CHAPTER – 3
AN OVERVIEW ON SAVING HABITS AND
INVESTMENT PREFERENCE
3.0 INTRODUCTION:
In this Chapter, saving preferences and investment habits among public is discussed.
Channelizing one's savings into investments is important for the growth of developing
economy. Investments are a great opportunity for people to get returns and earn more.
Without Investments cash flows in the economy are less and lead to a stagnant
economy. The research studies the saving preferences and investment habits of the
public in Chennai. This Research also includes the preference of saving schemes,
Factors induce the size of their savings, from where they get their saving and
investment information from and about the saving and investment schemes they are
comfortable with. The topics to be discussed under this study are:
3.1 INCOME, SAVING AND INVESTMENT:
To measure the growth of an economy there are three variables factor are as: Income,
Savings and Investment. There is a big hand of investment for the development of an
economy, and savings provides the basis for investment in broadest sense, Investment
means the sacrifice of certain present value for (possible uncertain) future value. The
investment pattern and saving habits of employee’s sector is determined by their
expectations from the various preferred avenues. Preference may vary due to various
considerations i.e. Safety, Liquidity and Marketability, returns, tax benefits, risk
involved etc. Investment also depends upon the awareness about investment
opportunities, level of knowledge and how these investment opportunities are
evaluated and selected. The appropriate investment decisions require a comprehensive
understanding of various subjects like finance, tax, economics, accountancy, business
laws etc. However, employees owing to the lack of education are not able to
comprehend such subjects.
3.2 SAVINGS OPTIONS AVAILABLE:
3.2.1 Public Provident Fund (PPF)
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The Public Provident Fund (PPF) scheme is one of the most popular and safest
investment options that is available in the country. Under Section 80C of the Income
Tax Act, contributions made towards the scheme as well as the interest that is
generated from the contributions are also tax exempt. The scheme can be opened at
post offices and banks, and the duration of the scheme is 15 years. Individuals are
allowed to increase the duration of the scheme by a further 5 years. The rate of
interest for the FY 2018-2019 is 8% p.a. and the interest is compounded on a yearly
basis. Individuals must make a minimum contribution of Rs.500 and can make a
maximum contribution of Rs.1.5 lakh on a yearly basis towards the scheme.
3.2.2 Employees’ Provident Fund (EPF)
The Employees’ Provident Fund Organisation (EPFO) launched the EPF scheme with
the main aim of helping employees save money for their retirement. It is mandatory
for organisations with more than 20 employees to contribute towards the EPF scheme.
The employee and employer each contribute 12% of the employee’s Dearness
Allowance (DA) and basic salary towards the scheme. Employees can withdraw funds
from the scheme in case of medical emergencies, construction of a house, buying a
house or land, repayment of home loan, etc. The rate of interest of the scheme for FY
2018-2019 is 8.65% p.a. The rate of interest is decided by the EPFO on a yearly basis.
3.2.3 National Pension System (NPS)
The NPS was launched by the Central Government with the main aim of providing
individuals a regular income after their retirement. Employees can avail the benefits
of the scheme by paying a small amount of premium. Employees will receive a lump
sum amount at the time of their retirement as well as a certain percentage will be paid
back as pension on a monthly basis after their retirement.
3.2.4 Sukanya Samriddhi Yojana Account (SSY)
The Sukanya Samriddhi Yojana (SSY) scheme was launched by Prime Minister
Narendra Modi to help secure the future of a girl child. The current rate of interest
offered by the scheme is 8.5% and an SSY account can be opened at post offices or
banks. The minimum and maximum deposit that can be made in a year towards the
scheme is Rs.1,000 and Rs.1.5 lakh, respectively. The account holder must make
contributions towards the scheme for a duration of 14 years and the maturity period of
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the scheme is 21 years. Individuals can transfer the SSY account from banks to post
offices and vice versa.
3.2.5 Atal Pension Yojana (APY)
The main aim of the scheme is to help individuals who are below the poverty line.
