A PROJECT REPORT

ON
FINANCIAL PLANNING
(IN THE INDIAN CONTEXT)

Submitted in Partial Fulfillment for the Award of the

Degree of Bachelor in Business Administration 2010-2012

Under the Guidance of: Submitted By:

Name of the Guide from Institute Name of the Student Adoitya Kaila
Ms.Shilpee Aggarwal
Faculty(MAIMS) University Enrollment No.-01514701709

Maharaja Agrasen Institute of Management Studies

Affiliated to Guru Gobind Singh Indraprastha University, Delhi
 STUDENT DECLARATION

This is to certify that I have completed the Summer Project titled

Financial Planning-In the Indian Context under the guidance of Ms.
Shilpee Aggarwal in partial fulfillment of the requirement for the award
of Degree of Bachelor of Business Administration at Maharaja Agrasen
Institute of Management Studies, Delhi. This is an original piece of work
& I have not submitted it earlier elsewhere.

Date: Signature:
Place: New Delhi Name: Mr. Adoitya
Kaila
University
Enrollment No.:01514701709

ii
iii
 CERTIFICATE FROM THE INSTITUTE GUIDE

This is to certify that the summer project titled Financial Planning-In the
Indian Contextis an academic work done by Mr. Adoitya kaila
submitted in the partial fulfillment of the requirement for the award of the
degree of Bachelor of Business Administration at Maharaja Agrasen
Institute of Management Studies, Delhi, under my guidance & direction.

To the best of my knowledge and belief the data & information presented
by him/her in the project has not been submitted earlier.

Signature :

Name of the Faculty : Ms. Shilpee Aggarwal

Designation : Faculty(MAIMS)

iv
 ACKNOWLEDGEMENT

Acknowledgement is an individuals feeling towards many people who

directly or indirectly stimulated and influenced ones intellectual
development in ones student and professional life. This formal statement
of acknowledgement will hardly meet the ends of justice in the matter of
expression of my sense of gratitude and obligation to all those who helped
me in the completion of this project.

With great reverence I would like to express my profound gratitude to my

project guide Mrs. Shilpee Aggarwal for her enormous help and
guidance on the topic. A special thanks and gratitude to Mr. Harbinder
Mehra(founder and CEO at pensionindia.com a unit of GetCertified
Inc) for being a mentor and for his unceasing interest, critical evaluation,
learned guidance, constant inspiration and immense encouragement there
by giving me the chance to look more closely into the field of my interest,
during the period of summer training.

I also wish to thank MAHARAJA AGRASEN INSTITUTE OF

MANAGEMENT STUDIES for making this experience of summer
training in an esteemed organization possible. The learning from this
experience has been immense and would be cherished throughout life.
Last but not the least I would also like to thank our Institutes Director
DR. N.K. Kakkar who helped to the fullest of his extent with his
valuable suggestions directly or indirectly at every stage of my training.

v
 EXECUTIVE SUMMARY

This project deals with financial planning:In the Indian Context. Key to
effective planning is the ability to take into account all relevant aspects of
your financial situation and to identify and analyse the interrelationships
among sometimes conflicting objectives. That is financial planning is a
process that determines how you and your family can best meet life goals
through the proper management of your financial affair. In other words
financial planning means deciding in advance how much to spend, on
what to spend according to the funds at your disposal. The objective is to
ensure that the right amount of money is available in the right hands at the
right point in the future to achieve an individuals life goals.

Here it is an endeavor to highlight that a true financial plan does not focus
one aspect or product, but instead seeks to take all areas of planning into
consideration when making financial decision. Areas in which financial
planning can be undertaken are:
Cash flow management .
Tax planning and management .
Risk Analysis
Investment planning and management.
Retirement planning and management.
Estate planning and management.
The Chapter summary is as follows:
CHAPTER ONE
Chapter one deals with the company profile and an overview of financial
planning.
CHAPTER TWO

vi
This Chapter Deals with the research methodology including types of
research,sample design,sampling methods etc and it also deals with the
objectives of study.
CHAPTER THREE
Chapter three deals with the analysis and findings of
questionnaire,different investment
avenues available and investment through financial planning.
CHAPTER FOUR
This chapter deals with the conclusion drawn from the study.

CHAPTER FIVE
This chapter deals with the suggestions and recommendations made after
study.
CHAPTER SIX
This chapter deals with the limitation of study.

vii
TABLE OF CONTENTS

Title page
Students Declaration
Certificate from Company
Certificate from the Guide
Acknowledgement
Executive summary

CHAPTER NO.
PAGE NO.

CHAPTER 1 - INTRODUCTION TO THE TOPIC

Company Profile
Financial planning : An overview

CHAPTER 2 - METHODOLOGY AND OBJECTIVES

OF STUDY

CHAPTER 3 ANALYSIS AND FINDINGS

Investment through financial
planning
Analysis of different investment
avenues
Analysis and Findings of questionaire

CHAPTER 4 - CONCLUSION

CHAPTER 5 - SUGGESTIONS

CHAPTER 6 - LIMITATIONS OF THE STUDY

BIBLIOGRAPHY

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 ANNEXURE(QUESTIONAIRE)

ix
 CHAPTER ONE
INTRODUCTION TO THE TOPIC

COMPANY
PROFILE(PENSIONINDIA.COM)
FINANCIAL PLANNING AN
OVERVIEW

x
 COMPANY PROFILE

PensionIndia.com(a unit of GetCertified Inc) believes that pension sector

reforms & growth is critical to Indias overall success storey. In order to
bring timely and insightful content to financial advisors and their clients
PensionIndia.com strives to be a one point resource for all your pension
related information. It features ongoing commentary on a variety of
financial planning subjects, including the latest developments around
taxes, planning for retirement and other wealth-related strategies for
comfortable retirement, and a wide range of investment and wealth
management information, retirement planning ideas thus allowing its
readers an updated & holistic view which can be used for their benefit.

PensionIndia.com is co-promoted by a team of skilled professionals in

finance and planning.
Pensionindia.com addresses the needs of financial advisors in many ways.
By using pensionindia.com, the advisors will get to the market quickly
with timely content, dynamic commentary and relevant strategies that can
help them in financial planning conversations with their clients.

Wealth management planning & especially retirement planning has never

been more challenging. Increasingly, clients look to their advisors for
what is called needs-based investing; in which advisors help them address
specific needs and goals -- everything from helping them address

xi
longevity, market, taxes and inflation risks to helping them generate
sufficient income in retirement. These are complex needs, and financial
advisors need the most advanced information and planning tools at their
disposal to help their clients achieve their goals.Pensionindia.com seek to
provide advisors and their clients with a single source for all of best
wealth planning resources and strategies available in the Indian context.

The Practice Management Center for advisors in pensionindia.com offers

a range of content-rich features, including frequently updated blog-like
posts on investment topics; timely " latest planning ideas" to help advisors
engage their clients in meaningful conversations which can lead to useful
solutions and business-building opportunities; and links to all existing
wealth management content, including a wide variety of investor
education literature, financial planning videos, client seminars and online
tools. It also covers the following topics in details :

Retirement/Income - Information on saving for retirement and managing

income in retirement, including investor education, worksheets and
calculators, client seminars and sales ideas and tools

Taxes - Client education articles and videos on a variety of tax-related

topics, including updates on changes to tax law

Insurance/Risk Management - Principles and strategies for safeguarding

wealth in volatile times including techniques for protecting assets from
potential creditors

Estate and Wealth Transfer - Estate planning articles and seminars

College Savings - Information about saving for college, including

analytical tools and calculators and client seminars

Investments - Content by Pensionindia team on investment issues,

including articles and presentations downloadable for use with clients

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Financial Planning Videos - Recent videos covered strategies to
construct a tax-efficient portfolio and the tax impact of various legislation.

Links to best Pension Funds, Mutual funds & Insurance schemes - Direct
links to the best performing funds in the market.

The most value that financial advisors can provide to their clients is
informed advice and solutions about how best to manage their wealth to
achieve their life goals. Advisors section in Pensionindia.com gives
advisors access to timely information, planning ideas and other content
they need to build their businesses and help their clients make informed
decisions.

Services and trainings that cater to the corporate employees :

1. Financial Planning Clinics

2. Financial Planning Services
3. Retirement Solutions
4. Tax Planning

FINANCIAL PLANNING

Financial planning is the process of meeting your life goals through the
proper management of your finances. Life goals can include buying a
home, saving for your child's education or planning for retirement. The
financial planning process consists of six steps that help you take a big
picture look at where you are financially. Using these six steps, you can
work out where you are now, what you may need in the future and what
you must do to reach your goals. The process involves gathering relevant
financial information, setting life goals, examining your current financial
status and coming up with a strategy or plan for how you can meet your
goals given your current situation and future plans. Personal financial
planning is broadly defined as a process of determining an individual's
financial goals, purposes in life and life's priorities, and after considering

xiii
his resources, risk profile and current lifestyle, to detail a balanced and
realistic plan to meet those goals. The individual's goals are used as
guideposts to map a course of action on 'what needs to be done' to reach
those goals. Alongside the data gathering exercise, the purpose of each
goal is determined to ensure that the goal is meaningful in the context of
the individual's situation. Through a process of careful analysis, these
goals are subjected to a reality check by considering the individual's
current and future resources available to achieve them. In the process, the
constraints and obstacles to these goals are noted. The information will be
used later to determine if there are sufficient resources available to get to
these goals, and what other things need to be considered in the process. If
the resources are insufficient or absent to meet any of the goals, the
particular goal will be adjusted to a more realistic level or will be replaced
with a new goal.

Planning often requires consideration of self-constraints in postponing

some enjoyment today for the sake of the future. To be effective, the plan
should consider the individual's current lifestyle so that the 'pain' in
postponing current pleasures is bearable over the term of the plan. In
times where current sacrifices are involved, the plan should help ensure
that the pursuit of the goal will continue. A plan should consider the
importance of each goal and should prioritize each goal. Many financial
plans fail because these practical points were not sufficiently considered.

BENEFITS
Financial planning provides direction and meaning to your financial
decisions. It allows you to understand how each financial decision you
make affects other areas of your finances. For example, buying a
particular investment product might help you pay off your mortgage faster
or it might delay your retirement significantly. By viewing each financial
decision as part of a whole, you can consider its short and long-term

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effects on your life goals. You can also adapt more easily to life changes
and feel more secure that your goals are on track.

SCOPE
The only thing permanent in life is change. Times change. People change.
So does life. You expect life to be much better tomorrow than it is today.
Tomorrow, you hope to fulfil all your dreams and aspirations. But what
happens if things take an untoward turn? Or, if there is an eventuality?
Perhaps it's time for you to change the way you plan your
investments.Financial planning is the process of solving financial
problems and achieving financial goals by developing and implementing a
personalized "game plan." In order to be effective this "plan" must take
into consideration an individuals overall picture. It must be:
coordinated
comprehensive
continuous

Financial planning is like all other phases of life; it involves choices like:

Spend now or save for later?

Pay off existing bills or increase retirement savings?
Focus savings dollars on short term or long term goals?

A true financial plan does not focus one aspect or product, but instead
seeks to take all areas of planning into consideration when making
financial decisions.

It Includes:

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 Cash Flow Management

This aspect of planning deals with the day to day allocation of

income; and its effective use in paying for current living expenses
and in accumulating assets which will be used in meeting financial
goals.

Tax Planning and Management

This area focuses on the understanding of and application of

federal and state income tax law, estate and inheritance taxes; and,
when possible, minimizing these taxes.

Risk Planning and Management

This area of planning deals with the risk of losing life, income, or
property. It includes the use of insurance products and strategies.

Investment Planning and Management

Almost everyone has accumulation goals for which investments

must be made and managed. These could include buying a home;
planning for college; or providing for retirement.

Retirement Planning and Management

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 By far the most common accumulation goal is the ability to
become financially independent. Retirement strategies encompass
the understanding of the Social Security system; employer-
sponsored retirement plans; and personal savings accumulation
plans.

Estate Planning and Management

The final phase of planning is for the transfer of assets to our heirs
with minimization of taxes and other costs.

FINANCIAL PLANNER

A financial planner is someone who uses the financial planning process to

help you figure out how to meet your life goals. Click here for more
information. The planner can take a big picture view of your financial
situation and make financial planning recommendations that are right for
you. The planner can look at all of your needs including budgeting and
saving, taxes, investments, insurance and retirement planning. Or, the
planner may work with you on a single financial issue but within the
context of your overall situation. This big picture approach to your
financial goals sets the planner apart from other financial advisers, who
may have been trained to focus on a particular area of your financial life.
Financial planners job function:A financial planner specializes in the
planning aspects of finance, in particular personal finance, as contrasted
with a stock broker who is only concerned with the actual investments, or
with a life insurance intermediary who advises on risk products

Financial planning is usually a six-step process, and involves considering

the client's situation from all relevant angles to produce integrated
solutions. The six-step financial planning process has been adopted by the
International Organization for Standardization (ISO). Financial planners
are also known by the title financial adviser in some countries, although
these two terms are technically not synonymous, and their roles have
some functional differences.Although there are many types of 'financial

xvii
planners,' the term is used largely to describe those who consider the
entire financial picture of a client and then provide a comprehensive
solution. To differentiate from the other types of financial planners, some
planners may be called 'comprehensive' financial planners.Other financial
planners may specialize in one or more areas, such as insurance planning
and retirement planning.Financial planning is a growing industry with
projected faster than average job growth through 2014.

OBJECTIVES

People enlist the help of a financial planner because of the complexity of

knowing how to perform the following:

Providing direction and meaning to financial decisions;

Allowing the person to understand how each financial decision
affects the other areas of finance; and

Allowing the person to adapt more easily to life changes in order

to feel more secure.

The Financial Planning Process

The financial planning process consists of the following six steps:

xviii
 Financial Planning Process

1. Determine the financial goals

2. Compilation of necessary data and

discussion of strategies
Step by 3. Setting up a personal analysis
step
4. Creation of a personal
financial plan

5. Implementation of the personal

financial plan

6. Periodic review of the personal

financial plan
Step by step

1.Establishing and defining the client-planner relationship.

The financial planner should clearly explain or document the services to

be provided to you and define both his and your responsibilities. The
planner should explain fully how he will be paid and by whom. You and
the planner should agree on how long the professional relationship should
last and on how decisions will be made.

