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SEEMA SETHI do hereby declare that the training report entitled "CHANGES IN
me for the partial fulfillment of degree of Master of Business Administration from
conducted by me. The data and facts provided in the report are authentic to the best of
my knowledge.

I solemnly declare that the work done by me is original and no copy of it has been
submitted to any other university for award of any other degree, diploma, and
fellowship on similar topic.


Heartfelt thanks to those who supported me…
It often happens that one is at loss of words when one is really thankful and sincerely
wants to express one's feeling of gratitude towards those for rendering helpful and
selfless service. A undertaken of study like this is never the outcome of effort of a
single person so I would be failing in duty if I don’t say a word of thank to all those
who have been the source of guidance, advice, co-operation and having taken pain in
acquainting me required information and data for the fulfillment of my project report
I am earnestly grateful to Mr. Vijay Sethi (Manager of HDFC Bank) for providing
me an opportunity to undertake project work in their esteemed organization and
practical training, which will go long term in shaping my career.

I am deeply indebted to our Director Dr. M.K. Sehgal and all my faculty members of
the institute for their valuable contribution during the academic session and guidance in
preparation of this project report. I especially want to thank my guide Mr. Adarsh
Kumar Aggarwal (Faculty of Finance) for guiding, supporting, also for giving a very
patient hearing whenever I needed.









































Standing on the threshold of the economic revival of the Indian economy where the
recovery and growth are already knocking at our door to usher the
new order with a note of optimism. The potential of India as a market
and as a manufacturing base continues to attract more and more
interest of the world at large. Undoubtedly, lot of development is
taking place in the investment pattern of the economy and its
multiplier impact would be there to be witnessed over a period of

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

investment like Mutual Funds, Systematic Investment Plan, RBI Bonds, and
Infrastructure Bonds proves to be a better option for the investors in comparison to
the old instruments of investment such as fixed deposits, savings, recurring deposits
etc. This project deals with the thorough study of these modern instruments in respect
of their returns, liquidity, and tenure & safety aspect etc.
History Of Banking In India

Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it should be
able to meet new challenges posed by the technology and any other external and
internal factors.

For the past three decades India's banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer
confined to only metropolitans or cosmopolitans in India. In fact, Indian banking
system has reached even to the remote corners of the country. This is one of the main
reason of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends
with the nationalization of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting
a draft or for withdrawing his own money. Today, he has a choice. Gone are days
when the most efficient bank transferred money from one branch to other in two days.
Now it is simple as instant messaging or dial a pizza. Money has become the order of
the day.

The first bank in India, though conservative, was established in 1786. From 1786 till
today, the journey of Indian Banking System can be segregated into three distinct
phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks

Nationalization of Indian Banks and up to 1991 prior to Indian banking sector
New phase of Indian Banking System with the advent of Indian Financial & Banking
Sector Reforms after 1991.
To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and

Phase III.
Phase I
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan
shareholders. and Bengal Bank. The East India Company established Bank of Bengal
(1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and
called it Presidency Banks. These three banks were amalgamated in 1920 and
Imperial Bank of India was established which started as private shareholders banks,
mostly Europeans

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906
and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian
Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic
failures between 1913 and 1948. There were approximately 1100 banks, mostly
small. To streamline the functioning and activities of commercial banks, the
Government of India came up with The Banking Companies Act, 1949 which was
later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No.
23 of 1965). Reserve Bank of India was vested with extensive powers for the
supervision of banking in India as the Central Banking Authority.

During those day’s public has lesser confidence in the banks. As an aftermath deposit
mobilization was slow. Abreast of it the savings bank facility provided by the Postal
department was comparatively safer. Moreover, funds were largely given to traders.
Phase II
Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive banking
facilities on a large scale especially in rural and semi-urban areas. It formed State
Bank of India to act as the principal agent of RBI and to handle banking transactions
of the Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on
19th July, 1969, major process of nationalization was carried out. It was the effort of
the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in
the country were nationalized.

Second phase of nationalization Indian Banking Sector Reform was carried out in
1980 with seven more banks. This step brought 80% of the banking segment in India
under Government ownership.

The following are the steps taken by the Government of India to Regulate Banking
Institutions in the Country:

1949: Enactment of Banking Regulation Act.

1955: Nationalization of State Bank of India.
1959: Nationalization of SBI subsidiaries.
1961: Insurance cover extended to deposits.
1969: Nationalization of 14 major banks.
1971: Creation of credit guarantee corporation.
1975: Creation of regional rural banks.
1980: Nationalization of seven banks with deposits over 200 crore.
After the nationalization of banks, the branches of the public sector bank India rose to
approximately 800% in deposits and advances took a huge jump by 11,000%.
Banking in the sunshine of Government ownership gave the public implicit faith and
immense confidence about the sustainability of these institutions.
Phase III
This phase has introduced many more products and facilities in the banking sector in
its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee
was set up by his name which worked for the liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being
put to give a satisfactory service to customers. Phone banking and net banking is
introduced. The entire system became more convenient and swift. Time is given more
importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from
any crisis triggered by any external macroeconomics shock as other East Asian
Countries suffered. This is all due to a flexible exchange rate regime, the foreign
reserves are high, the capital account is not yet fully convertible, and banks and their
customers have limited foreign exchange exposure.

Nationalisation Of Banks In India

The nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi the
then prime minister. It nationalized 14 banks then. These banks were mostly owned
by businessmen and even managed by them.
Central Bank of India
Bank of Maharashtra
Dena Bank
Punjab National Bank
Syndicate Bank
Canara Bank
Indian Bank
Indian Overseas Bank
Bank of Baroda
Union Bank
Allahabad Bank
United Bank of India
UCO Bank
Bank of India
Before the steps of nationalization of Indian banks, only State Bank of India (SBI)
was nationalized. It took place in July 1955 under the SBI Act of 1955.
Nationalisation of Seven State Banks of India (formed subsidiary) took place on 19th
July, 1960.

The State Bank of India is India's largest commercial bank and is ranked one of the
top five banks worldwide. It serves 90 million customers through a network of 9,000
branches and it offers -- either directly or through subsidiaries -- a wide range of
banking services.

The second phase of nationalization of Indian banks took place in the year 1980.
Seven more banks were nationalized with deposits over 200 crores. Till this year,
approximately 80% of the banking segment in India was under Government

After the nationalization of banks in India, the branches of the public sector banks
rose to approximately 800% in deposits and advances took a huge jump by 11,000%.

1955 : Nationalisation of State Bank of India.

1959 : Nationalisation of SBI subsidiaries.
1969 : Nationalisation of 14 major banks.
1980 : Nationalisation of seven banks with deposits over 200 crores.
Banking Sector : Growth & Evolution

The Indian Banking sector has undergone a sea of change in the past decade with the
Implementation of the ongoing banking sector reforms. The sector, over the years has
become more efficient with the implementation of prudential norms for asset
classification and improved thrust on technology advancement. The PSBs (Public
Sector Banks) still dominate the sector with 75% of the market share of business and
profits. The new private sector banks with their technology driven business model are
fast catching up with the PSBs. The last two years has seen banks book windfall gains
in treasury profits. With the interest rates hardening up, banks need to focus on core
profit growth. The retailisation of the banks’ balance sheet has seen banks improve
their asset mix with home loans, auto loans and personal loans


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

part of the overall structural reforms aimed at improving the productivity and
efficiency of the economy. The role of an integrated financial infrastructure is to
stimulate and sustain economic growth.

The US$ 28 billion Indian financial sector has grown at around 15 per cent and has
displayed stability for the last several years, even when other markets in the Asian
region were facing a crisis. The financial sector has kept pace with the growing needs
of corporate and other borrowers. Banks, capital market participants and insurers
have developed a wide range of products and services to suit varied customer
requirements. The Reserve Bank of India (RBI) has successfully introduced a regime
where interest rates are more in line with market forces.

Financial institutions have combated the reduction in interest rates and pressure on
their margins by constantly innovating and targeting attractive consumer segments.
Banks and trade financiers have played a vital role to promote the foreign trade of the

The Indian banking system has a large geographic and functional coverage. Presently
the total asset size of the Indian banking sector is 3US$ 270 billion while the total
deposits amount to US$ 220 billion with a branch network exceeding 66,000
branches across the country. Revenues of the banking sector have grown at 6 per cent
CAGR over the past few years to reach a size of US$ 15 billion. While commercial
banks cater to short and medium term financing requirements; national level and state
level financial institutions meet longer-term requirements.

Banking has grown into a technology concentrated and customer friendly model with
a focus on convenience. The sector is moving towards the emergence of financial
supermarkets in the form of universal banks providing a set of services ranging from
retail to corporate banking, industrial lending and investment banking. While
corporate banking is clearly the largest segment, personal financial services is the
highest growth segment.

The recent favorable government policies for enhancing limits of foreign investments
to 49 per cent among other key initiatives have encouraged such activity. Larger
banks will be able to muster sufficient capital to finance asset expansion and fund
investments in technology.



In the banking industry, business, in simple terms is defined as the sum of the
deposits and advances as on a particular date. The business of scheduled commercial
banks is estimated to grow from Rs 21,644 billion in 2002-03 to Rs 32,229 billion by
2005-06 at a CAGR of 14.2 per cent, led by continued growth in retail finance,
gradual recovery in commercial credit, pick-up in agriculture credit and growth in
Due to the slowdown in industrial growth, many corporate restructured themselves to
survive; hence, credit off take was low. With reduced avenues for investment of
surplus funds, banks turned to retail financing. The retail finance portfolio grew by
around 27 per cent during the same period.

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

Proportion of different sources of funds of SCBs

Deposits consist of demand deposits (current account deposits), savings deposits and
term deposits. Firms maintain demand deposits to meet their day-to-day cash
requirements. The deposits of all scheduled banks are expected to grow from a level
of Rs 14,045 billion as of March 2003 to Rs 19,929 billion as of March 2006 at a
CAGR of 12.4 per cent. This will be driven by a growth of 8.5 per cent, 16.2 per cent
and 11.7 per cent in demand deposits, savings deposits and term deposits,

Technology-driven products also taper growth in demand deposits. It’s estimated that
demand deposits will grow at a CAGR of 4.1 percent from Rs 1,668 billion as of
March 2003 to Rs 1,881 billion by end-March 2006, due to the introduction of newer,
technology-driven products/facilities. With the advent of new technology-driven
products such as electronic fund transfers, Real Time Gross Settlements (RTGS) and
Cash Management Systems (CMS), the clearing cycle has shortened. RTGS and CMS
allow quick transfer of funds to and from any part of the country. This will encourage
corporates/firms to reduce their balances in demand deposits, and probably slow
down their growth. Further, customer-friendly products that are introduced by banks
with the aid of technology (swipe-in and swipe-out) will divert some portion of
demand deposits towards fixed deposits.
Alternative investment products

Besides term deposits, investors have the option of investing in insurance, small
savings schemes, mutual funds etc. While the share of small savings schemes in total
investments has remained more or less stable, the share of insurance and mutual funds
in the total pie is increasing. This has led to a drop in the share of the bank liability
product from 68 per cent in 1998-99 to 57 per cent in 2002-03.

Borrowings are expected to grow at 7.1 per cent CAGR from Rs 912 billion as of
March 2003 to Rs 1,122 billion by end-March 2006, led by a strong growth in
advances. During 2000-01 to 2002-03, borrowings of scheduled commercial banks
grew by 22.9 per cent (5.4 per cent) CAGR.

Equity capital
Another source of funds for the banking sector is the equity capital. In the last 10
years, the total equity capital raised by banks has gone up, although it is not the main
source of funds for banks. With stricter capital adequacy norms and the growing loan
book size, banks will need to infuse more capital to maintain a healthy capital
adequacy ratio. Many of the public sector banks have reduced the government stake
by raising equity from the market. In 2002-03, the total amount raised by public
sector banks through equity was approximately Rs 7.7 billion. Hence, in order to
maintain a healthy capital adequacy ratio, going forward, and banks will embark on
infusing more equity capital. Equity capital is estimated to grow at CAGR of 2.5 per
cent in the next year.

II. Increasing credit deposit ratio to slow down the growth rate of
The investments portfolio of banks is likely to grow at CAGR of 8.8 per cent during
2003-04 to 2005-06. With low credit off take, banks had no avenues to deploy funds.
Hence they parked them in investments. The investment to deposit ratio grew from 42
per cent in 1998 to 51 per cent in 2003 and is estimated to have been 50.5 per cent in
2004. With the expected increase in demand for commercial credit, banks would
prefer lending to the industrial sector than invest in government securities, as the
former yields higher returns. Also, to meet the demand for commercial credit, banks
would prune their investment portfolio. With the estimated slow down in investments,
the investment-deposit ratio is expected to taper to 46 per cent by March 2006.

III. Interest rates to harden in 2004-05

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

basis points (bps) during 2004-05 to 7.00 per cent by March 2005 from 5.17 per cent
as of end-March 2004. The benchmark yield is expected to go up further by 50 bps
during 2005-06 to touch 7.50 per cent by March 2006. Rising inflation and the
gradual increase in credit demand has led to a hardening of interest rates. Banks have
started moving to the short end of the curve with the rise in interest rates. In general,
the movement of interest rates depends on:

2.Growth in credit off take
3.International interest rate.
4.Expected rate of inflation
5. Fiscal deficit, and the resultant borrowing programme of the

IV. Agri Credit

During 1999-2000 to 2002-03, agriculture credit recorded a CAGR of 19.2 per cent
from Rs 504.3 billion as of end-March 2000 to Rs 853.8 billion as of end-March
2003. The growth in agriculture credit has been steady due to low penetration of
agricultural credit in the rural areas and uneven agriculture output over the years. The
government has laid emphasis on improving the credit delivery to the agriculture
sector and thus improving agriculture production in the country. The Ministry of
Finance has advised all banks to increase their agriculture credit by 30 per cent over
the next 3 years, from 2004-05 to 2007-08. Further, several measures have been
initiated, like increasing the credit limit of the Kisan credit card scheme, special
agricultural credit plans, etc. The Reserve Bank of India has directed banks to
restructure / reschedule the overdue agriculture loans, waive margin money
requirement for agricultural loans up to Rs 50,000, etc. Agriculture credit had been
growing between 17-18 per cent during the last few years. Several banks have started
restructuring their operations to meet the targeted agricultural growth.

