silver had been a safe
haven for Indian investors since ages. Besides jewellery these metals are used
for investment purposes also. Since last 1 year, both Gold and Silver have highly

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appreciated in value both in the domestic as well as the international markets. In
addition to its attributes as a store of value, the case for investing in gold revolves
around the role it can play as a portfolio diversifier.

1.3.9 Financial Derivatives: Derivatives are contracts and can be used as an

underlying asset. Various types of Derivatives are:

 Forwards: A forward contract is a customized contract between two entities,

where settlement takes place on a specific date in the future at today’s pre-
agreed price.

 Futures: A futures contract is an agreement between two parties to buy or

sell an asset at a certain time in the future at a certain price. Futures contracts
are special types of forward contracts in the sense that the former are
standardized exchange traded contracts

 Options: Options are of two types - calls and puts. Calls give the buyer the
right but not the obligation to buy a given quantity of the underlying asset, at a
given price on or before a given future date. Puts give the buyer the right, but
not the obligation to sell a given quantity of the underlying asset at a given
price on or before a given date.
 Swaps: Swaps are private agreements between two parties to exchange
cash flows in the future according to a prearranged formula. They can be
regarded as portfolios of forward contracts. E.g. Currency swaps, interest
swaps.

1.4 EVALUATION OF VARIOUS INVESTMENT AVENUES

Table 1.1: Summary evaluation of various investment avenues

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Source: Investment analysis and portfolio management
Author: Prasanna Chandra
Table 1.1 shows the evaluation of various investment avenues. From this
table we can say that risk, liquidity and return are the so called factors which are
considered before making an investment. But there is a trade off between risk
and return. Higher the risk higher is the return. Lower the risk and lower is the
return. The decision of which mode of investment to choose largely depends
upon the investors necessity and the factors which according to him is the most
vital one.
People with more security concern choose fixed investment like bank
deposits and investments in government securities and various post office
savings. The main reason for choosing such an investment mode is that the

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amount invested in the above stated securities seems to be very secure and
hence they seemed to be more preferred one where security is the prime
concern.
People whom returns are most important are ready to take risk to earn
fairer risk. The preferred mode of investment over here is equity shares and
mutual fund. The risk factor in these modes of investment is basically the returns
are basically performance based. If the company performs well the investors can
accept fairer returns but if the company fails to perform then there can be a threat
to the invested amount. Hence the returns are very volatile with the changes in
the market conditions.

1.5 ATTRIBUTES OF INVESTMENT

Investment can be said to be an art. Many people invest money without
knowing what they are doing. Only a few people really understand the art of
investing money. They invest according to certain principles. There are also
certain factors that affect the investment decisions. All these are done mainly to
increase the return on the investment and also to keep the risk to a minimum.
The various factors that affect the investment decisions are given below.

For evaluating an investment avenue, the following attributes are relevant.

a) Rate of Return: The rate of return on an investment for a period (which is
usually a period of one year) is defined as follows:
Rate of return = Annual income + (Ending price – Beginning price)
Beginning price
Yield: Yield is the annual rate of return for any investment and is expressed as a
percentage. With stocks, yield can refer to the rate of income generated from a
stock in the form of regular dividends. This is often represented in percentage
form, calculated as the annual dividend payments divided by the stock's current
share price.
Current yield= Annual cash inflows
Market price

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Capital Appreciation: It’s the rise in the market price of an asset. Capital
appreciation is one of two major ways for investors to profit from an investment in
a company. The other is through dividend income.
b) Risk: The risk of investment refers to the variability of its rate of return.
A simple measure of dispersion is the range of values, which is simply the
difference between the highest and the lowest values.

Figure 1.2: Relationship between Expected Return and Risk

Figure 1.2 shows the relationship between expected return and risk. From this
figure it is clear that with higher risk the returns also increases while it decrease
as the risk decreases. High variance indicates high degree of risk and low
variance indicates lesser risk. Expected returns increases when investors is
willing to take risk.
Other measures commonly used in finance are as follows:
 Variance: This is the mean of the squares of deviations of individual
returns around their average values
 Standard deviation: This is the square root of variance
 Beta: This reflects how volatile the return from an investment is, in
response to market swings.
 Risk = Actual Return – Expected Returns
If, Actual Return = Expected Return = Risk Free Investment
If, Actual Return > or < Expected Return is risky investment
c) Marketability: An investment is highly marketable or liquid if:
 it can be transacted quickly
 the transaction cost is low; and
 the price change between two successive transactions is negligible.

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The liquidity of a market may be judged in terms of its depth, breadth, and
resilience. Depth refers to the existence of buy as well as sells orders around the
current market price. Breadth implies the presence of such orders in substantial
volume. Resilience means that new orders emerge in response to price changes.
Generally, equity shares of well established companies enjoy high marketability
and equity shares of small companies in their formative years have low
marketability. High marketability is a desirable characteristic and low
marketability is an undesirable one.
d) Tax Shelter: Tax benefits are of the following three kinds:
 Initial Tax Benefit: An initial tax benefit refers to the tax relief enjoyed at
the time of making the investment.
 Continuing Tax Benefit: A continuing tax benefits represent the tax
shield associated with the periodic returns from the investment.
 Terminal Tax Benefits: A terminal tax benefit refers to relief from
taxation when an investment is realized or liquidated.
e) Convenience: Convenience broadly refers to the ease with which the
investment can be made and looked after.
The degree of convenience associated with investments varies widely. At one
end of the spectrum is the deposit in a savings bank account that can be made
readily and that does not require any maintenance effort. At the other end of the
spectrum is the purchase of a property that may involved a lot of procedural and
legal hassles at the time of acquisitions and a great deal of maintenance effort
subsequently.

1.6 APPROACHES TO INVESTMENT DECISION MAKING

The stock market is thronged by investors pursuing diverse investment
strategies which may be subsumed under four broad approaches:
i. Fundamental Approach: The basic tenets of the fundamental approach,
which is perhaps most commonly advocated by investment professionals,
are as follows:

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  There is an intrinsic value of a security, which depends upon
underlying economic (fundamental) factors. The intrinsic value can be
established by a penetrating analysis of the fundamental factors
relating to the company, industry, and economy.
 At any given point of time, there are some securities for which the
existing market price will differ from the intrinsic value. Sooner or later,
of course, the market price will fall in line with the intrinsic value.
 Superior returns can be earned by buying under-valued securities
(securities whose intrinsic value exceeds the market price) and selling
over-valued securities (securities whose intrinsic value is less than the
market price).
ii. Psychological Approach: The psychological approach is based on the
premise that stock prices are guided by emotion rather than reason. Stock
prices are believed to be influenced by the psychological mood of
investors. When greed and euphoria sweep the market, prices rise to
dizzy heights. On the other hand, when fear and despair envelop the
market, prices fall to abysmally low levels.
Since psychic values appear to be more important than intrinsic
values, the psychological approach suggests that it is more profitable to
analyze how investors tend to behave as the market is swept by waves of
optimism and pessimism, which seem to alternate. The psychological
approach has been described vividly as the ‘castles in the air’ theory
Burton G. Malkiel.
Those who subscribe to the psychological approach or the ‘castles
in the air’ theory generally use some form of technical analysis which is
concerned with a study of internal market data, with a view to developing
trading rules aimed at profit making. The basic premise of technical
analysis is that there are certain persistent and recurring patterns of price
movements, which can be discerned by analyzing market data. Technical
analysts use a variety of tools like bar chart, point and figure chart, moving
average analysis, breadth of market analysis, etc.

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iii. Academic Approach: Over the last five decades or so, the academic
community has studied various aspects of the capital market, particularly
in the advanced countries, with the help of fairly sophisticated methods of
investigation.
 Stock markets are reasonably efficient in reacting quickly and rationally
to the flow of information. Hence, stock prices reflect intrinsic value
fairly well. Put differently, Market price = Intrinsic value
 Stock price behaviour corresponds to a random walk. This means that
successive price changes are independent. As a result, past price
behaviour cannot be used to predict future price behaviour.
 In the capital market, there is a positive relationship between risk and
return. More specifically, the expected return from a security is linearly
related to its systematic risk
iv. Eclectic Approach: The eclectic approach draws on all the three different
approaches discussed above. The basic premises of the eclectic
approach are as follows:
 Fundamental analysis is helpful in establishing basic standards and
benchmarks. However, since there are uncertainties associated with
fundamental analysis, exclusive reliance on fundamental analysis
should be avoided. Equally important, excessive refinement and
complexity in fundamental analysis must be viewed with caution.
 Technical analysis is useful in broadly gauging the prevailing mood of
investors and the relative strengths of supply and demand forces.
However, since the mood of investors can vary unpredictably
excessive reliance on technical indicators can be hazardous. More
important, complicated technical systems should ordinarily be regarded
as suspect because they often represent figments of imagination rather
than tools of proven usefulness.
 The market is neither as well-ordered as the academic approach
suggest, nor as speculative as the psychological approach indicates.
While it is characterized by some inefficiencies and imperfection, it
seems to react reasonably efficiently and rationally to the flow of

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 information. Likewise, despite many instances of mispriced securities,
there appears to be a fairly strong correlation between risk and return.
 Level of return often necessitates the assumption of a higher level of
risk.

1.7 COMMON ERRORS IN INVESTMENT MANAGEMENT

Investments always do not generate wealth sometimes it fail do so because
of some conditions. The reason for this failure is either the market condition or
some mistakes made by the investors. We cannot control market condition but
errors made by investors could be avoided. Investors appear to be prone to the
errors in managing their investments. Some of the errors made by investors are
discussed below:

1.7.1 Inadequate Comprehension of Return and Risk

Many investors have unrealistic and exaggerated expectations from
investments, in particular from equity shares and convertible debentures. One
often comes across investors who say that they hope to earn a return of 25 to 30
percent per year with virtually no risk exposure or even double their investment in
a year or so. They have apparently been misled by one or more of the following;
(a) tall and unjustified claims made by people with vested interests;
(b) Exceptional performance of some portfolio they have seen or managed,
which may be attributable mostly to fortuitous factors; and
(c) Promises made by tipsters, operators, and others. In most of the cases, such
expectations reflect investor inexperience and gullibility.
1.7.2 Vaguely Formulated Investment Policy
Often investors do not clearly spell out their risk disposition and
investment policy. This tends to create confusion and impairs the quality of
investment decisions. Ironically, conservative investors turn aggressive when the
bull market is near its peak in the hope of reaping a bonanza; likewise, in the
wake of sharp losses inflicted by a bear market, aggressive investors turn unduly
cautions and overlook opportunities before them. Ragnar D. Naess put it this

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way: “The fear of losing capital when prices are low and declining, and the greed
for more capital gains when prices are rising, are probably, more than any other
factors, responsible for poor performance. “if you know what your risk attitude is
and why you are investing, you will learn how to invest well. A well articulated
investment policy, adhered to consistently over a period of time, saves a great
deal of disappointment.