2. Gathering client data, including goals.

The financial planner should ask for information about your financial
situation. You and the planner should mutually define your personal and

xix
financial goals, understand your time frame for results and discuss, if
relevant, how you feel about risk. The financial planner should gather all
the necessary documents before giving you the advice you need.

3. Analyzing and evaluating your financial status.

The financial planner should analyze your information to assess your

current situation and determine what you must do to meet your goals.
Depending on what services you have asked for, this could include
analyzing your assets, liabilities and cash flow, current insurance
coverage, investments or tax strategies.

4.Developing and presenting financial planning recommendations

and/or alternatives.
The financial planner should offer financial planning recommendations
that address your goals, based on the information you provide. The
planner should go over the recommendations with you to help you
understand them so that you can make informed decisions. The planner
should also listen to your concerns and revise the recommendations as
appropriate.

5. Implementing the financial planning recommendations.

You and the planner should agree on how the recommendations will be
carried out. The planner may carry out the recommendations or serve as
your coach, coordinating the whole process with you and other
professionals such as attorneys or stockbrokers.

6. Monitoring the financial planning recommendations.

You and the planner should agree on who will monitor your progress
towards your goals. If the planner is in charge of the process, she should
report to you periodically to review your situation and adjust the
recommendations, if needed, as your life changes.

INVESTMENT PLANNING

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Everyone needs to save for a rainy day. Once you have saved enough to
take care of emergencies, you should start thinking about investing and to
make your money grow. We can help you plan your investments so that
you can reap adequate benefits and achieve your financial goals.
Essentially, Investment Planning involves identifying your financial goals
throughout your life, and prioritising them. Investment Planning is
important because it helps you to derive the maximum benefit from your
investments Your success as an investor depends upon your ability to
choose the right investment options. This, in turn, depends on your
requirements, needs and goals. For most investors, however, the three
prime criteria of evaluating any investment option are liquidity, safety and
return. Investment Planning also helps you to decide upon the right
investment strategy. Besides your individual requirement, your investment
strategy would also depend upon your age, personal circumstances and
your risk appetite. These aspects are typically taken care of during
investment planning.

Investment Planning also helps you to strike a balance between risk and
returns. By prudent planning, it is possible to arrive at an optimal mix of
risk and returns, that suits your particular needs and requirements.

IMPORTANCE OF INVESTMENT PLANNING

Investment means putting your money to work to earn more money. Done
wisely, it can help you meet your financial goals like buying a new house,
paying for college education of your children, of your enjoying a
comfortable retirement, or whatever is important to you. You do not have
to be wealthy to be an investor. Investing even a small amount can
produce considerable rewards over the long-term, especially if you do it
regularly. But you need to decide about how much you want to invest and
where. To choose wisely, you need to know the investment options
thoroughly and their relative risk exposures. Investment planning is
necessary for every one who wishes to achieve any financial goal. You
have to plan your limited resources to avail the maximum benefit out of
them. You should plan your investments to fulfill major needs like:

xxi
 Creating wealth over the long term
Acquiring assets like a dream house or a dream car
Fulfilling your need for financial security

Thus, Investment Planning is nothing but a holistic approach to meet your

life's goals.

CHOOSING THE RIGHT INVESTMENT

The choice of the best investment options for you will depend on your
personal circumstances as well as general market conditions. For example,
a good investment for a long-term retirement plan may not be a good
investment for higher education expenses. In most cases, the right
investment is a balance of three things: Liquidity, Safety and Return.

Liquidity - how accessible is your money?

How easily an investment can be converted to cash, since part of your

invested money must be available to cover financial emergencies.

Safety - what is the risk involved?

The biggest risk is the risk of losing the money you have invested.
Another equally important risk is that your investments will not provide
enough growth or income to offset the impact of inflation, which could
lead to a gradual increase in the cost of living. There are additional risks
as well (like decline in economic growth). But the biggest risk of all is not
investing at all.

Return - what can you expect to get back on your investment?

Investments are made for the purpose of generating returns. Safe

investments often promise a specific, though limited return. Those that
involve more risk offer the opportunity to make - or lose - a lot of money.

xxii
To a large extent, the choice of the right investment option will also
depend upon your financial goals. For example, if you want to invest for
funding your vacation next year, don't choose an investment vehicle that
has a three-year lock-in. Similarly, if you want to invest for your
daughter's marriage after 10 years, don't invest in 1yr bonds for the next
10 years. Instead, choose an option that matches your investment horizon.

INVESTMENT STRATEGY

Investment Strategies
You can make your own investment picking approach or adopt one after
consulting financial experts or investment advisors. Whatever method you
use, keep in mind the importance of diversification, or variety in your
investment portfolio and the need for a strategy, or a plan, to guide your
choices.

Investment approaches

The options you choose to put your money in, reflect the investment
strategy you are using - whether you realize it or not. Most people adopt
the following approaches:-

Conservative
These investors take only limited risk by concentrating on secure, fixed-
income investments etc.

Moderate
Such Investors take moderate risk by investing in mutual funds, bonds,
select bluechip equity shares etc.

Aggressive
These are investors who take major risk on investments in order to have
high (above-average) returns like speculative or unpredictable equity
shares, etc. As a matter of fact, the investment approach of an investor is
directly linked to his or her ability to shoulder risk. The ability to take

xxiii
risks depends largely on personal circumstances and factors like age, past
experiences with investing, level of responsiblility, etc.

RISK VS RETURN
Risk and returns go hand in hand. Higher the risk, higher is the possibility
of earning a good return. Thus, it follows that all types of investment have
some form of risk attached to it. Theoretically, even 'safe' investments
(such as bank deposits) are not without some element of risk. Broadly,
here are the various types of risks that you might have to face as an
investor.

Credit Risk

The risk is that the issuer of the security will default, or not repay the
principal amount. This is valid for corporate bonds etc.

Liquidity Risk

If you invest in securities, stocks, bonds, you are risking their sellability.
In other words, your money gets stuck unnecessarily, creating an asset-
liability mismatch.

Market Risk

Financial markets are volatile in nature. Volatility means sudden swings in

value from high to low, or the reverse. The more volatile an investment is,
the more profit or loss you can make, since there can be a big spread
between what you paid and what you sell it for. But you also have to be
prepared for the price to drop by the same amount. Those who invest in
stocks and mutual funds typically run this risk.

Interest Rate Risk

Depending on the interest rate movement in the economy, the rates of

interest investment instruments may go up or come down, resulting in a

xxiv
subsequent reverse movement of their prices. Such a scenario of economic
instability might effect mutual funds etc.

The whole idea behind investment planning is to evaluate the risk

associated with various type of investments and take steps so as to balance
it with the desired return.

INVESTMENT PLANNING STEPS

Investment Planning is the key to successful investing. It is a scientific

process, which, if done in the right spirit, can help you achieve your
financial goals.
Here are the basic steps of Investment Planning

Step 1 : Identify your financial needs and goals

The starting point of a sound investment plan is to begin with a clear
understanding of you financial needs and goals. Typically, any financial
need or goal would translate into determining the tenure of your
investment (investment horizon). All investment needs and goals can
therefore be translated into short-term (less than 1 year), medium-term
(more than 1 year) and long-term (more than 5 years). Here is an example
of the financial goal of a typical household (a couple with two childrens).

Expected Cost (at

Financial Goals todays prices in Time Frame Investment Horizon
Rs)
Anils computer 0.5 Lakhs Next month Short-term

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Sunitas school
0.35 Lakhs 6 months Short-term
admission
Vacation 0.5 Lakhs 1-2 years Medium-term
Buying a second car 5 Lakhs 2-3 years Medium-term
Anils education 2 Lakhs 10-12 years Long-term
Sunitas education 2 Lakhs 12-15 years Long-term
Retirement 20 Lakhs 20-25 years Long-term

Step 2 : Understanding investment choices

There are three basic investment categories: Equity, Debt and Cash. Any
investment can be classified into one of these three categories, or asset
classes. The key to investment success lies in understanding how each
asset class performs over the various investment horizons, the choices
within each category and the risks involved in making investment
decisions in each of these choices.

Equity or Stocks are ownership shares investors buy in a corporation.

When you make equity investments, you become part-owner (to the extent
of your shareholding) of the company you have invested in. However,
there is no particular rate of return indicated while investing. The current
value of your holding is reflected in the price at which the stock/share is
traded in the stock markets. Hence, these constitute a relatively riskier
form of investment.

Debt instruments or Bonds are loans investors make to corporations or

the government. They promise a fixed return at the time of making the
investment. Also the promise of getting the money back is dependent on
who is making the promise. In case of the Government, the promise will
certainly get fulfilled, but if the issuer of debt is a company or an
institution, the quality of the issuer needs to be adjudged, to ascertain its
ability to keep the promise. Debt investments, therefore, provide you with
the promise that your principal will be returned along with the interest
payable thereon.

xxvi
Cash includes money in bank savings accounts and other liquid
investment options.

Asset Classes Instruments Risk

Savings deposits in a bank, Liquid Mutual
Cash Low
funds
GOI Relief Bonds, Public Provident Fund, Low to Medium, depending o
National Savings Certificate, Company the type of issuer. In case th
Debt
Fixed Deposits, Debt-based Mutual funds issuer is Govt, the risk of defaul
,Debentures/Bonds is negligible
Equity-based Mutual Funds Stocks/shares
Equity High
issued by various companies

Step 3 : Decide an appropriate mix of various investment choices

(Asset Allocation Plan)
Making an asset allocation plan is about determining the proportion of
investments in each of the three basic asset classes. Essentially this
depends upon your profile as an investor. Whatever stage of life you are
at, you would need to invest part of your money for security and liquidity.
A part of your investments should generate regular income and part of it
should contribute to growth and capital appreciation. The proportion
however, will vary based on individual goals, time horizons available to
meet those goals and one's risk profile (the tolerance reaction to any down
turn in the stock/debt markets). The key to investment success lies in
determining the appropriate mix of the above mentioned categories and
not just the individual investments that are done within each category.

INFLATION DEVIL

Inflation, the rate at which the general level of prices for goods and
services rises, can steadily erode the purchasing power of your income.
That is why you should invest a portion of your savings at a rate higher
than the inflation rate to recover the loss of purchasing power. This means
that over time a rupee will be able to buy a lesser amount of goods and
services. If the inflation rate is 5%, then Rs. 100 worth of goods will cost

xxvii
Rs. 105 after a year. The following table indicates how the value of Rs
1,00,000 will change over time at different levels of inflation

.
Inflation % p.a.
Years 2 3 4 4.5 5 6
5 90,573 86,261 82,193 80,245 78,353 74,726
10 82,035 74,409 67,556 64,393 61,391 55,839
15 74,301 64,186 55,526 51,672 48,102 41,727
20 67,297 55,368 45,639 41,464 37,689 31,180
25 60,953 47,761 37,512 33,273 29,530 23,300
30 55,207 41,199 30,832 26,700 23,138 17,411

Table indicating the value of Rs 1,00,000 at different levels of inflation

over time

xxviii
THE POWER OF COMPOUNDING

Regardless of where you choose to put your money - cash, stocks, bonds,
or a combination of these - the key to saving for the future is to make your
money work for you. This is done through the power of compounding.
Compounding investment earnings is what can make even small
investments become larger, given enough time. You are probably already
familiar with the principle of compounding. The money you put into a
bank account earns an interest. Then, you earn interest on the money you
originally put in, plus on the interest you have accumulated. As the size of
your account grows, you earn interest on a bigger and bigger pool of
money.The following table shows how much your money would grow
when you invest a fixed amount per month over a period of 10, 15, 20, 25,
and 30 years, assuming an interest rate of 10% p.a.

Amount (Rs)
Years 1000 2000 3000 4000 5000
5 78,082 156,165 234,247 312,330 390,412
10 206,552 413,104 619,656 826,208 1,032,760
15 417,924 835,849 1,253,773 1,671,697 2,089,621
20 765,697 1,531,394 2,297,091 3,062,788 3,828,485
25 1,337,890 2,675,781 4,013,671 5,351,561 6,689,452
30 2,279,325 4,558,651 6,837,976 9,117,301 11,396,627

How power of compounding makes your money grow, when you invest a
fixed amount every month Here's how much your money would grow if
you make an lump sum (one-time)investment and leave it untouched. The
interest rate has been assumed to be 10%.

Amount (Rs)
Years 100000 200000 300000 400000 500000
5 161,051 322,102 483,153 644,204 805,255
10 259,374 518,748 778,123 1,037,497 1,296,871
15 417,725 835,450 1,253,174 1,670,899 2,088,624
20 672,750 1,345,500 2,018,250 2,691,000 3,363,750
25 1,083,471 2,166,941 3,250,412 4,333,882 5,417,353
30 1,744,940 3,489,880 5,234,821 6,979,761 8,724,701

The real power of compounding comes with time. The earlier you start
saving, the more your money can work for you. To attain certain amount
of corpus within a set period of time, a pro-active investment style is
preferable. Thus, no matter how young you are, the sooner you begin
saving for the future, the better it is.

NEED FOR INSURANCE PLANNING

"Insurance is not for the person who passes away, it for those who
survive," goes a popular saying that explains the importance of Insurance
Planning. It is extremely important that every person, especially the
breadwinner, covers the risks to his life, so that his family's quality of life
does not undergo any drastic change in case of an unfortunate eventuality.
Insurance Planning is concerned with ensuring adequate coverage against
insurable risks. Calculating the right level of risk cover is a specialised
activity, requiring considerable expertise. Proper Insurance Planning can
help you look at the possibility of getting a wider coverage for the same
amount of premium or the same level of coverage for the same amount of
premium or the same level of coverage for a reduced premium. Hence, the
need for proper insurance planning.

Insurance, simply put, is the cover for the risks that we run during our
lives. Insurance enables us to live our lives to the fullest, without worrying
about the financial impact of events that could hamper it. In other words,
insurance protects us from the contingencies that could affect us. So what
are the risks that we run? To name a few - the risk on our lives that is, the
worries of replacement of the incomes that we contribute to the running of
the household), the risks of medical contingencies (since they have the
capability of depleting our wealth considerably) and risks to assets (since
the replacement of these can have tremendous financial implications). If
we can imagine a situation where our goals are disturbed by acts beyond

2
our control, we can realize the relevance of insurance in our lives.
Insurance Planning takes into account the risks that surround you and then
provides an adequate coverage against those risks. There is no risk not
worth insuring yourself against, and insurance should first and foremost
be looked as a measure to guard against risks - the risk of your dreams
going awry due to events beyond your control.