The scheme also benefits people who work in the unorganised sector and require
financial support from the government. Individuals pay a very low premium towards
the scheme and receive a pension after their retirement. However, it is mandatory that
individuals have an active savings account in order to avail benefits from the scheme.
Citizens between the ages of 18 years and 40 years can apply for the Atal Pension
Yojana scheme. Contributions towards the scheme must be made for a minimum
duration of 20 years. Individuals must make very low contributions towards the
scheme, however, if the contributions that are being made are high, the pension that is
received will also be high. However, in case individuals opt for the Atal Pension
Yojana scheme, they cannot opt for any other savings scheme.
3.2.6 Voluntary Provident Fund (VPF)
Employees can opt for the VPF scheme on a voluntary basis. Under the VPF scheme,
employees are allowed to contribute their entire basic salary towards the scheme,
unlike the EPF scheme, where only 12% of the basic salary can be contributed. Any
contributions made towards the VPF scheme will impact the EPF scheme and vice
versa. The rate of interest that is generated from contributions made towards the
scheme for the FY 20182019 is 8.65% p.a.
3.2.7 Kisan Vikas Patra (KVP)
The Kisan Vikas Patra certificate scheme is offered by post offices in India. The rate
of interest that is offered by the scheme at the moment is 7.7% and it is compounded
on an annual basis. The minimum contribution that must be towards the scheme is
Rs.1,000 and there is no maximum limit. Over the course of 112 months, the amount
invested towards the scheme doubles. Individuals are allowed to add nominees to the
scheme and the certificate can be transferred from one individual to another and from
one post office to another. Individuals are also allowed to encash the certificate after
30 months from when the certificate was issued.
3.2.8 Senior Citizens Savings Scheme (SCSS)
The SCSS was launched with the aim of helping individuals who are 60 years and
above. Individuals who are between the ages of 55 years and 60 years and have
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chosen for Voluntary Retirement Scheme (VRS) can also avail the benefits of the
SCSS.The duration of the SCSS is 5 years and the rate of interest under the scheme is
8.7% p.a. Individuals must invest a minimum of Rs.1,000 towards the scheme and the
maximum investment that can be made is Rs.15lakh. Individuals can also transfer
their SCSS accounts from a post office to a bank and vice versa. Under Section 80C
of the Income Tax Act, tax deductions are available for investments made towards the
scheme.
3.2.9 National Savings Certificate (NSC)
The NSC scheme is one of the most popular schemes in India. Since the scheme is
backed by the Indian Government, guaranteed returns and tax benefits are provided.
The duration of the scheme is 5 years and individuals can invest in the scheme at post
offices. The Indian Government decides the interest rates of the scheme on a quarterly
basis. The rate of interest of the scheme for FY 2018-2019 is 8.0%. The interest that is
generated is compounded on an annual basis. The minimum contribution that must be
made towards the scheme is Rs.100 and there is no limit to the amount of contribution
that can be made. Under Section 80C of the Income Tax Act, individuals are eligible
for tax benefits on the contribution they make towards the scheme. Individuals are
also allowed to transfer the certificate to another person’s name. However, this can be
done only once.
3.2.10 Post Office Savings Scheme
The various savings schemes that are offered by India Post are very popular as the
risks are very minimal and most of the schemes provide guaranteed returns. The
process to open any saving schemes accounts at the post office is simple and quick.
The many good features offered by the schemes also make them popular.
3.3 INVESTMENT OPTIONS AVAILABLE:
There are a large number of investment instruments available today. To make our lives
easier we would classify or group them. In India, numbers of investment avenues are
available for the investors. Some of them are marketable and liquid while others are
non-marketable and some of them also highly risky while others are almost risk less.
The people have to choose Proper Avenue among them, depending upon his specific
need, risk preference, and return expected Investment avenues can broadly categories
under the following heads.