1.7.3 Naive Extrapolation of the Past

Investors generally believe in a simple extrapolation of past trends and
events and do not effectively incorporate changes into expectations. As Arthur
Zeikel says:
“People generally, and investors particularly, fail to appreciate the working of
countervailing forces; change and momentum are largely misunderstood
concepts. Most investors tend to cling to the course to which they are currently
committed, especially at turning point.”
` The apparent comfort provided by extrapolating too far, however, is
dangerous. As Peter Bernstein says: “Momentum causes things to run further
and longer than we anticipate. They very familiarity of a force in motion reduces
our ability to see when it is losing its momentum. Indeed, that is why
extrapolating the present into the future so frequently turns out to be the genesis
of an embarrassing forecast.”

1.7.4 Cursory Decision Making

Investment decision making is characterized by a great deal of
cursoriness. Investors tend to:
 Base their decisions on partial evidence, unreliable hearsay, or casual tips
given by brokers, friends, and others.
 Cavalierly brush aside several of investment risk (market risk, business
risk, and interest rate risk) as greed overpowers them.

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  Uncritically follow others because of the temptation to ride the bandwagon
or lack of confidence in their own judgment.

1.7.5 Untimely entries and exits

Investors tend to follow an irrational start and stop approach to the market
characterized by untimely entries (after a market advance has long been
underway) and exit (after a long period of stagnation and decline).

1.7.6 High costs

Investors trade excessively and spend a lot on investment management. A
good proportion of investors indulge in day trading in the hope of making quick
profits. However more often transaction cost wipes out whatever profits they may
generate from frequent trading.

1.7.7 Over-Diversification and Under-Diversification

Many individuals have portfolios consisting of thirty to sixty, or even more,
different stocks. Managing such portfolios is an unwieldy task and as
R.J.Jenrette put it: Over-diversification is probably the greatest enemy of portfolio
performance. Most of the portfolios we look at have too many names. As a result,
the impact of a good idea is negligible.”
Perhaps as common as over-diversification is under-diversification. Many
individuals do not apparently understand the principle of diversification and its
benefit in term of risk reduction. A number of individual portfolios seem to be
highly under-diversified, carrying an avoidable risk exposure.
1.7.8 Wrong Attitude towards Losses and Profits
An investor has an aversion to admit his mistake and cut losses short. If
the price falls, contrary to his expectation at the time of purchase, he somehow
hopes that it will rebound and he can break even. Surprisingly, such a belief
persists even when the prospects look dismal and there may be a greater
possibility of a further decline. If the price recovers due to favourable conditions,
there is a tendency to dispose of the share when its price more or less equals the
original purchase price, even though there may be a fair chance of further

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increases. The psychological relief experienced by an investor from recovering
losses seems to motivate such behaviour. This means the tendency is to let the
losses run and cut profits short, rather than to cut the losses short and let the
profits run.

1.8 RISKS IN INVESTMENT

Risk is uncertainty of the income /capital appreciation or loss or both.
Every investment (equity, debt, property, etc.) carries an element of risk that is
unique to it. Though risk cannot be totally eliminated, it can be managed by
undertaking effective risk management. To manage risk, one first need to identify
different kinds of risks involved in investing and then take appropriate steps to
reduce it.
Risk and return share a direct relationship with one another. Therefore, an
investment which carries negligible risk, will offer a low return (viz. bonds issued
by the Reserve Bank of India) while an investment which carries a higher risk,
also offers the potential of higher returns (stocks).All investments are a ‘trade off’
between risk and returns. Let us first discuss the types of risks.
1.8.1 Types of Risks
All investments carry their unique set of risks. Though there are several
types of risks, the important ones are - market risk, credit risk, interest rate risk,
inflation risk, currency risk and liquidity risk. These are briefly explained below:
a) Market Risk: A share may rise or fall depending on the fortunes of the
company, the industry it is in, or in response to investor sentiment.
b) Credit Risk: This risk is attributed to debt investments wherein the borrower
may default on interest and/or principal repayment.
c) Interest Rate Risk: When interest rates rise, fixed income investments lose
value. This is because the investor will continue to earn the same (lower)
interest rate until the investment matures while market interest rates have
already gone up. In order to compensate for a lower interest rate compared to
the market rate, the fixed income investment will thus have to be priced at a
lower rate.

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d) Inflation Risk: Rising inflation will erode the value of your income and asset.
Due to inflation, the cost of products and services will rise and consequently,
your future income and assets will be worth less than what they are worth
today.
e) Currency Risk: Changes in exchange rates between currencies could lead to
decline in value of your investments. With Indian investors now being allowed
to invest in other countries, you will now be exposed to currency risk i.e. a fall
in the value of the currency in which you are investing vis-à-vis your home
currency i.e. the Rupee.
f) Liquidity Risk: Certain investments carry the risk of poor liquidity either due
to the nature of the asset or regulatory reasons. For example, property is
inherently an illiquid investment as it cannot be sold as simply as selling
stocks. Certain investments like the Reserve Bank of India bonds are not
transferable till maturity. Investments in Equity Linked Savings Schemes are
illiquid for a period of 3 years and in case you redeem from such schemes,
your tax benefit is withdrawn.

1.8.2 Risk Management

Once different kinds of risks associated with investments are identified
appropriate steps can be taken to reduce these risks. Some of these steps are:
a) Diversification: Most types of risks can be managed by diversifying your
investments across asset classes (stocks, bonds, properties etc.), industry,
currencies etc. Diversification spreads the risk and reduces the adverse
impact that any one investment might have on a portfolio.
b) Research and Monitor: Rigorous research and continuous monitoring will
help in controlling the market and credit risk of your investments. This will
caution beforehand to avoid an investment and alert in case the risk is
increasing on an investment already undertaken.

1.8.3 Risk Tolerance Level: Risk includes the possibility of losing money.
However, extra considerations should be made in addition to the safety of
the principal and the potential for growth. These considerations include the

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 likelihood of achieving the financial goals you have established. Additionally,
one should consider whether he/she is willing and able to accept a higher
level of risk in order to achieve further rewards.
Before starting on the setting of the investment portfolio, every investor
should establish his/her risk tolerance level. Only after this he/she is ready to
build strategies for the accomplishment of his/her financial goals. The higher the
degree of risk involved in the investment portfolio the greater the chances of
higher returns and failures.
The setting of the risk tolerance level is very subjective issue. However,
younger investors can afford more risk taking since they have more time to fix the
losses. On the other hand older investors should apply more conservative
approach since they have less time in front of them. But, they should keep in
mind that they greatly decrease their chances of faster achieving their financial
goals.
A portfolio that carries more bonds is considered more conservative and
risk averse. However, the one that includes a greater percentage of stocks is
more risk taking with higher potential of rewards. Many financial experts
recommend the diversification between investments with different degrees of
risk. This is a good idea since your portfolio will benefit from the rises and falls of
the different investments and will alleviate the potential of losing money.

Risk Personalities: Based on the risk capacity and risk tolerance, risk
appetite can be decided. This is the level of risk that one is ready to bear. Broadly
risk personalities can be categorised at 3 levels – Conservative, Balanced and
Aggressive. Each risk personality has a different objective which it aims to
achieve through the investment portfolio. These personalities are explained
below:
 Conservative personality: For investors having this personality preservation
of the capital invested is the ultimate goal, even if it means compromising on
the returns.

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 Balanced personality: People with this type of personality wish to strike a
balance between high-risk and low-risk investments.
 Aggressive personality: Investors with such personality do not wish to
compromise at all on the returns, even if their capital erodes.

CHAPTER 2
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 RESEARCH
METHODOLOGY

2.1 INTRODUCTION

Indian investor today have to endure a slow-moving economy, the steep

market declines prompted by declining revenues, alarming reports of scandals
ranging from illegal corporate accounting practices like that of Satyam to insider
trading to make investment decisions. Stock market’s performance is not simply
the result of intelligible characteristics but also due to the emotions that are still
baffling to the analysts. Despite loads of information coming from all directions, it

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is not the calculations of financial wizards, or company’s performance or widely
accepted criterion of stock performance but the investor’s irrational emotions like
overconfidence, fear, risk aversion, etc., seem to decisively drive and dictate the
fortunes of the market.
The market is so volatile that its behaviour is unpredictable. In the past
couple of years, the movement of share prices exceeded all the limits and had
gone remarkably low and high levels. These dramatic prices of the shares ruin
the concept of intrinsic value and rational investment behaviour. The traditional
finance theories assume that investors are rational but they are unable to explain
the behaviour and pricing of the stock market completely.
Many research studies have validated the relationship between a
dependent variable i.e., risk tolerance level and independent variables such as
demographic characteristics of an investor. Most of the Indian investors are from
high income group, well educated, salaried, and independent in making
investment decisions and from the past trends it is also seen that they are
conservative in nature. Television is the media that is largely influencing the
investor’s decisions. Hence, in the present project report an attempt has been
made to study the relationship between risk tolerance level and demographic
characteristics of Indian investors.

2.2 STATEMENT OF THE PROBLEM

This study on investor’s behaviour is an attempt to know the profile and

the characteristics of the investors so as to understand their preference with
respect to their investments. The main focus of the study is to discover the
influence of demographic factors like gender and age on risk tolerance level of
the investor. The study mainly concentrates on the factors that influence an
individual investor before making an investment. It also studies the various
patterns in which investors like to invest their money based on their risk tolerance
level and other demographic factors like income level, occupation etc.