V.Retail finance

The net outstanding retail finance portfolio of the banks is expected to grow at a
CAGR of 36 per cent during the period 2003-04 to 2005-06, from Rs 1,051 billion as
of end-March 2003 to Rs 2,670 billion as of end-March 2006, driven by continued
growth in housing, commercial vehicles and car finance. The projected growth in the
outstanding retail finance in the next 3 years would be mainly driven by the following
1. Continued growth expected in housing finance, and cars and commercial vehicles
2. Increasing market share of banks vis-à-vis NBFCs in the retail finance pie.
3. Increasing tenures of the loans.

During 2000-01 to 2002-03, the retail finance portfolio of banks has grown at a
CAGR of 27 per cent from Rs 516.4 billion to Rs 1,051.4 billion. This steady growth
in retail finance portfolio was mainly on account of the following factors:
1. Focus of large public and private sector banks on disbursements to the household
sector for housing loans, commercial vehicles, cars and two wheelers
2. Increasing penetration of banks vis-à-vis NBFCs.
3. Lower interest rates, contributing to increase in demand, and rising tenure of car,
housing and commercial vehicle portfolio.
VI. Non Performing Assets

By March 2006, the gross NPA may come down to 5.82 per cent as against as 8.84
per cent as of March 2003, while net NPA may drop to 2.54 per cent from 4.42 per
cent during the same period. At the gross level, the gross NPAs, which stood at Rs
687.80 billion as on March 31, 2003, have fallen to Rs 669.15 billion as on March 31,
2004, but would rise thereafter to Rs 710.56 billion as in March 2006, with the
growth in advances. But it’s estimated that gross NPAs will fall further to 5.84 per
cent by end-March 2006.The prime drivers are:

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

credit appraisals, providing extensive training staff members undertaking appraisals,
putting in place an effective system of post disbursement monitoring of accounts.

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

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

performance has improved significantly, and we expect it to continue improving its
profitability in the current industrial upturn, which will help improve the risk profile
of loans given to the industrial sector.

The gross NPA of the scheduled commercial banks have fallen from 12.8 per cent as
of end-March 2000 to 8.8 per cent as of end-March 2003, while net NPAs had fallen
from 6.8 percent to 4.4 per cent during the same period. The primary drivers for the
improvement are:
1. Higher provisions: The falling interest rate and corresponding increase in profit on
sale of investments provided banks enough room to increase their provisioning / write
off of bad loans while maintaining profit growth.
2. Regulatory measures: Regulators introduced various measures, such as One Time
Settlement Scheme (OTS), Corporate Debt Restructuring (CDR) etc, which allowed
banks to restructure the bad loans or settle the bad loans at a discount. It also
prevented potential NPAs from becoming NPAs.

3. Legal reforms: Reforms in the legal systems, in the form of strengthening the Debt
Recovery Tribunal (DRT) and enactment of the Securities and Reconstruction of
Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002,
enabling banks to pressurize the defaulters to clear the over dues, and thus clean their
balance sheet.

4. Best practices: Banks started adopting best practices, and building strong credit risk
management to improve their loan portfolio.


The first major trend is that of universal banking as a model with emphasis on retail
banking. Banks have begun to offer whole portfolio of services because they aim at
maximizing bank’s share of the customer’s wallet. Retail banking is less subject to
economic cycles than wholesale or investment banking which explains the emphasis
on retail banking within the model of universal banking.

The second trend is that of use of technology in reducing cost of operations. The
process has gone so far ahead that technology is no longer a differentiator between

The third trend is towards emergence of regulatory model in the form of Basel II
which reconciles the market based assessment of risk with the regulatory capital,
something which Basel I did not do. The expectation is that Banks with better risk
management would be permitted lower regulatory capital, allowing them more room
for growth, as compared to banks with weaker risk management.
Lastly, there is a renewed emphasis on effective corporate governance arising as a
response to the fiduciary nature of banking business, the need to raise capital from the
markets and stiffer legislation. Effective corporate governance would correct
information asymmetry, increase efficiency and enhance brand image.

The combined effect of all the above trends would be increased competition among
banks with tighter regulation, enabling the financial sector to yield higher value
addition per unit of capital employed and resulting in the financial sector accounting
for a higher share of gross domestic product, ranging between 8 to 10% in US, UK
and Australia as compared to 6.5% for India.

I. Indian Aspirations
In the context of these global trends, one can trace the sources of competitive
strengths of the Indian banking sector.

As far as the strengths are concerned

• There has been sufficient deregulation in the financial sector over the last decade to
induce elements of competition in the banking sector.

• Secondly, the Indian Banking sector has a longer experience of market economies
than say the counterparts in Eastern Europe.

• Thirdly, Indian players also have international presence.

• Fourthly, the growth of retail lending, over the last five years or so, if not the quality
of the portfolio, mirrors the international trend.

• Fifth, India has a large and untapped market. Over 60% of the household still do not
have access to banking services. This implies a considerable scope for
experimentation, innovation, and expansion which can develop into long term
competitive advantages for the sector.
• Lastly, the public ownership of roughly three fourth of the Indian Banking sector is,
for the moment, an effective shield which the banks can use to nurture their
competitive advantages.

However one can hardly be complacent, if one looks at Indian banking in terms of
cost structure, human resources, technology platforms, management systems and
corporate governance. There is certainly an efficient fringe in banking sector, but that
fringe is overshadowed by public sector banks which constitute the bulk. In case of
public sector banks, operating profit as a percentage of total assets is about 1
percentage point lower than that of foreign banks operating in India. In spite of a
series of VRS, the wage bill as percentage of total assets in case of public sector
banks is higher by about 1 percentage point as compared to the new private sector
banks which shows the scope for economies. In the area of technology, the haste to
implement core banking is not matched by a similar urgency to introduce modest but
more effective solutions relating to systems, procedures and customer interface. As
regards risk assessment and mitigation, freeing up of interest rates, more often that
not, has provided the managements a rationale to bypass risk based pricing of credit
altogether. As regards corporate governance, it is still looked at as a matter of
conscience rather than business necessity.


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

As of March 2003, all scheduled commercial banks, except two banks, had their
CRAR above the stipulated norm of 9 %. Between March 2002 and March 2003, we
see a marked improvement in the nationalized banks. This was due to the increase in
profitability and the fresh capital raised by many banks. With the likely
implementation of new Capital Accord (Basel II), many banks, especially those
having a global presence, have been holding capital in excess of the stipulated norm.
From the sample of six banks listed below, we see that the capital adequacy ratio of
all banks, except ICICI Bank, has improved. The capital adequacy ratio of PSBs has
shown a significant improvement in comparison to that of the new private sector
banks on account of the aggressive lending strategy of new private sector banks in
comparison to the aggressive capital raising strategy of the public sector banks.
CRAR of top six banks

With the expected increase in demand for credit, banks will prefer to increase their
loan portfolio instead of investments. This will result in banks shifting their focus
from investments towards advances.


Critical success factors for banks today revolve around being more competitive in
their chosen markets, delivering products and service to their customers "anytime/any
where", effective enterprise information management and optimized use of their
technology and people resources. The open systems based, network computing model
best positions a bank to effectively address these "critical success factors", as opposed
to constantly expanding and re-engineering expensive and cumbersome mainframe-
centric legacy environments.

I. New Technologies supporting these CSF’s

1. Data warehousing: effective enterprise information management

The Banking Industry is data rich but information poor. Enterprise information
management can be best addressed by using data warehousing technologies and
disciplines. Data warehousing based solutions can be implemented the quickest and
the most cost-effectively on UNIX-based open systems platforms.
2. Thin client: the ideal network computing model
Sun is encouraging the industry to adopt the network computing model, and
incorporate Java as a core development component. A key component of this strategy
includes the network appliance, or Sun Ray. Because of their high utilization of
workstations that perform basically single or dual repetitive operational functions,
banks are ideally positioned to exploit the network computing model, utilizing the
network appliance.

3. Addressing the supply chain management challenge in banking

Delivering products quickly and "any time/any where" requires a bank to focus on its
channel delivery strategy and position itself to integrate its delivery channels in the
future. The Banking Industry has traditionally developed systems with a product or
line of business focus. This is changing to a customer relationship focus with
integrated delivery of products and services.
The Internet has been identified as the next business frontier. While many banks have
approached it initially as a sales and marketing vehicle, its real potential exists as a
financial transaction medium and a customer support channel. The Internet can allow
a bank to reduce its cost of delivering retail services, like home banking, or corporate
services, like Cash Management, and thus expand its customer and fee revenue base.

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

Since the availability of funds is more and deployment is less, banks should evolve
new and attractive products and services to the customers. There should be rational
thinking in sanctioning loans, which will bring down the NPA’s.

The banking sector is made more attractive with differential interest rates. Banks
should also ensure that its funds are effectively utilized in the priority sector. Banks
should be given more autonomy and independence and the unions should play a
major role in building the banking industry.

Banks with their large customer base and good reputation can effectively counter the
threats from NBFC’s and mutual funds.

Internet banking is growing in India where banking is made more user friendly.
Banks with Their Intellectual Capital Should move towards Fee based activities.
With The emergence of IT, using its intellectual resources banks should be able to
attract funds and market their products nd services more effectively and efficiently.

The efficiency with which bank is able to manage the competitive forces will be
reflected in their financial statements.


I.Foreign Banks
During 1999-00 to 2002-03, foreign banks held on to their share of the business and
also maintained the highest spreads. Greater spreads and a high core fee income ratio
helped them in sustaining high operating expenses. They will continue to have a high
core fee income ratio, but are likely to face competition from other bank groups, who
are increasing their worldwide presence. Foreign banks have the lowest NPA ratios
and, with their stringent credit assessment norms, will continue to maintain them.

II.Other Scheduled Commercial Banks

Since these banks, especially the new private sector banks, are expanding their
operations, operating expenses will be high. But the benefits of these large
investments will accrue to them in the near future. The yield on carry business is
likely to improve with the gradual increase in credit demand from the commercial
sector. However, the improvement could be restricted due to the expected drop in the
yield on investments. Because of the aggressive lending strategy adopted by the new
private sector banks, the asset quality may deteriorate, although the banks will try to
maintain the net NPA ratio. Private sector banks have to concentrate on their credit
management systems to improve the asset quality.

III.Public Sector Banks

These banks need to rein in their operating costs by controlling manpower costs and
rationalizing operations. Investments in technology may result in surplus staff, which
can affect productivity (if the excess manpower is not utilized properly). The gradual
increase in commercial sector credit will enable a healthy growth in advances. Public
sector banks need to reduce their exposure to investments by focusing on the core
activity of lending. Moreover, these banks have started focusing on retail finance,
which will contribute to the growth in advances. The asset quality of the public sector
banks may improve on account of the expected improvement in credit management.
But PSBs need to improve and be aggressive in their communication and business
strategies to garner more customers, if they want to attain mass in the retail finance
Budget 2004-05: Banking

The much-needed reforms in the banking sector have transformed the sector
drastically in the last few years. Falling interest rates as well as strengthening of the
hands of banks (Securitisation Act) have changed the dynamics of the Indian banking
sector itself. The new Securitisation Act has given more power to the banking sector
against defaulting borrowers. Further, changes to be implemented on the issue of
voting rights among private sector banks is likely to speed up the consolidation


 The government has proposed to double credit to the agriculture sector in the next
three years.
 There has been a significant emphasis on making credit available towards
infrastructure development.

 Inter-institutional group comprising select banks and financial institutions

incorporated to ensure speedy conclusion of loan agreements for infrastructure
projects. Nearly Rs 400 bn will be kept aside by this consortium for infrastructure
 Task force to be set up to explore reforms in the cooperative banking sector.
 Securitisation Act to be amended.
 FDI in the insurance sector to be hiked from 26% to 49%.


 As per the common minimum program (CMP), the budget has focused a lot
on the need to improve credit to the agriculture sector and banks will be at the
forefront of disbursing credit. Vagaries of monsoons impact the agriculture
sector heavily and banks are vulnerable if monsoon fails. Also, the RBI has
released new guidelines for banks with regards to agricultural lending.
However, it is too early to ascertain the impact. The impact of these initiatives
by the government will only be apparent over the long-term.
 Banks are likely to benefit from increased lending to the infrastructure sector.
This will come about in two ways i.e. direct equity participation and indirectly
(corporate borrowing for expanding capacity). While this would provide an
impetus to core advances of banks, the quality of such advances is likely to be
better. In this light, there is relatively less NPA risk.
 Reforms in the banking sector in the form of amendments to the Securitisation
Act may strengthen the backbone of the financial sector.
 A hike in the FDI in the insurance sector is likely to significantly raise
investments in the nascent insurance sector. Domestic banks like ICICI Bank,
ING Vysya, Kotak Bank and SBI who have joint ventures with international
insurance majors will be able to infuse more capital into their insurance
business. In the future, there may be an opportunity for these domestic banks
to unlock value from such investments as well.
Housing Finance Sector

Against the milieu of rapid urbanization and a changing socio-economic scenario, the
demand for housing has grown explosively. The importance of the housing sector in
the economy can be illustrated by a few key statistics. According to the National
Building Organization (NBO), the total demand for housing is estimated at 2 million
units per year and the total housing shortfall is estimated to be 19.4 million units, of
which 12.76 million units is from rural areas and 6.64 million units from urban areas.
The housing industry is the second largest employment generator in the country. It is
estimated that the budgeted 2 million units would lead to the creation of an additional
10 million man-years of direct employment and another 15 million man-years of
indirect employment.

