The Most Comprehensive Financial Guide For Women

The
Most
Comprehensive
Financial Guide For

Women
Anand Vijayakumar
AWomanisalwaystheHeart&SouloftheFamilyandher
contribution to the family is Second to None. This Book is
MyAttempttohelpherBecomeFinanciallyIndependent
2014AnandsBlog
The Most Comprehensive Financial Guide For Women
Foreword
Haveyoueverseenyourmotheroryourfriendsmotherpulloutahundredrupeenoteorafiftyrupee
notefrominsideaJarofCerealswhenyouneedmoneyinahurryanddadisntaround?Forpeoplein
our generation, the Woman was almost always a Home Maker and did not earn. But, when the
monthendcomescloser,theladyofthehousealmostalwayshasmoremoneyatherdisposalandeven
sometimes bails out the husband. Just imagine this; our mothers never had any formal financial
education or training. They learnt things the hard way and saved money from whatever was given to
themtorunthehousebytheirhusbands.Evenwiththelimitedresourcestheyhad,theymanagedto
enroll themselves into chitfund schemes or into GoldSaving schemes and helped contribute towards
thefamilysSavings.
WhatiftheyhadanopportunitytolearnaboutInvestingandFinancialDiscipline?OurMomswouldve
beenabletosavealotmorethanwhattheyusedto
As you might already know, I am a blogger and write a lot about financial topics. However, my lovely
wifeismytotalopposite.Shedoesnteventrackherownbankaccountthroughonlinebanking.Most
Womenwouldfallintothesamecategoryasmywife.Itisnotasiftheycannotdoit.Awomanwhocan
workinanofficeandgrowinhercareercanveryeasilystartplanningherfinancesaswell.Inmostcases
theydontgetintoInvestmentsorFinancebecausetheirfatherorhusbandorsondoesitforthem.
So, if you want to understand what your father or husband is doing, its pretty easy. It is not that
complicatedandyoucaneasilyunderstandit.
Thisbookismyattempttohelpwomenunderstandthebasicsofthefinancialmarkets,Investments,Life
Insuranceandeverythingelseaboutmoney.
Hopeyoufindituseful.
BestRegards,
Anand
2014 Anands Blog. All Rights Reserved.
Page 1

This book is dedicated to my wife Dharini who has had the Patience to Put Up
with me spending countless hours in front of the laptop.
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Copyright 2014 Anands Blog. All Rights Reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or in any means by electronic, mechanical,
photocopying,recordingorotherwisewithouttheexplicitpriorwrittenpermissionoftheAuthor.
LEGAL DISCLAIMER: The Author is an Independent Blogger and Financial Advisor. Use of the information contained in
this book is at ones own risk. This is not an offer to sell or solicitation to buy any investment products. All stock market
investments carry an inherent risk of loss and the author will not be liable for any losses incurred out of the investment(s)
made by the reader. Information contained herein does not constitute a personal recommendation or take into account the
particular investment objectives, financial situation or needs of individual investors. All content and information provided in
this book is on an As Is basis by the Author. Information in this book is believed to be reliable but the Author does not
warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or
implied. The author may hold investments in any of the products discussed here however the author has NO Vested Interest
in recommending any of the products outlined in this book. The Performance of the products quoted in this book may or may
not be sustained in future. All rate of returns used in calculations are for indicative purposes only and do not guarantee
future results. The actual returns your portfolio will gain will be based on multiple factors like your investment choice, market
performance etc.
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Table of Contents
Introduction..................................................................................................................................................8
BeforeWeBegin...........................................................................................................................................9
1.1:BankingServices..................................................................................................................................11
1.1.1:WhatisaBank?.............................................................................................................................11
1.1.2:WhoRegulatestheBankingSysteminIndia?...............................................................................11
1.1.3:HowdoesabankWork?...............................................................................................................12
1.1.4:WhyBankingSystemsWork?.......................................................................................................14
1.1.5:WhatHappensifaBankFails?......................................................................................................14
1.1.6:WhatServicesDoBanksProvide?.................................................................................................15
1.1.7:ABankCheque..............................................................................................................................16
1.1.8:DemandDrafts..............................................................................................................................22
1.2:TheDebtMarkets................................................................................................................................23
1.2.1:FixedDeposits...............................................................................................................................23
1.2.2:Bonds............................................................................................................................................24
1.2.3:RisksInvolvedinInvestinginBonds.............................................................................................25
1.2.4:Debentures...................................................................................................................................27
1.3:TheEquityorStockMarkets................................................................................................................29
1.3.1:WhatisanEquityShare?..............................................................................................................29
1.3.2:HowDoesaCompanyIssueShares?............................................................................................29
1.3.3:TheSecondaryMarket..................................................................................................................35
1.3.4:TheStockExchangesofIndia........................................................................................................35
1.3.5:MarketTrendsBearsandBulls...................................................................................................37
1.3.6:SecuritiesandExchangesBoardofIndiaSEBI...........................................................................38
1.3.7:ChoosingaGoodStockforInvestment?.......................................................................................39
1.3.8:HowtoTradeandInvestinEquityMarkets.................................................................................42
1.3.9:ExchangeTradedFunds................................................................................................................44
1.4:TheMutualFundsMarket...................................................................................................................46