RETIREMENT PLANNING:

Some like it. Some dont. But retirement is a reality for every working
person. Most young people today think of retirement as a distant reality.
However, it is important to plan for your post-retirement life if you wish
to retain your financial independence and maintain a comfortable standard
of living even when you are no longer earning. This is extremely
important, because, unlike developed nations, India does not have a social
security net. Retirement Planning acquires added importance because of
the fact that though longevity has increased, the number of working years
havent.

WHY PLAN FOR RETIREMENT ?

In simple words, retirement planning means making sure you will have
enough money to live on after retiring from work. Retirement should be
the best period of your life, when you can literally sit back and relax or
enjoy your life by reaping benefits of what you earn in so many years of
hard work. But it is easier said than done. To achieve a hassle-free retired
life, you need to make prudent investment decisions during your working
life, thus putting your hard-earned money to work for you in future.

Why is it important?

India, unlike other countries, does not have state-sponsored social security
for the retired people. And after several decades when pensions provided
many people with a large chunk of money they needed to live comfortably

3
after they retired, things are changing. While you may be entitled to a
pension, or income during retirement, in the new economic era, you are
increasingly likely to be responsible for providing for your own needs.
Although the compulsory savings in provident fund through both
employee and employer contributions should offer some cushion, it may
not be enough to support you throughout your retirement. That is why
retirement planning is extreme ly important for every one. There are many
reasons for the working individuals to secure their future emergence of
nuclear families and its attendant insecurity, increasing uncertainties in
personal and professional life, the growing trends of seeking early
retirement and rising health risks are among few important risks. Besides
falling interest rates and the sustained increase in the cost of living make it
a compelling case for individuals to plan their finances to fund their
retired life. Planning for retirement is as important as planning your career
and marriage. Life takes its own course and from the poorest to the
wealthiest, no one gets spared. "Everyone grows older". We get older
every day, without realising. However, we assume that old age is never
going to touch us. The future depends to a great extent on the choices you
make today. Right decisions with the help of proper planning, taken at the
right time will assure smile and success at the time of retirement.If you are
in young, retirement may be the last thing on your mind. But if you think
you have a long way to go for to plan for retirement, think again. It is
never too early to prepare for retirement, especially if you want to
maintain the same standard of living that you would have got accustomed
to by then.

Let us take a hypothetical example. Let's assume that you are a 35 year
old, earning Rs.3 lakh per annum. Your salary grows at 5% per annum and
you plan to retire after 25 years. Under these circumstances, assuming
your post-retirement requirement would be 60% of your last annual
income (Rs.10 lakh approx), you would need about Rs.6 lakh per annum
after retirement. To achieve this, you need a retirement corpus of Rs.75
lakh assuming you earn a return of 5% per annum over a period of 20

4
years. To meet this goal, you would have to invest more than Rs.9,000 per
month at 7% per annum for the next 25 years. Inflation and tax
implications have not been considered for simplicity.

Steps for making Retirement a Success.

People have different plans for retired life. For example you may think of
retirement as a time to relax, to laze around, to spend more time with
family, travel or write a masterpiece. Attaining financial independence
after retirement will not be just a dream if the following steps are followed
with steady discipline, perseverance and if smart investment strategies.

Start saving early

Nobody takes retirement seriously. But the fact is that even a small sum of
money saved regularly and invested regularly makes a big amount which
will come in very handy after retirement. One should not believe that after
retirement, one can place all savings into income generating investment
and spend rest of life in happiness. If you don't plan early, you cound end
up eroding your principal savings in order to have to supplement your
monthly income. The key to a financially independent future is "sooner
the better". Cautious investors believe in this principal and plan their
retirement accordingly. They not only save, they save early and regularly. .
The catch is to make the power of compounding work one's benefit.

Retirement should be your top priority

Retirement should be kept as a top priority because if one does not keep it
at the top one might end up depending on one's children, which probably
no one would relish.

Create a Retirement Plan

Develop a plan for saving based on your requirements at the time of

retirement. The goals you keep for saving depend on your lifestyle but you

5
will need at least about 66% of your pre-retirement income to maintain
your standard of living when you stop working.

Understand your pension plan

If your employer offers on pension plan, understand carefully your benefit

level, financial stability of plan and the vesting period. Use retirement
plans even if you already have enough money. With retirement plans your
money grows in a tax efficient manner and compounding interest over
time makes it one of the best investment options.

Balance your risk tolerance and your investment strategy

Evaluate your risk profile and then balance your investment strategy to
invest in various avenues to get the most out of your retirement money
keeping your risk profile unhampered.

Diversify your investments & allocate your assets carefully.

Depending on your work profile divide your savings into equity , bonds,
Mutual Funds, and other investment avenues. Don't invest too heavily in
one sector or one company, since the risk associated with putting all your
eggs in one basket is indeed very high.

Save and Invest Regularly

Saving and investing regularly makes a big difference at the time of

retirement. Investing at regular intervals builds your retirement fund over
time and helps you to minimize risk and gives a tension free retirement-a
time to pursue your hobbies, fulfill your dreams and passions.

What is PFRDA ?
Just like you have IRDA which is a regulator for Insurance and SEBI for
capital market PFRDA (Pension Fund Regulatory and Development
Authority) is a regulatory body for pension sector in India.

6
PFRDA was established on 23rd August 2002 by the Government of the
India. The PFRDA Bill, 2005 is awaiting approval of Parliament. Pending
passage of the Bill, the Government has, through an executive order dated
10th October 2003, mandated PFRDA to act as a regulator for the pension
sector. This mandate of PFRDA is for development and regulation of
pension sector in India. As a first step towards ushering reforms in
pension sector, Government of India moved from a defined benefit
pension to a defined contribution based pension system by making it
mandatory for its new recruits (except armed forces) with effect from 1st
January, 2004. Since 1st April, 2008, the pension contributions of Central
Government employees covered by the New Pension System (NPS) are
being invested by professional Pension Fund Managers in line with
investment guidelines of Government applicable to non-Government
Provident Funds.

Twenty two state & UT Governments have also notified the New Pension
System for their new employees. Of these, six states have already signed
agreements with the intermediaries of the NPS architecture appointed by
PFRDA for carrying forward the implementation of the New Pension
System. The other States are in the process of finalization of
documentation.

PFRDA launched the New Pension Scheme ( NPS ) on1st April 2009.
PFRDA has extended the NPS architecture to all private citizens. The NPS
architecture is transparent and is web-enabled. It allows a subscriber to
monitor his/her investments and returns under NPS, the choice of Pension
Fund Manager and the investment option also rests with the subscriber.
The design allows the subscriber to switch his/her investment options as
well as pension funds. The facility for seamless portability and switch
between pension fund managers (PFMs) is designed to enable subscribers
to maintain a single pension account throughout their saving period.

7
PFRDA has set up a Trust under the Indian Trusts Act, 1882 to oversee the
functions of the PFMs. The NPS Trust is composed of members
representing diverse fields and brings wide range of talent to the
regulatory framework.

The New Pension System has been designed to enable the subscriber to
make optimum decisions regarding his/her future and provide for his/her
old-age through systemic savings from the day he/she starts his/her
employment. It seeks to inculcate the habit of saving for retirement
amongst the citizens.

PFRDA also works towards financial education and awareness as a part of

its strategy to protect the interest of all pensioners.
What is the right time to plan for retirement?
Many young people I meet ask me what is the right time to plan for
retirement? I have just started my career so why worry about retirement
now? Many people wake up in their middle ages & then start thinking
about retirement when they realize that getting support from kids in
todays time is not feasible. Taking a decision to start retirement planning
is a serious question that every individual must address now, not later.

Following are the myths people still hold about not planning for
retirement early:
I am too young to think of retirement?
Young people in their 20s & early 30s think that retirement is far
too away and they will plan for it at an appropriate time later, but
the fact is that in the melee of fast life with unlimited choices of
needs & wants the word retirement planning starts to haunt only in
their late 40s or 50s when they have very limited options. For all
those young people I would say if they have heard of the phrase
little drops make an ocean. Retirement Planning is just like that,
the chances of creating a more comfortable ocean of wealth are

8
 much higher if you start accumulating the drops of money right
now.

My children will take care of me?

To all those who still think on the above lines I must ask them to
visit the old age homes in their respective cities. You will find
there some of very successful, well traveled people whose children
are all financially well settled either in India or abroad. Recently I
happen to cross the Lodhi Estate crossing in New Delhi and found
an old lady knocking on my car doors & begging. With her looks I
could well make out that she was not the usual beggar we find on
streets as she had an air & feel of a dignified & educated lady. I
parked my car after crossing the square and came back to that lady
who seemed to be somewhat of unsound mind. When I enquired
from the other usual beggars around, they said that she has been
around only for last 2 months and many times recounts her
glorious past and how she was abandoned by her son who seemed
to be settled in AMRICA. This is a fact of life and the parents of
today must recognize the changing moral values and aspirations of
their children where they may find their parents as a liability
which they do not want to carry any more.

I have a secure job or business & enough properties, stocks &

bank balance.

Think again. In todays volatile times, rapid changes in technology

and fast changing world what is relevant today might not be
relevant tomorrow. In the past the difference between past &
present change used to be 25/50 years but in recent times that time
difference has shrunk to 5/10 years i.e what is relevant now in your
business or profession might not be relevant 5 years later. The

9
 theory of too big to fail in corporate world has changed nothing
is too big to fail quite recently. Leave alone the big companies
even the countries, as in the case of Portugal & Ireland, are liable
to fail. This leaves us to an important question. Are my assets
enough to cover for expected changes plus the inflation (loss in
value of money over a period)? During my 17 years of corporate
experience, I have seen exporters loosing their pledged properties,
wealthy brokers committing suicide and once top corporate Vice-
Presidents, now driving cabs in down town New York. Your assets
too are all marked to market today be it properties or stocks. Look
what happened to the prices of properties in US in the recent sub-
prime crises? In todays time one never knows when & where the
next bubble is getting created & when it will burst.

NPS ( New Pension Scheme ) Vs EPF ( Employee Provident Fund )

NPS & EPF were both conceptualized as tool for retirement.

However, after the introduction of the NPS, does continuing with EPFO
(Employee Provident Fund Office) by private sector employees makes
sense?

10
There is one major difference between NPS and EPF.NPS is purely based
on defined contribution but EPF can be considered as a Hybrid plan
having the benefits of both defined benefit and defined contribution.
In the defined benefit schemes, the benefits are know and defined. For
example you know that your EPF will give you 9.50 % rate of interest for
FY 2010 2011.Also if you continue working in your private company
from say 20 years you will know your pension based on your personable
service. Like defined contribution, EPF is portable and can be carried
from employer to employer as it is managed by EPFO ( A government
Organization ).
In defined contribution schemes like NPS, the final benefit is not known.
Here, your contributions are grown by a mutual fund where the fund
manager has also the option to invest in stock markets and corporate
bonds.
So, in NPS, although there is risk, the upside can be very rewarding as
stock market returns outperform any other asset class in the long term.
In contrast the EPFO does not allow investment in stocks. Hence, the risk
is minimal but the upside is also limited to the rate announced by the
government from time to time.

Swalamban Scheme

To encourage people from the unorganized sector to voluntarily save for

their retirement and to lower the cost of operations of the New Pension
System (NPS) for such subscribers, the Central Government had
announced, in the Budget 2010-11, a new initiative called
Swavalamban, to be administered by Pension Fund Regulatory and
Development Authority (PFRDA). The Finance Minister formally
launched the Swavalamban Scheme on 26.09.2010 at Jangipur (West
Bengal).

What is the amount of contribution ?

11
In this scheme the Central Government shall contribute Rs. 1000 per
annum to such subscribers. This contribution by the Central Government
shall be available for the current financial year and three years thereafter.
Who can Join ?
As per the Government guidelines for Swavalamban, any citizen who is
not part of any statutory pension scheme of the Government and
contributes between Rs. 1000 and Rs. 12000/- per annum, could join the
Swavalamban Scheme.
Who would collect the contributions?
The contributions of the subscribers under Swavalamban would be
collected by agencies, such as, Government agencies or NGOs, in flexible
installments on monthly or quarterly basis.
How do I benefit from it ?
The contributions of subscribers would be invested in the financial
instruments and the returns and the contributions would be used to build
the pension corpus of the subscribers. The subscriber could be eligible to
get pension from a life insurance company at age 60 ( now changed to 50
in budget 2011 ) by using 40% of the pension corpus. However, if the
amount of pension corpus is not sufficient to get a minimum amount of
pension of Rs. 1000 per month, then the percentage of pension corpus
would be increased so that the pension amount becomes Rs. 1,000 per
month, failing which the entire pension corpus would be used to get
pension.

What are the changes in Budget 2011-12 regarding this scheme?

In the present budget for Swavalamban scheme the Finance minister has
proposed a relaxation in exit norms from the earlier 60 years to 50 years
or a minimum tenure of 20 years.
Also, all subscribers of Swavalamban who enroll in 2011-12 will get an
additional benefit with the government extending its contribution from
three to five years.
Why my agent or advisor never told me about this beautiful scheme?
Thats because your agent or advisor does not earn any commission from
selling it. They are interested in selling something where they have some

12
self interest. These are superb low cost schemes designed to provide you a
comfortable retirement and those eligible should grab it without blinking.

TAX PLANNING:

Proper tax planning is a basic duty of every person which should be

carried out religiously. Basically, there are three steps in tax planning
exercise. These three steps in tax planning are: Calculate your taxable
income under all heads ie, Income from Salary, House Property, Business
& Profession, Capital Gains and Income from Other Sources.

Calculate tax payable on gross taxable income for whole financial year
(i.e.,From 1st April to 31st March) using a simple tax rate table, given on
next page. After you have calculated the amount of your tax liability. You
have two options to choose from:

1. Pay your tax (No tax planning required)

2. Minimise your tax through prudent tax planning.

Most people rightly choose Option 'B'. Here you have to compare the
advantages of several tax saving schemes and depending upon your age,
social liabilities, tax slabs and personal preferences, decide upon a right
mix of investments, which shall reduce your tax liability to zero or the
minimum possible.Every citizen has a fundamental right to avail all the
tax incentives provided by the Government. Therefore, through prudent
tax planning not only income-tax liability is reduced but also a better
future is ensured due to compulsory savings in highly safe Government
schemes. We sincerely advise all our readers and clients to plan their
investments in such a way, that the post-tax yield is the highest possible
keeping in view the basic parameters of safety and liquidity

TAX SAVING SCHEME:

13
After assessing your tax liability, the next step is tax planning. It involves
selecting the right tax saving instruments and making investments
accordingly.