Having identified housing as a priority area in the Ninth Five Year Plan (1997-2002),
the National Housing Policy has envisaged an investment target of Rs. 1,500 billion
for this sector. In order to achieve this investment target, the Government needs to
make low cost funds easily available and enforce legal and regulatory reforms.


HDFC was incorporated in 1977 with the primary objective of meeting a social need
– that of promoting home ownership by providing long-term finance to households
for their housing needs. HDFC was promoted with an initial share capital of Rs. 100
Business Objectives

The primary objective of HDFC is to enhance residential housing stock in the country
through the provision of housing finance in a systematic and professional manner,
and to promote home ownership. Another objective is to increase the flow of
resources to the housing sector by integrating the housing finance sector with the
overall domestic financial markets..

Organizational Goals

HDFC’s main goals are to a) develop close relationships with individual households,
b) maintain its position as the premier housing finance institution in the country, c)
transform ideas into viable and creative solutions, d) provide consistently high returns
to shareholders, and e) to HDFC is a professionally managed organization with a
board of directors consisting of eminent persons who represent various fields
including finance, taxation, construction and urban policy & development. The board
primarily focuses on strategy formulation, policy and control, designed to deliver
increasing value to shareholders.

Mr. Deepak S Parekh (Chairman)

Mr. Keshub Mahindra (Vice Chairman)
Mr. Shirish B Patel
Mr. B S Mehta
Mr. D M Sukthankar
Mr. D N Ghosh4
Dr. S A Dave
Mr. S Venkitaramanan
Dr. Ram S Tarneja
Mr. N M Munjee
Mr. D M Satwalekar
Ms. Renu S. Karnad (Executive Director)
Mr. K M Mistry (Managing Director)

DR.D.S Parikh

MR.Keshub mahindra Mr.Renu S.Karnad Mr. Mistry

(Executive (Managing
(Vice Chairman)
Director) Director)

Mr.Shirish Mr. Mr. Mr. Mr.S.A Mr. S Mr.

Mehta Sukthankar D.N Dave Venkitaramanan(BOD) Rama
B Patel
(BOD) (BOD) Ghosh (BOD) Tarnej
(BOD) (BOD) a


o HDFC Ranked as ‘India’s Third Best Managed Company’ by Finance
Asia – 2005
o Mr. Deepak Parikh awarded the 'Hall of Fame' award by Outlook Money
o HDFC receives the 'Dream Home' award for the best Housing Finance
company for 2004 from Outlook Money magazine
o Awards galore by HDFC at the 44th ABCI Awards!!!
o 5th Best Company to work for in India, ranked by Business Today in
November 2004
o Economic Times Corporate Citizen of the Year Award, November 2004
o Rated by Deutsche Bank as one of the top 5 banks/Financial Institutions in
Asia in October 2004
o Ranked among the Top 20 companies to deliver healthiest returns to
shareholders, Outlook Money Magazine - September 2004
o 1st Prize at the New York Festival's Gold Midas Awards for
Environmental Communication Ad in August 2004
o Features in the Forbes list of Top 20 Leading Indian Companies in May 2004.
o One of the Top 10 Investor Friendly Companies, ranked by Business Today in
March 2004.
o HDFC Ranked No. 3 - 'India's Best Managed Companies' by Finance
o Clean Sweep by HDFC at the 43rd ABCI Awards!!!
o National Award for Excellence In Corporate Governance by The
Institute of Company Secretaries of India
o 2nd Best Company for Corporate Governance in India by the Asset
o The Economic Times Lifetime Achievement Award - 2003. (For Mr.
Deepak Parikh - Chairman, HDFC Ltd. )
o One of the Top Ten - Most Admired Companies in India ' - 2003 by Business
o One of the Top Ten - Most Admired CEOs in India ' - 2003 by Business
Barons ( for Mr. Deepak Parikh )
o India's Second Best Managed Company - 2003 by Finance Asia.
o India's Biggest Wealth Creator in the banking and financial serives by the
fourth Business Today - Stern Steward Survey.
o One of the Top Ten - Most Respected Companies in India' by Business
o Highest rating for ' Governance and Value Creation ' by CRISIL.
o One among the top ten ' Company Leaders in India' by the Far Eastern
Economic Review Survey.
o Best Managed Financial Institution in India' by fox Pitt Survey.


The Housing Development Finance Corporation Limited (HDFC) was amongst the
first to receive an ‘in principle’ approval from the Reserve Bank of India (RBI) to set
up a bank in the private sector, as part of the RBI’s liberalisation of the Indian
Banking Industry in 1994. The bank was incorporated in August 1994 in the name of
‘HDFC Bank Limited’, with its registered office in Mumbai, India. HDFC Bank
commenced operations as a Scheduled Commercial Bank in January 1995.


HDFC is India’s premier housing finance company and enjoys an impeccable track
record in India as well as in international markets. Since its inception in 1977, the
Corporation has maintained a consistent and healthy growth in its operations to
remain the market leader in mortgages. Its outstanding loan portfolio covers well over
a million dwelling units. HDFC has developed significant expertise in retail mortgage
loans to different market segments and also has a large corporate client base for its
housing related credit facilities. With its experience in the financial markets, a strong
market reputation, large shareholder base and unique consumer franchise, HDFC was
ideally positioned to promote a bank in the Indian environment.

Business Focus

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

sound customer franchises across distinct businesses so as to be the preferred provider
of banking services for target retail and wholesale customer segments, and to achieve
healthy growth in profitability, consistent with the bank’s risk appetite. The bank is
committed to maintain the highest level of ethical standards, professional integrity,
corporate governance and regulatory compliance. HDFC Bank’s business philosophy
is based on four core values - Operational Excellence, Customer Focus, Product
Leadership and People.

Capital Structure
The authorized capital of HDFC Bank is Rs.450 crore (Rs.4.5 billion). The paid-up
capital is Rs.309.9 crore (Rs.3.09 billion). The HDFC Group holds 22.2% of the
bank’s equity and about 19.5% of the equity is held by the ADS Depository (in
respect of the bank’s American Depository Shares (ADS) Issue). Roughly 31.7% of
the equity is held by Foreign Institutional Investors (FIIs) and the bank has about
190,000 shareholders. The shares are listed on the The Stock Exchange, Mumbai and
the National Stock Exchange. The bank’s American Depository Shares are listed on
the New York Stock Exchange (NYSE) under the symbol “HDB”.
Times Bank Amalgamation
In a milestone transaction in the Indian banking industry, Times Bank Limited
(another new private sector bank promoted by Bennett, Coleman & Co./Times
Group) was merged with HDFC Bank Ltd., effective February 26, 2000. As per the
scheme of amalgamation approved by the shareholders of both banks and the Reserve
Bank of India, shareholders of Times Bank received 1 share of HDFC Bank for every
5.75 shares of Times Bank. The acquisition added significant value to HDFC Bank in
terms of increased branch network, expanded geographic reach, enhanced customer
base, skilled manpower and the opportunity to cross-sell and leverage alternative
delivery channels.
Distribution Network
HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable
network of over 495 branches spread over 218 cities across India. All branches are
linked on an online real-time basis. Customers in over 120 locations are also serviced
through Telephone Banking. The Bank’s expansion plans take into account the need
to have a presence in all major industrial and commercial centres where its corporate
customers are located as well as the need to build a strong retail customer base for
both deposits and loan products. Being a clearing/settlement bank to various leading
stock exchanges, the Bank has branches in the centers where the NSE/BSE have a
strong and active member base.

The Bank also has a network of about over 1054 networked ATMs across these cities.
Moreover, HDFC Bank’s ATM network can be accessed by all domestic and
international Visa/MasterCard, Visa Electron/Maestro, Plus/Cirrus and American
Express Credit / Charge card holders.
Mr. Jagdish Capoor took over as the bank's Chairman in July 2001. Prior to this, Mr.
Kapoor was a Deputy Governor of the Reserve Bank of India.

The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25
years, and before joining HDFC Bank in 1994 was heading Citibank's operations in

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

experience in public policy, administration, industry and commercial banking. Senior
executives representing HDFC are also on the Board.

Senior banking professionals with substantial experience in India and abroad head
various businesses and functions and report to the Managing Director. Given the
professional expertise of the management team and the overall focus on recruiting
and retaining the best talent in the industry, the bank believes that its people are a
significant competitive strength.

HDFC Bank operates in a highly automated environment in terms of information
technology and communication systems. All the bank’s branches have online
connectivity, which enables the bank to offer speedy funds transfer facilities to its
customers. Multi-branch access is also provided to retail customers through the
branch network and Automated Teller Machines (ATMs). The Bank has made
substantial efforts and investments in acquiring the best technology available
internationally, to build the infrastructure for a world class bank. In terms of software,
the Corporate Banking business is supported by Flexible, while the Retail Banking
business by Fin ware, both from i-flex Solutions Ltd. The systems are open, scaleable
and web-enabled.
The Bank has prioritized its engagement in technology and the internet as one of its
key goals and has already made significant progress in web-enabling its core
businesses. In each of its businesses, the Bank has succeeded in leveraging its market
position, expertise and technology to create a competitive advantage and build market

Business Profile

HDFC Bank caters to a wide range of banking services covering both commercial and
investment banking on the wholesale side and transactional / branch banking on the
retail side. The bank has three key business segments:

a) Wholesale Banking Services

The Bank’s target market is primarily large, blue-chip manufacturing companies in
the Indian corporate sector and to a lesser extent, small & mid-sized corporate and
agri-based businesses. For these customers, the Bank provides a wide range of
commercial and transactional banking services, including working capital finance,
trade services, transactional services, cash management, etc. The bank is also a
leading provider of structured solutions, which combine cash management services
with vendor and distributor finance for facilitating superior supply chain management
for its corporate customers. Based on its superior product delivery / service levels and
strong customer orientation, the Bank has made significant inroads into the banking
consortia of a number of leading Indian corporate including multinationals,
companies from the domestic business houses and prime public sector companies. It
is recognized as a leading provider of cash management and transactional banking
solutions to corporate customers, mutual funds, stock exchange members and banks.
c) Treasury

Within this business, the bank has three main product areas - Foreign Exchange and
Derivatives, Local Currency Money Market & Debt Securities, and Equities. With the
liberalization of the financial markets in India, corporate need more sophisticated risk
management information, advice and product structures. These and fine pricing on
various treasury products are provided through the bank’s Treasury team. To comply
with statutory reserve requirements, the bank is required to hold 25% of its deposits
in government securities. The Treasury business is responsible for managing the
returns and market risk on this investment portfolio.

b) Retail Banking Services

The objective of the Retail Bank is to provide its target market customers a full range
of financial products and banking services, giving the customer a one-stop window
for all his/her banking requirements. The products are backed by world-class service
and delivered to the customers through the growing branch network, as well as
through alternative delivery channels like ATMs, Phone Banking, Net Banking and
Mobile Banking.

The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank
Plus and the Investment Advisory Services programs have been designed keeping in
mind needs of customers who seek distinct financial solutions, information and
advice on various investment avenues. The Bank also has a wide array of retail loan
products including Auto Loans, Loans against marketable securities, Personal Loans
and Loans for Two-wheelers. It is also a leading provider of Depository Participant
(DP) services for retail customers, providing customers the facility to hold their
investments in electronic form.
HDFC Bank was the first bank in India to launch an International Debit Card in
association with VISA (VISA Electron) and issues the Master card Maestro debit card
as well. The Bank launched its credit card business in late 2001. By March 2005, the
bank had a total card base (debit and credit cards) of 4.2 million cards. The Bank is
also one of the leading players in the “merchant acquiring” business with over 42,000
Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant
establishments. The Bank is well positioned as a leader in various net based B2C
opportunities including a wide range of internet banking services for Fixed Deposits,
Loans, Bill Payments, etc.


a) Credit Rating
HDFC Bank has its deposit programmes rated by two rating agencies - Credit
Analysis & Research Limited. (CARE) and Fitch Ratings India Private Limited. The
Bank’s Fixed Deposit programme has been rated ‘CARE AAA (FD)’ [Triple A] by
CARE, which represents instruments considered to be “of the best quality, carrying
negligible investment risk”. CARE has also rated the Bank’s Certificate of Deposit
(CD) programme “PR 1+” which represents “superior capacity for repayment of short
term promissory obligations”. Fitch Ratings India Pvt. Ltd. (100% subsidiary of Fitch
Inc.) has assigned the “TAAA (ind)” rating to the Bank’s deposit programme, with
the outlook on the rating as “stable”. This rating indicates “highest credit quality”
where “protection factors are very high”. HDFC Bank also has its long term
unsecured, subordinated (Tier II) Bonds of Rs.4 billion rated by CARE and Fitch
Ratings India Private Limited. CARE has assigned the rating of “CARE AAA” for
the Tier II Bonds while Fitch Ratings India Pvt. Ltd. has assigned the rating
“AAA(ind)” with the outlook on the rating as “stable”. In each of the cases referred to
above, the ratings awarded were the highest assigned by the rating agency for those
b) Corporate Governance Rating
The bank was one of the first four companies, which subjected itself to a Corporate
Governance and Value Creation (GVC) rating by the rating agency, The Credit
Rating Information Services of India Limited (CRISIL). The rating provides an
independent assessment of an entity’s current performance and an expectation on its
“balanced value creation and corporate governance practices” in future. The bank has
been assigned a ‘CRISIL GVC Level 1’ rating which indicates that the bank’s
capability with respect to wealth creation for all its stakeholders while adopting sound
corporate governance practices is the highest.

c) Awards and Accolades

Over the years, HDFC Bank has received recognition and awards from various
leading organisations and publications, both domestic and international. In June 2005,
HDFC Bank won Asia money magazine’s “Best Domestic Commercial Bank Award
2005” for India. The Bank was awarded The Asian Banker’s, “Excellence in Retail
Banking Risk Management Award for 2004”, a pan-Asia recognition of the bank’s
risk management abilities. The Asset (Triple A Country Awards) rated HDFC Bank
as the “Best Domestic Bank in India – 2004” and “Best Domestic Bank in India –
2003”. Forbes Global again named the Bank in its listing of ‘Best Under a Billion,
100 Best Smaller Size Enterprises in Asia/Pacific and Europe”, in its November 2004
issue. The Bank was rated as the “Best Overall Local/Domestic Bank – India” in the
Corporate Cash Management Poll conducted by the Hong Kong based Asia money
magazine. The said magazine also awarded the Bank with the titles of “Overall Most
Improved Company for Best Management Practices in India” in the Best Managed
Companies poll 2004, “Best Local Cash Management Bank”, Best Overall Domestic
Trade Finance Services Award”, and also awarded the Managing Director, Mr.
Aditya Puri as the “Best Chief Executive Officer in India”. In May 2004, the Bank
also won the “Operational Excellence in Retail Financial Services – India” award as
part of the Asian Banker Excellence in Retail Financial Services Program 2003.
HDFC Bank was selected by Finance Asia as the “Best Local Bank – India 2003”,
“Best Local Bank in India 2002”, “Best Domestic Commercial Bank – India 2001”,
“Best Domestic Commercial Bank – India 2000” and “Best Domestic Commercial
Bank – India 1999”. Euro money rated HDFC Bank as “Best Bank in India 2002”,
“Best Bank – India 2001”, “Best Domestic Bank – India 2000” and “Best Bank –
India 1999”. For its use of information technology the bank has been recognized as a
“Computerworld Honors Laureate” and awarded the 21st Century Achievement
Award in 2002 for Finance, Insurance & Real Estate category by Computer world,
Inc., USA.