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1. Insurance policies
2. Mutual Funds
3. Shares
4. Bonds
5. Bank Fixed Deposits
6. Public provident fund
7. Post office savings.
8. Direct Equity
9. Gold/Silver
10. Real Estate
11. Debt Security
3.3.1 Insurance policies:
Insurance companies offer many investment schemes to investors. These schemes
promote saving and additionally provide insurance cover. L1C is the largest life
insurance company in India. Some of its schemes include
• Life policies
• Convertible whole life assurance policy,
• Endowment assurance policy,
• Jeevan Saathi,
• Money back policy
• Unit linked plan
• Term assurance
• Immediate annuity • Deferred annuity
• Riders etc.
Insurance policies, while catering to the risk compensation to be faced in the future by
investor, also have the advantage of earning a reasonable interest on their investment
insurance premiums.
3.3.2 Mutual Funds:
This is an emerging area for investment and there is a large variety of schemes in the
market to suit the requirements of a large number of people. In finance, in general,
you can think of equity as ownership in any asset after all debts associated with that
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asset are paid off. For example, a car or house with no outstanding debt is considered
the owner's equity because he or she can readily sell the item for cash. Stocks are
equity because they represent ownership in a company.
3.3.3 Shares:
Shares are units of equity ownership in a corporation. For some companies, shares
exist as a financial asset providing for an equal distribution of any residual profits, if
any are declared, in the form of dividends. Shareholders of a stock that pays no
dividends do not participate in a distribution of profits. Instead, they anticipate
participating in the growth of the stock price as company profits increase. Shares
represent equity stock in a firm, with the two main types of shares being common
shares and preferred shares. As a result, "shares" and "stock" are commonly used
interchangeably.
3.3.4 Bonds:
A bond is a fixed-income instrument that represents a loan made by an investor to a
borrower (typically corporate or governmental). A bond could be thought of as an
I.O.U. between the lender and borrower that includes the details of the loan and its
payments. Bonds are used by companies, municipalities, states, and sovereign
governments to finance projects and operations. Owners of bonds are debt-holders, or
creditors, of the issuer. Bond details include the end date when the principal of the
loan is due to be paid to the bond owner and usually include the terms for variable or
fixed interest payments made by the borrower.
3.3.5 Bank Fixed Deposits:
A fixed deposit, also known as an FD, is an investment instrument offered by banks,
as well as non-banking financial companies (NBFC) to their customers to help them
save money. With an FD account, you can invest a sizeable amount of money at a
predetermined rate of interest for a fixed period. At the end of the tenure, you receive
the lump sum, along with an interest, which is a good money-saving plan. Banks
offers different rates of interest for a fixed deposit account. You can choose a fixed
deposit for a period ranging from minimum 7-14 days to maximum 10 years. This is
why an FD is sometimes called a term deposit. When you open a fixed deposit
account at a specific interest rate, it is guaranteed, for the rate of interest remains the
same, irrespective of any changes, which happen due to market fluctuations. The
interest you earn is either paid at maturity or on periodic basis depending on your
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choice. You are not allowed to withdraw the money before the maturity. If you want
to, you have to pay a penalty.
3.3.6 Public provident fund:
The PPF account or Public Provident Fund scheme is one of the most popular long-
term savings-investment products, mainly due to its combination of safety, returns and
tax savings. The PPF was first offered to the public in the year 1968 by the Finance
Ministry’s National Savings Institute. Since then, it has emerged as a powerful tool to
create longterm wealth for investors. Investors use the PPF as a tool to build a corpus
for their retirement by putting aside sums of money regularly, over long periods of
time (PPF has a 15-year maturity, and the facility to extend the tenure). With its
attractive interest rates and tax benefits, the PPF is a big favourite with a small saver.
3.3.7 Post office savings:
The post office savings account is a deposit scheme provided by the post office
throughout India. The account provides a fixed interest rate on the account balance. It
is a beneficial scheme for individual investors who wish to earn a fixed rate of interest
by investing a significant portion of their financial assets. Post office savings account
is also a very helpful scheme for those residing in rural parts of India. Since the
nationwide reach of the post offices is much greater as compared to banks, a large
number of unprivileged people have been able to get access to savings accounts
through post offices.