Deductions from Taxable Income:

Deduction under section 80C

Under this section, a deduction of up to Rs. 1,00,000 is allowed from

Taxable Income in respect of investments made in some specified
schemes. The specified schemes are the same which were there in section
88 but without any sectoral caps (except in PPF).

Specified Investment Schemes u/s 80C

Life Insurance Premiums

Contributions to Employees Provident Fund/GPF
Public Provident Fund (maximum Rs 70,000 in a year)
NSC
Unit Linked Insurance Plan (ULIP)
Repayment of Housing Loan (Principal)
Equity Linked Savings Scheme (ELSS)
Tuition Fees including admission fees or college fees paid for Full-
time education of any two children of the assessee (Any
Development fees or donation or payment of similar nature shall
not be eligible for deduction).
Infrastructure Bonds issued by Institutions/ Banks such as IDBI,
ICICI, REC, and NHAI.

Interest accrued in respect of NSC VIII issue.

Notes:

1. There are no sectoral caps (except in PPF) on investment in the

new section and the assessee is free to invest Rs. 1,00,000 in any
one or more of the specified instruments.

14
 2. Amount invested in these instruments would be allowed as
deduction irrespective of the fact whether (or not) such investment
is made out of income chargeable to tax.
3. Section 80C deduction is allowed irrespective of assessee's income
level. Even persons with taxable income above Rs. 10,00,000 can
avail benefit of section 80C.

Section 80 CCE

Aggregate deduction u/s 80 C, u/s 80 CCC and 80 CCD can not exceed
Rs. 1,00,000.

Deduction under section 80D.

Under This section, a deduction up to Rs 15,000 (Rs 20,000 in case of

senior citizens) is allowed in respect of premium paid by cheque towards
health insurance policy, like "Mediclaim". Such premium can be paid
towards health insurance of spouse, dependent parents as well as
dependent children.

Deduction under section 24(b)

Under this section, Interest on borrowed capital for the purpose of house
purchase or construction is deductible from taxable income up to Rs.
1,50,000 with some conditions to be fulfilled

CASH FLOW PLANNING:

In simple terms, cash flow refers to the inflow and outflow of money. It is
a record of your income and expenses. Though this sounds simple, very
few people actually take the time out to find out what comes in and what
goes out of their hands each month. Cash flow planning refers to the
process of identifying the major expenditures in future (both short-term
and long-term) and making planned investments so that the required
amount is accumulated within the required time frame.Cash flow planning
is the first thing that should be done prior to starting an investment

15
exercise, because only then will you be in a position to know how your
finances look like, and what is it that you can invest without causing a
strain on yourself. It will also enable you to understand if a particular
investment matches with your flow requirement.So does it involve
looking at future cash flows only? Not really. You should always do a cash
flow for yourself as on date, and you will realize that you could have a
potential savings amount within each month of your working life. This is
the amount that you should look at saving for meeting your financial
goals. The best way of doing this is to have a personal budget.

CASH FLOW BASICS:

The idea behind cash flow planning is to match expenses on life goals
with the available income. Cash flow planning begins with identifying the
sources and the amount of income and expenditure.'Income' includes
maturities of investments, income from other sources, dividends, etc.
'Expenses' include loan repayments, and all other outflows etc.

The next crucial step is to list out the life goals and assigning a time frame
for achieving
them. For example, your list could look like this:

Going abroad on a vacation next year

Buying a car in 2 years
Buying your child a computer next year

The next step is to prioritize these goals. As you will notice, some of these
goals (like buying your child a computer, which is important for his or her
education; or a wedding in the family) are high priority, while others (such
as going abroad on a vacation) could be assigned a relatively lower
priority. High priority goals are those where you do not have the liberty of
compromising either on the time frame or on the amount. Low priority
goals, on the other hand, can be tweaked around a bit. Finally, take care to
ensure that you have a contingency fund to tackle an emergency. Ideally,
the size of your contingency fund should be two-three times your monthly

16
expenditure, if you are a working person. If you are a retired person, the
amount should be three to five times. Thereafter, your financial planner
can help you work out the right investment strategy by using the
principles of Investment Planning. Essentially, this involves calculating
the amount of investment required to realise the goal, taking inflation into
account.

WAY TO MAKE YOUR PERSONAL BUDGET :

The first thing you will need to do is to collect all your bills, receipts and
other documents which will help you monitor your spending for the
month. A good idea is to jot down all your expenses in a notebook.
Include both fixed and variable expenses in your list.

Fixed expenses are those that stay the same every month (at least for a
relatively long period). These are expenses that have been committed for a
long term. For example, rent, school fees of your children, wages paid out
to domestic helps, etc are all fixed expenses.

Variable expenses, on the other hand, are those that change from month
to month. Expenses on food, clothing, electricity and phone bills,
entertainment, etc. could be clubbed under this head. You have a relatively
higher control over some of these.

If you have just started the budgeting exercise, it may be difficult to keep
all records. Do not worry, and do your best to keep records. Start keeping
track of as many expenses as you can. The more accurate and complete
this exercise is, the easier and more effective will your cash flow planning
be.

Steps to Creating an Effective Personal Budget

Make a list of all of your monthly income. If you have have

received an annual bonus, divide this number by 12. Do the same
to all other lump sum incomes of an annual nature. It is important
to list all sources.

17
 Next, make a list of all your monthly expenses. If an expense
occurs less frequently, convert it to the monthly format. Be sure to
include all expenses as housing, food, transportation, utilities,
entertainment, etc. It is wise to track your spending for a full
month during this stage.
Now you can see for yourself if your income covers all of your
current expenses. If the answer is no, then you need to cut down
on your expenses.
Depending on the amount of the shortfall, you may choose to
reduce some of your variable expense (such as spending money on
movies or junk food!) or increase your earnings. For example, you
could take up a part-time job after your regular work hours, or give
tuitions.
If your income is in excess of your expenses, consider investing
the difference instead of
spending it.

Importance of cash flow planning

Cash flow plans are commonly used by business houses. Without a viable
cash flow plan, a company could easily spend more than its revenue,
putting it in peril. Unfortunately, most of us do not realise that a cash flow
plan is as important for people like us as well. The principles that apply to
corporate finance and to our personal lives are largely the same. There has
never been a bigger need than today for families and individuals to work
out cash flow plans. Without proper cash flow planning one could easily
get caught in the debt trap. Of course, it goes without saying that creating
a plan is not enough. One also needs to implement the plan, besides
bringing about a change in the spending habits. Cash flow plan brings you
face-to-face with what you should ideally be saving, and investing in a
systematic and regular manner, and what would it mean to you to
withdraw from your portfolio after a couple of years. It brings down in
numbers what your financial future has in store for you, and gives a

18
crystal clear view (as much as is possible with inflation and the interest
rate scenario).

Childrens future planning

Like every parent, you too must be overjoyed to watch your child grow.
All parents want to give the best possible upbringing to their children.
This includes good education and security, in case of any eventuality.
Soon, your little bundle of joy will grow up, and it will be time to provide
for his or her higher education and wedding. The purpose of Children's
Future Planning is to create a corpus for foreseeable expenditures such as
those on higher education and wedding, and to provide for an adequate
security cover during their growing years. Children's Future Planning
acquires added importance because children's education and wedding are
high priority life goals, which can neither be postponed nor can there be a
compromise on the amount. Good education has always been the passport
to a secure future. Today, career opportunities have grown manifold, and
there are many professional course that your child can aspire for.
However, costs of higher education have also increased exponentially.
Like most parents, you might be saving regularly to ensure a safe
tomorrow for your child. However, savings alone is no longer enough. For
ensuring adequate funding of your child's education, you as a parent, need
to do two things:

1.Invest appropriate amount systematically and at regular intervals

2. Provide for a financial security blanket to cover any eventuality

It is never too early to start saving and investing for your child's future.
Especially in today's context. For example, the cost of a professional
degree today is approximately Rs 2.5 lakhs. If your child is one-year-old
today, after 17 years when he/she goes to college, you may require a sum
of Rs 6.3 lakhs, assuming an annual rate of inflation of 6%.There are
many products which your Financial Planner can use to achieve the above
objectives. For example, he could suggest a Children's Future Plan offered

19
by any good insurance company, to build a corpus for your child's higher
education, and provide for a security cover in the event of the parent's
unfortunate demise. Children's plans are also available under unit-linked
option. Being unit-linked, they offer access to investments in all kinds of
asset classes - equity, debt and cash.

How To Make Financial Planning Work For You

You are the focus of the financial planning process. As such, the results
you get from working with a financial planner are as much your
responsibility as they are those of the planner. To achieve the best results
from your financial planning engagement, you will need to be prepared to
avoid some of the common mistakes shown above by considering the
following advice:

Set measurable financial goals. Set specific targets of what you

want to achieve and when you want to achieve results. For
example, instead of saying you want to be comfortable when you
retire or that you want your children to attend good schools, you
need to quantify what comfortable and good mean so that you'll
know when you've reached your goals.

Understand the effect of each financial decision. Each financial

decision you make can affect several other areas of your life. For
example, an investment decision may have tax consequences that
are harmful to your estate plans. Or a decision about your child's
education may affect when and how you meet your retirement
goals. Remember that all of your financial decisions are
interrelated.

Re-evaluate your financial situation periodically. Financial

planning is a dynamic process. Your financial goals may change
over the years due to changes in your lifestyle or circumstances,
such as an inheritance, marriage, birth, house purchase or change
of job status. Revisit and revise your financial plan as time goes by

20
 to reflect these changes so that you stay on track with your long-
term goals.

Start planning as soon as you can. Don't delay your financial

planning. People who save or invest small amounts of money
early, and often, tend to do better than those who wait until later in
life. Similarly, by developing good financial planning habits such
as saving, budgeting, investing and regularly reviewing your
finances early in life, you will be better prepared to meet life
changes and handle emergencies.

Be realistic in your expectations. Financial planning is a

common sense approach to managing your finances to reach your
life goals. It cannot change your situation overnight; it is a lifelong
process. Remember that events beyond your control such as
inflation or changes in the stock market or interest rates will affect
your financial planning results.

Realize that you are in charge. If you're working with a financial

planner, be sure you understand the financial planning process and
what the planner should be doing. Provide the planner with all of
the relevant information on your financial situation. Ask questions
about the recommendations offered to you and play an active role
in decision-making.

Common Mistakes Consumers Make When Approaching Financial

Planning

1. Don't set measurable financial goals.

2. Make a financial decision without understanding its effect on other
financial issues.
3. Confuse financial planning with investing.
4. Neglect to re-evaluate their financial plan periodically.
5. Think that financial planning is only for the wealthy.
6. Think that financial planning is for when they get older.

21
7. Think that financial planning is the same as retirement planning.
8. Wait until a money crisis to begin financial planning.
9. Expect unrealistic returns on investments.
10. Think that using a financial planner means losing control.
11. Believe that financial planning is primarily tax planning.

22
CHAPTER TWO

RESEARCH METHODOLOGY
 RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the research problem. It may be

understood as a science of studying how research is done scientifically. So, the research
methodology does not only cover the research methods but also considers the logic
behind the method used in the context of the research study.

TYPES OF RESEARCH

Exploratory Research

'The objective of exploratory research is to gather preliminary information that will help
define problems and suggest hypotheses.

Descriptive Research

'The objective of descriptive research is to describe things, such as the market potential for a
product or the demographics and attitudes of consumers who buy the product. '

Causal Research

'The objective of causal Research is to test hypotheses about cause-and-effect relationships.

qunantitative research

The emphasis of Quantitative research is on collecting and analyzing numerical data; it

concentrates on measuring the scale, range, frequency, etc. of phenomena.

This type of research, although harder to design initially, is usually high detailed and
structured and results can be easily collated and presented statistically.

Exploratory research

Exploratory Research is undertaken when few or no previous studies exist. The aim is to look
for patterns, hypothesis or ideas that can be tested and will form the basis of further research.
Exploratory research provides insights into and comprehension of an issue or situation. It
should draw definitive conclusions only with extreme caution. Exploratory research is a type
of research conducted because a problem has not been clearly defined. Exploratory research
helps determine the best research design, data collection method and selection of subjects.
Given its fundamental nature, exploratory research often concludes that a perceived problem
does not actually exist.

Exploratory research often relies on secondary research such as reviewing available literature
and/or data, or qualitative approaches such as informal discussions with consumers,
employees, management or competitors, and more formal approaches through in-depth
interviews, focus groups, projective methods, case studies or pilot studies.
The results of exploratory research are not usually useful for decision-making by themselves,
but they can provide significant insight into a given situation. Although the results of
qualitative research can give some indication as to the "why", "how" and "when" something
occurs, it cannot tell us "how often" or "how many."

RESEARCH DESIGN OR TYPE OF RESEARCH DONE?

It is an exploratory research design, as the aim is to gain insight to the distribution channels
being preferred by the customers to buy an insurance policy.
Research design is important primarily because of the increased complexity in the market as
well as marketing approaches available to the researchers. In fact, it is the key to the evolution
of successful marketing strategies and programmers. It is an important tool to study buyers
behavior, consumption pattern, brand loyalty, and focus market changes. A research design
specifies the methods and procedures for conducting a particular study.
According to Kerlinger, Research Design is a plan, conceptual structure, and strategy of
investigation conceived as to obtain answers to research questions and to control variance.

DATA SOURCE
To determine the appropriate data for research mainly two kinds of data was collected namely
primary & secondary data as explained below:
Primary data
Primary data are those, which were collected afresh & for the first time and thus happen to be
original in character. However, there are many methods of collecting the primary data; all
have not been used for the purpose of this project. The ones that have been used are:
Questionnaire

Informal Interviews

Observation

Secondary data
Secondary data is collected from previous researches and literature to fill in the respective
project. The secondary data was collected through:
Text Books

Articles

Journals

Website

Statistical tools used

The main statistical tools used for the collection and analyses of data in this project are:
Questionnaire

Pie Charts and bar chart

Questionnaire
This is the most popular tool for the data collection. A questionnaire contains question that the
researcher wishes to ask his respondents which is always guided by the objective of the
survey.
Pie chart
This is very useful diagram to represent data, which are divided into a number of categories.
This diagram consists of a circle of divided into a number of sectors, which are proportional
to the values they represent. The total value is represented by the full create. The diagram bar
chart can make comparison among the various components or between a part and a whole of
data.
Bar chart
This is another way of representing data graphically. As the name implies, it consist of a
number of whispered bar, which originate from a common base line and are equal widths. The
lengths of the bards are proportional to the value they represent.