Closer home, HDFC Bank was selected as the “Best Bank in India” for the second
consecutive year in 2004 by Business Today. The Bank was selected by Business
World as "one of India's Most Respected Companies" as part of The Business World
Most Respected Company Awards 2004. In the FE-E&Y Best Banks Survey for
2002-03, HDFC Bank was selected as the number one new generation private-sector
bank. Outlook Money Awards selected HDFC Bank as the “Best Bank – Private
Sector 2003-04” in February 2004. HDFC Bank was ranked India’s Best Bank – 2003
by Business Today and as Best Bank for the year 2000 by Business India. It was also
the winner of The Economic Times Award – Corporate Excellence for Emerging
Company of the Year 2000-01. HDFC Bank was awarded the Best IT User award
2003 (category: Banking) as part of the IT User Awards 2003 conferred by & Nasscom.
Product Profile

Savings, Fixed Deposits, Current and Demat Accounts

Savings Account: Apart from the usual facilities, you get a free ATM Card, Inter-
branch banking, Net-Banking, Bill-Pay, Phone-Banking, Debit Card and Mobile-
Banking, among others.

HDFC Bank Preferred: A preferential Savings Account where you are assigned
a dedicated Relationship Manager, who is your one-point contact. You also get
privileges like fee waivers, enhanced ATM withdrawal limit, priority locker
allotment, free Demat Account and lower interest rates on loans, to name a few.

Sweep-In Account: A fixed deposit linked to your Savings Account. So, even if
your Savings Account runs a bit short, you can issue a cheque (or use your ATM
Card). The money is automatically swept in from your fixed deposit into your
Savings Account.

Super Saver Account: Gives you an overdraft facility up to 75% of your Fixed
Deposit. In an emergency, you can access your funds while your Fixed Deposit
continues to earn high interest.

HDFC Bank Plus: Apart from Regular and Premium Current accounts we also
have HDFC Bank Plus, a Current Account and then some more. You can transfer up
to Rs. 50 lakh per month at no extra charge, between the four metros. You can also
avail of cheque clearing between the four metros, get cash delivery/pickup upto Rs.
25,000/-, home delivery of Demand Drafts, at-par cheques, outstation cheque
clearance facility, etc.
Demat Account: Conduct hassle-free transactions on your shares. You can also
access your Demat Account on the Internet.

Innovative services for your convenience...

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

ATM 24-hour banking: Apart from routine transactions, you can also pay your
utility bills and transfer funds, at any of our ATMs across the country all year round.

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

495 branches in 218 cities.

Net-Banking: Access your bank account from anywhere in the world, at anytime,
at your own convenience. You can also view your Demat Account through Net

International Debit Card: An ATM card you can shop with all over the country
and in over 140 countries with. You can spend in any currency, and pay in Rupees.

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

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

BillPay: Pay your telephone, electricity and mobile-phone bills through our ATMs,
Internet, phone or mobile phone. No more standing in long queues or writing
Loans for every need

Now, our loans come to you in easy-to-pay monthly installments, and are available
with easy documentation and quick delivery.

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

purchase of a computer or an exciting holiday.

New Car Loans and Used Car Loans: Finance up to 90% of the cost of a car,
new or used! And the loans come to you with easy documentation and speedy
processing at attractive interest rates.

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

rate against physical shares, up to 50% of the market value of your shares. In case of
Demat Shares, you can get a Loans Against Shares of up to 65% of the market value
of your shares, till Rs. 20 lakh.

Two Wheeler & Consumer Loans: To help you buy the best durables for
your home.
Demat Account: Protect your shares from damage, loss and theft, by maintaining
your shares in electronic form. You can also access your demat account on the
Current Account: Get a personalised cheque book, monthly account statements,
inter-branch banking and much more.
Mutual Funds: Apart from a wide choice of mutual funds to suit your individual
needs, you benefit from expert advice on choosing the right funds based on in-depth
market analysis.
International Credit Card: Get an option of Silver, Gold, or Health Plus Credit
card, accepted worldwide from a world-class bank. If you have outstanding balance
on your other credit card, you can transfer that balance to this card at a lower interest
NRI Services: A comprehensive range, backed by unmatched features and world-
class service, ensures NRIs all the banking support they need.

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

demand drafts, to meet your travel needs.
Insurance*: HDFC Bank now brings you Life Insurance and Pension Solutions
like Risk Cover Scheme, Savings Scheme, Children’s Plan and Personal Plan from
HDFC Standard Life Insurance Co. Ltd.
Management Hierarchy

Board of directors:

Mr. Jagdish Kapoor, chairman

Mr. Aditya Puri, Managing Director
Mr. Keki Mistry
Dr. (Mrs.) Amla Samanta
Mr. Anil Ahuja
Dr. Venket Rao Gadwal
Mr. Vineet Jain
Mrs. Renu Karnad
Mr. Arvind Pande
Mr. Rajan Kapur
Mr. Bobby Parekh
Mr. Ashim Sama
A Rajan
Abhay Aima
Bharat Shah
Harish Engineer
Neeraj Swaaroop
Paresh Sukthankar
Samir Bhatia
Sudhir M Joshi
Vinod G Yennamadi
Sanjay Dongre

1. HDFC is an old and well renowned bank with well qualified employees
2. HDFC is a leading bank in regard to home loans as compared to any private or
public sector bank.
3. According to the recent news in the economic times HDFC bank beats SBI as
the most valuable financial firm.

1. The direct selling agents are posing a threat to the reputation of the firm by
not disclosing the complete information about their services.
2. The staff does not provide complete information to employees regarding the
penalties involved.

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

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

1. The opening up of another private sector bank, ICICI in the city.
2. The merger of the public sector banks thus making them stronger and efficient
as compared to the private sector banks.
3. The private sector banks are facing stiff and tough competition from the
foreign banks.
The faith of the people towards the public sector banks makes them all the more
reluctant to switch over to a private bank.


Type of Research:

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

internet and fact finding enquiries of different kinds. The major purpose of analytical
research is description of the state of affairs as it exists at present. In social science
and business research we quite often use the term Ex post facto research for analytical
research studies. The main characteristic of this method is that the researcher has no
control over the variables; he can only report what has happened or what is

Research Design:

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

do our Research work. The methodology of study will be through
Source of Data Sampling Plan:
Secondary data. Secondary data was collected from the bank’s annual report,
brochures and its website.
Methods of data collection:
Secondary Data: For secondary data the methods used for data collection are as
Internet, newspapers, bank’s manual, brochures etc.
Objectives of the study:

1. To assess the trends towards the investment pattern.

2. To study the traditional instruments of investments at HDFC BANK such as

Fixed Deposits, Recurring Deposits , saving account,current account etc.

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


4. Fixed deposits. Vs RD
L i m i t at i o n s of t h e s t u d y :

o The constraint of time available for carrying out this study is limited.
o The findings of the research are limited to a particular area & cannot be
applied to all places.
o As the human behavior is not constant so the results collected through
Questionnaire may or may not apply to future period of time.
o Human Bias can also be considered as an important limitation of the research.


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

investment like Mutual Funds, Systematic Investment Plan, RBI Bonds, and
Infrastructure Bonds proves to be a better option for the investors in comparison to
the old instruments of investment such as fixed deposits, savings, recurring deposits
etc. This project deals with the thorough study of these modern instruments in respect
of their returns, liquidity, and tenure & safety aspect etc.
Investments have become a key complexity because of the following reasons:
-Interest rates falling.
-Equity markets violate.
-All usual choices look the same.

One of the most important question in today’s scenario is that where would a person
like his / her money to be i.e. what are the factors which a person look for before
a) Investments opportunities to optimize returns.
b) Focus on tax-free returns.
c) Protect income flows.
d) Preserve capital.


The traditional instruments of investment were:

6.3NSC’s(National Saving Certificates)


A fixed deposit is meant for those investors who want to deposit a lump sum of
money for a fixed period; say for a minimum period of 15 days to five years and
above, thereby earning a higher rate of interest in return. Investor gets a lump sum
(principal + interest) at the maturity of the deposit.

Bank fixed deposits are one of the most common savings scheme open to an average
investor. Fixed deposits also give a higher rate of interest than a savings bank
account. The facilities vary from bank to bank. Some of the facilities offered by
banks are overdraft (loan) facility on the amount deposited, premature withdrawal
before maturity period (which involves a loss of interest) etc. Bank deposits are fairly
safer because banks are subject to control of the Reserve Bank of India.

In this category we include deposits, which are made with the bank for a fixed period.
The deposit of specifies the period at the time of making the deposit. These deposits
are repayable after the maturity/expiry of the specified period. The depositor,
depending upon his requirements instructs the bank to keep the deposit for a certain
period. For example, if the depositor knows that he is not going to need the money for
the next three years, he may ask the bank to prepare a fixed deposit receipt for a
period of three years. On the other hand, if he requires the money after say nine
months or so, he may request the bank to prepare the fixed deposit receipt for a
shorter period. As the date of repayment of the fixed deposits is determined in
advance, the bank need not keep more cash reserves against it and can utilize such
amount profitably elsewhere. Since the depositor parts with liquidity for a definite
period, the bank offers higher rate of interest on fixed deposits. Some years ago fixed
deposits are very popular among the depositors and constitute more than half of the
total bank deposits.

6.1.1 The joy of fixed returns

Fixed deposits remain the most popular instrument for financial savings in India.
They are the middle path investments with adequate returns and sufficient liquidity.
There are basically three avenues for parking savings in the form of fixed deposits.
The most common are bank deposits. For nationalized banks, the yield is generally
low with a maximum interest of 10 to 10.5% per annum for a period of three years or
more. As opposed to that, NBFCs and company deposits are more attractive.

The idea is to select the right company to minimize the risk. Company deposits as a
saving instrument have declined in popularity over the last three years. The major
reasons being the slowdown in economy resulting in default by some companies.
Also, some NBFCs simply vanished with the depositors' money.

All that is likely to change for the better. Corporate performance is likely to improve
and stricter control by RBI should improve NBFCs record. But one still needs to be

6.1.2 Features

Bank deposits are fairly safe because banks are subject to control of the Reserve Bank
of India (RBI) with regard to several policy and operational parameters. The banks
are free to offer varying interests in fixed deposits of different maturities. Interest is
compounded once a quarter, leading to a somewhat higher effective rate.
The minimum deposit amount varies with each bank. It can range from as low as Rs.
100 to an unlimited amount with some banks. Deposits can be made in multiples of
Rs. 100/-.

Before opening a FD account, try to check the rates of interest for different banks for
different periods. It is advisable to keep the amount in five or ten small deposits
instead of making one big deposit. In case of any premature withdrawal of partial
amount, then only one or two deposit need be prematurely encashed. The loss
sustained in interest will, thus, be less than if one big deposit were to be
encashed. Check deposit receipts carefully to see that all particulars have been
properly and accurately filled in. The thing to consider before investing in an FD is
the rate of interest and the inflation rate. A high inflation rate can simply chip away
your real returns.

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

increased to include interest earned during the previous quarter.

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

from time to time.
Note: Interest rates are subject to change from time to time. Request you to clear your
cache to see the updated interest rates. The bank will give applicable interest rates as
on the date of receipt of the funds.

6.1.3 Returns

The rate of interest for Bank Fixed Deposits varies between 4 and 11 per cent,
depending on the maturity period (duration) of the FD and the amount invested.
Interest rate also varies between each bank. A Bank FD does not provide regular
interest income, but a lump-sum amount on its maturity. Some banks have facility to
pay interest every quarter or every month, but the interest paid may be at a discounted
rate in case of monthly interest. The Interest payable on Fixed Deposit can also be
transferred to Savings Bank or Current Account of the customer. The deposit period
can vary from 15, 30 or 45 days to 3, 6 months, 1 year, 1.5 years to 10 years.

Duration Interest rate (%) per annum

5-30 days 4 -7 %
30-45 days 5-8 %
46-90 days 6-8 %
91-180 days 6.5-9.5 %
181-365 days 7-9.5 %
1-1.5 years 8.5-10.25 %
1.5-2 years 8.5-10.5 %
2-3 years 9-10.5 %
3-5 years 9.5-10.5 %
5 years 9.5-11 %

6.1.4 How to apply

One can get a bank FD at any bank, be it nationalised, private, or foreign. You have
to open a FD account with the bank, and make the deposit. However, some banks
insist that you maintain a savings account with them to operate a FD. When a
depositor opens an FD account with a bank, a deposit receipt or an account statement
is issued to him, which can be updated from time to time, depending on the duration
of the FD and the frequency of the interest calculation. Check deposit receipts
carefully to see that all particulars have been properly and accurately filled in.
We present a few pointers, which FD investors must consider at the
time of investment,

FDs have conventionally been the premier choice for investors with a low risk
appetite; assured returns is the key factor, which attracts investors towards deposits.
Stick to FDs of the highest credit rating i.e. those with a “AAA” rating even if their
rates seem modest vis-à-vis those offered by company deposits.