1.4.1:WhatisaMutualFund?................................................................................................................46
1.4.2:WhatDoIdowiththeMoneyyouInvested?...............................................................................46
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1.4.3:DoMutualFundsHaveAnyFeeorCharges?................................................................................47
1.4.4:TheAssociationofMutualFundsinIndiaAMFI........................................................................48
1.4.5:TypesofMutualFunds..................................................................................................................49
1.4.6:ChoosingaGoodMutualFundForYourPortfolio.....................................................................52
1.4.7:MutualFundMyths.......................................................................................................................55
1.4.8:WhatistheBestWaytoInvestinMutualFunds?........................................................................57
1.4.9:HowtoInvestBuy/SellMutualFunds........................................................................................59
1.5:TheDerivativesMarket........................................................................................................................60
1.5.1:WhatareDerivatives?...................................................................................................................60
1.5.2:ARealLifeExampleforDerivatives..............................................................................................60
1.5.3:PurposeofDerivatives..................................................................................................................61
1.5.4:TypesofDerivatives......................................................................................................................61
1.5.5:ParticipantsinaDerivativeMarket..............................................................................................62
1.5.6:DerivativeCategories....................................................................................................................64
1.5.7:HowtoTradeintheDerivativesMarket?.....................................................................................75
1.5.8:TheCommodityFuturesMarket...................................................................................................76
2.1:CreditCards..........................................................................................................................................80
2.1.1:WhatisaCreditCard?..................................................................................................................80
2.1.2:HowaCreditCardWorks..............................................................................................................81
2.1.3:OnlinePurchases...........................................................................................................................82
2.1.4:So,HowDoestheBankMakeMoney?.........................................................................................82
2.1.5:ThingstoCheckBeforeyouSignupforaCreditCard...............................................................83
2.1.6:ThingsYouShouldKnowAboutYourCreditCard........................................................................84
2.1.7:Zero%InterestSchemesareNotReally0%.................................................................................85
2.1.8:Credit/DebitCardSafetyInstructions........................................................................................86
2.2:LifeInsurance.......................................................................................................................................89
2.2.1:So,whatisLifeInsurance?............................................................................................................89
2.2.2:HowLifeInsuranceWorks............................................................................................................89
2.2.3:HowInsuranceCompaniesWork..................................................................................................90
2.2.4:InsuranceRegulatoryandDevelopmentAgencyIRDA..............................................................92
2.2.5:TypesofLifeInsurancePolicies....................................................................................................94
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2.2.6:HowMuchInsuranceDoINeed?.................................................................................................95
2.2.7:InsuranceasanInvestmentABIGNO.......................................................................................95
2.2.8:DoYouHaveMedical/HealthInsurance?.....................................................................................99
2.2.9:WhattoDoIfyouhaveanInsuranceRelatedGrievance?.........................................................100
2.3:UnitLinkedInsurancePlansULIPs..................................................................................................102
2.3.1:WhatareULIPs?.........................................................................................................................102
2.3.2:HowdoULIPswork?...................................................................................................................102
2.3.3:So,WhyDoPeopleLikeULIPsSoMuch?....................................................................................103
2.3.4:WhataretheFee&ChargesAssociatedwithULIPInvestments?..............................................104
2.3.5:ThingsMostPeopleDONOTKnowAboutULIPs........................................................................105
2.3.6:AREALLIFEEXAMPLE:................................................................................................................107
2.3.7:AmITotallyAgainstULIPS?........................................................................................................108
2.3.8:ThingsToDoBeforeYouPurchaseaULIPPlan.......................................................................109
2.3.9:WhatToDowithyourExistingULIPInvestments?....................................................................110
3.1:InvestmentPortfolio..........................................................................................................................114
3.1.1:WhydoweneedaPortfolio?.....................................................................................................114
3.1.2:InvestingInGold.........................................................................................................................118
4.1RetirementPlanning...........................................................................................................................124
4.1.1:WhyPlanforRetirement?..........................................................................................................125
4.1.2:HowmuchmoneywillIneed?....................................................................................................126
4.1.3:Wherewillthemoneycomefrom?............................................................................................129
4.1.4:BuildingtheRetirementCorpus.................................................................................................133
4.1.5:EmployeeProvidentFundandEmployeePensionScheme.......................................................134