3.3.8 Direct Equity:
Direct equity investments refer to those investments made by investors directly in the
stock market for buying the company shares/stocks. In other words, the money
invested in the shares of the company is termed equity. In legal terms, the investor is
buying partial ownership of the company to get the voting rights. Investors require a
demat account for trading in shares. This account can be a personally managed
account, or a broker/dealer can manage it. Some investors who understand the
working of equity markets can directly purchase stocks/shares of the company and
plan their investment portfolio. Also, they can find the right balance between risk and
returns. On the other hand, some investors can find it difficult to understand business
fundamentals and technical. Hence, they should invest in direct equity under an
expert’s guidance.
3.3.9 Gold/Silver:
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The bullion offers investment opportunity in the form of gold, silver, art objects
(paintings, antiques), precious stones and other metals (precious objects), specific
categories of metals are traded in the metal exchange.
3.3.10 Real Estate:
Investment in real estate also made when the expected returns are very attractive.
Buying property is an equally strenuous investment decision. Real estate investment
is often linked with the future development plans of the location. At present
investment in real assets is booming there are various investment source are available
for investment which are directly or indirectly investing real estate. In addition to this,
the more affluent investors are likely to be interested in other type of real estate, like
commercial property, agricultural land, semi urban land, and resorts.
3.3.11 Debt security:
A debt security is a debt instrument that can be bought or sold between two parties
and has basic terms defined, such as the notional amount (the amount borrowed),
interest rate, and maturity and renewal date. Examples of debt securities include a
government bond, corporate bond, certificate of deposit (CD), municipal bond, or
preferred stock. Debt securities can also come in the form of collateralized securities,
such as collateralized debt obligations (CDOs), collateralized mortgage obligations
(CMOs), mortgage-backed securities issued by the Government National Mortgage
Association (GNMA), and zero-coupon securities.
3.4 KEY DIFFERENCE BETWEEN SAVINGS AND INVESTMENT:
The differences between savings and investment are explained in the following points:
3.4.1. Savings means to set keep aside a part of your earned income for future use.
Investment is often defined as the act of putting funds into the productive uses, i.e.
investing in such investment vehicles which can reap money over a period of time.
3.4.2. People often save money, to fulfil their unexpected and sudden expenses or
urgent money requirements. Conversely, investments are made or done to generate
returns over the period so that it can help in capital formation of an individual.
3.4.3. With an investment, there is follows always a risk of losing money. Unlike savings,
there are comparatively fewer chances of the losing the hard-earned money.
3.4.4. Investment provides higher returns than savings, as there is a assured and
nominal rate of interest on savings. However, the investments in turn can earn money
more than the invested amount, if invested wisely.
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3.4.5. You can have easily had access to your savings, any time because they are
highly liquid and flexible, but in the case of investment you cannot have easy access
to money as compared, because the process of selling the investments and making
liquid takes some time.
3.5 Significance of Savings:
3.5.1 Earn Interest
A savings account helps you earn interest on the deposited amount. To attract new
customers, banks now offer higher interest rates and a host of other benefits such as
discounts on locker rentals, unlimited ATM transactions, and more. Moreover, some
of the banks also offer many different types of savings account to meet the different
needs of the customers.
3.5.2 Safest Investment Option
One of the biggest advantages of saving account is unlike most other investment
options, a savings bank account does not invest your money but still offers modest
returns. All you need to do is to deposit money in your savings account to take
advantage of this feature.
3.5.3 Minimum Investment Amount
Browse through the different investment options and you’ll see that a savings account
is also the most affordable. You are simply required to keep the minimum balance in
your account to keep earning interest. This minimum deposit amount can be different
for every bank.
3.6 Issues relating of Savings:
3.6.1 Interest Rates Can Change
One important disadvantage of a savings bank account is that the interest rates offered
by the bank are variable. This means that the bank has the right to make changes to
the interest rate. While the changes are generally minimal, it is possible that the
interest rate of a savings account now can be lower 6 months down the line.