Company deposits are unsecured in nature and investing in them would imply taking
on disproportionately higher risk. If as an investor you are open to investing in
instruments involving higher risk levels, market linked instruments like mutual funds
may not be a bad deal.

Short tenured fixed deposits continue to be your best bet. With interest rates on the
ascent, a further hike in rates offered by fixed deposits cannot be ruled out. Locking
your investments in longer tenured instruments may lead to an opportunity loss. Even
if a 3-Yr FD looks like a lucrative proposition as compared to one, which runs over a
year or so, pick the short tenured one. In a rising rate scenario, you could be more
than compensated for the lower returns at present.


Find out how your FD fares on the premature encashment front i.e. how easily can
your investments be liquidated. Also enquire about the penalty clause.

4. Some Additional Benefits

FD’S from reputed entities offer additional benefits e.g. they can be used as collateral
security against which loans can be raised.
Benefits of Company Fixed Deposits as an investment avenue


Bank deposits are the safest investment after Post office savings because all bank
deposits are insured under the Deposit Insurance & Credit Guarantee Scheme of
India. It is possible to get a loans up to75- 90% of the deposit amount from banks
against fixed deposit receipts. The interest charged will be 2% more than the rate of
interest earned by the deposit. With effect from A.Y. 1998-99, investment on bank
deposits, along with other specified incomes, is exempt from income tax up to a limit
of Rs.12, 000/- under Section 80L. Also, from A.Y. 1993-94, bank deposits are
totally exempt from wealth tax. The 1995 Finance Bill Proposals introduced tax
deduction at source (TDS) on fixed deposits on interest incomes of Rs.5000/- and
above per annum.

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

FD receipt being stolen. In case it falls into wrong hands, it cannot be
misused. The FD holder in such a case should write to the company, which
shall issue duplicate deposit receipt upon execution of an indemnity and
cancel the previous one.
• No income tax is deducted at source if the interest income is up to Rs 5000/-in
one financial year.One can spread his investment in more than one company,
so that interest from one company does not exceed Rs. 5000.-
• Further, advantage of investing in company fixed deposits is that one can
analyses the company before investing in it because companies accepting
deposits are old-established reputed companies with proven track records.
• It is also important that company fixed deposit should be made for short
term, i.e., tenure should be for 1-3 years depending upon the rate of interest.
This will help the investor to switch to other company if need be
• Recently, nomination facility has been introduced in company fixed deposits.
6.1.7 History of Company Fixed Deposits in India

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

basically grew out of the need of Corporate Sector for raising short-term finance and
requirements of small investors to earn superior returns as compared to returns
offered by the Banks. The concept of company fixed deposits was started in India in
1964 by Bajaj Capital launching first ever Company Fixed Deposit of Oberoi
Group - East India Hotels Ltd.(now EIH Ltd.).The success of East India Hotels
prompted others private and public sector companies which started accepting deposits
from public.

Since then company deposit market has grown by leaps and bounds. Today,
company deposit market has grown to approximately Rs.25,000 crores. Hundreds of
top companies belonging to reputed industrial houses like Tata, Birla, Escorts, Godrej
etc. and government companies like HUDCO are accepting deposits from public. The
numbers of depositors have increased to around 5 million.

The benefits of company deposit are numerous like superior returns from reputed
companies, fixed and assured returns, premature encashment, simplicity of
transactions, TDS benefits, wide choice, All these features have made company
deposits a preferred instrument of investment.


 Companies which pay a rate of interest higher than 14%

 Companies, which are not paying regular dividends to their shareholders.
 New companies belonging to first generation of promoters, which have yet to
prove their credit worthiness.
 It is best to avoid private limited companies, and partnership firms and other un-
incorporated bodies. Such companies are under no obligation to publish their
balance sheets working results and it is, therefore, very difficult to judge their
 Companies whose balance sheets show accumulated losses.
 Companies with a poor liquidity position and below investment grade rating.

How to choose a company for making deposit

There are many companies operating in Company Deposit market. Investors,

however, have to be careful while selecting a company for investing their hard earned
money. Following is a checklist for selecting good companies:

Credit Rating/ Reputation and Size of Industrial Group

The first thing to check out is the rating of the deposit scheme. Investors should
avoid those companies, which have below ‘A’ rating. In case of manufacturing
companies, it’s however not mandatory to get rating. In this case investor should
look at the background of promoters and financial track record. In manufacturing
companies, reputation and size of industrial group to which the company belongs
is the key criteria for safety and reliability.

The whole procedure of making investment in company deposits can be described

in two words; it is simple and liquid. It is simple for depositor to put in and get
back his money anytime after 6 months. It is also simple for company to raise
money in form of fixed deposits.

Don't put all your eggs in one Basket

The deposits should be spread over a large number of companies engaged in

different industries. In this way an investor will be able to diversify his risk
among various Industries/ Companies. Investors should not put more than 10% of
their total portfolio in one particular company.
Period of Deposit

Ideally the investment should be for 1 to 3 years depending upon the

rate of interest.

1. Periodic Review of the Companies

The performance of the companies should be reviewed at maturity i.e., whether to

renew or reshuffle, the deposit. A watch should also be kept over the companies
by checking their share prices, annual reports and other news reported in the
commercial columns of daily papers.

Persons who can open an account

I) An account may be opened by
a) A single adult; or
b) Two adults jointly, the amount due on the account being payable-
i) To both jointly or survivor, or
ii) to either of them or survivor, or

c). A guardian on behalf of a minor or a person of unsound mind; or

d).A minor who has attained the age of ten years, in his own name.


The Recurring deposit in Bank is meant for someone who want to invest a specific
sum of money on a monthly basis for a fixed rate of return. At the end, you will get
the principal sum as well as the interest earned during that period. The scheme, a
systematic way for long term savings, is one of the best investment option for the low
income groups.
6.2.1 Features

The minimum investment of Recurring Deposit varies from bank to bank but usually
it begins from Rs 100/-. There is no upper limit in investing. The rate of interest
varies between 7 and 11 percent depending on the maturity period and amount
invested. The interest is calculated quarterly or as specified by the bank. The period
of maturity ranging from 6 months to 10 years.

The deposit shall be paid as monthly installments and each subsequent monthly
installment shall be made before the end of the calendar month and shall be equal to
the first deposit. In case of default in payment, a default fee is chargeable for delayed
deposit at the rate of Rs. 1.50/- for every Rs. 100/- per month for deposits up to 5
years and Rs. 2/- per Rs. 100/- in case of longer maturities.

Since a recurring deposit offers a fixed rate of return, it cannot guard against inflation
if it is more than the rate of return offered by the bank. Worse, lower the gap between
the interest rate on a recurring deposit and inflation, lower your real rate of return.
Premature withdrawal is also possible but it demands a loss of interest.
6.2.2 Returns

The rate of interest varies between 7 and 11 percent depending on the maturity period
and amount invested. The interest is calculated quarterly or as specified by the bank.

Amount invested per month Maturity amount in 2 years

Rs 100 Rs 2626
Rs 500 Rs 13,132
Rs 750 Rs 19,698
Rs 3000 Rs 78,792

6.2.3 Advantages

Some Nationalised banks are giving more facilities to their customer, State Bank of
India give Free Roaming Recurring Deposit facility to their customers. They can
transfer their account to any branch of SBI free. Tax benefit on the interest earned on
Recurring Deposit up to Rs 12000 Tax Deductible at source if the interest paid on
deposit exceeds Rs 5000/-per customer, per year, per branch.

6.2.4 How to open an Account

A Recurring Bank Deposit account can be opened at any branch of a bank that offers
this facility. However, some banks insist that you maintain a savings bank account
with them to operate a Recurring Bank Deposit account. The terms and conditions
vary from bank to bank. When a depositor opens a Recurring Bank Deposit account
with a bank, a pass-book or an account statement is issued to him.

These are fixed deposits with a difference.

How it works
In a normal fixed deposit, you put in an amount and, after a specific period of time,
you are free to withdraw it. Meanwhile, you do not touch the money or add to it.

A recurring deposit works on a similar principle. The difference is: instead of

putting in a bulk amount, you put in a specified amount (which you decide when
you open your recurring account) every month. This could be a small amount that
will not pinch your pocket or make a dent in your lifestyle

At the end of the tenure, you get a nice amount. And the interest that you earn -- to a
maximum of Rs 12,000 per year -- is exempt from tax (under Section 80L of the
Income Tax Act, 1961).

There are two ways you can open a recurring deposit:

1. With your bank.

How it works

Your bank automatically deducts a fixed amount from your savings account.

So, every month, when your salary cheque is put in your account, your bank
will debit the amount you initially agreed upon and credit it to your recurring deposit

If you tell them to put in Rs 1,000 every month, this amount will automatically move
from your savings account to your recurring deposit account. So with no effort on
your part, at the end of 12 months, you will have Rs 12,000 to which you can add the
interest the bank will give you.

With banks, you determine beforehand how much you would like to put in every
month and that is how it stays -- you cannot change that figure till the end of your
recurring term. So if you fix it at Rs 1,000 every month, that is the amount that will
move to your recurring account -- nothing more, nothing less.
What you should know

o Though banks score high on convenience, they offer lower returns. The
rates vary from three percent to seven percent per annum.
o Banks offer you flexibility, in that you can start with a term that is as low
as one year onwards.

2. With the local post office

How it works

You can put in amounts as low as Rs 10 per month. There is no upper limit.

The post office deposit will give you 7.5 per cent per annum.

What you should know

o The post office scheme is for five years.

o You have to make a trip every month to your post office to deposit your

So, as far as recurring deposit options are concerned, you will either make a trip
to your local post office or tell your local bank that you would like a recurring
deposit option. The tenure of the deposit, the interest rate and the minimum
amount to be regularly deposited will vary from bank to bank.

6.3.Time Deposit
6.3.1 What is Time Deposit A Post-Office Time Deposit Account (RDA) is a
banking service similar to a Bank Fixed Deposit offered by Department of post,
Government of India at all post office counters in the country. The scheme is meant
for those investors who want to deposit a lump sum of money for a fixed period; say
for a minimum period of one year to two years, three years and a maximum period of
five years. Investor gets a lump sum (principal + interest) at the maturity of the
deposit. Time Deposits scheme return a lower, but safer, growth in investment.

6.3.2 Features Time Deposits can be made for the periods of 1 year, 2 years, 3
years and 5 years. The minimum investment in a post-office Time deposit is Rs 200
and then its multiples and there is no prescribed upper limit on your investment.

Account may be opened by an individual, Trust, Regimental Fund and Welfare


The account can be closed after 6 months but before one year of opening the account.
On such closure the amount invested is returned without interest. 2 year, three year
and five year accounts can be closed after one year at a discount. They involve a loss
in the interest accrued for the time the account has been in operation.

Interest is payable annually but is calculated on a quarterly basis at the prescribed

rates. Post maturity interest will be paid for a maximum period of 24 months at the
rate applicable to individual savings account.

One can take a loan against a time deposit with the balance in your account pledged
as security for the loan.

6.3.3 Returns This investment option pays annual interest rates between 6.25 and
7.5 per cent, compounded quarterly. Time deposit for 1 year offers a coupon rate of
6.25%, 2-year deposit offers an interest of 6.5%, 3 years is 7.25% while a 5-year
Time Deposit offers 7.5% return.

Duration of Account Quarterly Compound Interest

1year 6.25%
2 years 6.5%
3 years 7.25%
5 years 7.5%

6.3.4 Advantages In this scheme your investment grows at a pre- determined rate
with no risk involved. With a Government of India-backing, your principal as well as
the interest accrued is assured under the scheme. The rate of interest is relatively high
compared to the 4.5% annual interest rates provided by banks. Although the amount
invested in this scheme is not exempted as per section 88 of Income Tax, the amount
of interest earned is tax free under Section 80-L of Income Tax Act.

6.3.5 How to start a Time Deposit A Time Deposit account can be opened at
any post-office in the country. Account may be opened by an individual, i.e., Single,
Joint A/B (not more than two adults) Trust, Regimental Fund and Welfare Fund. On
opening a Time Deposit, you will receive an account statement stating the amount
deposited and the duration of the account. The account can be closed after 6 months
of opening the account. On such closure the amount invested is returned with/without
interest depending on the time the deposit was maintained.

6.4. National Savings Certificates

6.4.1 What is National Savings Certificate National Savings Certificates
(NSC) are certificates issued by Department of post, Government of India and are
available at all post office counters in the country. It is a long term safe savings
option for the investor. The scheme combines growth in money with reductions in tax
liability as per the provisions of the Income Tax Act, 1961. The duration of a NSC
scheme is 6 years.

6.4.2 Features NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs

5,000 and Rs 10,000 for a maturity period of 6 years. There is no prescribed upper
limit on investment.

o Individuals, singly or jointly or on behalf of minors and trust can purchase a NSC
by applying to the Post Office through a representative or an agent.
o One person can be nominated for certificates of denomination of Rs. 100- and
more than one person can be nominated for higher denominations.
o The certificates are easily transferable from one person to another through the
post office. There is a nominal fee for registering the transfer. They can also be
transferred from one post office to another.
o One can take a loan against the NSC by pledging it to the RBI or a scheduled
bank or a co-operative society, a corporation or a government company, a housing
finance company approved by the National Housing Bank etc with the permission
of the concerned post master.
o Though premature encashment is not possible under normal course, under sub-
rule (1) of rule 16 it is possible after the expiry of three years from the date of
purchase of certificate.
Tax benefits are available on amounts invested in NSC under section 88, and
exemption can be claimed under section 80L for interest accrued on the NSC.
Interest accrued for any year can be treated as fresh investment in NSC for that
year and tax benefits can be claimed under section 88.
6.4.3 Return It is having a high interest rate at 8% compounded half yearly.
Post maturity interest will be paid for a maximum period of 24 months at the rate
applicable to individual savings account. A 1000 rs denomination certificate will
increase to 1601Rs. on completion of 6 years.