QUESTIONNAIRE DESIGN/ FORMULATION

The questionnaire has 12 closed ended Questions and 1 open ended question.

SAMPLE DESIGN
Sample Element/ Sample Unit General public
Sample size - 100
Extent - Delhi/NCR
Time Frame - 40 days

Sampling Technique
For this survey Convenience Sampling technique has been used. Sample of 50(customer)
people was selected around the area and interviewed according to the questionnaire.
In the survey it has been tried to find out the thinking of the customers towards insurance,
purchasing insurance for their safety purchases. We tried to find out how much the thinking of
the Indian society has changed, have they accepted Insurance industry and to what extent,
how many other distribution channels they are preferring, have the people changed with the
change in time.

OBJECTIVE OF THE STUDY

1) To study the sensitivity of the typical Indian while investing his savings.
2) To study how a financial plan can help the individual to negotiate the twists and turns
of the life. Thus highlighting the importance of the right investment strategy based on
ones financial goal.
3) To gain an insight into different investment avenues.
4) To describe the fact that the true financial plan does not focus one aspect or product,
but instead it seeks to take all areas of planning into consideration when making a
financial decisions. That is it includes cash flow management, tax planning and
 management, risk planning and management, investment planning and management,
retirement planning and management, and estate planning and management.
5) To gauge the consumer sentiment on the various services provided by their financial
planner.

For the purpose of this study it was absolutely imperative to find out what the consumers
want from their financial planners. It was also necessary to find out the consumers profile
i.e his monthly income, occupation and also the current financial planner with whom
he/she is working. For this purpose a detailed questionnaire was circulated. The total field
work was done for 40 days in which a total sample size of 100 investors was covered.
Later the analysis was done on the basis of responses obtained.
 CHAPTER THREE
FINDINGS AND ANALYSIS
Investment through Financial Planning
Analysing Different Investment Avenues in India
Analysis and Findings of Questionaire
 INVESTMENT THROUGH FINANCIAL PLANNING
Section 80C: Rooting for financial planning

The annual tax-planning exercise for most investors tends to be divorced from their financial
planning process. As a result factors like risk appetite, investment objective and tenure of
investment are often overlooked when tax-planning investments are made. While apathy or
lack of awareness on the investors' part could be partly 'credited' for this, the restrictive nature
of Section 88 of the Income Tax Act should also shoulder the blame.

Section 88

Investors are required to make investments in stipulated tax-saving instruments for claiming
tax rebates under the given section. the investor's income level is the key in determining the
rebate he was entitled to; a higher income level translated into lower rebates. Investments
eligible for the purpose of claiming tax benefits included Public Provident Fund (PPF),
National Savings Certificate (NSC) and tax-saving funds among others. The upper limit (in
monetary terms) for the purpose of tax-saving investments was pegged at Rs 100,000.
However the hitch was that 'sectoral caps' existed on the various investment avenues. For
example investments in tax-saving funds (also referred to as ELSS) of upto Rs 10,000 were
eligible for claiming tax benefits. Similarly investments in instruments like PPF, NSC, tax-
saving funds and avenues like insurance premium, repayment of home loan (principal
component of the EMI only) among others accounted only for a Rs 70,000 benefit. The
balance Rs 30,000 (Rs 100,000 less Rs 70,000) was reserved for infrastructure bond
investments. Effectively, the investor had little choice in selecting the tax-saving investments.
Instead it was Section 88 which determined how each individual would make his investments.
An investor with a high risk appetite had to choose the same investment avenues as a low risk
investor because of Section 88's restrictive nature.

Enter Section 80C

Section 88 was scrapped in Finance Bill 2005, instead Section 80C was introduced. All
avenues which were eligible for tax benefits under Section 88 were brought under the Section
80C fold. However instead of offering tax rebates, investments (upto Rs 100,000) under
Section 80C qualified for deduction from gross total income. Hence a new system of claiming
tax benefits was introduced; furthermore a new tax structure was introduced as well.
PERSONAL TAX RATES
For individuals, HUF, Association of Persons (AOP) and Body of individuals (BOI):
For the Assessment Year 2008-09
Rate
Taxable income slab (Rs.)
(%)
Up to 1,50,000
Up to 1,80,000 (for women)
NIL
Up to 2,25,000 (for resident individual of 65 years or
above)
1,50,001 3,00,000 10
3,00,001 5,00,000 20
5,000,001 upwards 30*
*A surcharge of 10 per cent of the total tax liability is applicable where the total income
exceeds Rs 1,000,000.
Note : -
Education cess is applicable @ 3 per cent on income tax, inclusive of surcharge if
there is any.
A marginal relief may be provided to ensure that the additional IT payable, including
surcharge, on excess of income over Rs 1,000,000 is limited to an amount by which
the income is more than this mentioned amount.

Agricultural income is exempt from income-tax

The biggest advantage Section 80C offered was that sectoral caps on tax-saving instruments
were removed. As a result investors were given the freedom to select investment avenues of
their choice for tax-planning purpose.

Why Section 80C scores over Section 88:

Investing in line with one's risk appetite is a tenet of financial planning and Section 80C
promotes the same. Removal of sectoral caps on investments for the purpose of tax-planning
means investors can invest in line with their risk appetites and needs. A risk-taking investor
can invest his entire corpus of Rs 100,000 in a high risk instrument like ELSS; conversely a
risk-averse investor can select small savings schemes like PPF and NSC. As a result, every
investor's tax-saving portfolio can now reflect his individual preferences. Another advantage
Section 80C offers is for investors whose gross total income is greater that Rs 500,000. Under
the earlier tax regime, these investors were not eligible for Section 88 tax rebates. However
Section 80C has done away with this disparity and investors across tax brackets can claim the
Rs 100,000 deduction.

Eligible avenues for Section 80C

1. Payment of life insurance premium.

2. Contribution to provident fund.

3. Repayment of principal amounts on housing loans.

4. Payment of tuition fees.

5. Investments in PPF

6. Investments in NSC.

7. Investments in ELSS

8. Investments in Infrastructure Bonds.

What should investors do?

Clearly Section 80C has ensured that the onus of conducting the tax-planning exercise in line
with one's risk profile has shifted to investors. Investors now need to utilise the opportunity by
making the right investments. Investors would do well to remember that investments made for
the purpose of tax-planning can have a significant impact on their finances over the long-term
horizon, hence due importance should be accorded to it. Our advice - engage the services of a
qualified investment advisor, make an investment plan for your tax-planning investments and
stick to it; finally don't deviate from your risk appetite.

Tax-saving schemes at a glance

Particulars PPF NSC ELSS Infrastructure

 Bonds
Tenure (years) 15 6 3 3
Min. investment 500 100 500 5,000
(Rs)
Max. 70,000 100,000 100,000 100,000
investment (Rs)
Safety/Rating Highest Highest High Risk AA/AAA
Return (CAGR) 8.00 8.00 12.00 - 15.00 5.50 - 6.00
Interest Compounded Compounded No assured Options available
frequency annually half yearly dividends/returns
Taxation of Tax free Taxable Dividend & capital Taxable
interest gains tax free

Money control section 80c : Choices galore

The last few budgets have thrown open a variety of investment options to invest to save tax.
The most important question is which area of investment to choose. Three most important
investments which as far as possible should be taken advantage of by all individual tax payers
in particular are:

(a) Investment in a residential house property;

(b) Investment upto a maximum of Rs 1 lakh so as to enjoy the tax deduction u/s 80C /
80CCC;

(c) Investment upto Rs.10,000/- in a mediclaim medical insurance policy, popularly

known as Mediclaim Policy.

If you want to achieve the highest score of tax planning with reference to your investments,
then one must make it a point to buy one residential house property for self-occupation
especially when you do not own a residential property in your name. As per the provisions
contained in section 24 of the Income Tax Act, 1961, a deduction equal to Rs 1,50,000 is
permissible for every individual in respect of interest on loan for residential self-occupied
house property. This interest on loan is allowed as a deduction irrespective of the person from
whom you take the loan. Hence, even if you take a loan not from a banker but from a relative
or your spouse and make the payment of the interest still then the deduction in respect of
interest on loan would be allowed.
The maximum amount of deduction as per section 24 in respect of interest on loan for
residential house property is Rs 1,50,000 per year. If you don't have a housing loan, it really
makes sense right now to start hunting for housing loan and try to get the occupation of the
property before the close of 31st March so as to enjoy the full deduction on account of interest
on the housing loan. Please do remember that in case the house is not ready the benefit of
deduction will not be available in this year. Your investment in residential house property for
self-occupation can also get you another tax deduction in terms of section 80C whereby
deduction from your income upto Rs 1 lakh is permissible even in respect of repayment of the
housing loan to bank, financial institution, employer etc. Those interested should refer to the
exact provisions of section 80C.Now, it is time to judge your preference for making
investment in various vistas available as per section 80C of the Income Tax Act, 1961.
However, please do remember that one or more items taken together the total investment
amount should be a maximum of Rs 1 lakh to entitle you to a deduction u/s 80C. One can also
opt for contribution to the Pension Plan whereby deduction u/s 80CCC is permissible upto Rs
1 lakh. However, the combined deduction of section 80C and section 80CCC for Pension Plan
is Rs 1 lakh only.

Hence, it implies that there is no separate specific deduction for pension plan
contribution.Now coming to the most important area of tax deduction by making investment
in tune with the provisions contained in section 80C of the Income Tax Act, 1961, we find that
the comparatively popular areas in which investment can be made by the tax payers are
payment of life insurance premium, contribution to public provident fund, investment in NSC,
investment in NSS (National Saving Scheme), payment of the children tuition fee, investment
in ELSS and repayment of the housing loan. Thus, all together one can pick and choose from
all these investment options as also the pension plan and thereby target the total investment to
the figure of Rs 1 lakh, which happens to be the maximum amount which one can contribute
by way of investment for tax benefit.

Another happy news of making investment for the purposes of section 80C is investment in
bank fixed deposit of any scheduled bank having a maturity period of minimum five years.
Thus, your investment in bank fixed deposit during the current year for five years or more will
entitle you to tax deduction in terms of section 80C of the Income Tax Act, 1961.
How to choose the best investment?

Now let us try to analyze which investment is good for which category of tax payer. It is a
well-known fact that the tax payers can be classified into different categories depending upon
the tax bracket in which they are assessed. For example, the first category of tax payers would
be persons having income in excess of Rs 1 lakh but upto Rs 1,50,000. All those tax payers
coming into this category are required to pay income tax of just 10%. I would like to
recommend this group to make investment especially in insurance, NSC, NSS and bank fixed
deposit.

Now comes the next category of those tax payers who are having annual income exceeding
Rs 1,50,000 per annum and going upto Rs 3,00,000 per annum. All those tax payers coming
in this bracket are required to pay income-tax at 20%. The best module of investment for this
category of tax payers would be insurance, payment of tuition fees of the children, ELSS,
repayment of housing loan and PPF. Now comes the last category of tax payers who come
within the income bracket of more than Rs 3,00,000 where the maximum marginal rate of
income tax is 30%. This category of individual tax payers should invest in insurance, PPF,
ELSS and repayment of the housing loan. However, the investment in various investment
instruments can vary from person to person depending upon his profile of investment and his
liking or otherwise. However, purely from the point of view of tax and investment planning it
makes no sense to invest in bank fixed deposit especially by those tax payers who are having
high income and high rate of income tax. This conclusion is drawn from the fact that if a
person having, say, income in excess of Rs 3,00,000 makes investment in the bank fixed
deposit for five years to achieve the benefit of section 80C deduction, he enjoys tax deduction
but on his income from bank fixed deposit he will be required to make payment of income tax
at the rate of 30%. Hence, we would like to recommend investment in bank fixed deposit as a
part of investment strategy to achieve tax deduction u/s 80C only for those tax payers who are
coming within the lowest income bracket.

ANALYSING DIFFERENT INVESTMENT AVENUES

Avenues of investment

An investor has wide array of investment avenues available. They are as under:
 1. Mutual funds.
2. Bonds.
3. Life insurance policies .
4. Non marketable financial assets:
Bank deposits.
Post office deposits.
Company deposits.
Provident fund deposits.
5. Precious metals : These are items generally small in size but highly valuable in
monetary terms. They are :
Gold and silver.
Precious stones.
Other valuable objects.
6. Financial derivatives.
7. Real estate.
8. Equity shares and preference shares.
MUTUAL FUND

Understanding Mutual Funds

Mutual fund is a trust that pools money from a group of investors (sharing common financial
goals) and invest the money thus collected into asset classes that match the stated investment
objectives of the scheme. Since the stated investment objectives of a mutual fund scheme
generally forms the basis for an investor's decision to contribute money to the pool, a mutual
fund can not deviate from its stated objectives at any point of time. Every Mutual Fund is
managed by a fund manager, who using his investment management skills and necessary
research works ensures much better return than what an investor can manage on his own. The
capital appreciation and other incomes earned from these investments are passed on to the
investors (also known as unit holders) in proportion of the number of units they own.
When an investor subscribes for the units of a mutual fund, he becomes part owner of the
assets of the fund in the same proportion as his contribution amount put up with the corpus
(the total amount of the fund).
Mutual Fund investor is also known as a mutual fund shareholder or a unit holder.
Any change in the value of the investments made into capital market instruments (such as
shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is
defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a
scheme is calculated by dividing the market value of scheme's assets by the total number of
units issued to the investors.
For example :
A. If the market value of the assets of a fund is Rs. 100,000
B. The total number of units issued to the investors is equal to 10,000.
C. Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or 10.00
D. Now if an investor 'X' owns 5 units of this scheme
E. Then his total contribution to the fund is Rs. 50 (i.e. Number of units held multiplied
by the NAV of the scheme)

STRUCTURE OF MUTUAL FUND

SEBI Regulations 1996 defines a mutual fund established in the form of a trust to raise money
through the sale of units under one or more schemes for investing in securities. So a mutual
fund is constituted in the form of a trust under the Indian Trust Act, 1882. There are several
constituents of a mutual fund structure. Different constituents of a mutual funds structure are :

a) SPONSOR: Sponsor means any person who, acting alone or in combination with
another body corporate, establishes a mutual fund. Sponsor also creates a Board of
Trustees.

b) BOARD OF TRUSTEES: The Board of trustees holds the property of the mutual fund
in the trust for the benefit of the unitholders. The board has a responsibility to ensure
that the mutual fund is managed under the statutory provisions and the relevant
guidelines.

c) Asset Management Company (amc): A mutual fund is set up as a trust which has a
sponsor AMC. The AMC must be recognized by SEBI. It manages the funds of the
mutual funds scheme by making investment in various types of securities SEBI
Regulations require that 50% of the directors of the AMC must be independent.

d) CUSTODIAN, etc: Custodian, bankers and registrar and transfer agents are other
constituents of the mutual fund structure. They are appointed by the board of trustees
and provide various types of financial services to the mutual fund. Constituents of a
Fidelity mutual fund are:

NAME : Fidelity mutual fund.