2.3 REVIEW OF LITERATURE

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 The literature review section examines the importance of research studies,
company data or industry reports that serve as a foundation for the setup of
study. The research dimension of the related literature and the relevant
information begins from an explanatory perspective, approaching towards
specific studies which do related to judge the limitations and informational gaps
in data from the secondary sources. This analysis may reveal conclusions from
past studies to realize the reliability of the secondary sources and their credibility.
This in turn enables one to rely on a comprehensive review for the study.

Literature suggests that major research in the area of investor’s behaviour

has been done by behavioural scientists such as Weber (1999), Shiller (2000)
and Shefrin (2000). Shiller (2000) who strongly advocated that stock market is
governed by the market information which directly affects the behaviour of the
investors. Several studies have brought out the relationship between the
demographics such as Gender, Age and risk tolerance level of individuals. Of this
the relationship between Age and risk tolerance level has attracted much
attention.
Horvath and Zuckerman (1993) suggested that one’s biological,
demographic and socioeconomic characteristics; together with his/her
psychological makeup affects one’s risk tolerance level. Malkiel (1996) suggested
that an individual’s risk tolerance is related to his/her household situation,
lifecycle stage and subjective factors. Mittra (1995) discussed factors that were
related to individuals risk tolerance, which included years until retirement,
knowledge sophistication, income and net worth. Guiso, Jappelli and Terlizzese
(1996), Bajtelsmit and VenDerhei (1997), Powell and Ansic (1997), Jianakoplos
and Bernasek (1998), Hariharan, Chapman and Domain (2000), Hartog, Ferrer-I-
Carbonell and Jonker (2002) concluded that males are more risk tolerant than
females.
Wallach and Kogan (1961) were perhaps the first to study the relationship
between risk tolerance and age. Cohn, Lewellen et.al found risky asset fraction of
the portfolio to be positively correlated with income and age and negatively
correlated with marital status. Morin and Suarez found evidence of increasing

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risk aversion with age although the households appear to become less risk
averse as their wealth increases. Yoo (1994) found that the change in the risky
asset holdings were not uniform. He found individuals to increase their
investments in risky assets throughout their working life time, and decrease their
risk exposure once they retire. Lewellen et.al while identifying the systematic
patterns of investment behaviour exhibited by individuals found age and
expressed risk taking propensities to be inversely related with major shifts taking
place at age 55 and beyond. Indian studies on individual investor’s were mostly
confined to studies on share ownership, except a few.
The RBI's survey of ownership of shares and L.C. Gupta's enquiry into the
ownership pattern of Industrial shares in India were a few in this direction. The
NCAER's studies brought out the frequent form of savings of individuals and the
components of financial investments of rural households.
The Indian Shareowners Survey brought out a volley of information on
shareowners. Rajarajan V (1997, 1998, 2000 and 2003) classified investors on
the basis of their demographics. He has also brought out the investor’s
characteristics on the basis of their investment size. He found that the
percentage of risky assets to total financial investments had declined as the
investor moves up through various stages in life cycle. Also investor’s lifestyles
based characteristics has been identified. The above discussion presents a
detailed picture about the various facets of risk studies that have taken place in
the past. In the present study, the findings of many of these studies are verified
and updated.
Latha Krishnan (2006) explained as Investments come in many forms.
While some people consider hard assets such as land, house, gold and platinum
as investments, others look to monetary instruments such as stocks and bonds
as ways to make their money grow.
A cautious or conservative investor is unlikely to play carelessly with his
hard-earned money. So he keeps to safe investments that guarantee the return
of his capital and still earn good returns in a stipulated period if the product in

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which he invested gains in that period. In such an investment, even if the markets
go down and he does not gain much, he also does not suffer a heavy loss.
A wealthy person with more money to invest can take more risks and
invest in a variety of products that major financial players provide. A wealth of
information on these as well as comments and criticisms on their performances
and profitability is readily available.
“Perception of investors towards capital market instruments globally” by
John Marshall and “Investment analysis and Portfolio management’” by
Punithavathy Pandian. John Marshall’s study was at global scale and it explains
the perception of people across globe towards capital market instruments and
Pandian explains the theoretical aspects of capital market instruments and use of
various investment avenues to build a strong portfolio.

2.4 NEED FOR STUDY

Investing money is a crucial and deciding the avenues where to invest
needs a lot of planning. In India people are more conservative and hence prefer
investments that are less risky. Similarly there are other demographic factors like
age, income level, gender which affect their decision. As the availability of
financial products increase, perception of investors towards such avenues
changes over a period of time. It becomes important for a marketer to understand
the perception of investors towards investment avenues to successfully pitch the
product. Marketing is known as meeting needs profitably. If the marketer is able
to understand the mindset of investor towards a product then he/she will be in a
position to market the product. This report attempts to study the behavior of
Indian investors while making an investment. Here we also look upon other
factors that influence them while making investment decisions. Innovations in
financial products like derivatives, unit linked insurance products, fund of funds
likewise are not easily understood by the investor. Hence the need for this study
arises to understand what exactly an Indian investor thinks before investing
his/her money and how much risk he/she is willing to take. This report gives the
marketer and other peers to successfully market the financial products which are

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more popular, as it gives information regarding the perception of investors
towards investment avenues in India.

2.5 OBJECTIVES OF THE STUDY

2.5.1 Primary Objectives
 To study the investment characteristics of investors
 To study the objectives of investment plan of an investors
 To study the demographic information of investors
2.5.2 Secondary Objectives
 To know the preferred investment avenues of investors
 To identify the preferred sources of information influencing investment
decisions
 To understand the risk tolerance level of the investors and suggest a
suitable portfolio
 To study the dependence/independences of the demographic factors
(Gender, Age, income level) of the investor and his/her risk tolerance level

2.6 SCOPE OF STUDY

Based on previous research in related areas, a questionnaire was
constructed to measure the investment pattern of individuals on the basis of
demographic characteristics and the risk tolerance of investors was also
calculated. It helped us to understand how an Indian investor behaves while
investing. This study will be helpful to mutual fund companies and other
investment companies to understand individual behaviour of investors so that
they could build suitable investment options for them individually. Also this study
will help the investor to decide the areas where they could invest.

2.7 HYPOTHESIS
A hypothesis describes the relationship between or among variables. A good
hypothesis is one that can explain what it claims to explain, is testable and has
greater range, probability and simplicity than its rivals. There are two approach of
hypothesis testing:
1) Classical or sampling theory statistics and 2) The Bayesian approach

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 In the present dissertation chi square test has been used to find out the
dependence/independence of various factors that influence investment decision.
Hypothesis has been found between following factors:
 Gender and risk tolerance of respondents
 Age and preferred investment avenues by the respondents
 Income and investment avenues preferred by the respondents
 Age of respondents and time horizon for investment
 Age and risk tolerance of the respondents

2.8 RESEARCH DESIGN

Research methodology is a way to systematically solve the research problem.
It may be understood as a science of studying how research is done scientifically.
 Research type
Many investors were reluctant to reveal their investment details especially
the amount of money invested so, referral sampling method is used for this
study.
 Sample description
The sample was drawn from the population of the potential investors from
India. A survey was conducted to understand the investor’s behaviour with the
help of questionnaire. It was carried out with a sample size of 250 investors.

2.9 TOOLS OF DATA COLLECTION

Primary data: The data has been collected directly from respondent with the
help of structured questionnaires.
Secondary data: The secondary data has been collected from various
magazines, journals, newspapers, text books and related websites.

2.10 METHOD OF ANALYSIS

Statistical techniques like Chi square test, simple percentage method are
used to analyze and interpret raw data. Chi square was used to show the
dependency/independency of various factors.

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 After collecting the data its variable having defined character, it was
tabulated and analyzed with the help of charts and graphs in Microsoft Excel
2007.

2.11 LIMITATIONS OF STUDY

• Sample size is small because of the time constraint
• Respondent may be hesitant to provide their investment details
• Behavior of investors doesn’t remain same for long time
• Time for the study is limited

CHAPTER 3
Page | 38
 INDUSTRY PROFILE

3.1 INDIAN FINANCIAL MARKET

Money always flows from surplus sector to deficit sector. That means
persons having excess of money lend it to those who need money to fulfil their
requirement. Similarly, in business sectors the surplus money flows from the
investors or lenders to the businessmen for the purpose of production or sale of
goods and services. So, we find two different groups, one who invest money or
lend money and the others, who borrow or use the money.
The financial markets act as a link between these two different groups. It
facilitates this function by acting as an intermediary between the borrowers and
lenders of money. So, financial market may be defined as ‘a transmission
mechanism between investors (or lenders) and the borrowers (or users) through

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which transfer of funds is facilitated’. It consists of individual investors, financial
institutions and other intermediaries who are linked by a formal trading rules and
communication network for trading the various financial assets and credit
instruments.
Financial market talks about the primary market, FDIs, alternative
investment options, banking and insurance and the pension sectors, asset
management segment as well. India Financial market happens to be one of the
oldest across the globe and is the fastest growing and best among all the
financial markets of the emerging economies. The history of Indian capital
markets spans back 200 years, around the end of the 18th century. It was at this
time that India was under the rule of the East India Company. The capital market
of India initially developed around Mumbai; with around 200 to 250 securities
brokers participating in active trade during the second half of the 19th century.

3.1.1 Scope of Indian Financial Market

The financial market in India at present is more advanced than many other
sectors as it became organized as early as the 19th century with the securities
exchanges in Mumbai, Ahmedabad and Kolkata. In the early 1960s, the number
of securities exchanges in India became eight - including Mumbai, Ahmedabad
and Kolkata. Apart from these three exchanges, there was the Madras, Kanpur,
Delhi, Bangalore and Pune exchanges as well. Today there are 23 regional
securities exchanges in India.
The Indian stock markets till date have remained stagnant due to the rigid
economic controls. It was only in 1991, after the liberalization process that the
India securities market witnessed a flurry of IPOs serially. The market saw many
new companies spanning across different industry segments and business
began to flourish. The launch of the NSE (National Stock Exchange) and the
OTCEI (Over the Counter Exchange of India) in the mid 1990s helped in
regulating a smooth and transparent form of securities trading. The regulatory
body for the Indian capital markets was the SEBI (Securities and Exchange
Board of India). The capital markets in India experienced turbulence after which

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the SEBI came into prominence. The market loopholes had to be bridged by
taking drastic measures.