3.6.2 Easy Access
While easy access to funds is seen as one of the most important features of savings
account, it can also work as a disadvantage for some people. As these accounts allow
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you to access your funds any time you like, people are more tempted to spend. This
can make long-term savings challenging.
3.6.3 Minimum Balance Requirement
When you open a savings bank account, you’ll be required to maintain a minimum
average balance in your account. If you fail to maintain this balance, the bank charges
a penalty for the same. So, before opening an account, make sure that you check the
minimum balance requirements of the bank and always maintain this balance to avoid
the penalty.
3.7 Significance of Investment:
3.7.1. Potential for long-term returns:
While cash is undoubtedly safer than shares, it’s unlikely to grow much, or find
opportunities to grow, in the long run. In the past, investors have found rewards over
longer terms with investments that come with a level of capital risk. That means the
risk that you might lose some or all of the amount you initially invested. Of course,
these rewards are not guaranteed. Volatility in the stock market, when stock prices
change rapidly over a short period of time, isn’t necessarily a bad thing. In fact,
volatility can sometimes offer investment managers the opportunity to buy attractive
shares at a cheaper price and get better returns in the long term.
3.7.2. Outperform inflation:
In order for your savings to grow in real terms over time, they need to earn a rate of
return after tax that’s greater than the rate of inflation. With today’s low interest rates,
it can be difficult to find a savings account that can give you a return above the
current inflation rate. So, it’s worth considering investments which have the potential
to outperform inflation.
3.7.3. Provide a regular income:
If you’re retired or approaching retirement, you’ll probably be looking for something
can give you a regular income to cover day-to-day living expenses. There’s a range of
investments, including equities, bonds and property that can provide you with regular
income that’s often higher than the rate of inflation.
3.7.4. Tailor to your changing needs:
You or an Investment Manager can design your investment portfolio to achieve
different goals as you go through life, e.g. you may prefer less risky options as you get
older. With careful planning you can tailor your portfolio to reflect your changing
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goals and priorities. If you plan on investing over a long time period, you may want to
invest in funds that have growth potential, risky sectors such as emerging markets, or
private equity where your savings can ride out short term market changes. If you’re
approaching retirement, you may want to invest in more income-focused options.
3.7.5. Invest to fit your financial circumstances:
As your financial circumstances change over time, you can change how you invest to
suit your needs. You can invest lump sums as and when you can, or smaller regular
amounts in a monthly investment plan. If you have the money available, you can start
investing straight away. The sooner you invest, the longer your investment has to
grow. Alternatively, investing a regular amount each month can help iron out
fluctuations in the stock market, particularly in a volatile market.
3.8 Issues in Investment:
3.8.1. Risk:
You could lose your entire investment. If a company does poorly, investors will sell,
sending the stock price plummeting. When you sell, you will lose your initial
investment.
If you can't afford to lose your initial investment, then you should buy bonds.
3.8.2. Common stockholders paid last:
Preferred stockholders and bondholders or creditors get paid first if a company goes
broke. But that happens only if a company goes bankrupt. A well-diversified portfolio
should keep you safe if any company goes under.
3.8.3. Time:
If you are buying stocks on your own, you must research each company to determine
how profitable you think it will be before you buy its stock. You must learn how to
read financial statements and annual reports and follow your company's developments
in the news. You also have to monitor the stock market itself, as even the best
company's price will fall in a market correction, a market crash, or bear market.
3.8.4. Taxes:
If you sell your stock for a loss, you may be able to get a tax break. However, if you sell
your stock for a profit, you'd be liable to to pay capital gains taxes.
3.8.5. Emotional Roller Coaster:
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Stock prices rise and fall second by second. Individuals tend to buy high out of greed,
and sell low out of fear. The best thing to do is not constantly look at the price
fluctuations of stocks, and just check in on a regular basis.
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