4.1.6:WithdrawalofEPF......................................................................................................................139
4.1.7:TransferofEPF............................................................................................................................140
4.1.8:HowMuchPensionWillWeGetThroughEPS?..........................................................................142
4.1.9:GratuityBenefits.........................................................................................................................144
4.1.10:SuperAnnuationBenefits..........................................................................................................146
5.1:PlanningYourChildrensFuture........................................................................................................150
5.1.1:WhyPlanforourKidsFuture?....................................................................................................150
5.1.2:HowtoCalculatetheFutureMoneyRequirement?...................................................................151
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5.1.3:So,HowtoAccumulatethemoney?..........................................................................................151
5.1.4:So,WhatNext?...........................................................................................................................152
5.1.5:ATIPfortheParentWhoisExtremelyBusy:..............................................................................153
6.1:BuyingaHouse...................................................................................................................................155
6.1.1:Thingstodobeforebuyingahome:...........................................................................................155
6.1.2:IdeasfortheSmartHomeBuyer................................................................................................155
6.1.3:DocumentsyouwillNeedToAvailaHomeLoan....................................................................157
6.1.4:HomeLoanPartRepayment....................................................................................................157
7.1:MoneyTipsForTodaysWomen....................................................................................................161
7.1.1:TipNo.1:OvercometheGenderBarrier....................................................................................161
7.1.2:TipNo.2:SaveUpforaContingencyFund................................................................................161
7.1.3:TipNo.3:GetyourselfInsuredSufficiently................................................................................163
7.1.4:TipNo.4:AlwaysPrepareaBudgetandTrytoSticktoIt..........................................................163
7.1.5:TipNo.5:AlwaysSetSavingTargetsandTrytoAchieveThem.................................................164
7.1.6:TipNo.6:ControlYourUrgetoSplurge.....................................................................................164
7.1.7:TipNo.7:DontIgnoreYourFamilysFinances..........................................................................164
7.1.8:TipNo.8:KnowYourHusbandsFinancialStatus........................................................................164
7.1.9:TipNo.9:DontLetFearStopYou..............................................................................................165
7.1.10:TipNo.10:LearnFromYourMistakes......................................................................................165
7.2:InvestmentDosandDonts............................................................................................................166
7.2.1:TheDos:.....................................................................................................................................166
7.2.2:TheDonts:..................................................................................................................................166
7.2.3:WhenandWhattoBuy...............................................................................................................167
7.2.4:SomeGeneralGuidelines............................................................................................................167
7.3:TrackingyourPortfolioPerformance.................................................................................................168
7.3.1:TrackingyourPortfolioTheManualRoute..............................................................................169
7.3.2:TrackingyourPortfolioTheFinanceWebsitesRoute..............................................................169
Page 7
Introduction
OursocietyandcultureplacesanimmenseemphasisontheManofthehousetobethebreadwinnerof
thefamily.Inthepastcoupleofdecades,moreandmorewomenhavestartedworking&earningand
the%ofwomenwhocansurviveontheirown;isgoingupeveryday.Thoughalotofwomenworkand
earn,notmanyofthemarefullyawareofInvestmentConcepts,RetirementPlanningandmanyother
financerelatedtopics.
In fact, one of the leading investment firms in the world had conducted a survey among working
women.Youwillbeshockedwiththefindings
90% of working women do not handle their own finances and let their Spouses handle their
investments
ManyWomenjustlettheirmoneystayidleintheirbankaccounts
Morethan50%ofworkingwomendonothaveanyRetirementPlan
Morethan80%ofretiredwomendonothaveanypensionincome
If you conduct a similar study among working men, the results will be starkly different. Why so much
difference?
IsitbecauseWomenareanylesscompetentwhenitcomestoinvestmentandfinance?
SomeofthemostsuccessfulinstitutionsacrosstheglobehavebeenmanagedbyWomen.Infact,even
intheMutualFundsworld,someofthetopperformingEquityMutualFundsaremanagedbyWomen
andtheyhavebeenabletomeetorbeatthereturnsgeneratedbytheirpeerfundsmanagedbyMen.
So,abilityisdefinitelynottheproblemhere.IaskedthisquestionontheWHYparttomywifeandher
answeramazedme
BeforeMarriagemyDadhandledmyfinancesandAfterMarriageyouaredoingit.So,whena
ManIfullytrustandloveisdoingit,whyshouldIbother?
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Before We Begin
So,youhavepurchasedthisbookandpaidadecentamountofmoneytogetit.Ifyouwentthroughthe
previewcopyofthisbookorifyoujustreviewedtheTableofContentsyouwouldvebeensurprised
thatthisbookdoesnotcovertwomaintopics:
a. IncomeTaxes
b. ARetirementPortfolio
Ifyoudidnotnotice this andyoujust realized that thisbook doesnot cover IncomeTaxesorhowto
buildaRetirementPortfoliodontworry.Iwouldnevershortchangemyloyalreaders.Ihadpublishedan
ebooklastyeartitledYourCompleteGuidetoIndianIncomeTaxandRetiringasaCrorepati.Asyou
have paid a significant amount of money in purchasing this book, I am going to give you that book
ABSOLUTELYFREE!!!
Page 9
Page 10
1.1: Banking Services
ABankAccountissomethingthatallofushave.Rightfromourchildhoodwearetaughttosavemoney
inourlittlePiggyBanksandaswegrowup,wemoveontoSavingsBankAccountswherewekeepour
money.So,howdoesabankworkandistheroleofthebank?
BanksaretheFinancialIntermediariesoftheEconomy.TheirMainaimistofacilitatetheflowof
moneyfromthosethathaveitinsurplus(ByAcceptingDeposits)tothosethatneedit(ByGiving
outLoans).WithoutBanks,ourEconomywouldjustcometoastandstill
1.1.1: What is a Bank?
AccordingtotheOfficialDefinitionAbankisaninstitutionthatdealsinmoneyanditssubstitutesand
providesotherfinancialservicestoitsCustomers.Banksacceptdepositsandmakeloansandderivea
profitfromthedifferenceintheinterestratespaidandcharged,respectively.
1.1.2: Who Regulates the Banking System in India?