3.1.2 Potential of Indian Financial Market

India Financial Market helps in promoting the savings of the economy -
helping to adopt an effective channel to transmit various financial policies. The
Indian financial sector is well-developed, competitive, efficient and integrated to
face all shocks. In the India financial market there are various types of financial
products whose prices are determined by the numerous buyers and sellers in the
market. The other determinant factor of the prices of the financial products is the
market forces of demand and supply. The various other types of Indian markets
help in the functioning of the wide India financial sector.

3.1.3 Features of Indian Financial Market

 India Financial Indices - BSE 30 Index, various sector indexes,
stock quotes, Sensex charts, bond prices, foreign exchange,
Rupee & Dollar Chart
 Indian Financial market news
 Stock News - Bombay Stock Exchange, BSE Sensex 30 index,
S&P CNX-Nifty, company information, issues on market
capitalization, corporate earnings statements
 Fixed Income - Corporate Bond Prices, Corporate Debt details,
Debt trading activities, Interest Rates, Money Market, Government
Securities, Public Sector Debt, External Debt Service
 Foreign Investment - Foreign Debt Database composed by BIS,
IMF, OECD,& World Bank, Investments in India & Abroad
 Global Equity Indexes - Dow Jones Global indexes, Morgan
Stanley Equity Indexes
 Currency Indexes - FX & Gold Chart Plotter, J. P. Morgan Currency
Indexes
 National and Global Market Relations
 Mutual Funds
 Insurance
 Loans
 Forex and Bullion

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The main functions of financial market are:
 It provides facilities for interaction between the investors and the borrowers.
 It provides pricing information resulting from the interaction between buyers
and sellers in the market when they trade the financial assets.
 It provides security to dealings in financial assets.
 It ensures liquidity by providing a mechanism for an investor to sell the
financial assets. It ensures low cost of transactions and information.

3.2 CLASSIFICATION OF FINANCIAL MARKETS

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 Figure 3.1: Classification of financial markets
Source: Investment analysis and portfolio management
Author: Prasanna Chandra
Figure 3.1 shows the classification of financial markets. From this figure we can
interpret that there are different ways of classifying financial market.
 One is to classify financial market by the type of financial claim. The debt
market is the financial market foe fixed claims (debt instrument) and the
equity market is the financial market for residual claims (equity instruments)

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 The second way is to classify financial markets by the maturity of claims. The
market for short term financial claims is referred to as the money market and
the market for long term financial claims is referred to as the capital market.
 The third way to classify financial markets is based on whether the claims
represent new issues or outstanding issues. The market where issues sell
new claims is referred as primary market and the market where issues sell
outstanding claims is referred as secondary market.
 The fourth way to classify financial markets is by the timing of delivery. A cash
or spot market is one where the delivery occurs immediately and forward or
futures markets are those markets where the delivery occurs at a pre
determined time in future.
 The fifth way to classify financial markets is by the nature of its organizational
structure. An exchange traded market is characterized by a centralized
organization with standardized procedures and an over the counter market is
a decentralized market with customized procedures.
These markets are further explained in detail.

3.3 MONEY MARKET

The money market is a market for short-term funds, which deals in
financial assets whose period of maturity is up to one year. It should be noted
that money market does not deal in cash or money as such but simply provides a
market for credit instruments such as bills of exchange, promissory notes,
commercial paper, treasury bills, etc. These financial instruments are close
substitute of money. These instruments help the business units, other
organizations and the Government to borrow the funds to meet their short-term
requirement.
Money market does not imply to any specific market place. Rather it refers
to the whole networks of financial institutions dealing in short-term funds, which
provides an outlet to lenders and a source of supply for such funds to borrowers.
Most of the money market transactions are taken place on telephone, fax or
Internet. The Indian money market consists of Reserve Bank of India,
Commercial banks, Co-operative banks, and other specialized financial

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institutions. The Reserve Bank of India is the leader of the money market in
India. Some Non-Banking Financial Companies (NBFCs) and financial
institutions like LIC, GIC, UTI, etc. also operate in the Indian money market.

3.4 CAPITAL MARKET

Capital Market may be defined as a market dealing in medium and long-
term funds. It is an institutional arrangement for borrowing medium and long-term
funds and which provides facilities for marketing and trading of securities. So it
constitutes all long-term borrowings from banks and financial institutions,
borrowings from foreign markets and raising of capital by issue various securities
such as shares debentures, bonds, etc.
The market where securities are traded known as Securities market. It
consists of two different segments namely primary and secondary market. The
primary market deals with new or fresh issue of securities and is, therefore, also
known as new issue market; whereas the secondary market provides a place for
purchase and sale of existing securities and is often termed as stock market or
stock exchange.

3.4.1 PRIMARY MARKET

The Primary Market consists of arrangements, which facilitate the
procurement of long-term funds by companies by making fresh issue of shares
and debentures. You know that companies make fresh issue of shares and/or
debentures at their formation stage and, if necessary, subsequently for the
expansion of business. It is usually done through private placement to friends,
relatives and financial institutions or by making public issue. In any case, the
companies have to follow a well-established legal procedure and involve a
number of intermediaries such as underwriters, brokers, etc. who form an integral
part of the primary market. You must have learnt about many initial public offers
(IPOs) made recently by a number of public sector undertakings such as ONGC,
GAIL, NTPC and the private sector companies like Tata Consultancy Services
(TCS), Biocon, Jet-Airways and so on.

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3.4.2 SECONDARY MARKET
The secondary market known as stock market or stock exchange plays an
equally important role in mobilizing long-term funds by providing the necessary
liquidity to holdings in shares and debentures. It provides a place where these
securities can be encashed without any difficulty and delay. It is an organized
market where shares and debentures are traded regularly with high degree of
transparency and security. In fact, an active secondary market facilitates the
growth of primary market as the investors in the primary market are assured of a
continuous market for liquidity of their holdings. The major players in the primary
market are merchant bankers, mutual funds, financial institutions, and the
individual investors; and in the secondary market you have all these and the
stockbrokers who are members of the stock exchange who facilitate the trading.
After having a brief idea about the primary market and secondary market let see
the difference between them.

3.5 DISTINCTION BETWEEN PRIMARY MARKET AND SECONDARY

MARKET
The main points of distinction between the primary market and secondary
market are as follows:
1. Function: While the main function of primary market is to raise long-term
funds through fresh issue of securities, the main function of secondary market is
to provide continuous and ready market for the existing long-term securities.
2. Participants: While the major players in the primary market are financial
institutions, mutual funds, underwriters and individual investors, the major players
in secondary market are all of these and the stockbrokers who are members of
the stock exchange.
3. Listing Requirement: While only those securities can be dealt with in the
secondary market, which have been approved for the purpose (listed), there is no
such requirement in case of primary market.

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4. Determination of prices: In case of primary market, the prices are
determined by the management with due compliance with SEBI requirement for
new issue of securities. But in case of secondary market, the price of the
securities is determined by forces of demand and supply of the market and keeps
on fluctuating.

3.6 DISTINCTION BETWEEN CAPITAL MARKET AND MONEY MARKET

Capital Market differs from money market in many ways.
 While money market is related to short-term funds, the capital market related
to long term funds.
 While money market deals in securities like treasury bills, commercial paper,
trade bills, deposit certificates, etc., the capital market deals in shares,
debentures, bonds and government securities.
 While the participants in money market are Reserve Bank of India,
commercial banks, non-banking financial companies, etc., the participants in
capital market are stockbrokers, underwriters, mutual funds, financial
institutions, and individual investors.
 While the money market is regulated by Reserve Bank of India, the capital
market is regulated by Securities Exchange Board of India (SEBI).

3.7 STOCK EXCHANGE

As indicated above, stock exchange is the term commonly used for a
secondary market, which provide a place where different types of existing
securities such as shares, debentures and bonds, government securities can be
bought and sold on a regular basis. A stock exchange is generally organised as
an association, a society or a company with a limited number of members. It is
open only to these members who act as brokers for the buyers and sellers. The
Securities Contract (Regulation) Act has defined stock exchange as an “
association, organisation or body of individuals, whether incorporated or not,
established for the purpose of assisting, regulating and controlling business of
buying, selling and dealing in securities”.

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The main characteristics of a stock exchange are:
 It is an organized market.
 It provides a place where existing and approved securities can be bought and
sold easily.
 In a stock exchange, transactions take place between its members or their
authorized agents.
 All transactions are regulated by rules and by laws of the concerned stock
exchange.
 It makes complete information available to public in regard to prices and
volume of transactions taking place every day.
 It may be noted that all securities are not permitted to be traded on a
recognised stock exchange.
 It is allowed only in those securities (called listed securities) that have been
duly approved for the purpose by the stock exchange authorities. The method
of trading nowadays is quite simple on account of the availability of on-line
trading facility with the help of computers.
 It is also quite fast as it takes just a few minutes to strike a deal through the
brokers who may be available close by. Similarly, on account of the system of
scrip-less trading and rolling settlement, the delivery of securities and the
payment of amount involved also take very little time, say, 2 days.