Sponsor : Fidelity international investment advisors (liability limited to 1
lakh)
Trustee : Fidelity trustee company (p) ltd.
AMC : Fidelity fund management (p) ltd.

In case of UTI mutual fund, there are 4 sponsors: The SBI, PNB, BOB, LIC (liability of each
sponsor limited to RS 10,000).
 STRUCTURE OF MUTUAL FUND

RETURN FROM A MUTUAL FUND

Return from a mutual fund depends upon the objective of the scheme .In general, the
return from the mutual funds may consist of the following:
1. Periodic dividends in cash(generally annual),

2. Distribution of the capital gains,and

3. Increase(change) in NAV over the period.

Annual percentage return from a mutual fund may be calculated as follows:

RETURN = Div + CG + (NAV1 - NAV0) / NAV0*100

Where;
Div = Dividends for the period.
CG = Capital gain distributed ,if any
NAV0 = NAV in the beginning.
NAV1 = NAV at the end of the year.

NAV :The net asset value, or NAV, is the current market value of a fund's holdings, less the
fund's liabilities, usually expressed as a per-share amount. For most funds, the NAV is
determined daily, after the close of trading on some specified financial exchange, but some
funds update their NAV multiple times during the trading day. The public offering price, or
POP, is the NAV plus a sales charge. Open-end funds sell shares at the POP and redeem shares
at the NAV, and so process orders only after the NAV is determined. Closed-end funds (the
shares of which are traded by investors) may trade at a higher or lower price than their NAV;
this is known as a premium or discount, respectively. If a fund is divided into multiple classes
of shares, each class will typically have its own NAV, reflecting differences in fees and
expenses paid by the different classes.

The Value of Your Fund

Net asset value (NAV), which is a fund's assets minus liabilities, is the value of a mutual fund.
NAV per share is the value of one share in the mutual fund, and it is the number that is quoted
in newspapers. You can basically just think of NAV per share as the price of a mutual fund. It
fluctuates everyday as fund holdings and shares outstanding change.

When you buy shares, you pay the current NAV per share plus any sales front-end load. When
you sell your shares, the fund will pay you NAV less any back-end load. Investors are the
owners of the mutual fund. Fund s collected under a particular scheme are invested in
different securities. So the ownership interest of the unitholders is represented by these
securities. Net assets refers to the ownership interest per unit of the mutual fund i.e NAV
refers to the amount which a unitholder would receive per unit if the scheme is closed.NAV is
represented as follows:

NAV = Value of securities - Liabilities/No. of unit outstandings

COSTS AND LOADS IN THE MUTUAL FUNDS INVESTMENT

Investors in mutual funds bear following costs. These are:

Operating expenses : Operating expenses are the costs incurred by mutual fund in
respect of management of portfolio of assets on behalf of the investors. The operating
expenses include the administrative expenses and the advisory fees payable is added to
the cost of the asset. The operating expenses may be expressed as a percentage of the
total assets under management of the mutual fund. The Expense Ratio is also known
 as Annual Recurring Expenses. This basket of charges comprises the fund
management fee, agent commission, registrar fees and the selling and promotion
expenses. The expense ratio is disclosed every March and September and is expressed
as a percentage of the funds average weekly net assets. A funds expense ratio states
how much you pay a fund in percentage terms to manage your money.

For example, lets assume you invest Rs 10,000 in a fund with an expense ratio of 1.5 per
cent. This means that you pay the fund Rs 150 to manage your money. The expense ratio
affects the returns you get as well. If the fund generates returns of 10 per cent, what you will
get is just 8.5 per cent after the expense ratio of 1.5 per cent has been deducted. Hence, this
makes it necessary for investors to know the expense ratio of the funds he invests in.

Since the expense ratio is charged every year, a high expense ratio over the long term can eat
into your returns massively. For example, Rs 1 lakh invested over a period of 10 years would
grow to Rs 4.05 lakh if the fund delivers returns of 15 per cent per annum. But when we
deduct the expense ratio of 1.5 per cent per annum, then your returns come down to Rs. 3.55
lakh, down by almost 14 per cent over the period of 10 years.Different funds have different
expense ratios. However to keep things in check, the Securities & Exchange Board of India
(SEBI) has stipulated an upper limit that a fund can charge. The limit stands at 2.50 per cent
for equity funds and 2.25 per cent for debt funds.

The largest component of the expense ratio is the management and advisory fees. Then there
are marketing and distribution expenses and all those involved in the operations of a fund like
the custodian and auditors also get a share of the pie. Interestingly, brokerage paid by a fund
on the purchase and sale of securities is not reflected in the expense ratio. Funds state their
buying and selling price after taking the transaction cost into account.Now that you know
everything about expense ratios, lets see if it really matters. The answer is yes, it does,
especially in the case of debt funds. Debt funds generate about 7 9 per cent returns and any
percentage of expense ratio becomes a substantial amount in the case of such low yields. On
the other hand, in the case of actively managed equity funds, the issue of expenses is more
complicated. The wide divergence of returns between good and bad funds makes the
expense ratio secondary. However, if you are stuck between two similar funds, the expense
ratio can be a good differentiator. But keep in mind, expense ratio is charged even when the
funds returns are negative. Overall, before you invest in a mutual fund, it is imperative that
you check out the funds expense ratio. But remember that a low expense ratio doesnt
necessarily mean that the fund is good. A good fund is one that delivers good returns with
minimal expenses. The unitholders do not pay directly for the operating expenses. Rather the
operating expenses are deducted from the closing NAV(assets). The unitholders bear these
costs in terms of reduced NAV .

Expense ratio = Total operating expenses/Average asset under management.

Loads : The mutual funds comes with a sales charge or commission.The fund
investor pays the load which goes to compensate a sales intermediary(broker,financial
planner ,investment advisor etc).Or his/her time and expertise in selecting an
appropriate fund for the investor. The load is paid at the time of purchase when the
shares are sold or as long as the fund is held by the investor. Loads typically come in 3
varieties and the funds are typically noted as class a, class b, class c. The first is a front
end load where the fee is paid up front(when you buy the fund). The second category
is a back end load (you pay on your way out of the fund) and the third is a constant
load where you are charged each year.If a fund limits its level load to no more than .
25%(the maximum is 1%) it can call itself a no load fund in its marketing literature.
Front end and back end loads are not part of mutual fundss operating expenses but
level loads called 12b-1 fees are included.The record shows that the performance of
load and no load funds is similar. 12 b1 is taken from a funds prospectus, 12b-1 fee
represents the annual charge deducted from fund assets to pay for distribution and
marketing costs. If fee levels have changed since the end of the most recent fiscal year,
the actual fees will most commonly be presented as a recalculation based on the prior
year's average monthly net assets using the new, current expenses. Although contract-
type distribution costs are listed in a fund's prospectus, these are maximum amounts
and funds may waive a portion, or possibly all, of this fee. Actual fees thus represent a
closer approximation of the true costs to shareholders.
How you can invest in a mutual fund

There are two ways in which you can invest in a mutual fund.

1. A one-time outright payment

If you invest directly in the fund, you just hand over the cheque and you get your fund units
depending on the value of the units on that particular day. Let's say you want to invest Rs
10,000. All you have to do is approach the fund and buy units worth Rs 10,000. There will be
two factors determining how many units you get.

Entry load

This is the fee you pay on the amount you invest. Let's say the entry load is 2%. Two percent
on Rs 10,000* would Rs 200. Now, you have just Rs 9,800 to invest.

NAV

The Net Asset Value is the price of a unit of a fund. Let's say that the NAV on the day you
invest is Rs 30.

So you will get 326.67 units (Rs 9800 / 30).

2. Periodic investments

This is referred to as a SIP. A Systematic Investment Plan is not a type of mutual fund. It is a
method of investing in a mutual fund.That means that, every month, you commit to investing,
say, Rs 1,000 in your fund. At the end of a year, you would have invested Rs 12,000 in your
funLet's say the NAV on the day you invest in the first month is Rs 20; you will get 50 units.
The next month, the NAV is Rs 25. You will get 40 units.

The following month, the NAV is Rs 18. You will get 55.56 units.

So, after three months, you would have 145.56 units. On an average, you would have paid
around Rs 21 per unit. This is because, when the NAV is high, you get fewer units per Rs
1,000. When the NAV falls, you get more units per Rs 1,000. The Systematic Investment Plan
(SIP) is a simple and time honored investment strategy for accumulation of wealth in a
disciplined manner over long term period. The plan aims at a better future for its investors as
an SIP investor gets good rate of returns compared to a one time investor.

What is Systematic Investment Plan

A specific amount should be invested for a continuous period at regular intervals under
this plan.
SIP is similar to a regular saving scheme like a recurring deposit. It is a method of
investing a fixed sum regularly in a mutual fund.
SIP allows the investor to buy units on a given date every month. The investor decides
the amount and also the mutual fund scheme.
While the investor's investment remains the same, more number of units can be bought
in a declining market and less number of units in a rising market.
The investor automatically participates in the market swings once the option for SIP is
made.

SIP ensures averaging of rupee cost as consistent investment ensures that average cost per unit
fits in the lower range of average market price. An investor can either give post dated cheques
or ECS instruction and the investment will be made regularly in the mutual fund desired for
the required amount. SIP generally starts at minimum amounts of Rs.1000/- per month and
upper limit for using an ECS is Rs.25000/- per instruction. For instance, if one wishes to
invest Rs.1, 00,000/- per month, then they need to do it on four different dates.

Benefits of Systematic Investment Plan

Power of compounding: The power of compounding underlines the essence of making
money work if only invested at an early age. The longer one delays in investing, the greater
the financial burden to meet desired goals. Saving a small sum of money regularly at an early
age makes money work with greater power of compounding with significant impact on wealth
accumulation.

Rupee cost averaging: Timing the market consistency is a difficult task. Rupee cost
averaging is an automatic market timing mechanism that eliminates the need to time one's
investments. Here one need not worry about where share prices or interest are headed as
investment of a regular sum is done at regular intervals; with fewer units being bought in a
declining market and more units in a rising market. Although SIP does not guarantee profit, it
can go a long way in minimizing the effects of investing in volatile markets.
Convenience: SIP can be operated by simply providing post dated cheques with the
completed enrolment form or give ECS instructions. The cheques can be banked on the
specified dates and the units credited into the investor's account. The SIP facility is available
in the Principal Income Fund, Monthly Income Plan, Child Benefit Fund, Balanced Fund,
Index Fund, Growth Fund, Equity fund and Tax Savings Fund.

SIP features
Disciplined investing is vital to earning good returns over a longer time frame. Investors are
saved the bother of identifying the ideal entry and exit points from volatile markets. SIP
options such as equity, debt and balanced schemes offer a range of investment plans. While
there is no entry load on SIP, investors face an exit load if the units are redeemed within a
stipulated time frame. The success of your SIP hinges on the performance of your selected
scheme

Benefits of Mutual Fund investment

Professional Management
Mutual Funds provide the services of experienced and skilled professionals, backed by a
dedicated investment research team that analyses the performance and prospects of companies
and selects suitable investments to achieve the objectives of the scheme.

Diversification
Mutual Funds invest in a number of companies across a broad cross-section of industries and
sectors. This diversification reduces the risk because seldom do all stocks decline at the same
time and in the same proportion. You achieve this diversification through a Mutual Fund with
far less money than you can do on your own.

Convenient Administration
Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as
bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds
save your time and make investing easy and convenient.

Return Potential
Over a medium to long-term, Mutual Funds have the potential to provide a higher return as
they invest in a diversified basket of selected securities.
Low Costs
Mutual Funds are a relatively less expensive way to invest compared to directly investing in
the capital markets because the benefits of scale in brokerage, custodial and other fees
translate into lower costs for investors.

Liquidity
In open-end schemes, the investor gets the money back promptly at net asset value related
prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock
exchange at the prevailing market price or the investor can avail of the facility of direct
repurchase at NAV related prices by the Mutual Fund.

Transparency
You get regular information on the value of your investment in addition to disclosure on the
specific investments made by your scheme, the proportion invested in each class of assets and
the fund manager's investment strategy and outlook.

Flexibility
Through features such as regular investment plans, regular withdrawal plans and dividend
reinvestment plans, you can systematically invest or withdraw funds according to your needs
and convenience.

Affordability
Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund
because of its large corpus allows even a small investor to take the benefit of its investment
strategy.

How to choose a right mutual fund scheme.

Once you are comfortable with the basics, the next step is to understand your investment
choices, and draw up your investment plan relevant to your requirements. Choosing your
investment mix depends on factors such as your risk appetite, time horizon of your
investment, your investment objectives, age, etc.

What should be kept in mind before investing in Mutual Funds ?

Mutual Fund investment decisions require consistent effort on the part of the investor. Before
investing in Mutual Funds, the following steps must be given due weightage to decide on the
right type of scheme:

1. Identifying the Investment Objective

2. Selecting the right Scheme Category
3. Selecting the right Mutual Fund
4. Evaluating the Portfolio

A) Identifying the Investment Objective

Your financial goals will vary, based on your age, lifestyle, financial independence, family
commitments, level of income and expenses, among many other factors. Therefore, the first
step is to assess you needs. Begin by asking yourself these simple questions:

Why do I want to invest?