TheReserveBankofIndiaorRBIistheCentralBankofIndiaandistheGoverningBodythatsupervises
allbankingservicesinourcountry.TheReserveBankofIndia(RBI)isIndia'scentralbankinginstitution,
which controlsthemonetarypolicyoftheIndianrupee.Itwasestablishedon1April1935duringthe
British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934. Following India's
independence in 1947, the RBI was nationalized in the year 1949. The Reserve Bank Governor is the
person who is at the helm of the RBI. Though the Finance Minister has the power to influence the
decisionsoftheRBI,theRBIisanautonomousbodyandhasthepowertotakedecisionsonitsown.
1.1.2.1: Functions of the RBI
ThefollowingarethekeyfunctionsoftheRBI:
DeveloptheBankingSysteminIndia
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IssueCurrencyNotesinIndia
ServeastheMonetaryAuthorityoftheCountry
RegulatorandSupervisoroftheFinancialIndustryintheCountry
ManageForexRequirements&SetForexRegulations
GrantLoanstootherBanksthatoperateinIndia
SetPolicyRatesandReserveRatiosforBanks
Etc
The list is actually very long. To put it simply, any bank that serves customers in India would have to
obtain approvals from the RBI before they start the same and they have to follow every rule and
regulationthatissetbythem.
1.1.3: How does a bank Work?
Banksarecriticaltooureconomy.Theprimaryfunctionofbanksistoputtheiraccountholders'money
tousebylendingitouttootherswhocanthenuseittobuyhomes,businesses,sendkidstocollege...
When you deposit your money in the bank, your money goes into a big pool of money along with
everyoneelse's,andyouraccountiscreditedwiththeamountofyourdeposit.Whenyouwritechecks
or make withdrawals, that amount is deducted from your account balance. Interest you earn on your
balanceisalsoaddedtoyouraccount.
Banks create money in the economy by making loans. The amount of money that banks can lend is
directlyaffectedbythereserverequirementsetbytheRBI.Thisamountcanbeheldeitherincashon
handorinthebank'sreserveaccountwiththeRBI.Toseehowthisaffectstheeconomy,thinkaboutit
likethis.WhenabankgetsadepositofRs.100,assumingareserverequirementof10percent,thebank
canthenlendoutRs.90.That90goesbackintotheeconomy,purchasinggoodsorservices,andusually
endsupdepositedinanotherbank.ThatbankcanthenlendoutRs.81ofthatRs.90deposit,andthat
Rs. 81 goes into the economy to purchase goods or services and ultimately is deposited into another
bankthatproceedstolendoutapercentageofit.Inthisway,moneygrowsandflowsthroughoutthe
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communityinamuchgreateramountthanphysicallyexists.ThatRs.100makesamuchlargerripplein
theeconomythanyoumayrealize!
Letussay,yourdadjustretiredandgothisfinalsettlementfromhisemployer.Hehas25lakhswithhim
rightnowbutdoesntwanttospendit.Heconsultsafinancialadvisorwhoconsideringhisageandrisk
appetite suggests that he invest the money in a Bank Fixed Deposit. Now, the bank has 25 lakhs as a
deposit and they need to do something with it so that they can afford to pay your dad the Interest
Amount.Forex:IftheRateofInterestis9%thenthebankhastogiveyourdadRs.2,25,000/asInterest
attheendof1yearwhenhisdepositmatures.
Ontheotherhand,letssayIamplanningtobuyaHondaCityCarwhichcostsapprox.10lakhs.Ihave
around3lakhsinmysavingsaccountascashbutneed7morelakhstofinishmypurchase.So,Itakea
Car Loan. The average rate of interest that banks charge is around 11% and they also charge a small
processingfeeontheloan.So,ifIborrow7lakhsIwillenduppayingaround8.5lakhsattheendofthe
loantenure.Ifthebankmanagestoattractsomemorecustomerslikeme,itwilldisbursemoreloans
andtheywillcollectaninterestfromallofus.Theywillusethisinteresttopaydepositcustomerslike
yourdad.
Ofcourse,thebalanceremainingamountistheirincome
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1.1.4: Why Banking Systems Work?
Bankingisallabouttrust.Wetrustthatthebankwillkeepourmoneyforuswhenwegotogetit.We
trustthatitwillhonorthechequeswewritetopayourbills.Thethingthat'shardtograspisthefact
thatwhilepeopleareputtingmoneyintothebankeveryday,thebankislendingthatsamemoneyand
more to other people every day. Banks consistently extend more credit than they have cash. That's a
littlescary;butifyougotothebankanddemandyourmoney,you'llalwaysgetit.However,ifeveryone
goestothebankatthesametimeanddemandstheirmoney,theremightbeproblem.
ABankdoesnothavetherighttodemandafullsettlementonitsloansfromcustomersanytimethey
wantbuttheCustomerhastherighttodemandhisdepositanytimehewants.
ABankRunisasituationwhereallthecustomersofaBankvisititsbranchtowithdrawtheir
money.AsIjustexplained,Bankswillkeepa%ofthemoneyyoudeposittomeettheReserve
RequirementssetbytheRBIandlendouttheremaining.So,ifeveryonevisitsthebankonefine
dayandasksfortheirmoney,thereisagoodchancethatthebankmaynothaveenoughmoney
topayallitscustomers.Infact,thisishowmanysmallBanksandfinancialinstitutionsacross
theworldcollapsedafewyearsagoduringtheEconomicCrisis.Theydidnotclosebecausethey
didnothaveenoughmoney.Theyhadmoneybutitwasalllentouttoothercustomerswhichthey
couldntaskfor
1.1.5: What Happens if a Bank Fails?