3.7.1 FUNCTIONS OF A STOCK EXCHANGE

The functions of stock exchange can be enumerated as follows:
 Provides ready and continuous market: By providing a place where listed
securities can be bought and sold regularly and conveniently, a stock
exchange ensures a ready and continuous market for various shares,
debentures, bonds and government securities. This lends a high degree of
liquidity to holdings in these securities as the investor can encash their
holdings as and when they want.
 Provides information about prices and sales: A stock exchange maintains
complete record of all transactions taking place in different securities every
day and supplies regular information on their prices and sales volumes to
press and other media. In fact, now-a-days, you can get information about
minute to minute movement in prices of selected shares on TV channels like

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 CNBC, Zee News, NDTV and Headlines Today. This enables the investors in
taking quick decisions on purchase and sale of securities in which they are
interested. Not only that, such information helps them in ascertaining the
trend in prices and the worth of their holdings. This enables them to seek
bank loans, if required.
 Provides safety to dealings and investment: Transactions on the stock
exchange are conducted only amongst its members with adequate
transparency and in strict conformity to its rules and regulations which include
the procedure and timings of delivery and payment to be followed. This
provides a high degree of safety to dealings at the stock exchange. There is
little risk of loss on account of non-payment or no delivery.
 Helps in mobilisation of savings and capital formation: Efficient
functioning of stock market creates a conducive climate for an active and
growing primary market. Good performance and outlook for shares in the
stock exchanges imparts buoyancy to the new issue market, which helps in
mobilising savings for investment in industrial and commercial
establishments. The stock exchanges provided liquidity and profitability to
dealings and investments in shares and debentures. It also educates people
on where and how to invest their savings to get a fair return. This encourages
the habit of saving, investment and risk-taking among the common people.
Thus it helps mobilising surplus savings for investment in corporate and
government securities and contributes to capital formation.
 Barometer of economic and business conditions: Stock exchanges reflect
the changing conditions of economic health of a country, as the shares prices
are highly sensitive to changing economic, social and political conditions. It is
observed that during the periods of economic prosperity, the share prices
tend to rise. Conversely, prices tend to fall when there is economic stagnation
and the business activities slow down as a result of depressions. Thus, the
intensity of trading at stock exchanges and the corresponding rise on fall in
the prices of securities reflects the investor’s assessment of the economic
and business conditions in a country, and acts as the barometer which
indicates the general conditions of the atmosphere of business.

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 Better Allocation of funds: As a result of stock market transactions, funds
flow from the less profitable to more profitable enterprises and they avail of
the greater potential for growth. Financial resources of the economy are thus
better allocated.

3.7.2 ADVANTAGES OF STOCK EXCHANGES

Having discussed the functions of stock exchanges, let us look at the advantages
which can be outlined from the point of view of (a) Companies, (b) Investors, and
(c) the Society as a whole.

a) To the Companies
 The companies whose securities have been listed on a stock exchange
enjoy a better goodwill and credit-standing than other companies because
they are supposed to be financially sound.
 The market for their securities is enlarged as the investors all over the
world become aware of such securities and have an opportunity to invest
 As a result of enhanced goodwill and higher demand, the value of their
securities increases and their bargaining power in collective ventures,
mergers, etc. is enhanced.
 The companies have the convenience to decide upon the size, price and
timing of the issue.
(b) To the Investors:
 The investors enjoy the ready availability of facility and convenience of
buying and selling the securities at will and at an opportune time.
 Because of the assured safety in dealings at the stock exchange the
investors are free from any anxiety about the delivery and payment
problems.
 Availability of regular information on prices of securities traded at the stock
exchanges helps them in deciding on the timing of their purchase and
sale.
 It becomes easier for them to raise loans from banks against their
holdings in securities traded at the stock exchange because banks prefer
them as collateral on account of their liquidity and convenient valuation.
(c) To the Society

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  The availability of lucrative avenues of investment and the liquidity thereof
induces people to save and invest in long-term securities. This leads to
increased capital formation in the country.
 The facility for convenient purchase and sale of securities at the stock
exchange provides support to new issue market. This helps in promotion
and expansion of industrial activity, which in turn contributes, to increase
in the rate of industrial growth.
 The Stock exchanges facilitate realisation of financial resources to more
profitable and growing industrial units where investors can easily increase
their investment substantially.
 The volume of activity at the stock exchanges and the movement of share
prices reflect the changing economic health.
 Since government securities are also traded at the stock exchanges, the
government borrowing is highly facilitated. The bonds issued by
governments, electricity boards; municipal corporations and public sector
undertakings (PSUs) are found to be on offer quite frequently and are
generally successful.

3.7.3 LIMITATIONS OF STOCK EXCHANGES

Like any other institutions, the stock exchanges too have their limitations.
One of the common evils associated with stock exchange operations is the
excessive speculation. You know that speculation implies buying or selling
securities to take advantage of price differential at different times. The
speculators generally do not take or give delivery and pay or receive full
payment. They settle their transactions just by paying the difference in prices.
Normally, speculation is considered a healthy practice and is necessary for
successful operation of stock exchange activity. But, when it becomes excessive,
it leads to wide fluctuations in prices and various malpractices by the vested
interests. In the process, genuine investors suffer and are driven out of the
market.
Another shortcoming of stock exchange operations is that security prices
may fluctuate due to unpredictable political, social and economic factors as well

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as on account of rumours spread by interested parties. This makes it difficult to
assess the movement of prices in future and build appropriate strategies for
investment in securities. However, these days good amount of vigilance is
exercised by stock exchange authorities and SEBI to control activities at the
stock exchange and ensure their healthy functioning.

3.8 SPECULATION IN STOCK EXCHANGES

The buyers and sellers at the stock exchange undertake two types of
operations, one for speculation and the other for investment. Those who buy
securities primarily to earn a regular income from such investment and possibly
make some long-term gain on account of price rise in future are called investors.
They take delivery of the securities and make full payment of the price. Such
transactions are called investment transactions.
But, when the securities are bought with the sole object of selling them in
future at higher prices or these are sold now with the intention of buying at a
lower price in future, are called speculation transactions. The main objective of
such transactions is to take advantage of price differential at different times. The
stock exchange also provides for settlement of such transactions even by
receiving or paying, as the case may be, just the difference in prices. However,
nowadays stock exchanges have a system of rolling settlement. Such facility is
limited only to transactions of purchase and sale made on the same day, as no
carry forward is allowed.
Though speculation and investment are different in some respects, in
practice it is difficult to say who is a genuine investor and who is a pure
speculator. Sometimes even a person who has purchased the shares as a long-
term investment may suddenly decide to sell to reap the benefit if the price of the
share goes up too high or do it to avoid heavy loss if the prices starts declining
steeply. But he cannot be called a speculator because his basic intention has
been to invest. It is only when a person’s basic intention is to take advantage of a
change in prices, and not to invest, then the transaction may be termed as
speculation.

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 In strict technical terms, however, the transaction is regarded as
speculative only if it is settled by receiving or paying the difference in prices
without involving the delivery of securities. It is so because, in practice, it is quite
difficult to ascertain the intention. Some people regard speculation as nothing but
gambling and consider it as an evil. But it is not true because while speculation is
based on foresight and hard calculation, gambling is a kind of blind and reckless
activity involving high degree of chance element. Not only that, speculation is a
legal activity duly recognised as a prerequisite for the success of stock exchange
operations while gambling is regarded as an evil and a punishable activity.
However, reckless speculation may take the form of gambling and should be
avoided.

3.9 STOCK EXCHANGES IN INDIA

The first organised stock exchange in India was started in Mumbai known
as Bombay Stock Exchange (BSE). It was followed by Ahmedabad Stock
Exchange in 1894 and Kolkata Stock Exchange in 1908. The number of stock
exchanges in India went up to 7 by 1939 and it increased to 21 by 1945 on
account of heavy speculation activity during Second World War. A number of
unorganised stock exchanges also functioned in the country without any formal
set-up and were known as kerb market. The Security Contracts (Regulation) Act
was passed in 1956 for recognition and regulation of Stock Exchanges in India.
At present we have 23 stock exchanges in the country. Of these, the most
prominent stock exchange that came up is National Stock Exchange (NSE). It is
also based in Mumbai and was promoted by the leading financial institutions in
India. It was incorporated in 1992 and commenced operations in 1994. This stock
exchange has a corporate structure, fully automated screen-based trading and
nation-wide coverage.
Another stock exchange that needs special mention is Over the Counter
Exchange of India (OTCEI). It was also promoted by the financial institutions like
UTI, ICICI, IDBI, IFCI, LIC etc. in September 1992 specially to cater to small and
medium sized companies with equity capital of more than Rs.30 Lakhs and less
than Rs.25 Crores. It helps entrepreneurs in raising finances for their new

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projects in a cost effective manner. It provides for nationwide online ring less
trading with 20 plus representative offices in all major cities of the country. On
this stock exchange, securities of those companies can be traded which are
exclusively listed on OTCEI only. In addition, certain shares and debentures
listed with other stock exchanges in India and the units of UTI and other mutual
funds are also allowed to be traded on OTCEI as permitted securities. It has
been noticed that, of late, the turnover at this stock exchange has considerably
reduced and steps have been afoot to revitalise it. In fact, as of now, BSE and
NSE are the two Stock Exchanges, which enjoy nation-wide coverage and
handle most of the business in securities in the country.

3.10 REGULATIONS OF STOCK EXCHANGES

As indicated earlier, the stock exchanges suffer from certain limitations
and require strict control over their activities in order to ensure safety in dealings
thereon. Hence, as early as 1956, the Securities Contracts (Regulation) Act was
passed which provided for recognition of stock exchanges by the central
Government. It has also the provision of framing of proper bylaws by every stock
exchange for regulation and control of their functioning subject to the approval by
the Government. All stock exchanges are required submit information relating to
its affairs as required by the Government from time to time. The Government was
given wide powers relating to listing of securities, make or amend bylaws,
withdraw recognition to, or supersede the governing bodies of stock exchange in
extraordinary/abnormal situations. Under the Act, the Government promulgated
the Securities Regulations (Rules) 1957, which provided inter alia for the
procedures to be followed for recognition of the stock exchanges, submission of
periodical returns and annual returns by recognised stock exchanges, inquiry into
the affairs of recognised stock exchanges and their members, and requirements
for listing of securities.