The probable answers could be:

"I need a regular income"

"I need to buy a house/finance a wedding"
"I need to educate my children," or
A combination of all the above

How much risk am I willing to take?

The risk-taking capacity of individuals vary depending on various factors. Based on their risk
bearing capacity, investors can be classified as:
Very conservative
Conservative
Moderate
Aggressive
Very Aggressive

What are my cash flow requirements?

For example, you may require:
A regular Cash Flow
A lumpsum after a fixed period of time for some specific need in the future
 Or, you may have no need for cash, but you may want to create fixed assets for the
future

B) Selecting the scheme category

The next step is to select a scheme category that matches your investment objectives:
For Capital Appreciation go for equity sectoral funds, equity diversified funds or
balanced funds.
For Regular Income and Stability you should opt for income funds/MIPs
For Short-Term Parking of Funds go for liquid funds, floating rate funds, short-term
funds.
For Growth and Tax Savings go for Equity-Linked Savings Schemes.

Investment Investment
Ideal Instruments
Objective horizon
Short-term
1- 6 months Liquid/Short-term plans
Investment
Capital
Over 3 years Diversified Equity/ Balanced Funds
Appreciation
Regular Income Flexible Monthly Income Plans / Income Funds
Tax Saving 3 yrs lock-in Equity-Linked Saving Schemes (ELSS)

C) Selecting the right Mutual fund

Once you have a clear strategy in mind, you now have to choose which Mutual fund and
scheme you want to invest in. The offer document of the scheme tells you its objectives and
provides supplementary details like the track record of other schemes managed by the same
Fund Manager. Some important factors to evaluate before choosing a particular Mutual Fund
are:
The track record of performance over that last few years in relation to the appropriate
yardstick and similar funds in the same category.
How well the Mutual Fund is organized to provide efficient, prompt and personalized
service.
The degree of transparency as reflected in frequency and quality of their
communications.
D) Evaluation of portfolio

Evaluation of equity fund involve analysis of risk and return, volatility, expense ratio, fund
managers style of investment, portfolio diversification, fund managers experience. Good
equity fund should provide consistent returns over a period of time. Also expense ratio should
be within the prescribed limits. These days fund house charge around 2.50% as management
fees. Evaluation of bond funds involve it's assets allocation analysis, return's consistency, its
rating profile, maturity profile, and its performance over a period of time. The bond fund
with ideal mix of corporate debt and gilt fund should be selected.

How to calculate the growth of your Mutual Fund investments ?

Let's assume that Mr. Gupta has purchased Mutual Fund units worth Rs. 10,000 at an NAV of
Rs. 10 per unit on February 1. The Entry Load on the Mutual Fund was 2%. On September
15, he sold all the units at an NAV of Rs 20. The exit load was 0.5%.

His growth/ returns is calculated as under:

1. Calculation of Applicable NAV and No. of units purchased:

(a) Amount of Investment = Rs. 10,000
(b) Market NAV = Rs. 10
(c) Entry Load = 2% = Rs. 0.20
(d) Applicable NAV (Purchase Price) = (b) + (c) = Rs. 10.20
(e) Actual Units Purchased = (a) / (d) = 980.392 units
2. Calculation of NAV at the time of Sale
(a) NAV at the time of Sale = Rs 20
(b) Exit Load = 0.5% or Rs.0.10
(c) Applicable NAV = (a) (b) = Rs. 19.90

3. Returns/Growth on Mutual Funds

(a) Applicable NAV at the time of Redemption = Rs. 19.90
(b) Applicable NAV at the time of Purchase = Rs. 10.20
(c) Growth/ Returns on Investment = {(a) (b)/(b) * 100} = 95.30 %
TAX BENEFITS
Twenty percent of the amount invested in specified mutual funds (called equity linked savings
schemes or ELSS and loosely referred to as "tax savings schemes") is deductible from the tax
payable by the investor in a particular year subject to a maximum of Rs2000 per investor. This
benefit is available under section 88 of the I.T. Act.Investment of the entire proceeds obtained
from the sale of capital assets for a period of three years or investment of only the profits for a
period of 7 years, exempts the asset holder from paying capital gains tax. This benefit is
available under section 54EA and 54EB of the I.T. Act, provided the capital asset has been
sold prior to April 1, 2000 and the amount is invested before September 30, 2000.The mutual
fund is completely exempt from paying taxes on dividends/interest/capital gains earned by it.
While this is a benefit to the fund, it is the indirect benefit of unitholders as well. This benefit
is available to the mutual fund under section 10 (23D) of the I.T. Act.

A mutual fund has to pay a withholding tax of 10% on the dividends distributed by it under
the revised provisions of the I.T. Act putting them on par with corporates. However, if a
mutual fund has invested more than 50% of its assets into equity shares, then it is exempt
from paying any tax on the dividend distributed by it, for a period of three years, by an
overriding provision. This benefit is available under section 115R of the I.T. Act.

The investor in a mutual fund is exempt from paying any tax on the dividend received by him
from the mutual fund, irrespective of the type of the mutual fund. This benefit is available
under section 10(33) of the I.T. Act.The units of mutual funds are treated as capital assets and
the investor has to pay capital gains tax on the sale proceeds of mutual fund units sold by him.
For investments held for less than one year the tax is equal to 30% of the capital gain. For
investments held for more than one year, the tax is equal to 10% of the capital gains. The
investor is entitled to indexation benefit while computing capital gains tax. Thus if a typical
growth scheme of an income fund shows a rise of 12% in the NAV after one year and the
investor sells it, he will pay a 10% tax on the selling price less cost price and indexation
component. This reduces the incidence of tax considerably. This concession is available under
section 48 of the I.T. Act. The following calculations show this in more detail:

Purchase NAV = Rs 10

Sale NAV = Rs 11.2

Indexation component=8%

Capital gains = 11.2 10(1.08)

= 11.2 10.8

= 0.4

Capital gains tax = 0.4*0.1 = 0.04.

If an investor buys a fresh unit in the closing days of March and sells it in the first week of
April of the following year, he is entitled to indexation benefit for two financial years which
close in the two March ending periods. This is termed as double indexation and lowers the tax
even further especially for income funds. In the above example, the calculation would be as
follows:

Capital gains = 11.2 10(1.08)(1.08)

= 11.2 11.7

= -0.5
Thus there will be no capital gains tax.

REGULATION OF MUTUAL FUNDS

All Mutual Funds are registered with SEBI (Securities and exchange board of India)and they
function within the provisions of strict regulations designed to protect the interests of
investors. The operations of Mutual Funds are regularly monitored by SEBI.

ASSOCIATION OF MUTUAL FUNDS OPERATION IN INDIA

With the increase in mutual fund players in India, a need for mutual fund association in India
was generated to function as a non-profit organisation. Association of Mutual Funds in India
(AMFI) was incorporated on 22nd August, 1995.AMFI is an apex body of all Asset
Management Companies (AMC) which has been registered with SEBI. Till date all the AMCs
are that have launched mutual fund schemes are its members. It functions under the
supervision and guidelines of its Board of Directors.Association of Mutual Funds India has
brought down the Indian Mutual Fund Industry to a professional and healthy market with
ethical lines enhancing and maintaining standards. The Association of Mutual Funds of India
works with 30 registered AMCs of the country. It has certain defined objectives which
juxtaposes the guidelines of its Board of Directors. The objectives are as follows:

This mutual fund association of India maintains a high professional and ethical
standards in all areas of operation of the industry.

It also recommends and promotes the top class business practices and code of conduct
which is followed by members and related people engaged in the activities of mutual fund
and asset management. The agencies who are by any means connected or involved in the
field of capital markets and financial services also involved in this code of conduct of the
association.
AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual
fund industry.
Association of Mutual Fund of India do represent the Government of India, the
Reserve Bank of India and other related bodies on matters relating to the Mutual Fund
Industry.
It develops a team of well qualified and trained Agent distributors. It implements a
programme of training and certification for all intermediaries and other engaged in the
mutual fund industry.
AMFI undertakes all India awareness programme for investors inorder to promote
proper understanding of the concept and working of mutual funds.
At last but not the least association of mutual fund of India also disseminate
informations on Mutual Fund Industry and undertakes studies and research either
directly or in association with other bodies.

BROAD MUTUAL FUND TYPES

1. Equity Funds
Equity funds are considered to be the more risky funds as compared to other fund types, but
they also provide higher returns than other funds. It is advisable that an investor looking to
invest in an equity fund should invest for long term i.e. for 3 years or more. There are
different types of equity funds each falling into different risk bracket. In the order of
decreasing risk level, there are following types of equity funds:

a. Aggressive Growth Funds - In Aggressive Growth Funds, fund managers aspire for
maximum capital appreciation and invest in less researched shares of speculative
nature. Because of these speculative investments Aggressive Growth Funds become
more volatile and thus, are prone to higher risk than other equity funds.
b. Growth Funds - Growth Funds also invest for capital appreciation (with time horizon
of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that
they invest in companies that are expected to outperform the market in the future.
Without entirely adopting speculative strategies, Growth Funds invest in those
companies that are expected to post above average earnings in the future.
c. Speciality Funds - Speciality Funds have stated criteria for investments and their
portfolio comprises of only those companies that meet their criteria. Criteria for some
speciality funds could be to invest/not to invest in particular regions/companies.
Speciality funds are concentrated and thus, are comparatively riskier than diversified
funds.. There are following types of speciality funds:
i. Sector Funds: Equity funds that invest in a particular sector/industry of the
market are known as Sector Funds. The exposure of these funds is limited to a
particular sector (say Information Technology, Auto, Banking, Pharmaceuticals
or Fast Moving Consumer Goods) which is why they are more risky than
equity funds that invest in multiple sectors.
ii. Foreign Securities Funds: Foreign Securities Equity Funds have the option to
invest in one or more foreign companies. Foreign securities funds achieve
international diversification and hence they are less risky than sector funds.
However, foreign securities funds are exposed to foreign exchange rate risk
and country risk.
iii. Mid-Cap or Small-Cap Funds: Funds that invest in companies having lower
market capitalization than large capitalization companies are called Mid-Cap
or Small-Cap Funds. Market capitalization of Mid-Cap companies is less than
that of big, blue chip companies (less than Rs. 2500 crores but more than Rs.
 500 crores) and Small-Cap companies have market capitalization of less than
Rs. 500 crores. Market Capitalization of a company can be calculated by
multiplying the market price of the company's share by the total number of its
outstanding shares in the market. The shares of Mid-Cap or Small-Cap
Companies are not as liquid as of Large-Cap Companies which gives rise to
volatility in share prices of these companies and consequently, investment gets
risky.
iv. Option Income Funds*: While not yet available in India, Option Income
Funds write options on a large fraction of their portfolio. Proper use of options
can help to reduce volatility, which is otherwise considered as a risky
instrument. These funds invest in big, high dividend yielding companies, and
then sell options against their stock positions, which generate stable income for
investors.

d. Diversified Equity Funds - Except for a small portion of investment in liquid money
market, diversified equity funds invest mainly in equities without any concentration
on a particular sector(s). These funds are well diversified and reduce sector-specific
or company-specific risk. However, like all other funds diversified equity funds too
are exposed to equity market risk. One prominent type of diversified equity fund in
India is Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of
90% of investments by ELSS should be in equities at all times. ELSS investors are
eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time of filing
the income tax return. ELSS usually has a lock-in period and in case of any
redemption by the investor before the expiry of the lock-in period makes him liable
to pay income tax on such income(s) for which he may have received any tax
exemption(s) in the past.
e. Equity Index Funds - Equity Index Funds have the objective to match the
performance of a specific stock market index. The portfolio of these funds comprises
of the same companies that form the index and is constituted in the same proportion as
the index. Equity index funds that follow broad indices (like S&P CNX Nifty, Sensex)
are less risky than equity index funds that follow narrow sectoral indices (like
 BSEBANKEX or CNX Bank Index etc). Narrow indices are less diversified and
therefore, are more risky.
f. Value Funds - Value Funds invest in those companies that have sound fundamentals
and whose share prices are currently under-valued. The portfolio of these funds
comprises of shares that are trading at a low Price to Earning Ratio (Market Price per
Share / Earning per Share) and a low Market to Book Value (Fundamental Value)
Ratio. Value Funds may select companies from diversified sectors and are exposed to
lower risk level as compared to growth funds or speciality funds. Value stocks are
generally from cyclical industries (such as cement, steel, sugar etc.) which make them
volatile in the short-term. Therefore, it is advisable to invest in Value funds with a
long-term time horizon as risk in the long term, to a large extent, is reduced.
g. Equity Income or Dividend Yield Funds - The objective of Equity Income or
Dividend Yield Equity Funds is to generate high recurring income and steady capital
appreciation for investors by investing in those companies which issue high dividends
(such as Power or Utility companies whose share prices fluctuate comparatively lesser
than other companies' share prices). Equity Income or Dividend Yield Equity Funds
are generally exposed to the lowest risk level as compared to other equity funds.