In the event of a bank failure, your money is protected (to a certain extent) as long as the bank is
insured by the RBI. RBI has a Deposit Insurance Scheme which is mandatory for all banks in India to
enrollwith.EachdepositorinabankisinsureduptoamaximumofRs.1,00,000/(RupeesOneLakh)for
bothprincipalandinterestamountheldbyhimwiththebank.IncaseofaDefault,theRBIwillgiveyou
onelakhasabareminimumandthenworktowardshelpingtoclaimasmuchofyourdepositaspossible
bysellingthebanksassets.
A point to note here is that, even if you have multiple deposits with the bank, the total maximum
guarantee is one lakh only. However, if you have deposits with multiple banks, your deposits will be
insuredforupto1lakhineachindividualbankwithwhichyouhaveanaccount.
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1.1.6: What Services Do Banks Provide?
As I mentioned towards the beginning of this book, Banks are the Financial Intermediaries of the
Economyandprovideawidevarietyofservicestoitscustomers.
TheKeyServicesInclude:
a. Savings Accounts Thesearethebasicbankaccountswhereyoucanparkyoursurplus
funds for saving. The money is totally liquid and you can withdraw it any time you want.
Banksgiveyou4%interestonyoursavings.Someprivatebanksofferinterestsofupto6%
on your Savings Account Balance. There are certain limitations on the number of
transactionsthatyoucandoinamonth/yearbuttheselimitsareveryhighandsufficientfor
regularcustomerslikeyouandme.
b. Checking or Current Accounts These are accounts for businessmen and traders.
Themoneyinthisaccountistotallyliquidandyoucanwithdrawitanytimeyouwant.These
accountsdonothaveanylimitationsonthenumberoftransactionsbecausebusinessmen
needtodohundredsoftransactionseachmonthandregularsavingsaccountwouldntsuit
them.Becauseofthehighvolumeoftransactionsandliquidityrequirements,banksusually
donotofferanyinteresttosuchaccounts.
c. Fixed Deposits Thesearespecialdepositaccountswhereinthecustomer(You)specify
thequantumoftimethatyoufeelyouwontbeneedingthemoney.Asyouaredepositing
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d.
e.
f.
g.
h.
i.
yourmoneyforalongerduration,thebankoffersyouamuchhigherrateofinterest.Fora1
yeardeposit,banksofferinterestsofaround8to10%dependingonthebank.
Recurring Deposit NoteveryonewillhavealotofsurplusthattheycanopenFixed
Deposits with. So, in order to help out such customers save money, banks offer Recurring
DepositsorRDs.AnRDisnothingbutasimpledepositaccountwhereyousaveaspecific
amountofmoneyeachmonthforaprespecified/preplannedduration.AstheRDwillbe
open for a longer duration and you wont withdraw the funds quickly, banks offer much
higherinterestrates.Banksofferanaverageofaround8%interestforRDs.
Loans Not everyone will have investible surplus. There may be times when you need
moneybutyoudont haveitforex: whenyouwantto buya house.You wontpossibly
have20or30lakhslyingaroundforyoutobuythehouse.So,youtakealoanfromaBank.
TheBankwillgrantyoualoanbasedonyourincomeandeligibilityandyouwillrepaythe
money as monthly instalments. Banks offer different loans like Home Loan, Automobile
Loan,PersonalLoan,MortgageLoan,GoldLoanetc.
Insurance Advisory Services Banks also provide Insurance Advisory services
wherein they sell Insurance Products to its customers. Most Bank Branches will have
authorizedandtrainedindividualswhocanadvisecustomersontheInsuranceProductsthat
thebankiscurrentlyselling.
Investment Advisory Services BanksalsoprovideInvestmentAdvisoryServicesto
its customers wherein they sell Investment Products like Mutual Funds, ULIPs, and Gold
Bars. Just like Insurance Advisors, most bank branches will also have qualified individuals
whocanofferadviceonInvestmentProductsthatthebankiscurrentlyselling.
Safety Deposit Lockers Justlikewehavelockersinourcupboardorcabinet,Banks
tooprovideLockerswhichwecanrentout.Bypayingasmallfee,youcanrentoutasafety
depositlockerfromthebankandkeepyourvaluablesinside.Thelockerisusuallyhousedin
aSafeRoomthatisheavilyarmoredandguardedatalltimes.
Cheques & Demand Drafts ChequesandDemandDraftsaremonetaryinstruments
thatcan beconsideredat parwithCash.IfIneedtopayyousomemoneyI canissuethe
payment in cash or as a cheque or demand draft. When you deposit the cheque or draft
withyourbank,youwillgetthemoneythatIamsupposedtogiveyou.Thenextsectionwill
explainingreaterdetailabouthowtheseinstrumentswork.
1.1.7: A Bank Cheque
A cheque is a negotiable instrument that can be issued by one person to pay money to another
person/entity.Thepersontowhomthechequeisissuedisentitledtoreceivethesummentionedinthe
cheque(providedtheaccounthassufficientbalance)fromthebankwherethechequeissuerholdshis
account. A Sample Image of an HDFC Bank Cheque that I picked from the Internet can help you
understandhowarealchequewouldlook.