3.11 ROLE OF SEBI

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 As part of economic reforms programme started in June 1991, the
Government of India initiated several capital market reforms, which included the
abolition of the office of the Controller of Capital Issues (CCI) and granting
statutory recognition to Securities Exchange Board of India (SEBI) in 1992 for:
(a) Protecting the interest of investors in securities;
(b) Promoting the development of securities market;
(c) Regulating the securities market; and
(d) Matters connected there with or incidental thereto.
SEBI has been vested with necessary powers concerning various aspects
of capital market such as:
 Regulating the business in stock exchanges and any other securities
market;
 Registering and regulating the working of various intermediaries and
mutual funds;
 Promoting and regulating self regulatory organisations;
 Promoting investors education and training of intermediaries;
 Prohibiting insider trading and unfair trade practices;
 Regulating substantial acquisition of shares and takeover of companies;

As part of its efforts to protect investors’ interests, SEBI has initiated many
primary market reforms, which include improved disclosure standards in public
issue documents, introduction of prudential norms and simplification of issue
procedures. Companies are now required to disclose all material facts and risk
factors associated with their projects while making public issue. All issue
documents are to be vetted by SEBI to ensure that the disclosures are not only
adequate but also authentic and accurate. SEBI has also introduced a code of
advertisement for public issues for ensuring fair and truthful disclosures.
Merchant bankers and all mutual funds including UTI have been brought
under the regulatory framework of SEBI. A code of conduct has been issued
specifying a high degree of responsibility towards investors in respect of pricing
and premium fixation of issues. To reduce cost of issue, underwriting of issues
has been made optional subject to the condition that the issue is not under-
subscribed. In case the issue is under-subscribed i.e., it was not able to collect

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90% of the amount offered to the public, the entire amount would be refunded to
the investors. The practice of preferential allotment of shares to promoters at
prices unrelated to the prevailing market prices has been stopped and private
placements have been made more restrictive. All primary issues have now to be
made through depository mode. The initial public offers (IPOs) can go for book
building for which the price band and issue size have to be disclosed. Companies
with dematerialized shares can alter the par value as and when they so desire.
As for measures in the secondary market, it should be noted that all
statutory powers to regulate stock exchanges under the Securities Contracts
(Regulation) Act have now been vested with SEBI through the passage of
securities law (Amendment) Act in 1995. SEBI has duly notified rules and a code
of conduct to regulate the activities of intermediaries in the securities market and
then registration in the securities market and then registration with SEBI is made
compulsory. It has issued guidelines for composition of the governing bodies of
stock exchanges so as to include more public representatives. Corporate
membership has also been introduced at the stock exchanges. It has notified the
regulations on insider trading to protect and preserve the integrity of stock
markets and issued guidelines for mergers and acquisitions. SEBI has constantly
reviewed the traditional trading systems of Indian stock exchanges and tried to
simplify the procedure, achieve transparency in transactions and reduce their
costs.

3.12 EMERGENCE OF FINANCIAL SERVICES INDUSTRY IN INDIA

Services sector industry has started gaining large scale momentum since
the process of liberalization in 1991.Prior to its contribution to GDP was around
40 percent, but since 1992 it has been grown rapidly and reached a value of 51
percent GDP. Contribution of service sector to GNP in advanced counties like
USA is as high as 75%.In India many innovative financial products and services
like credit cards, ATMs, consumer finance, venture financing have been
emerging since 1980s And these financial services have become an integral
component of Indian financial system. This integration is largely attributed to the

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liberalization of economic policies and deregulation that led to economic
changes, development and contemporary evolution of capital market and
financial disintermediation.
The far reaching changes in the Indian economy since liberalization in the
early 1990s have had a deep impact on the Indian financial sector. The financial
sector has gone through a complex and sometimes painful process of
restructuring, capitalizing on new opportunities as well as responding to new
Challenges. During the last decade, there has been a broadening and deepening
of financial markets. Several new instruments and products have been
introduced.
Existing sectors have been opened to new private players. This has given
a strong impetus to the development and modernization of the financial sector.
New players have adopted international best practices and modern technology to
offer a more sophisticated range of financial services to corporate and retail
customers. This process has clearly improved the range of financial services and
service providers available to Indian customers. The entry of new players has led
to even existing players upgrading their product offerings and distribution
channels. This continued to be witnessed in 2002-03 across key sectors like
commercial banking and insurance, where private players achieved significant
success.
These changes have taken place against a wider systemic backdrop of
easing of controls on interest rates and their realignment with market rates,
gradual reduction in resource pre-emption by the government, relaxation of
stipulations on concessional lending and removal of access to concessional
resources for financial institutions. Over the past few years, the sector has also
witnessed substantial progress in regulation and supervision. Financial
intermediaries have gradually moved to internationally acceptable norms for
income recognition, asset classification, and provisioning and capital adequacy.
This process continued in 2002-03, with RBI announcing guidelines for
risk-based supervision and consolidated supervision. While maintaining its soft
interest rate stance, RBI cautioned banks against taking large interest rate risks,

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and advocated a move towards a floating rate interest rate structure. The past
decade was also an eventful one for the Indian capital markets. Reforms,
particularly the establishment and empowerment of securities and Exchange
Board of India (SEBI), market-determined prices and allocation of resources,
screen-based nation-wide trading, dematerialization and electronic transfer of
securities, rolling settlement and derivatives trading have greatly improved both
the regulatory framework and efficiency of trading and settlement.
On account of the subdued global economic conditions and the impact on
the Indian economy of the drought conditions prevailing in the country, 2002-03
was a subdued year for equity markets. Despite this, the National Stock
Exchange (NSE) and the Bombay Stock Exchange (BSE) ranked third and sixth
respectively among all exchanges in the world with respect to the number of
transactions. The year also witnessed the grant of approval for setting up of a
multi commodity exchange for trading of various commodities.
The US$ 28 billion Indian financial sector has grown at around 15 per cent
and has displayed stability for the last several years, even when other markets in
the Asian region were facing a crisis. This stability was ensured through the
resilience that has been built into the system over time. The financial sector has
kept pace with the growing needs of corporate and other borrowers. Banks,
capital market participants and insurers have developed a wide range of products
and services to suit varied customer requirements. The Reserve Bank of India
(RBI) has successfully introduced a regime where interest rates are more in line
with market forces.
Financial institutions have combated the reduction in interest rates and
pressure on their margins by constantly innovating and targeting attractive
consumer segments. Banks and trade financiers have also played an important
role in promoting foreign trade of the country. Here we will study the three
industries with respect to India.

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CHAPTER 4

ANALYSIS

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 &
INTERPRETATION

Data analysis and interpretation

Table 4.1: Gender wise classification of Respondents

Gender Number of Percentage (%)

Respondents
Male 200 80
Female 50 20
Total 250 100

Interpretation:

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

Figure 4.1: Gender wise classification of Respondents

Table 4.2: Age wise classification of Respondents

Age( in years) Number of Percentage (%)

Respondents
Below 35years 92 36.7
36-50years 133 53.3
51-60years 17 6.7
above 60years 8 3.3
Total 250 100

Interpretation:
Table 4.2 shows the Age wise classification of Respondents. When it comes to
age, it was found that 37% are young i.e. of age group below 35 years and 53%

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of them are in the age group of 35 to 50. Other than these 7% of them belong to
age group of 51 to 60 and rest them belongs to age group above 60. This shows
that age group of 35 years an above are more interested in investments while
people above 51 years make less investments as most of them would retire at
age of 60 and would start planning for retirement.

Figure 4.2: Age wise classification of Respondents

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

Marital Number of Percentage (%)

status Respondents
Single 55 22
Married 195 78
Total 250 100

Interpretation:
Table 4.3 shows classification of Respondents on the basis of their Marital
Status. It was found that marital status of 78% of the Respondents was found to
be married and the rest 22% are unmarried. This is because a married individual
is considered to have dependents so they are involved in making financial

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investments. Whereas Respondents who are unmarried mostly invest to
generate wealth but they do not have any financial responsibility.

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

Table 4.4: Classification of Respondents on basis of Occupation

Occupation Number of Percentage (%)

Respondents
Government 73 29
Employee
Businessman 70 28
Private Sector 90 36
Student 5 2
Others 12 5
Total 250 100

Interpretation:
Table 4.4 shows classification of Respondents on basis of Occupation. From the
above graph indicates that 36% of the Respondents are working in private sector,
29% of them are government employees, 28% of them are self employed, 2% of

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them are students and rest are working in other sectors. Respondents who work
in private sectors are involved in investments as the income would be lesser in
private sectors.

Figure 4.4: Classification of Respondents on basis of Occupation

Table 4.5: Classification of Respondents on basis of Annual Income

Annual Income Number of Percentage (%)

Respondents
Below 2 Lakhs 0 0
2 Lakhs – 4 Lakhs 10 4
4 Lakhs – 6 Lakhs 58 23.3
6 Lakhs – 8 Lakhs 61 24.3
above 8 Lakhs 121 48.4
Total 250 100

Interpretation:
Table 4.5 shows the classification of Respondents on basis of Annual Income. It
was found that 48% of Respondents with annual earnings above 8 Lakhs are
interested in investments because their savings are more which they invest to
generate wealth, 23% of them are earning 4 to 6 Lakhs annually, the other 25%
are earning between 6 to 8 Lakhs in a year, 4% of them earn 2 to 4 Lakhs in an

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year but there were no respondents with annual income below 2 Lakhs as they
do not have savings to invest.

Figure 4.5: Classification of Respondents on basis of Annual Income

Table 4.6: Classification of Respondents on basis of Education Level
Education Number of Percentage (%)
Level Respondents
Under 25 10
Graduate
Graduate 108 43.3
Post Graduate 117 46.6
and above
Total 250 100

Interpretation:
Table 4.6 shows the classification of Respondents on basis of Education Level. It
indicates that 47% of the Respondents covered in the study are postgraduates;
43% Respondents are graduates and 10% of the Respondents are
undergraduates. Investors with post graduate degree would be more exposed to
market situation which make them more interested in investments. Also
graduates would have fair knowledge about investments. Whereas Respondents

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who are undergraduates mostly do not invest due to unfamiliarity to investment
avenues or unavailability if information about investments.

Figure 4.6: Classification of Respondents on basis of Education Level

Table 4.7: Classification of Respondents on basis Influence on Investment

Decision
Investment Decisions are Number of Percentage (%)
Respondents
Taken on own initiative 185 74
Taken on own initiative but 45 18
with help from an expert
Made by expert on 20 8
investors behalf
Total 250 100

Interpretation:
Table 4.7 shows classification of Respondents on basis Influence on Investment
Decision. It was found that most Respondents tend not to depend upon expert
advice and help while making investment decisions. However, the majority of the
Respondents i.e. 74% make investment decisions without the help and advice
from experts; only 18% investors consult some experts, for advice in investment
decisions. And the rest of them allow the expert to take decision on their behalf.