Interest rates for the NSC Certificate of Rs 1000


1 year Rs 81.60
2 year Rs 88.30
3 year Rs95.50
4 years Rs103.30
5 years Rs 111.70
6 years Rs 120.80

6.4.4 Advantages Tax benefits are available on amounts invested in NSC under
section 88, and exemption can be claimed under section 80L for interest accrued on
the NSC. Interest accrued for any year can be treated as fresh investment in NSC for
that year and tax benefits can be claimed under section 88. NSCs can be transferred
from one person to another through the post office on the payment of a prescribed fee.
They can also be transferred from one post office to another. The scheme has the
backing of the Government of India so there are no risks associated with your

6.4.5 How to start Any individual or on behalf of minors and trust can purchase
a NSC by applying to the Post Office through a representative or an agent. Payments
can be made in cash, cheque or DD or by raising a debit in the savings account held
by the purchaser in the Post Office. The issue of certificate will be subject to the
realization of the cheque, pay order, DD. The date of the certificate will be the date of
realization or encashment of the cheque. If a certificate is lost, destroyed, stolen or
mutilated, a duplicate can be issued by the post-office on payment of the prescribed

6.5 Post Office Monthly Income Scheme

6.5.1 What is post office monthly income scheme?

The post-office monthly income scheme (MIS) provides for monthly payment of interest income to
investors. It is meant for investors who want to invest a sum amount initially and earn interest on a
monthly basis for their livelihood. The MIS is not suitable for an increase in your investment. It is meant
to provide a source of regular income on a long term basis. The scheme is, therefore, more beneficial for
retired persons.

6.5.2 Features Only one deposit is available in an account. Only individuals can open the account;
either single or joint.( two or three). Interest rounded off to nearest rupee i.e, 50 paise and above will be
rounded off to next rupee. The minimum investment in a Post-Office MIS is Rs 1,000 for both single and
joint accounts. The maximum investment for a single account is Rs 3 lakh and Rs 6 lakh for a joint
account. The duration of MIS is six years.

6.5.3 Returns The post-office MIS gives a return of 8% plus a bonus of 10 per cent on maturity.
However, this 10 per cent bonus is not available in case of premature withdrawals. The minimum
investment in a Post-Office MIS is Rs 1,000 for both single and joint accounts

Deposit Rs Monthly Interest Amount returned on

5,000 33 5,500
10,000 66 11,000
50,000 333 55,000
1,00,000 667 1,10,000
2,00,000 1333 2,20,000
3,00,000 2000 3,30,000
6,00,000 4000 6,60,000

6.5.4 Advantages Premature closure of the account is permitted any time after the expiry of a period
of one year of opening the account. Deduction of an amount equal to 5 per cent of the deposit is to be
made when the account is prematurely closed. Investors can withdraw money before three years, but a
discount of 5%. Closing of account after three years will not have any deductions. Monthly interest can
be automatically credited to savings account provided both the accounts standing at the same post office.
The interest income accruing from a post-office MIS is exempt from tax under Section 80L of the
Income Tax Act, 1961. Moreover, no TDS is deductible on the interest income. The balance is exempt
from Wealth Tax.

6.5.5 How to Open You can buy a post office MIS at any post-office in India. When you open an
MIS, you will get a certificate issued by the post office. In addition, the investor is provided with a
passbook to record his transactions against his MIS.


2. SIP (Systematic investment plan)
3. RBI Bonds
4. Infrastructure Bonds

1.1 Introduction

Different investments avenues are available to investors. Mutual funds also offer
good investment opportunity to the investors. Like all investments, they also carry
certain risks. The investors should compare the risks and expected yields after
adjustments of tax on various instruments while taking investment decisions. The
investors may seek advice from experts and consultants including agents and
distributors of mutual funds schemes while making investment decisions.

With objectives to make the investors aware of functioning of mutual funds, an

Attempt has been made to provide information in question-answer format which may
help the investors in taking investments decisions.

1.2 Definition of mutual fund

Mutual fund is a mechanism for pooling the resources by issuing units to the investors
and investing funds in securities in accordance with objectives as disclosed in offer

Investments in securities are spread across a wide cross-section of industries and

sectors and thus the risk is reduced. Diversification reduces the risk because4 all
stocks may not move in the same direction bin the same proportion at the same time.
mutual fund issues units to the investors in accordance with quantum of money
invested by them. Investors of mutual funds are known as unit holders.

The investors in proportion to their investments share the profits or losses.

The mutual funds normally come out with a number of schemes with different
investments objectives, which are launched from time to time. A mutual fund is
required to be registered with Securities and Exchange Board of India (SEBI), which
regulates securities markets before it can collect funds from the public.
1.3 History of Mutual Fund in India and role of SEBI in mutual
funds industry

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early
1990’s, Government allowed public sector banks and institutions to set up mutual
funds. In the year 1992, Securities and exchange Board of India (SEBI) Act was
passed. The objectives of SEBI are- to protect the interest of investors in securities
and to promote the development of and to regulate the securities market.

As far as mutual funds are concerned, SEBI formulates policies and regulates the
mutual funds to protect the interest of the investors. SEBI notified regulations for the
mutual funds in 1993.Therefore, mutual funds sponsored by private sector entities
were allowed to enter the capital market. The regulations were fully revised in 1996
and have been amended therefore from time to time. SEBI has also issued guidelines
to the mutual funds from time to time to protect the interests of investors.

All mutual funds whether promoted by public sector or private sector entities
including those promoted by foreign entities are governed by the same set of
Regulations. There is no distinction in regulatory requirements for these mutual funds
and all are subject to monitoring and inspections by SEBI. The risks associated with
the schemes launched by the mutual funds sponsored by these entities are of similar
type. It may be mentioned here that Unit Trust of India (UTI) is not registered with
SEBI as a mutual fund (as on January 15, 2002)

1.4 Mutual fund set up

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset
Management Company (AMC) and custodian. The trust is established by a sponsor or
more than one sponsor who is like promoter of a company. The trustees of the mutual
fund hold its property for the benefits of the unit holders. Asset Management
Company (AMC) approved buy SEBI manages the funds by making investments in
various types of securities. A custodian, who is registered with SEBI, holds the
securities of various schemes of the fund in its custody. The trustees are vested with
the general power of superintendence and direction over AMC. They monitor the
performance and compliance of SEBI Regulations by the mutual fund.

SEBI Regulations require that at least two thirds of the directors of trustee company
or board of trustee must be independent i.e. they should not be associated with the
sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds
are required to be registered with SEBI before they launch any schemes. However,
Unit Trust of India (UTI) is not registered with SEBI (as on January 15, 2002).

1.5 Net Asset Value (NAV) Of Schemes

The performance of a particular scheme of a mutual fund is denoted by net asset

value (NAV).

Mutual funds invest the money collected from the investors in securities markets. In
simple words, Net Asset Value is the market value of the securities held by the
schemes. Since market value of securities changes every day, NAV of a scheme also
varies on day-to-day basis. The NAV per unit is the market value of securities of a
scheme divided by the total number of units of the schemes on any particular date.
For example, if the market value of securities of a mutual fund schemes is Rs 200
lakes and the mutual fund has issued 10 lakes units of Rs. 10 each to the investors,
then the NAV per units of the fund is Rs.20. NAV is required to be disclosed by the
mutual funds on a regular basis- daily or weekly –depending on the type of scheme.

1.6 Different types of mutual fund schemes

1.6(1)Schemes according to Maturity Period:

A mutual fund schemes can be classified into open-ended schemes or close-ended

scheme depending on its maturity period.

Open- ended Fund/ Scheme

An open –ended fund or scheme is one that is available for subscription and
repurchase on a continuous basis. These schemes do not have a fixed maturity
period. Investors can conveniently buy and sell units at Net Asset Value (NAV)
related prices which are declared on a daily basis. The key feature of open-end
schemes is liquidity.

Close –ended Fund/Schemes

A close –ended fund or schemes has a stipulated maturity period e.g. 5-7 years.
The fund is open for subscription only during a specified period at the time of
launch of the scheme. Investors can invest in the schemes at the time of the initial
public issue and therefore they can buy or sell the units of the scheme on the stock
exchange where the units are listed. In order to provide an exit route to the
investors, some close-ended funds give an option of selling back the units to the
mutual fund through periodic repurchase at NAV related prices. SEBI
Regulations stipulate that at least one of the two exit routes is provided to the
investor i.e. either repurchase facility or through listing on stock exchanges. This
mutual funds scheme discloses NAV generally on weekly basis.
1.6(2)Schemes according to Investment Objective:

Schemes can also be classified as growth scheme, income scheme, or balanced

scheme considering its investment objective. Such schemes may be open-ended or
close-ended schemes as described earlier. Such schemes may be classified mainly as

o Growth /Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to
long-term. Such schemes normally invest a major part of their corpus in equities.
Such funds have comparatively high risks. These schemes provide different
options to the investors like dividend option, capital appreciation, etc. and the
investors may choose an option depending on their preferences. The investors
must indicate the option in the application form. The mutual funds also allow the
investors to change the options at later date. Growth schemes are good for
investors having a long-term outlook seeking appreciation over a period of time.

Income/ Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors.
Such schemes generally invest in fixed income securities such as bonds, corporate
debentures, Government securities and money market instruments. Such funds are
less risky compared to equity schemes. These funds are not affected because of
fluctuations in equity markets. However, opportunities of capital appreciation are
also limited in such funds. The NAVs of such funds are affected because of
change in interest rates in the country. If the interest rates fall, NAVs of such
funds are likely to increase in the short run and vice versa. However, long-term
investors may not bother about these fluctuations.
Balanced Fund

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

MONEY Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity,
preservation of capital and moderate income. These schemes invest exclusively in
safer short-term instruments such as treasury bills, certificates of deposit, commercial
paper and inter-bank call money, government securities, etc. Returns on these
schemes fluctuate much less compared to other funds. These funds are appropriate for
corporate and individual investors as a means to park their surplus funds for short

Gilt Fund

These funds invest exclusively in government securities. Government securities have

no default risk. NAVs of these schemes also fluctuate due to change in interest rates
and other economic factors as is the case with income or debt oriented schemes.

Index Funds

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive
index, S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in the
same weight age comprising of an index. NAVs of such schemes would rise or fall in
accordance with the rise or fall in the index, though not exactly by the same
percentage due to some factors known as “tracking error” in technical terms.
Necessary disclosures in this regard are made in the offer document of the mutual
fund scheme. There are also exchange traded index funds launched by the mutual
funds, which are traded in the stock exchanges.

Sector Specific funds/ schemes

These are the funds/schemes, which invest in the securities of only those sectors or
industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast
Moving Consumer Goods (FMCG),Petroleum stocks, etc. the returns in these funds
are dependent on the performance of the respective sectors/industries. While these
funds may gibe higher returns, they are more risky compared to diversified funds.
Investors need to keep a watch on the performance of those sectors/ industries and
must exit at an appropriate time. They may also seek advice of an expert.

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the
Income Tax Act, 1961 as the Government offers tax incentives for investment in
specified avenues. E.g. Equity Linked Savings Schemes (ELSS). Pension schemes
launched by the mutual funds also offer tax benefits. These schemes are growth
oriented and invest pre-dominantly in equities. Their growth opportunities and risks
associated are like any equity-oriented scheme.

Load or no–load Fund

A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each
time one buys or sells units in the fund, a charge will be payable. This charge is used
by the mutual fund for marketing and distribution expenses. Suppose the NAV per
unit is Rs. 10. if the entry as well as exit load charged is 1%, then the investors who
buy would be required to pay Rs. 10.10 and those who offer their units for
repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should
take the loads into consideration while making investment as these affect their
yields/returns. However, the investors should also consider the performance track
record and service standards of the mutual fund, which are more important. Efficient
funds may give higher returns in spite of loads.

A no-load fund is one that does not charge for entry or exit. It means the investors can
enter the fund/ scheme at NAV and no additional charges are payable on purchase or
sale of units.

Sales or repurchase/ redemption price

The price or NAV a unit holder is charged while investing in an open-ended scheme
is called sales price. It may include sales load, if applicable.

Repurchase or redemption price is the price or NAV at which an open-ended scheme

purchases or redeems its units from the unit holders. It may include exit load, if

Assured return scheme

Assured return schemes are those schemes that assure a specific return to the unit
holders irrespective of performance of the scheme.

A scheme cannot promise returns unless such returns are fully guaranteed by the
sponsor or AMC and this is required to be disclosed in the offer document.

Investors should carefully read the offer document whether return is assured for the
entire period of the scheme or only for a certain period. Some schemes assure returns
one year at a time and they review and change it at the beginning of the next year.
1.7 Ways to invest in a scheme of a mutual fund

Mutual funds normally come out with an advertisement in newspapers publishing the
date of launch of the new schemes. Investors can also contact the agents and
distributors of mutual funds who are spread all over the country for necessary
information and application forms. Forms can be deposited with mutual funds
through the agents and distributors who provide such services. Now a day, the post
offices and banks also distribute the units of mutual funds. However, the investors
may please note that the mutual funds schemes being marketed by banks and post
offices should not be taken as their own schemes being marketed by banks and post
offices should not be taken as their own schemes and no assurance of returns is given
to them. The only role of banks and post offices is to help in distribution of mutual
funds schemes to the investors.