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1.1.7.1: Who can issue Cheques?
Anyone who holds a valid bank account can issue a cheque to make payment to anyone or any
organization.
1.1.7.2: How a Cheque Works
LetssayIoweyouRs.10,000/andgiveyouachequedrawnonmybankaccount(ICICI).Letusseethe
sequenceofevents
1.
2.
3.
4.
IhandoverthechequeworthRs.10,000/drawnonICICIBanktoyou
Youtakeittoyourbank(letssayHDFC)anddeposititintoyourbankaccount
HDFCProcessesthechequeandsendsarequesttoICICIforpayment
IfIhaveenoughfundsinmyaccount,ICICIwillprocessthepaymentandreleasethefundsto
HDFCBank
5. HDFCBankprocessesthepaymentandcreditsthefundsintoyourbankaccount
TheaboveisasimpleillustrationofhowthiswholeChequeCollection&Clearingmechanismworks.If
you had an ICICI Bank account too, this whole process would be much faster because, step 3 is not
requiredatall.Thebankwilljustcheckifyouhaveenoughfundsinyouraccountandifso,movethe
moneyintothepayee'sbankaccountrightaway
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1.1.7.3: Cheque Clearing & Collection Timelines
With the use of latest technology, most banks issue Cheques that are Payable at Par In all their
BrancheswhichhassignificantlyshortenedtheChequeClearingTimelines.Onceuponatime,acheque
issued from an different city could take up to 7 days and from a village could take up to 14 days.
However,thesedaysalmostallchequesgetclearedwithin3to5BusinessDays.
1.1.7.4: What happens if your Account Doesnt have Sufficient Balance?
AspertheexampleIjustused,IhavegivenyouachequeforRs.10,000/.Letssaymybankaccount
doesnothavesufficientmoneytopayforthisCheque,theChequewillBOUNCE.YouWILLNOTgetany
money.
Issuingsuchchequesisanoffense.Notonlywillyourbankchargeyoupenaltiesandfeesforissuingsuch
cheques,thepersonwhogotthechequecanfileapolicecomplaintagainstyouandyoumaybejailed
for the same. So, we must always make sure that our account has sufficient funds before we issue
cheques.
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1.1.7.5: Cheque Clearing & Collection Fees
If you are using an At Par cheque, your bank CANNOT and SHOULD NOT be charging you any fee.
Anyways, in case of the remote possibility that you actually got a cheque from a bank in a different
city/town(fromwhereyoureside)whichisntanAtParCheque,yourbankmaychargeyouasmallfee.
RBIhassetguidelinesonthesechargesandtheyare:
UptoandincludingRs.5000Rs.25perinstrument+servicetax
Above Rs.5000 and Up to and including Rs. 10,000 not exceeding Rs. 50 per instrument+
servicetax
AboveRs.10,000anduptoandincludingRs.1,00,000notexceedingRs.100perinstrument+
servicetax
Rs.1,00,001andabovelefttothebankstodecide.
Youneedtocheckyourbanksoutstationchequecollectionpolicy&feesdocumenttofindoutthefee.
However,RBIhasrecentlyaskedBanksinarecentcirculartoreconsidertheircharges&Reducethem.
Thereisnotmuchclarityonhowmuchbankswillreducethesefeesbuttheywillbereducingitsoon.
Noadditionalchargessuchascouriercharges,outofpocketexpenses,etc.,shouldbelevied.
So,ifyouusedanoutstationchequeandwerechargedafeethatismorethantheamountsabove,you
havetherighttoquestionyourbank.
1.1.7.6: Important things to note while writing a cheque
AChequeisaPowerfulMonetaryInstrumentandifwearecareless,wemayendupintrouble.There
areanumberofimportantthingsthatwemustkeepinmindwhilewritingacheque.Theyare:
Remember to Cross the ChequeCrossingachequemeansputtingtwoparallellinesonthe
left hand top corner of the cheque. This means that, the cheque is an Account Payee cheque
whichmeansitcanonlybedepositedintoanotheraccountandcannotbeexchangedforcash
overthecounter.Thisservestwopurposesyoucankeepatrackofwhoencashedyourcheque
andalsoensurethatevenifthechequeislost,itcannotbemisusedbyanyone.Thepersonto
whomthechequewaspaidwillberecorded.
Write the Name of the person to whom the cheque is to be paid In Full. It is very
importanttostatethechequepayeesnameinfullwithoutmissinganypartofthenameinthe
paytolineThenameenteredhereshouldmatchthenameunderwhichthepersonholdsa
validbankaccount.Ifthereisanymismatchorspellingmistakethechequewillnotbepaid.
Write the amount to be paid both in numbers and words.Itisadvisabletowriteboththe
numbervalueaswellasvalueinwordsinthecheque.Alsocaremustbetakentoensurethat
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there are no leading or trailing blank spaces while entering these values which might cause
tamperingofthechequeandmodificationofthechequevalue
Write the cheque date CorrectlyDonotissuechequesthatdonothaveachequeissuedate.
