Presentation on Short-Term Investment Avenues

Group No. Nishit Kumar F2F- 42 Vishal Kumar F2F- 43 Kewal Varu F2F- 57 Devi Prasad F2F- 58

What is Short Term Investment Avenues

Short term investment avenues are different short term assets classes in which an investor can invest its money for a period less than 365 days or 1 years. Different Classes in which an investor can invest are: Equity market. Money Market. Commodities. Short term fixed Deposits. Short term floating rate funds. Mutual Funds.

Short-Term Floating Rate Funds

Short-term floating rate funds are suited for investors with an investment horizon of six months. Floating rate funds invest in instruments that revise their coupon rate in sync with changes in a pre-determined benchmark like the MIBOR (Mumbai Interbank Offered Rate). As a result, any change in the benchmark is reflected in the floating rate instrument's coupon as well. In a situation like the present one when interest rates are on the rise, floating rate funds can prove to be particularly lucrative. Short-term floaters Short-term Floating Rate Funds NAV (Rs) 1-Wk 1-Mth 6-Mth UTI - FLOATING RATE STP 10.90 0.11% 0.47% 2.73% KOTAK FLOATER STP 10.98 0.10% 0.45% 2.66% JM FLOATER FUND STP 11.01 0.10% 0.44% 2.65% TEMPLETON FLOAT STP 12.07 0.11% 0.46% 2.62% HDFC FLOATING STP 11.23 0.11% 0.44% 2.60% (Source: Credence Analytics. NAV data as on May 31, 2005.)

MUTUAL FUNDs
Mutual funds are money-managing institutions that pool money from the public and invest it in capital market such as stocks, bonds and other securities. Mutual Fund offer liquid funds and ultra short term funds in the debt category, which are suitable for short investment periods. Ultra short-term funds were earlier known as liquid plus funds. Liquid funds invest in money market instruments with a maturity of 91 days or less. However, there are no such restrictions for ultra short-term funds.

MONEY MARKET
As money became a commodity, the money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Different instruments in money market are: Treasury bills Certificate of deposits Commercial papers.

Treasury Bill - T-Bill

Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year. They are thus useful in managing short-term liquidity. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments. Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at par. Treasury bills are also issued under the Market Stabilization Scheme (MSS). For example, let's say you buy a 13-week T-bill priced at $9,800. Essentially, the Govt. of India (and its nearly bulletproof credit rating) writes you an IOU for $10,000 that it agrees to pay back in three months. You will not receive regular payments as you would with a coupon bond, for example. Instead, the appreciation - and, therefore, the value to you - comes from the difference between the discounted value you originally paid and the amount you receive back ($10,000). In this case, the T-bill pays a 8.10% interest rate ($200/$9,800 = 8.10%) over a three-month period.

Certificate Of Deposit - CD
A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years. A certificate of deposit is a promissory note issued by a bank. It is a time deposit that restricts holders from withdrawing funds on demand. Although it is still possible to withdraw the money, this action will often incur a penalty. For example, let's say that you purchase a 10,000 CD with an interest rate of 5% compounded annually and a term of one year. At year's end, the CD will have grown to 10,500 (10,000 * 1.05). CDs of less than 100,000 are called "small CDs"; CDs for more than 100,000 are called "large CDs" or "jumbo CDs". Almost all large CDs, as well as some small CDs, are negotiable.

Commercial Papers
The commercial paper is a debt instrument used for raising shortterm funds by the Corporates. It is issued for a shorter period of time for example 6 months, 1 years. CPs are very common in Market. CPs are rated by Credit rating companies.

Equity Market
A equity market is a public entity for the trading of company stock and derivatives at an agreed price. The securities are listed on stock exchanges. Examples of some of the common stocks which are traded daily are: Infosys- Rs.2350 per share. Reliance industrial infrastructure limited- Rs.496 per share. TCS- Rs.1299 per share. Steel Authority of India Ltd. (SAIL)- Rs.95.25 per share. Oil and Natural Gas Corporation Ltd.(ONGC)- Rs.238.30 per share.

Short - Term Fixed Deposit

In deposit terminology, the term Short Term Deposit refers to an amount of money placed in a bank or financial institution for a term no longer than one year. A Short Term Deposit will usually earn a fixed rate of interest. For example, we shall assume that an investor wants to invest a sum of Rs 10,000 for a 181 day (approximately 6 months) period. Let's start off with short-term fixed deposits. For investors who offer higher importance to capital preservation vis-vis returns, an assured return avenue like fixed deposits would be the apt choice. Short and safe FD Rates (per annum) State Bank of India [ Get Quote ]6.50% HDFC Bank [ Get Quote ]7.75% ICICI Bank [ Get Quote ]7.75%

 (Interest rates as on 7th September 2012 on a per annum basis for a 181 day tenure) The table above lists rates offered by some of the leading banks. While company deposits offer higher returns, investing in the same entails taking on higher risks since they are unsecured in nature.
Hence only fixed deposits with a high level of safety have been considered for the purpose of this study. In the example above, the investor would at best earn a return of 6.50 per cent per annum.

Example of SBI rate

Below Rs.15 Lakhs Tenor Rs.15 lakhs to less than Rs. 1 Cr

Existing Rates Revised rates Existing Rates Revised rates w.e.f. w.e.f. w.e.f. w.e.f. 07.08.2012 07.09.2012 07.08.2012 07.09.2012
7.00 7.00 7.00 7.25 6.50 6.50 6.50 6.50 8.00 8.00 8.00 8.00 7.50 7.50 7.50 7.50

7 days to 90 days 91 days to 179 days 180 days

181 days to 240 days

241 days to less than 1 year

7.50

6.50

8.00

7.50