Investors should not be carried away by commission. /gifts given by agents/

distributors for investing in a particular scheme. On the other hand they must consider
the track record of the mutual fund and should take objective decisions.

1.8 Can non-resident Indians (NRIs) invest in mutual funds or not

Yes, non-resident Indians can also invest in mutual funds. Necessary details in this
respect are given in the offer documents of the schemes. also help in this regard.

1.9 Procedure to fill up the application form of a mutual fund


An investor must mention clearly his name, address, number of units applied for and
such other information as required in the application form. He must give his bank
account number so as to avoid any fraudulent encashment of any cheque / draft issued
by the mutual fund at a later date for the purpose of dividend or repurchase. Any
changes in the address, bank account number, etc at a later date should be informed to
the mutual fund immediately.
1.10 Factors an investor look into an offer document

Am abridged offer document, which contains very useful information, is required to

be given to the prospective investor by the mutual fund. The application form for
subscription to a scheme is an integral part of the offer document. SEBIhas prescribed
minimum disclosures in the offer document. An investor, before investing in a
scheme, should carefully read the offer document. Due care must be given to portions
relating to main features of the scheme, risk factors, initial issue expenses and
recurring expenses to be scheme, entry or exit loads, sponsor’s track record,
educational qualification and work experience of key personnel including fund
managers, performance of other schemes launched by the mutual fund in the past,
pending litigations and penalties imposed, etc.

1.11 The investor gets certificate or statement of account after

investing in a mutual fund after the following period

Mutual funds are required to dispatch certificates or statements of

accounts within six weeks from the date of closure of the initial
subscription of the scheme. In case of close-ended schemes, the investors
would get either a demat account statement or unit certificates as these
are traded in the stock exchanges. In case of open-ended schemes, a
statement of account is issued by the mutual fund within 30 days from
the date of closure of initial public offer of the scheme. The procedure of
repurchase is mentioned in the offer document.

1.12 Can a mutual fund change the nature of the scheme from the
one specified in the offer document or not

Yes, however, no change in the nature or terms of the scheme, known as fundamental
attributes of the scheme e.g. structure, investment pattern, etc. can be carried out
unless a written communication is sent to each unit holder and an advertisement is
given in one English daily having nationwide circulation and in a newspaper
published in the language of the region where the head office of the mutual fund is
situated. The unit holders have the right to exit the scheme at the prevailing NAV
without any exit load if they do not want to continue with the scheme. The mutual
funds required similar procedure while converting the scheme form close-ended to
open-ended scheme and in case of change in sponsor.

1.13 Ways in which an investor come to know about the changes, if

any, which may occur in the mutual fund

There may be changes from time to time in a mutual fund. The mutual funds are
required to inform any material changes to their unit holders. Apart from it, many
mutual funds send quarterly newsletters to their investors.

At present, offer documents are required to be revised and updated at least once in
two years. In the meantime, new investors are informed about the material changes by
way of addendum to the offer document till the time offer document is revised and

1.14 Ways to know the performance of a mutual fund scheme

The performance of a schemer is reflected units net asset value (NAV), which is
disclosed on daily basis in case of open-ended schemes and on weekly basis in case
of close-ended schemes. The NAVs of mutual funds are required to be published in
newspapers. The NAVs are also available on the web sites of mutual funds. All
mutual funds are also required to put their NAVs on the web site of Association of
Mutual Funds in India (AMFI) www. and thus the investors can
access NAVs of all mutual funds at on e place.

The mutual funds are also required to publish their performance in the form of half-
yearly results which also include their returns/ yields over a period of time i.e. last six
months, 1 year, 3 year, 5 year and since inception of schemes. Investors can also look
into other details like percentage of expenses of total assets as these have an affect on
the yield and other useful information in the same half yearly format.
The mutual funds are also required to send annual report or abridged annual report to
the unit holders at the end of the year.

The financial newspapers on a weekly basis are publishing various studies on mutual
fund schemes including yields of different schemes. Apart from these, many research
agencies also publish research reports on performance of mutual funds including the
ranking of various schemes in terms of their performance. Investors should study
these reports and keep themselves informed about the performance of various
schemes of different mutual funds.

Investors can compare the performance of their schemes with those of other mutual
funds under the same category. They can also compare the performance of equity-
oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty,
etc. On the basis of performance of the mutual funds, the investors should decide
when to enter or exit from a mutual fund scheme.

1.15 Ways to know where the mutual fund scheme has invested
money mobilized from the investors

The mutual funds are required to disclose full portfolios of all of their schemes on
half-yearly basis, which are published in the newspapers. Some mutual funds send the
portfolios to their unit holders.

The scheme portfolio shows investment made in each security i.e. equity, debentures
money market instruments, government securities, etc. and their quantity, market
value and % to NAV. These portfolio statements also required disclosing illiquid
securities in the portfolio, investment made in rated and unrated debt securities, non-
performing assets (NPAs), etc.

Some of the mutual funds send newsletters to the unit holders on quarterly basis,
which also contain portfolios of the schemes.
1.16 Ways to choose a scheme for investment from a number of
schemes available

As already mentioned, the investors must read the offer document of the mutual fund
scheme very carefully. They may also look into the past track record of performance
of the scheme or other schemes of the same mutual fund. They may also compare the
performance with other schemes having similar investment objectives. Though past
performance of a scheme is not an indicator of its future performance and good
performance in the past may or may not be sustained in the future, this is one of the
important factors for making investment decision. In case of debt-oriented schemes,
apart from looking into past returns, the investors should also see the quality of debt
instruments, which is reflected in their rating. A scheme with lower rate of return but
having investments in better-rated instruments may be safer. Similarly, in equities
schemes also, investors may look for quality of portfolio. They may also seek advice
of experts.

1.17 The higher net worth of the sponsor a guarantee for better
returns or not

In the offer document of any mutual fund scheme, financial performance including
the net worth of the sponsor for a period of three years is required to be given. The
only purpose is that the investors should know the track record of the company,
which has sponsored the mutual fund. However, higher net worth of the sponsor does
not mean that the scheme would give better returns or the sponsor would compensate
in case the NAV falls.

1.18 An investor look out for information on mutual funds through:

Almost all the mutual funds have their own web sites. Investors can also access the
NAVs, half-yearly results and portfolios of all mutual funds at the web site of
Association of mutual funds in India (AMFI) AMFI has also
published useful literature for the investors.
Investors can log on to the web site of SEBI and go to “Mutual
Funds” section for information on SEBI regulations and guidelines, data on mutual
funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc.
Also, in the annual reports of SEBI available on the web site, a lot of information on
mutual funds is given.

There are a number of other web sites, which give a lot of information of various
schemes of mutual funds including yields over a period of time. Many newspapers
also publish useful information on mutual funds on daily and weekly basis. investors
may approach their agents and distributors to guide them in this regard.

1.19After mutual fund scheme is wound up, money invested becomes

In case of winding up of a scheme, the mutual funds pay a sum based on prevailing
NAV after adjustments of expenses. Unit holders are entitled to receive a report on
winding up from the mutual funds, which gives all necessary details.

From the very beginning, people find it very convenient to invest their money in fixed
deposits. But have we ever noticed the results that we get after investing in fixed
deposits that is our money get blocked till the completion of that fixed period of time.
Moreover the fixed and less return that we get after the completion of that fixed
period are also taxable. On the other hand the emergence of Mutual funds as a
strongest tool of investment gets unnoticed and most of the people have never made
efforts to increase their awareness regarding this particular investment option. People
are still unaware that there is a big margin in between the returns that we get while
investing in fixed deposits & Mutual funds. Fixed deposits provide us with a 5.5%
rate of return while Mutual funds gives us up to 12-14%. Availability of tax rebate is
also a big feature of Mutual fund investment. Along with it, we can have our invested
amount back whenever we feel like without any condition of time I.e. Liquidity. Risk
is also substantially reduced while investing in Mutual funds because Mutual funds
provides you for investing in not just one particular investment but in a combination
of investments like some money in equity shares, some in government securities,
some in Bonds so on while investing in Fixed deposits provides you for holding all
your money in just one investment which is more risk prone. For e.g.: It might happen
that price of equity shares may decline but at the same time the price in debt market
may be stable which is being offered by Mutual funds.
2.S Y S T E M A T I C I N V E S T M E N T P L A N
2.1 What is Systematic investment plan?
Systematic Investment Plan is a feature specifically designed for those who are
interested in building wealth over a long-term and plan out a better future for
themselves and their family.

Anyone can enroll for this facility by starting an account with (minimum investment
amount) and giving 4/6 post-dated cheques of periodic investment based on one’s

2.2 Features :

 Disciplined approach to investment

- Periodic & regular investment outflow.
 Rupee cost averaging
- Buy more when NAV is low & less when NAV is
& less when NAV is high.
-Help overcome market volatility.

 Power of compounding
- Longer the period, the more wealth you accumulate
 No entry load
 Minimum investment of Rs1000/- through a standing instruction.

THE HDFC Mutual fund systematic investment plan (SIP) is similar to a recurring
deposit. Every month an amount you choose is invested in a mutual fund scheme of
your choice. You’ll be amazed to learn about the many benefits of investing through

o Become a disciplined investor

Being disciplined –it’s the key to investing success. with the HDFC MF Systematic
investment plan you commit an amount of your choice(minimum of Rs 500&in
multiples of Rs 100 thereof)to be invested in one of the schemes. think of each SIP
Payment as laying a brick. one by one, you’ll see them transform into a building. It’s
as simple as giving at least 6 post-dated monthly cheques to us for a fixed amount in a
scheme of your choice. It’s the perfect solution for irregular investors.

o Reach your financial goals

Imagine you want to buy a car a year from now, but you don’t know where the down
payment will come from. The HDFFC SIP is a perfect tool for people who have a
specific future financial requirement. By investing an amount of your choice every
month, you can plan for and meet financial goals, like funds for a child’s education ,a
marriage in the family or a comfortable post retirement life.

Do all this effortlessly

Investing with HDFC MF SIP is easy. Simple give us post dated Cheques for an
amount of your choice (minimum of Rs. 500 and in multiples Of Rs 100
there of) and we’ll invest the money every month in a fund of your choice. The plans
are completely flexible. You can invest for a minimum of six months, or for as long
as you want. You can also decide to invest quarterly and will need to invest for a
minimum of two quarters.
With the HDFC MF SIP no loads are charged for investment up to Rs 1 lakh (per
investor, per due date, per scheme/plan/option). You can even change your monthly
investment amount.
All you have to do after that is sit back and watch your investments accumulate.

o Grow your investments with compounded benefits

It is far better to invest a small amount of money regularly,rather than save up to

make one large investment. This is because while you are saving the lump-sum ,
your saving may not earn much interest.
With HDFC MF SIP , each amount you invests grow through compounding benefits
as well.That is, the interest earned on your investment also earns interest. The
following example illustrates this:
Imagine Neha is 20 years old when she starts working. Every month she saves and
invests Rs 5,000 till she is 25 years old. The total investment made by her over 5
years is Rs. 3 lakhs.
Arjun also starts working when he is 20 years old.But he dosen’t invest monthly. He
gets a large bonus of Rs. 3 lakhs at 25 and decides to invests the entire amount.
Both of them decides not to withdraw these investments till they turn 50. At
50,Neha’s investments have grown to Rs.46,68,273 where as Arjun’s investments
have grown to Rs.36,17,084.
Neha’s small contribution to a SIP and her decision to start investing earlier than
Arjun have made her wealthier by over Rs.10 lakhs.
(Figures based on 10% p.a. interest compounded monthly)

3.3 What are RBI Bonds?

RBI Bonds are tax saving bonds that have a special provision that allows the investor
to save on tax. These Bonds are instruments that are issued by the RBI, and currently
has two options – one carrying an 8% rate of interest p.a., which is taxable and the
other one carries a 6.5% (tax-free) interest p.a. The interest is compounded half-
yearly and there is no maximum limit for investment in these bonds. The maturity
period of the 8%(taxable) bond is 6 years and that of the 6.5%(tax-free) bond is 5
years. Application forms for RBI Bonds are available and accepted at all branches of
the Reserve Bank of India, designated branches of the SBI, and designated branches
of nationalised banks across the country.


The minimum investment on RBI Savings Bonds is Rs 1,000. You can apply in
multiples of Rs 1,000 thereafter. There is no prescribed upper limit to your
investment in this instrument.


Under the cumulative option of the 6.5%(tax-free) RBI Relief Bond issued at a face
value of Rs 1,000 would be redeemed at Rs 1,377 on maturity (after 5 years). And in
case of the cumulative option of the 8% (taxable) RBI Relief Bond issued at a face
value of Rs 1,000 would be redeemed at Rs 1,601 on maturity (after 6 years).

You can opt to receive interest either on a half-yearly basis or on maturity of the
instrument, along with the principal invested. If you opt to receive interest on a half-
yearly basis, you will receive interest every six months from the date of issue of the
bond up to 30th June or 31st December, whichever is earlier. Interest is paid on 1st
July and 1st January each year.

The period of holding of 6.5 per cent (tax-free) RBI Relief Bond is 5 years from the
date of issue. And for the 8 per cent (taxable) RBI Relief bond, the maturity period is
6 years. The bonds are repayable on the expiration of the maturity.


While the 8 per cent taxable Savings Bond cannot be redeemed prematurely and must
be held for the entire duration (6 years), the 6.5 per cent tax-free Savings bond can be
redeemed before the maturity period of 5 years. In this case, after a minimum lock in
period of 3 years from the date of issue, an investor can surrender the bond any time
after the 6th half year but redemption payment will be made on the following interest
payment due date. Thus the effective date of premature encashment will be 1st July
and 1st January every year. However, 50% of the interest due and payable for the last
six months of the holding period will be recovered in such cases both in respect of
cumulative and non-cumulative Bonds.


RBI Savings Bonds are not eligible as collateral for loans from banks, financial
institutions and Non-Banking Financial Company (NBFC) etc.