This is to ensure that your cheque isnt Valid Indefinitely. Cheques in India are valid for a
period of 3 months from the date of Issue. Lets say I give you a cheque on 1st January, the
chequeisvaliduntil31stMarch.Starting1stApril,thechequeisuselessandevenifyoudeposit
thechequeinyourbank,thechequewillnotbehonoredandyouWILLNOTgetanymoney.
Sign the cheque at the bottom right hand corner with the exact signature that is
registered with the bank records. Ifthereisevenaslightmismatchbetweenthesignaturein
thebankrecordsandthatinthechequethebankwillnotreleasethepayment.
Dont Overwrite or Make Edits in the ChequeThereshouldbeNOEDITSorOVERWRITINGS
intheCheque.Ifanyarepresent,thechequewouldbeconsideredinvalidandwillnotbepaid
out.
NEVER Issue Blank Cheques DO NOT issue cheques to anyone that does not contain a
cheque value. If you do so, if the other person fills in some random big amount, you will be
liabletopaytheamountevenifyoudontowethemthatmuchmoney.
IntheOddChancethatachequethatyouissuedislostyouneedtoimmediatelyvisitthebankor
calluptheircustomercareandrequestthemtoStopPaymentonthecheque.Onceyoudoso,
evenifthechequeispickedupbysomestrangerwhotriestocashit,thebankwillnotpaythe
money.RememberItisourresponsibilitytokeepthechequessafe.Ifyouloseitandsomeone
encashesit,thebankwillbeliabletomakethepaymentandyouwillenduplosingMONEY.
1.1.7.7: Cheque Truncation System
TheRBIhascomeupwithanewstandardforusingchequescalledChequeTruncationSystemorCTS
2010whichallbankshavetofollow.AsperRBI,onlythosechequesthatareCTScompliantcanbeused
aslegalmonetaryinstrumentsbeginning2013.
1.1.7.7.1: How is it different from the previous standard?
Earlier, all cheques were sent directly (In physical mode) to the other bank for clearance. This means
that, if you have an ICICI Account and I give you a cheque from HDFC Bank, ICICI Bank will send the
chequeyoudepositedtoHDFCBanktoconfirmthatthechequeisvalidandthenreceivethepayment
Page 20
onyourbehalfandcredititintoyouraccount.Thisisthereasonwhyotherbankchequestakeatleast2
3daystogetcreditedintoyourbankaccount.
Starting 2013, banks will just send a digital (scanned) version of the cheque to the other bank and
technicallytheclearancecanhappenveryfast(evenonthesameday).
Thisessentiallymeansthreeveryimportantbenefits:
EasierProcessingforbothbanks
Nophysicaltransferofchequessolesserdelays
QuickerreceiptoffundsForCustomers
Fromthecustomerspointofview,wedontcarewhatthebankdoestogetmyfunds.Allwecareabout
ishowfastwillwegetmymoneyandthisCTS2010standardcanhelpbanksclearfundsmuchfaster
thanbefore.
1.1.7.7.2: What are the Features of CTS Compliant Cheques?
ACTSComplaintChequewouldlooklikebelow:
ThefollowingaresomefeaturesofchequesthatwillbeCTScompliant:
TheywillhavethewordingsPleasesignabovethislineatthebottomrighthandsidecorner
TheywillhaveawatermarkwithwordsCTSINDIAwhichcanbeseenagainstalight
AninvisiblebanklogowillbeplacedwithanUltraVioletInkwhichcanbeseenonlyunderUV
Scanners
Itwillnotallowanychanges/alterationstothecheque.Ifthereisanymistakeorcorrection,the
chequewillbecomeinvalid
Page 21
PayableatparatallbranchesofXXXXBankinIndiatextwillbeprintedatthebottomofthe
cheque
TheBanksIFSCandMICRCodewillbepresentinthecheque
Signatureswillhavetobemadeusingadarkinksothatyoursignaturescanbescannedproperly
Allthesefeatureswouldensureuniformityacrosschequesissuedbyvariousbanksaswellashelpbanks
scrutinizechequesproperly,whichinturnisexpectedtoactasadeterrentagainstchequefrauds.Below
isaSampleofhowthesenewCTS2010chequesmustlooklikeaspertheRBI:
1.1.8: Demand Drafts
A Demand Draft or DD (as it is frequently called) is very similar to a cheque but has a few minor
differences. Firstly only Banks can issue DDs. Any customer who needs a DD has to visit the bank
branch,fillupaformandrequestfortheDD.TheBankwillrequireanupfrontpaymenttobemadeand
only then the Draft will be issued. So, a DD is almost equivalent to Cash. Most people will prefer to
receiveDDsinplaceofChequesbecause,theDDwillnotbounce.Thebankwouldvealreadyreceived
money from you and hence the DD will definitely get paid. Apart from this difference, the clearance
processworksexactlythesamewayasCheques.
1.1.8.1: Will a Demand Draft Bounce?
TheoreticallyYes,butPracticallyNO.JustlikechequesitispossibletoCancelaDDhowever,inorder
todoso,youwillbeaskedtosubmit/surrendertheoriginalDD.IncaseoflossortheftoftheDDwhen
thecustomerwantstocancelhis/herDDthebankwillusuallyaskforaPoliceComplainttofacilitatethe
cancellationoftheDD.So,ifsomeonegivesyouaDD,theycantsneakbacktothebankandcancelit
withoutyourknowledge.ThisisexactlythereasonwhyalleducationalinstitutionsaskustoattachaDD
fortheApplicationFeeratherthanaskingustosendCheques.