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 Figure 4.7: Classification of Respondents on basis Influence on Investment
Decision

Table 4.8: Classification of Respondents on the basis of Regularity in making

Investment Decisions
Regularity of Number of Percentage (%)
Investment Decisions Respondents
Frequently 148 59.3
Seldom 102 40.7
Total 250 100

Interpretation:
Table 4.8 shows the classification of Respondents on the basis of Regularity in
making Investment Decisions. Most of the Respondents i.e. 59% of total sample
make investment decisions on a regular basis while rest 41% does not invest
regularly. Those who are familiar with the working of investments would invest
more frequently than those who do not have much knowledge about investments.

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

Table 4.9: Classification of Respondents on the basis of Objectives of

Investment Plan
Objective of investment Plan Number of Percentage (%)
Respondents
Preserve capital and generate 105 42
income
Generate moderate capital 77 30.6
growth with some income
Generate aggressive capital 41 16.3
growth over long-term

Generate long-term capital 27 11.1

growth
Total 250 100
Interpretation:
Table 4.9 shows the classification of respondents on the basis of Objectives of
Investment Plan. Based on this table, we can conclude that the investor’s

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

Figure 4.9: Classification of Respondents on the basis of Objectives of

Investment Plan

Table 4.10: Classification of Respondents on the basis of Factors Influencing an

Investment Decision
Factors Influencing an Number of Percentage (%)
Investment Decision Respondents
Risk 63 25
Rate of return 90 36
Tax shelter 35 14
Marketability 43 17
Convenience 20 8
Total 250 100
Interpretation:
Table 4.10 shows the classification of Respondents on the basis of Factors
considered before making an Investment. Out of all majorities of the
Respondents i.e. 36% prefer to invest where there is high return. 25% of the
Respondents look for risk involved in the investment, 14% of the Respondents
invest in those avenues wherein they will get tax benefit. 17% of Respondents
look for marketability and the rest look for ease with which the investment can be
made.

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Figure 4.10: Classification of Respondents on the basis of Factors Influencing an
Investment Decision
Table 4.11: Classification of Respondents on basis of Preferred Investment
Avenues
Investment Avenues Number of Percentage (%)
Respondents
Fixed Deposits 67 26.8
Insurance schemes 64 25.6
Equities 11 4.4
Mutual Funds schemes 60 24
Real estate 24 9.6
Commodities/ Derivatives 24 9.6
Total 250 100
Interpretation:
Table 4.11 shows classification of Respondents on basis of Preferred Investment
Avenues. It can be concluded that the Respondents prefer FD’s/Bonds/PPFs
avenues than insurance schemes next to mutual funds, equities and derivatives.
It was interesting to know that Indian individual investors still prefer to invest their
surplus amount in risk free investment avenues next to insurances schemes. It
confirms that Indian investors are conservative investors.

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 Figure 4.11: Classification of Respondents on basis of Preferred Investment
Avenues

Table 4.12: Classification of Respondents on the basis of Industry preferred

Industry Number of Percentage (%)
Respondents
Financial Corporations 53 21
Cement 13 5
Automobile 25 10
IT 45 18
Banking 18 7
Telecommunication 23 9
Agriculture 5 2
Manufacturing 23 9
Others 48 19
Total 250 100

Interpretation:
Table 4.12 shows the classification of Respondents on the basis of Industry
preferred by them for Investing. It is found that 21% of Respondents prefer
financial service, 18% of them prefer IT sector, 10% of them prefer automobile
industry, 9% of them prefer manufacturing and telecommunication each, 7% of
them prefer banking followed by cement and agriculture industries and rest 19%

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

Figure 4.12: Classification of Respondents on the basis of Industry preferred

Table 4.13: Classification of Respondents on the basis of Time Horizon for
Investment
Investment Time Number of Percentage (%)
Horizon Respondents
Below 1year 115 46
1-3 years 82 33
4-9 years 48 19
Above 10 years 5 2
Total 250 100

Interpretation:
Table 4.13 shows the classification of Respondents on the basis of Time Horizon
for Investment. From the above table we can interpret that majority of the
Respondents i.e. 46% of the total sample invest for less than 1 year, 33% of
them invest for time period of 1 to 3 years, 19% of them invest for period of 4 to 9
years and the rest of them i.e. 2% of them invest for long term i.e. more than 10
years. It is found that most of the Respondents want to make money quickly
hence they invest for a short period of below 1year.

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 Figure 4.13: Classification of Respondents on the basis of Time Horizon for
Investment
Table 4.14: Classification of Respondents on the basis of Knowledge about
Financial Terms
Knowledge about Number of Percentage (%)
Financial Terms Respondents
Excellent 107 42.7
Very good 70 27.8
Average 38 15.1
Good 27 11.3
Satisfactory 8 3.1
Total 250 100
Interpretation:
Table 4.14 shows classification of Respondents on the basis of Knowledge about
Financial Terms. Majority of the Respondents have excellent knowledge of
financial terms, 28 % have good knowledge, 15% have average knowledge, 11
% have good knowledge rest 3% have fair knowledge about investment.

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 Figure 4.14: Classification of Respondents on the basis of Knowledge about
Financial Terms
Table 4.15: Classification of Respondents on basis of Sources of Investment
Information
Sources of Investment Number of Percentage (%)
Information Respondents
News Paper/ Magazines 75 30
Electronic Media (T.V) 25 10
Peer group/ Friends 44 17.6
Broker/ Financial Advisor 50 20
Internet 46 18.4
Total 250 100
Interpretation:
Table 4.15 shows the classification of Respondents on basis of Sources of
Investment Information. Most of the Respondents get their information related to
investment through print media (News paper/ Business news paper/ Magazines)
next to electronic media (TV- NDTV Profit, CNBC and some business news
channels). This could be because print media is easy and readily accessible
investment information when compared to the other sources of investment

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

Figure 4.15: Classification of Respondents on basis of Sources of Investment

Information
Table 4.16: Classification of Respondents on basis of Risk Tolerance Level
Risk Tolerance Level No. of Respondents Percentage (%)
Low (Category A) 102 41
Medium (Category B) 63 25
High (Category C) 85 34
Total 250 100
Interpretation:
Table 4.16 shows the classification of Respondents on basis of Risk Tolerance
Level. From the table 4.16 we can conclude that 41% of Respondents are
preferring portfolio with less risk, 34% of them prefer highly risky portfolio with
high returns and rest of them i.e. 25 % prefer portfolio with moderate risk. Indian
investors are still conservative in nature and avoid taking huge risk while
investing their funds.

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

HYPOTHESIS:
The relationship between important factors has been analyzed with the help of
Chi-Square Test. The following pairs have been analyzed:

a) Gender and Risk Tolerance: Gender and the Risk Tolerance Level of an
investor are two independent attributes. The relationship between the
Gender and Risk Tolerance of investors can be presented with the help of
following table and diagram:
Table 4.17: Relationship between Gender and Risk Tolerance of
Respondents
Gender/ Risk Low risk Moderate risk High risk Total
Tolerance Level
Male 80 52 68 200
Female 22 12 16 50
Total 102 64 84 250

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Interpretation:
Table 4.17 shows the relationship between Gender and Risk Tolerance of
Respondents. Let us consider,

H0: Gender and Risk Tolerance of Respondents are independent.

H1: Gender and Risk Tolerance of Respondents are dependent .

Conducting chi square test at 5% level of significance, it is found that χ2 = 0.2658

as the computed value which is very less than the table value 5.991 so we
accept H0. Hence we can conclude that Gender and Risk Tolerance of an
investor are two independent attributes. Generally, it is considered that women
tend to be risk averse in comparison with men.

Figure 4.17: Relationship between Gender and Risk Tolerance of Respondents

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

Table 4.18: Relationship between Age and Investment Avenues preferred

by the Respondents

Interpretation:
Table 4.18 shows the relationship between Age and Investment Avenues
preferred by the Respondents. Let us take,

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H0: Age and Preferred Investment Avenues by investors are independent.
H1: Age and Preferred Investment Avenues by investors are dependent .

Conducting chi square test at 5% level of significance, it is found that χ2 = 3.889

i.e. 4 approx but the computed value is very less than the table value 24.996 so
we accept H0. Hence null hypothesis stands and we can conclude that age and
preferred investment avenues by the investors are two independent attributes of
the investor.

Figure 4.18: Relationship between Age and Investment Avenues preferred by

the Respondents

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 c) Income and Investment Avenues: There is no significant relationship
between the Income of an investor and the Investment Avenues preferred
by the investors. The relationship between Income and Investment
Avenues preferred by the investors can be presented with the help of
following table and diagram:

Table 4.19: Relationship between Income and Investment Avenues

preferred by the Respondents

Interpretation:

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Table 4.19 shows the relationship between Income and Investment Avenues
preferred by the Respondents. Let us consider,

H0: There is no significant relationship between Income and Investment Avenues

preferred by investors.
H1: There is significant relationship between Income and Investment Avenues
preferred by investors.

Conducting chi square test at 5% level of significance, it is found that χ 2 =

1.499662 but the computed value is very less than the table value 31.410 so we
accepts H0. Hence the null hypothesis stands and we can conclude that there is
no significant relationship between Income and Investment Avenues preferred by
the investors.

Figure 4.19: Relationship between Income and Investment Avenues

preferred by the Respondents

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 d) Age and Time Horizon: The relationship between Age of investors and
Time Horizon for investment can be presented with the help of following
table and diagram:
Table 4.20: Relationship between Age of Respondents and Time Horizon
for investment
Age/
Below 1 1-3 years 4-9 years Above 10 Total
Investment
year years
Time
Horizon
Below 43 31 17 1 92
35years
36-50years 62 44 25 2 133
51-60years 7 5 4 1 17
above 3 2 2 1 8
60years
Total 115 82 48 5 250

Interpretation:
Table 4.20 shows the relationship between Age of Respondents and Time
Horizon for investment. Let us take,

H0: Age of investors and Time Horizon for investment has no significant relation
H1: Age of investors and Time Horizon for investment has a significant relation

Conducting chi square test at 5% level of significance, it is found that χ2 = 7.047

as the computed value which is very less than the table value 16.919 so we
accept H0. Hence null hypothesis stands and we can conclude that Age of
investors and Time Horizon has no significant relation with each other.