RBI Savings Bonds are not tradable in the secondary market. The Bonds in the form
of Bond Ledger Account and Stock Certificate are not transferable except by way of
gift to a relative by execution of appropriate Transfer Form and execution of an
affidavit by the holder.


Market value of RBI Relief Bonds is determined on the basis of prevailing (6.5 p
per cent and 8 per cent, as applicable) interest rates and market conditions.


RBI Savings Bonds can be held at the credit of the holder in an account called BLA
or in the form of PN. The bond can be held in demat form, i.e., a certificate of holding
will be issued to the holder of bonds in the BLA. The bonds in the form of BLA are
issued and held with the public debt offices of the RBI or any branch of a scheduled
bank authorized by the RBI. The bonds in the form of PN are issued only at the
offices of RBI. However, bonds issued in one form will not be eligible for conversion
into the other.


In case of the 6.5 per cent RBI Savings Bond, the interest received is completely
exempt from income tax as per the provisions of the Income Tax Act, 1961. But, In
case of the 8 per cent RBI Savings Bond, the interest will be taxable under the
Income-Tax Act, 1961 as applicable according to the relevant tax status of the
bondholder. RBI Savings Bonds are exempt from Wealth Tax. However, there is no
tax benefit on the amount invested in these bonds.

With most investment avenues such as stocks, deposits in banks and NBFCs losing their
sheen, investors are seen with a sigh of relief by heading towards bonds issued by the
Reserve Bank of India. Currently there are two such bonds available in the market, the
already existing 8% relief bonds and the recently launched 7% savings bonds. Both
these bonds offer a moderate rate of return and are a safe haven to lock one’s funds with.

4.1What are Infrastructure Bonds?

4.1 Infrastructure bonds provide tax-saving benefits under Section 88 of the Income Tax
Act, 1961, up to an investment of Rs.1,00,000, subject to the bonds being held for a
minimum period of three years from the date of allotment.

Investments in infrastructure bonds from various financial institutions qualify for a tax
rebate under Section 88 of the Income Tax Act. The maximum investment limit to claim
rebate under Section 88 has now been enhanced to Rs 1 lakh, subject to a minimum
investment of Rs 30,000 in infrastructure bonds. An attractive feature of infrastructure
bonds is that the lock-in period is only three years. ICICI and IDBI are the major players
in this segment; others like the Rural Electrification Corporation Ltd. have also received
the permission to come up with the issues.

4.2 Pluses

• The minimum lock-in period of only three years makes this scheme attractive for
people who do not want their money locked in for too long.

4.3 Minuses

• Deduction on account of interest on infrastructure bonds under section 80L is not

• Returns on investments in these bonds work out to much lower than the returns
offered by Public Provident Fund (PPF) and National Savings Certificates
(NSC). In fact, with the falling interest rates the return on infrastructure bonds
has also fallen, to the extent that investing in this instrument doubts one's
financial prudence.

Infrastructure bonds, though they offer you an additional rebate on the investment under
section 88, do not make financial prudence any longer. Though it has a lock-in period of
as low as three years (the lowest among various other tax saving instruments), the rate of
interest is very near to what one would get on a one-year fixed deposit with banks.
Moreover, deduction under section 80L is not available here. It makes more sense to pay
tax and use the money to generate better returns than to lock the amount for three years
and lose out to inflation.

Infrastructure bonds are essentially for those who do not care to study better investment
avenues and would be satisfied with bank fixed deposits. Moreover, they being issued
by infrastructure companies (and not the government) are quite unsecured. Some study
in the financial markets can be well worth the effort.

Tax planning? Try infrastructure bonds

For most investors who are conducting their annual tax-planning exercise, claiming tax
benefits under Section 88 of the Income Tax Act means utilising conventional options
which include taking insurance and investing in Public Provident Fund and National
Savings Certificate.

From the total Rs 100,000 that can be claimed as rebates, the aforementioned avenues
account for only Rs 70,000; the balance Rs 30,000 is reserved for investments in
infrastructure bonds amongst others.

These investments are in the form of shares/bonds/debentures and are issued by public
financial institutions like IDBI and ICICI Bank. Also they are subject to a 3-year lock-in
period and any redemption prior to this tenure nullifies the tax benefits claimed at the
time of making the investment.

• Small savings with big tax benefits!

• How to invest and save tax

In case a sale/redemption is made prior to the 3-year period, the tax rebate previously
claimed is treated as investor's income for the year of sale.

So how good an option are infrastructure bonds and should investors contemplate using
the same.

Let's perform a cost-benefit analysis to answer this question. Unlike small savings
schemes that fall under the gamut of Section 88, returns offered by infrastructure bonds
are modest at best.

For the purpose of our study let's consider the previous issue of infrastructure bonds by a
leading public financial institution. Under the cumulative option, the following two
variants i.e. coupon rate 5.50% and 5.64%, respectively, were available:

• Invest Rs 5,000 and get Rs 6,030 after 3 years and 6 months.

• Invest Rs 5,000 and get Rs 6,580 after 5 years.

While the aforementioned scheme is not available at present, we have assumed that a
similar one will be made available shortly when the tax-planning season kicks in.

Another assumption is that inflation will continue to spiral northwards as a result

investors will be compensated with a coupon rate of 50 basis points above the previous

Hence the first option would carry a coupon rate of 6.00% while it would be 6.14% for
the second one.
If the tax benefits for both the options were factored in, the returns on a compounded
annualised growth rate (CAGR) basis would be as shown in Table 1.

Table 1: Are they good enough?

Annual Income Tax Rebate Effective Return*

3.5-Yr 5-Yr
Upto Rs 150,000 20% 12.98% 10.98%
Rs 150,000 – 500,000 15% 11.04% 9.65%
Over Rs 500,000 Nil 6.00% 6.14%

Even after assuming a generous 50 basis point hike in the coupon rate which may not
fructify, the returns are far from impressive.

Now factor in the loss of liquidity, which is another dampener since liquidating these
investments before the 3-year lock-in would imply losing the tax rebates claimed.
Barring the tax breaks, one can safely conclude that the infrastructure bonds are far from

The second option for investors is to pay up their tax liability and invest the balance sum
in alternate avenues. Hence an investor, who would have invested Rs 30,000 in
infrastructure bonds, will instead incur an additional tax liability of Rs 6,000 or Rs 4,500
depending on his tax bracket.

The balance (Rs 24,000 or Rs 25,500) should be invested in other investment avenues
like mutual funds. Returns of some of the top performers across categories have been
listed in Table 2.

Table 2: Risky but attractive!

Returns* 3-Yr 5-Yr

Diversified Equity Funds
HDFC Top 200 50.84% NA
Franklin India Bluechip 45.89% 25.04%
Sundaram Growth 43.22% 18.66%
Balanced Funds
HDFC Prudence Fund 41.57% 21.45%
DSP ML Balanced 32.58% 13.02%
FT India Balanced 32.27% NA

At the outset we would like to state that historical returns (in case of mutual funds) have
been compared with future assured returns for infrastructure bonds. Investments in
mutual funds are market-linked and not assured; therefore historical returns may not be
repeated in the future. But a 3-year period indicates reasonably well, what they are
capable of delivering going forward.

Secondly the risks associated with mutual fund investing are exponentially higher vis-à-
vis those in infrastructure bonds.A large number of investors who are habituated to risk-
free investing might be unwilling to venture into market-linked products and rightly so.
Investments should be governed by investors' risk-appetite and not how attractive the
returns are However the motive behind investing in infrastructure bonds, i.e. to save
taxes, should not be so overbearing that it proves to be an infeasible proposition.

If you are an investor with an appetite for risk; paying the taxes and investing in a well-
diversified equity/balanced scheme may not be a bad proposition.

The solution probably lies in striking a balance between the two, i.e. the benefits of an
investment avenue that offers assured yet modest returns coupled with tax benefits on
one hand and a high risk-high return proposition on the other. Find out where you
priorities lie and get invested accordingl
1. If you have invested in any investment scheme till yet, if yes,
then which –


Response No. of respondents Percentage

Fixed deposits 20 40%
Savings 25 50%
Mutual funds 15 30%

No. of Respondents

15 Series1
Fixed Savings Mutual
deposits funds


Interpretation Out of 60 respondents, 20 respondents has invested in Fixed

deposits, 25 in Savings & 15 in Mutual Funds.
2. Please rate your satisfaction on the return, of the investment you have made on the
scale of 1 to 10-

Response No. of Percentage


Less than 5 35 70%

More than 25 50%


No. of Respondents


20 Series1


More than 5 Less than 5


Interpretation: Out of 60 respondents, 25 respondents have given more than 5

points on the returns they get out of 10 & 35 have given less than 5 points.
3. Do you think that mutual fund is a better option than FD’S –?


Response No. of respondents Percentage

Yes 40 80%
No 20 40%


No.of Respondents

Yes No


Interpretation Out of 60 respondents , 40 respondents think that Mutual funds

is a better investment option than Fixed deposits& 20 think that Fixed deposits is
4. What factor would you consider most important while investing in any
investment scheme-


Responses No. of respondents Percentage

Risk 25 50%
Returns 20 40%
Tenure 15 30%


No. of Responses

15 Series1
Risk Returns Tenure


Interpretation Out of 60 respondents, 25 respondents think that Risk is the
important factor to be considered while investing in an investment option ,20 of them
think that Returns is important & 15 think that Tenure is important.

Do you invest in mutual fund?


Responses No. of respondents Percentage

Yes 15 30%
No 45 90%


No. of respondents

Yes No


Interpretation Out of 60 respondents, 15 respondents have invested in

Mutual funds scheme & 45 respondents have not.
5. Are you satisfied with the results of mutual funds scheme?


Responses No. of Respondents Percentage

Satisfied 12 24%
Unsatisfied 0 0
Neither Satisfied nor 3 6%

No. of Respondents

8 Series1
Satisfied Neither


Interpretation Out of 15 respondents who have invested in mutual funds, 13
are satisfied with the results & 3 respondents are neutral that is they are neither
satisfied nor dissatisfied.
7. Are you aware that mutual fund industry is regulated by SEBI?


Responses No. of Respondents Percentage

Yes 55 110%
No 5 10%


No. of Respondents

30 Series1
Yes No


Interpretation Out of 60 respondents, 55 respondents are aware that Mutual

fund industry is regulated by SEBI & 5 are unaware.
8 What do you think about the future of mutual fund in India? Is it?


Responses No. of Respondents Percentage

Very Bright 3 6%
Bright 9 18%
Very Bleak 0 0
Bleak 1 2%
Doesn’t Know 2 4%

Graph 8-
No. of Respondents


Ve igh










Interpretation Out of 15 Respondents who have invested in Mutual funds,3

think that it has very bright future,9 think that it has bright future,1 think that it
has bleak future&2 doesn’t hold any opinion.
9. Why you have not invested in mutual fund?.

Responses No. of Respondents Percentage
Lack of information 40 80%
High Risk 15 30%
Any other 5 10%

Graph 9-

No. of Respondents

Lack of High Risk Any other
Response s


Interpretation Out of 60 Respondents, 40 respondents have not invested in

mutual funds because of lack of information, 15 due of high risk& 5 due to any
other reason.
10.. Would you consider investing in mutual fund?


Responses No. of Respondents Percentage

Yes 10 20%
No 5 10%


No. of Respondents

6 Series1
Yes No


Interpretation Out of 15 respondents who have not invested in mutual funds,10

would consider investing in it & 5 would not.
11. Which information do you rely on?


Responses No. of Respondents Percentage

Newspapers 35 70%
Banks 40 80%
Investment advisors 45 90%
Friends/relatives 25 50%
Self analysis 50 100%


No. of Respondents

30 Series1
News papers Relatives/Friends



Interpretation Most of the respondents rely on Self analysis before

investing in any investment scheme & then on Banks & Investment advisors.


At last to conclude my study at the HDFC Bank, Ambala Cantt, it was found that in
this new emerging business scenario people still are investing their hard earned cash
in Traditional instruments of investment like FD’s rather than in modern instruments
like Mutual Funds. This is very surprising and is due to the unawareness of people
regarding the latest available investment options. Also, people are not satisfied with
the low and taxable returns they are getting after a certain time period by investing in
fixed deposits but they have no other choice because people are unaware about
modern techniques of investment. After making them aware about the existence of
these techniques and their features they have shown keen interest in these. The factors
responsible for their unawareness are lack of qualitative efforts by banks, their rigid
ness in investing in traditional techniques& high risk & uncertainty in returns etc.
Thus a decision can be drawn is that demand of modern techniques can be introduced
by creating awareness in the minds of people regarding these investment
opportunities available.


1) Awareness regarding Mutual funds scheme should be enhanced.

2) For Home loans and Personal loans separate counters should be made to avoid
3) Advertising should be done to make people aware about the E-ages like phone
banking, net banking.
4) More ATM machines should be there in the city.
5) The bank needs to have dedicated, dynamic, self-contained and comprehensive
6) To ensure maximum profitability, bank need to adequately charge for each service
with proper cost-benefit analysis. Also due steps should be taken to charge for
such services in commensurate with other non-banking financial institutions,
nationalized and foreign banks.
7) The bank staff shall have to be imparted requisite technical and psychological
training for handling these services products and to offer the best of services to
valuable clients.
8) The bank may consider tapping and targeting big players, who do not have their
own pinup. The most important such target group is of NRIs.

 Jha S.M; Bank Marketing; Himalayan Publishing
House; 3rd edition; 1-12
 Kothari C.R.; Research Methodology; Wishawa
Parkashan; 2nd edition; 68-84
 Natrajan Gorden; Banking Theory law and
practice; Himalayan Publishing House;16th edition;
 Shekhar &Shekhar; Banking theory and Practice;
Vikas Publishing House Pvt. Ltd.; 18th edition; 348-

 www. Finance.
 www.

Annual-report of HDFC (2004-05)

Broachers of HDFC
 Economic and Political Weekly; A Sameeksha Trust
Publication; March 19-25, 2005; Vol XL No 12; 1283-