Justrememberthat,eveniftheysomehowmanagetodoitandtheDDyougotBounces,itisILLEGAL
andyoucanfileapolicecomplaintagainstthatperson.
Page 22
1.2: The Debt Markets
TheTermDebtMarketsisabroadbasedtermthatreferstoinstrumentswhichareverysimilartoFixed
Deposits. The three main types of Instruments that fall under this category are Fixed Deposits,
BondsandDebentures
1.2.1: Fixed Deposits
AFixedDepositisarguablethemostcommonandmostwidelyusedDebtProductinIndia.Iampretty
sureyoualreadyknowwhataFDis,amIright?
Anyways, a Fixed Deposit is nothing but an agreement between a Bank and its Customer. The
CustomerdepositsaFixedSumofMoneyforaFixedDurationoftimeataFixedRateofInteresthence
thetermFixedDeposit.Basedonthedurationofyourdeposit,therateofinterestyouearnwillvary.
At the end of the deposit duration, the bank will return your money along with the Interest you
earnedbykeepingthedepositwiththebank.
Thesedays,FDsthatofferMonthly,Quarterly,HalfYearlyInterestPaymentoptionstoowhereinyou
willgettheInterestpaidoutasperyourselectionandthePrincipalwillbereturnedtousatMaturity.
ChoosingaFDisstraightforward.IfyouselectaGoodbankthatisgoingtoreturntheamountyou
invested, there is absolutely NO RISK for you as an investor here. By doing some research and
selecting the bank that offers the best FD product, you will only earn extra income out of your
Page 23
investments.So,ifyoudonthavethetimeorthemeanstoinquirewithmultiplebanks,justopenanFD
withthebankwhereyoumaintainyouraccount.Somebanksofferamuchhigherrateofinterestthan
others.So,Ifyouaregoingtodeposit10LakhsinanFD,abankoffering8%rateofinterestwillgiveyou
Rs.80,000/attheendoftheyearwhereasthebankoffering9%willgiveyouRs.90,000/
1.2.2: Bonds
A Bond is nothing but an arrangement between an Investor(s) and a Borrower wherein the Borrower
getsmoneyfromoneormoreInvestors,usesitforhisbusinesspurposesandthenrepaystheamount
along with an Interest. Bonds are used by companies, municipalities, states and even governments to
finance a variety of projects and activities. The rate of interest offered on the Bond depends on the
creditworthiness of the borrower. The borrower either makes periodic interest payments or pays the
interestatmaturity.Attheendofthedepositdurationtheinitialdeposit(plusinterest)isreturnedback
totheInvestor.
Bonds are usually backed by some sort of collateral that the borrower has to place with the central
governing bodies. Bonds usually offer a slightly higher rate of interest in comparison to Bank FDs
Page 24
becausepeoplehave,forgenerationstrustedBankFDsandtomakethemconsiderotherfixedreturn
investments,therateofreturnshastobeslightlyhigher.
PrivateCompaniesusuallyhavetoofferhigherinterestratesthangovernmentbondissuesbecausethey
need to motivate borrowers to invest in them even though government issues are safer. Another
important point to note here is that, in official Bond Terminology the Interest Component is called
Coupon.Ifsomeonesays,thisbondyieldsa8%coupon,itmeansthatthebondearnsarateofinterest
of8%.
1.2.3: Risks Involved in Investing in Bonds
Bondsareoneofthemostpreferredinvestmentinstrumentsfortheriskaverseinvestorwhowantsa
decentreturnoninvestment(ROI)andcapitalpreservationatthesametime.Bondsaredebtobligations
which pay out a fixed interest on the invested sum and pay back the whole invested principal at
maturity.Unfortunately,Bondsarenotsostraightforwardastheymightsound.Therearemanyrisks
involvedininvestinginBonds.Theseriskscancauselossestotheinvestorsbondportfolioanddefeat
thewholepurposeofcapitalpreservation.
SomeoftherisksinvolvedininvestinginBondsare:
1.
2.
3.
4.
5.
InterestRateRisk
ReinvestmentRisk
CallRisk
DefaultRisk&
InflationRisk
1.2.3.1: Interest Rate Risk
Thisisthemostorwellknownriskinthebondmarket.Thisreferstotheriskthatbondpriceswillfallas
the interest rates in the market rise. Bond prices are inversely proportional to the prevailing interest
ratesinthemarket.Bybuyingabond,thebondholderhascommittedtoreceivingafixedrateofreturn
forafixedperiod.Ifthemarketinterestraterisesfromthedateofthebond'spurchase,thebond'sprice
will fall accordingly. The bond will then be trading at a discount to reflect the lower return that an
investorwillmakeonthebond.Theinvestorwouldendupsufferinglossesifhewishestoliquidatehis
holdingsatthatpointoftime.Marketinterestratesareafunctionofseveralfactorssuchasthedemand
for,andsupplyof,moneyintheeconomy,theinflationrate,thestagethatthebusinesscycleisinas
wellasthegovernment'smonetaryandfiscalpolicies.
Page 25

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