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

e) Age and Risk Tolerance: The relationship between Age and Risk
Tolerance of the investors can be presented with the help of following
table and diagram:

Table 4.21: Relationship between Age and Risk Tolerance of the

Respondents
Age/ risk Low Moderate High risk Total
tolerance level risk risk
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 Below 35 years 38 23 31 92
35-50 years 55 33 45 133
51-60 years 6 5 6 17
Above 60 years 3 2 3 8
Total 102 63 85 250

Interpretation:
Table 4.21 shows the relationship between Age and Risk Tolerance of the
Respondents. Let us consider,
H0: Age and Risk Tolerance of the investors is independent.
H1: Age and Risk Tolerance of the investors is dependent.

Conducting chi square test at 5% level of significance, it is found that χ2 = 0.3333

as the computed value which is very less than the table value 12.592 so we
accept H0. Hence null hypothesis stands and we can conclude that Age and Risk
Tolerance of the Respondents are two independent attributes of the investor.

Figure 4.21: Relationship between Age and Risk Tolerance of the

Respondents

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CHAPTER 5

Page | 85
FINDINGS &
SUGGESTIONS

Page | 86
5.1 FINDINGS
In the present project, an attempt is made to study the investment
characteristics of Indian investors. Based on the data collected and
analysed about the investment preferences of the investors, the following
findings are given.
 The study reveals that male investors dominate the investment market in
India.
 It is found that most of the investors belong to the age group of below 35
years and 35 to 50 years indicating youngsters and the middle aged
people are predominant in the financial investment sector.
 Most of the investors possess higher education qualification like
graduation and above.
 Majority of respondents are working in private sector organisations as
compared to government organisations.
 As per the general perception, it is found respondents with higher income
groups like income above 8 Lakhs were found to invest more because of
their large portions of savings.
 The investor’s decisions are based on their own initiative.
 Specific investment pattern was noted in a majority of the people who
participated in the study.
 Respondents usually prefer to invest frequently.
 The objective of investment was either capital appreciation or balance of
capital appreciation and current income.
 Investors usually invest their funds so as to earn wealth.
 Investors prefer to invest their funds in avenues like PPF/FD/Bonds next
to insurance and mutual funds scheme.
 Most preferred industries for investment are financial services banking
and information technology.
 Most of the respondents preferred to invest for a short period that is less
than 1 year. Some of them preferred to invest for a time period of 1-3
years.
 With reference to the objective of investment, most of the respondents
preferred high returns, followed by risk, tax shelter, convenience and
marketability.

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  Most of the investors get their information related to investment through
print media like business newspapers and magazines while others prefer
to get information from brokers and electronic media like TV.
 Most of the investors prefer to invest in to less risky investments. Very
less proportion of respondents preferred risky portfolios.
 Indian investors are conservative in nature and prefer to invest in less
risky avenues.
 Majority of the investors have moderate knowledge about financial terms
related to investment.
 Gender and the risk tolerance level of the investor are independent
attributes of the investor.
 It is found from the analysis of data that increase in age decrease the risk
tolerance level.
 It is revealed from the study that age of investors independent of
preferred investment avenue.
 Income of investors and investment avenues preferred by them are two
independent attributes of the investor.
 Age of investors and time horizon for which they invest are two
independent attributes of the investor.
 Age and risk tolerance of the investors are two independent attributes of
the investor.

5.2 SUGGESTIONS
The traditional finance theories assume that investors are rational but they
are unable to explain the behaviour and pricing of the stock market completely.
Despite loads of information popping from all directions, it is not the calculations
of financial wizards, or company’s performance or widely accepted criterion of
stock performance but the investor’s irrational emotions like overconfidence, fear,
risk aversion, etc., seem to decisively drive and dictate the fortunes of the
market. Many research studies have validated the relationship between a
dependent variable i.e., risk tolerance level and independent variables such as
Page | 88
demographic characteristics of an investor. Hence, in the present project report
an attempt has been made to study the relationship between risk tolerance level
and demographic characteristics of Indian investors. Based on the analysis of
data, the following suggestions are given.
 It is evident from the study that investors’ lack knowledge of the pros and
cons of various investment avenues. Hence it is suggested that investors
are to be educated about various investment avenues, selection of
schemes based on their objectives, their risk tolerance, importance of
diversification and so on to which will in turn help in efficient investment
rather impulsive.
 The analysis of data clearly indicates that the investors’ investment
behaviour is independent of their demographic factors. Therefore it is
suggested that the schemes can be designed based on matching the
objectives of the investment rather based on demographic factors in order
to motivate investors.
 The primary objective of most of the respondents is maximise return
through capital appreciation as well as regular returns. Hence, the
investment avenues that offer capital appreciation and dividend income
like equity shares are more attractive to the investors. Therefore various
schemes can be designed that includes equity investment.
 Most of the respondents hesitate to invest their money through online
mode, so it is preferred to contact the investors through the distributors
and financial advisers besides online services.
 All the investors prefer to maximise their returns and minimise the risk.
Even now fixed deposits and insurance schemes are more famous among
Indian investors. It is suggested that the investors have carefully construct
their portfolios after doing fundamental analysis and through proper
diversification.
 It always better that the investors follow a systematic investment process
to invest their money. Investment avenues are to be chosen based on
their objectives and risk preferences which would result in risk return trade
off.

Page | 89
CHAPTER 6

Page | 90
 CONCLUSION

CONCLUSION
Investment is putting money into something with the expectation of profit.
More specifically, investment is the commitment of money or capital to the
purchase of financial instruments or other assets so as to gain profitable returns
in the form of interest, dividends, or appreciation of the value of the instrument.
Investment is involved in many areas of the economy, such as business
management and finance whether for households, firms, or governments.
Investment comes with the risk of the loss of the principal sum. The investment
that has not been thoroughly analyzed can be highly risky with respect to the

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investment owner because the possibility of losing money is not within the
owner's control.
This study has tried addressing the “Investment characteristics of Indian
investors”. Because of time limit only 250 respondents are taken for the study. A
survey was conducted to get knowledge of factors which influence Indian
investor’s investment decisions. This study was an attempt to understand the
characteristics of Indian investors.

This study is limited to Indian investors only but the study can be extended
to other investors also. The study can be extended to global investor’s
investment behaviour. There is also a scope of a comparative study which can be
done between Indian investors investment behaviour with the global investors
behaviour. Due to time limitation this study was restricted to only demographic
characteristics but the study can be done with considering other factors also.

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 BIBLIOGRAPHY

BIBLIOGRAPHY
Books
 C K Kothari, Research Methodology, Wishwa Prakashan Publishing,
1996, Second Edition
 Herbert B. Mayo, Investments, Chennai Micro Print pvt. Ltd Chennai,
2006
 Punithavathi Pandyan, Security Analysis and Portfolio Management,
Tata Mc Graw-Hill Publishing Company Ltd , New Delhi,2008 Third Edition

Page | 93
  Prasanna Chandra, Investment Analysis And Port Folio Management,
Tata Mc Graw-Hill Publishing Company Ltd , New Delhi,2008
 Prasanna Chandra, Financial Management, Tata Mc Graw –Hill
Publishing Company Ltd , New Delhi2007

Journals
 Asian Journal Of Management
 Global Journal of Finance and Management
 Indian Journal of Finance
 The IUP Journal of Behavioural Finance,
 Barberis, N. and Thaler, R. H. (2002) A Survey of Behavioural Finance

Websites Reference
 www.indiafinance&investmentguide.com
 www.wikipedia.org
 www.nseindia.com
 www.capitalmarkets.com
 www.bseindia.com
 www.financeindia.org/article

ANNEXURE
Page | 94
 ANNEXURE

QUESTIONNAIRE
I am Chitra Raveendran student of MBA from Acharya Institute of Management
and Sciences Bangalore, conducting a survey on “A Study on Investment
characteristics of Indian investors” as a part of my dissertation. I would request to
kindly fill in this questionnaire and the information given by you will be kept highly
confidential.

(Please tick mark √ the choice from the option given below)
PART – A
1) Name:

2) Gender: Male Female

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 3) Age Group:
Below 35years 36-50years 51-60years above 60years

4) Please specify your marital status?

Single Married

5) What is your occupation?

Government Employee Self-Employed Private Sector
Businessman Student
Others (please specify) _____

6) What is your annual income?

Below 2 Lakhs 2 Lakhs – 4 Lakhs 4 Lakhs – 6 Lakhs
6 Lakhs – 8 Lakhs above 8 Lakhs

7) Please mention your education level.

Under Graduate Graduate Post Graduate and above
PART – B
1) Which of the following investments you have invested in?
Fixed Deposits Insurance schemes Equities
Mutual Funds schemes Real estate
Commodities/ Derivatives

2) Please mention the list of industries you have invested in.

a) __________________________________
b) __________________________________
c) __________________________________
d) __________________________________

3) Which of the following statements best describes your main objective of

investment?
To preserve capital and generate income
To generate moderate capital growth with some income
To generate aggressive capital growth over long-term
To generate long-term capital growth

4) Your knowledge about financial terms or aspects of investments is:

Excellent Very good Average Good
Satisfactory

5) What is your investment time horizon?

Below 1 year 1year – 3 years 4years – 9years
Above 10years

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6) How regularly do you make investment decisions?
Frequently Often

7) Your investment decisions are

Taken on own initiative
Taken on own initiative but with help from an expert
Made by expert on your behalf

8) Which source do you prefer to get investment information?

News Paper/ Magazines
Electronic Media (T.V)
Peer group/ Friends
Broker/ Financial Advisor
Internet

9) What is your risk appetite?

High Medium Low No Risk / Safe Investments

10) If you could choose only one of the three portfolios characterized below,
which would you select, given your investments are in Equities, Fixed
deposits, cash equivalents, alternative assets?
Portfolio A(less risky): 25%, 50%, 25%, and 0%
Portfolio B (balanced): 55%, 30%, 10%, and 5%
Portfolio C (risky): 10%, 5%, 5%, 80%

Thank You

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