Short - Term Products

  Short- term Products- Low Returns with Capital Appreciation

Short term goals are those less than three five years in the future. To reduce the risk of loss, holding the investment in cash or cash like vehicles is likely the most appropriate strategy. Money market funds and cash equivalent investments are conservative popular investments, as are savings accounts.

                                                     Investors with short-term money/ goals have two primary objectives.

1. Safety of capital

2. Return on capital

Money Market Funds / Liquid Schemes

Money Market or Liquid Funds are very short-term maturity. They invest in debt securities with less than 91 days to maturity. The primary source of return is interest income. Liquid fund is a very short-term fund and seeks to provide safety of principal and superior liquidity. An investor seeking the lowest risk ought to go for a liquid scheme. However, the returns in such investment are lower. Cash-equivalent instruments and money market funds are the least volatile of the investment types and are therefore ideal for people with extremely low risk tolerance.

Short Term Debt Funds

Short term funds may provide a higher level of return than liquid funds and ultra short term funds, but will be exposed to higher mark to market risks. Debt instruments are FDs, Bonds, debt based Mutual Fund Scheme such as Short Term Funds, Gilt Funds, Liquid Funds, floater etc. Depending upon the liquidity needs and taxation, the product should be taken debt category.

Fixed Maturity Plans (FMPs)

FMP's are closed end schemes that invest in a portfolio of debt securities which mature on or before the maturity of the scheme. FMP's come with tenors ranging from 90 days to 3 years. The investment horizon of the investor must watch the tenor of the scheme.

Bank Deposits

The simplest of all investment 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. Bank offer deposits of varying time frames beginning with a minimum of 7 days.

Post Office Time Deposits (POTDs)

The Post Office Term deposits is similar to a fixed bank deposit, where you save money for a definite time period earning a guaranteed return through the tenure of deposit.

Recurring Deposits (RDs)

This is one more type of secured investment. This product is ideally suitable to those who not able to invest a lump sum and looking for monthly investment. Ideally bank offers RD of minimum tenure with 6 months to a maximum of 10 yrs. Interest received on your RD is taxable as per your tax slab.

5- Yrs National Savings Certificate (NSC)

You can invest in Postal NSC of 5 years, only if you are sure that goal is exactly at 5 years from today. You can claim deduction under section 80 C. However, the interest on NSC will be taxable.

  

Derivatives

                                         Derivatives

Derivative is a product whose value is derived from the price of some other asset commonly known as underlying. It includes wide range of underlying assets. These include: 

1. Metals such as Gold, Silver, Aluminium, Lead, Zinc etc.

2. Energy resources such as Oil (crude oil), Coal, Electricity etc

3. Financial assets such as Shares, Bonds and Foreign exchange.

Derivatives market helps in improving price discovery. It helps in transfer of various risks from those who are exposed to risk but have low risk taking capacity. For example: Investors don't want to take the risk but traders are willing to take risk.

In Indian stock market there are two types of markets: 

1. Cash Market

2. Derivative Market

Derivatives are typically used for three purposes:

a) Hedging

b) Speculation

c) Arbitrage

A) Hedging

When an investor has an open position in the underlying, he can use derivative market to protect the position from the risks of future price movements. Without selling the assets from the portfolio investor can sell it in derivative market.

B) Speculation

A speculative trade in a derivative is not supported by an underlying position in cash, but simply implements a view on the future prices of the underlying, at a lower cost. Alternatively, he can take a long position in that stock through futures market as well. In derivatives, market you got a high amount of leverage this sometimes make derivative market risky. If the market had moved against his prediction, he would have incurred huge losses compared to the spot market.

C) Arbitrage

If the price of the underlying is Rs 100 and the futures prices is Rs 110, anyone can buy in the cash market and sell in the futures market and make the costless profit of Rs 10. This is called arbitrage. Arbitrageurs are specialist traders who evaluate whether the Rs 10 difference in price is higher than the cost of borrowing. Other highly traded derivatives in global markets are for currencies, interest rates and commodities. 

Risk & Its Types

                                           Risk

The deviation between actual and expected returns is the risk in his investment. If the return from an investment remains unchanged over time, there would be no risk. But, there is no investment of that kind in the real world. Deviations from expected outcomes can be positive or negative, both are considered to be risky. All investment are subject to risk, but the type and extent of risk are different.

                                    Types  Of  Risk

1. Market Risk - Systematic and Unsystematic

Total risk consist of two parts. The part of risk that affects the entire system is known as systematic risk, and the part that can be diversified away is known as unsystematic risk. Systematic risk is caused due to factors that many affect the economy/ markets as a whole, such as changes in government policy, external factors. Inflation risk, exchange rate risk, interest rate risk are systematic risk. Unsystematic risk is the risk specific to individual securities or a small case of investments.

Credit risk, business risk are unsystematic risks.   

2. Inflation Risk

Inflation risk is also known as purchasing power risk. It is a risk that arises from the decline in value of security's cash flows due to the falling purchasing power of money. Inflation risk represents the risk that the money received on an investment may be worth less when adjusted for inflation.

3. Interest rate risk

It refers to the risk that bond prices will fall in response to rising interest rates. Interest rate is inversely proportional to bond price, share price.

4. Liquidity risk

It implies that the investor may not be able to sell his investment when desired, or it has to be sold below its intrinsic value, or there are high costs to carrying out transactions.

5. Exchange rate risk

It is incurred due to changes in the exchange rate of domestic currency relative to a foreign currency. When a domestic investor invests in foreign assets, or a foreign investor invests in domestic assets, the investment is subject to exchange rate risk.