2. Debt / Income Funds

Funds that invest in medium to long-term debt instruments issued by private companies,
banks, financial institutions, governments and other entities belonging to various sectors (like
infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk
profile funds that seek to generate fixed current income (and not capital appreciation) to
investors. In order to ensure regular income to investors, debt (or income) funds distribute
large fraction of their surplus to investors. Although debt securities are generally less risky
than equities, they are subject to credit risk (risk of default) by the issuer at the time of interest
or principal payment. To minimize the risk of default, debt funds usually invest in securities
from issuers who are rated by credit rating agencies and are considered to be of "Investment
Grade". Debt funds that target high returns are more risky. Based on different investment
objectives, there can be following types of debt funds:

a. Diversified Debt Funds - Debt funds that invest in all securities issued by entities
belonging to all sectors of the market are known as diversified debt funds. The best
 feature of diversified debt funds is that investments are properly diversified into all
sectors which results in risk reduction. Any loss incurred, on account of default by a
debt issuer, is shared by all investors which further reduces risk for an individual
investor.
b. Focused Debt Funds* - Unlike diversified debt funds, focused debt funds are narrow
focus funds that are confined to investments in selective debt securities, issued by
companies of a specific sector or industry or origin. Some examples of focused debt
funds are sector, specialized and offshore debt funds, funds that invest only in Tax
Free Infrastructure or Municipal Bonds. Because of their narrow orientation, focused
debt funds are more risky as compared to diversified debt funds. Although not yet
available in India, these funds are conceivable and may be offered to investors very
soon.
c. High Yield Debt funds - As we now understand that risk of default is present in all
debt funds, and therefore, debt funds generally try to minimize the risk of default by
investing in securities issued by only those borrowers who are considered to be of
"investment grade". But, High Yield Debt Funds adopt a different strategy and prefer
securities issued by those issuers who are considered to be of "below investment
grade". The motive behind adopting this sort of risky strategy is to earn higher interest
returns from these issuers. These funds are more volatile and bear higher default risk,
although they may earn at times higher returns for investors.
d. Assured Return Funds - Although it is not necessary that a fund will meet its
objectives or provide assured returns to investors, but there can be funds that come
with a lock-in period and offer assurance of annual returns to investors during the
lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset
Management Companies (AMCs). These funds are generally debt funds and provide
investors with a low-risk investment opportunity. However, the security of investments
depends upon the net worth of the guarantor (whose name is specified in advance on
the offer document). To safeguard the interests of investors, SEBI permits only those
funds to offer assured return schemes whose sponsors have adequate net-worth to
guarantee returns in the future. In the past, UTI had offered assured return schemes
(i.e. Monthly Income Plans of UTI) that assured specified returns to investors in the
future. UTI was not able to fulfill its promises and faced large shortfalls in returns.
Eventually, government had to intervene and took over UTI's payment obligations on
 itself. Currently, no AMC in India offers assured return schemes to investors, though
possible.
e. Fixed Term Plan Series - Fixed Term Plan Series usually are closed-end schemes
having short term maturity period (of less than one year) that offer a series of plans
and issue units to investors at regular intervals. Unlike closed-end funds, fixed term
plans are not listed on the exchanges. Fixed term plan series usually invest in debt /
income schemes and target short-term investors. The objective of fixed term plan
schemes is to gratify investors by generating some expected returns in a short period.

3. Gilt Funds

Also known as Government Securities in India, Gilt Funds invest in government papers
(named dated securities) having medium to long term maturity period. Issued by the
Government of India, these investments have little credit risk (risk of default) and provide
safety of principal to the investors. However, like all debt funds, gilt funds too are exposed to
interest rate risk. Interest rates and prices of debt securities are inversely related and any
change in the interest rates results in a change in the NAV of debt/gilt funds in an opposite
direction.

4. Money Market / Liquid Funds

Money market / liquid funds invest in short-term (maturing within one year) interest bearing
debt instruments. These securities are highly liquid and provide safety of investment, thus
making money market / liquid funds the safest investment option when compared with other
mutual fund types. However, even money market / liquid funds are exposed to the interest rate
risk. The typical investment options for liquid funds include Treasury Bills (issued by
governments), Commercial papers (issued by companies) and Certificates of Deposit (issued
by banks).

5. Hybrid Funds
As the name suggests, hybrid funds are those funds whose portfolio includes a blend of
equities, debts and money market securities. Hybrid funds have an equal proportion of debt
and equity in their portfolio. There are following types of hybrid funds in India:
 a. Balanced Funds - The portfolio of balanced funds include assets like debt securities,
convertible securities, and equity and preference shares held in a relatively equal
proportion. The objectives of balanced funds are to reward investors with a regular
income, moderate capital appreciation and at the same time minimizing the risk of
capital erosion. Balanced funds are appropriate for conservative investors having a
long term investment horizon.
b. Growth-and-Income Funds - Funds that combine features of growth funds and
income funds are known as Growth-and-Income Funds. These funds invest in
companies having potential for capital appreciation and those known for issuing high
dividends. The level of risks involved in these funds is lower than growth funds and
higher than income funds.
c. Asset Allocation Funds - Mutual funds may invest in financial assets like equity,
debt, money market or non-financial (physical) assets like real estate, commodities
etc.. Asset allocation funds adopt a variable asset allocation strategy that allows fund
managers to switch over from one asset class to another at any time depending upon
their outlook for specific markets. In other words, fund managers may switch over to
equity if they expect equity market to provide good returns and switch over to debt if
they expect debt market to provide better returns. It should be noted that switching
over from one asset class to another is a decision taken by the fund manager on the
basis of his own judgment and understanding of specific markets, and therefore, the
success of these funds depends upon the skill of a fund manager in anticipating market
trends.

6. Commodity Funds

Those funds that focus on investing in different commodities (like metals, food grains, crude
oil etc.) or commodity companies or commodity futures contracts are termed as Commodity
Funds. A commodity fund that invests in a single commodity or a group of commodities is a
specialized commodity fund and a commodity fund that invests in all available commodities
is a diversified commodity fund and bears less risk than a specialized commodity fund.
"Precious Metals Fund" and Gold Funds (that invest in gold, gold futures or shares of gold
mines) are common examples of commodity funds.

7. Real Estate Funds

Funds that invest directly in real estate or lend to real estate developers or invest in
shares/securitized assets of housing finance companies, are known as Specialized Real Estate
Funds. The objective of these funds may be to generate regular income for investors or capital
appreciation.

8. Exchange Traded Funds (ETF)

Exchange Traded Funds provide investors with combined benefits of a closed-end and an
open-end mutual fund. Exchange Traded Funds follow stock market indices and are traded on
stock exchanges like a single stock at index linked prices. The biggest advantage offered by
these funds is that they offer diversification, flexibility of holding a single share (tradable at
index linked prices) at the same time. Recently introduced in India, these funds are quite
popular abroad. Simply put, an ETF is a basket of securities that is traded on the stock
exchange, akin to a stock. So, unlike conventional mutual funds, ETFs are listed on a
recognized stock exchange. Their units can be bought and sold directly on the exchange,
through a stockbroker during the trading hours. ETFs can be either close-ended or open-
ended. Open-ended ETFs can issue fresh units to investors even post the new fund offer stage,
although this tends to happen selectively on account of the substantial lot sizes involved. In
case of ETFs, since the buying and selling is largely done over the stock exchange, there is
minimal interaction between investors and the fund house.

Besides, ETFs can be either actively or passively managed. In an actively-managed ETF, the
objective is to outperform the benchmark index. To that end, they have no obligation to invest
in stocks from any benchmark index. On the contrary, a passively-managed ETF attempts to
replicate the performance of a designated benchmark index. Hence it invests in the same
stocks, which comprise its benchmark index and in the same weightage. For example, Nifty
BeES is a passively managed ETF with the S&P CNX Nifty being its designated benchmark
index. In the Indian context, passively managed ETFs are more prominent.

9. Fund of Funds

Mutual funds that do not invest in financial or physical assets, but do invest in other mutual
fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds
maintain a portfolio comprising of units of other mutual fund schemes, just like conventional
mutual funds maintain a portfolio comprising of equity/debt/money market instruments or
non financial assets. Fund of Funds provide investors with an added advantage of diversifying
into different mutual fund schemes with even a small amount of investment, which further
helps in diversification of risks. However, the expenses of Fund of Funds are quite high on
account of compounding expenses of investments into different mutual fund schemes.

Major Mutual Fund Companies in India

ABN AMRO Mutual Fund

Birla Sun Life Mutual Fund
Bank of Baroda Mutual Fund (BOB Mutual Fund)
HDFC Mutual Fund
HSBC Mutual Fund
ING Vysya Mutual Fund
Prudential ICICI Mutual Fund
Sahara Mutual Fund
State Bank of India Mutual Fund
Tata Mutual Fund
Kotak Mahindra Mutual Fund
Unit Trust of India Mutual Fund
Reliance Mutual Fund
Standard Chartered Mutual Fund
Franklin Templeton India Mutual Fund
Morgan Stanley Mutual Fund India
Escorts Mutual Fund
Alliance Capital Mutual Fund
Benchmark Mutual Fund
Canbank Mutual Fund
Chola Mutual Fund
LIC Mutual Fund
GIC Mutual Fund etc.

INVESTMENT IN BOND
Bonds are a core element of any financial plan to invest and grow wealth .When you buy
bonds, you're lending the bond issuer money in return for a fixed rate of return. Bonds are
therefore known as fixed-income investments, and you are a creditor of the company. Stocks,
on the other hand, go up and down in value depending on the stock market, and you are an
owner of the company. Bonds are another word for loans taken out by large organizations,
such as corporations, cities, and the U.S. Government. Since these entities are so large, they
need to borrow the money from more than one person or bank. Bonds can be described
simply as long-term debt instruments representing the issuers contractual obligation, or IOU.
The buyer of a newly issued coupon bond is lending money to the issuer who, in turn, agrees
to pay interest on this loan and repay the principal at a stated maturity date. When you buy a
bond, you become a lender. The bond issuer is the borrower. The bond issuer might be a
company, a city, a state, or a federal government agency. They may borrow for short periods
to manage cash flow or cover operating costs, for example. They may also borrow money for
longer-term goals such as to build new facilities or pay for new technologies. Cities or states
may need to build bridges or provide other community services. One common way to borrow
money is to issue a bond series and sell units of the series to the public.Therefore, bonds are a
piece of a really big loan. The borrowing organization promises to pay the bond back, and
pays interest during the term of the bond. Since large organizations don't like to actually say
they are borrowing money, they say they are selling bonds...presumably because it sounds
better.Like loans, bonds return interest payments to the bond holder. In the old days, when
people actually held paper bonds, they would redeem the interest payments by clipping
coupons. Today, most bonds are held by the financial planning institution, and interest is
automatically accrued for the life of the bond.Bonds are usually resold before they mature, or
reach the end of the loan period. This is how bonds rise and fall in value. Since bonds return a
fixed interest payment, they tend to look more attractive when the economy and stocks market
decline. When the stock market is doing well, investors are less interested in purchasing
bonds, and their value drops. Like stocks, bonds can be packaged into a bond mutual fund.
This is a good way for an individual investor to let an experienced mutual fund manager pick
the best selection of corporate bonds. A bond fund can also reduce risk through
diversification. This way, if one corporation defaults on its bonds, then only a small part of the
investment is lost.Bonds can be issued by corporations, states, cities, and the federal
government. The interest on bonds is usually paid quarterly, but is sometimes paid at the date
the bond matures, when the borrower pays you back the principal you lent them. Bonds issued
by the federal government are extremely safe. Corporate bonds and municipal bonds (munis),
issued by states and cities, can be safe or high-risk. Just because a bond is issued by a city or
state doesn't guarantee their safety.

Bonds are rated for safety by bond-rating companies like A.M. Best (www.ambest.com),
Moody's (www.moodys.com), and Standard and Poor's (www.standardandpoors.com). These
rating companies give each bond a grade between A (low risk) and C (high risk). The grade
indicates the likelihood that the bond issuer will pay the interest and principal as promised.
Since you lock-in your interest rate when you buy bonds, one of the risks of owning bonds is
that you could be stuck with a lower interest rate while interest rates in the market are rising.
Bonds have a place in every portfolio. The danger is in being too conservative by having too
much of your money invested in conservative bonds and not enough in more aggressive
stocks or mutual funds. In a nutshell a bond is a debt security, similar to an I.O.U. When you
purchase a bond, you are lending money to a government, municipality, corporation, federal
agency or other entity known as the issuer. In return for the loan, the issuer promises to pay
you a specified rate of interest during the life of the bond and to repay the face value of the
bond (the principal) when it matures, or comes due.

REASON FOR CHOOSING BOND

It's an investing axiom that stocks return more than bonds. In the past, this has generally been
true for time periods of at least 10 years or more. However, this doesn't mean you shouldn't
invest in bonds. Bonds are appropriate any time you cannot tolerate the short-term volatility
of the stock market. Take two situations where this may be true:

1) Retirement - The easiest example to think of is an individual living off a fixed income. A
retiree simply cannot afford to lose his/her principal as income for it is required to pay the
bills.

2) Shorter time horizons - Say a young executive is planning to go back for an MBA in three
years. It's true that the stock market provides the opportunity for higher growth, which is why
his/her retirement fund is mostly in stocks, but the executive cannot afford to take the chance
of losing the money going towards his/her education. Because money is needed for a specific
purpose in the relatively near future, fixed-income securities are likely the best investment.

These two examples are clear cut, and they don't represent all investors. Most personal
financial advisors advocate maintaining a diversified portfolio and changing the weightings of
asset classes throughout your life. For example, in your 20s and 30s a majority of wealth
should be in equities. In your 40s and 50s the percentages shift out of stocks into bonds until
retirement, when a majority of your investments should be in the form of fixed income.

CHARACTERSTICS

Bonds have a number of characteristics of which you need to be aware. All of these factors
play a role in determining the value of a bond and the extent to which it fits in your portfolio.

Face Value/Par Value

The face value (also known as the par value or principal) is the amount of money a
holder will get back once a bond matures. A newly issued bond usually sells at the par
value. Corporate bonds normally have a par value of $1,000, but this amount can be
much greater for government bonds. What confuses many people is that the par value
is not the price of the bond. A bond's price fluctuates throughout its life in response to
a number of variables (more on this later). When a bond trades at a price above the
face value, it is said to be selling at a premium. When a bond sells below face value, it
is said to be selling at a discount.

Coupon (The Interest Rate)

The coupon is the amount the bondholder will receive as interest payments. It's called
a "coupon" because sometimes there are physical coupons on the bond that you tear
off and redeem for interest. However, this was more common in the past. Nowadays,
records are more likely to be kept electronically. As previously mentioned, most
bonds pay interest every six months, but it's possible for them to pay monthly,
quarterly or annually. The coupon is expressed as a percentage of the par value. If a
bond pays a coupon of 10% and its par value is $1,000, then it'll pay $100 of interest a
year. A rate that stays as a fixed percentage of the par value like this is a fixed-rate
bond. Another possibility is an adjustable interest payment, known as a floating-rate
bond. In this case the interest rate is tied to market rates through an index, such as the
rate on Treasury bills. You might think investors will pay more for a high coupon than
for a low coupon. All things being equal, a lower coupon means that the price of the
bond will fluctuate more.
 Maturity
The maturity date is the date in the future on which the investor's principal will be
repaid. Maturities can range from as little as one day to as long as 30 years (though
terms of 100 years have been issued).

A bond that matures in one year is much more predictable and thus less risky than a
bond that matures in 20 years. Therefore, in general, the longer the time to maturity,
the higher the interest rate. Also, all things being equal, a longer term bond will
fluctuate more than a shorter term bond.

Issuer
The issuer of a bond is a crucial factor to consider, as the issuer's stability is your
main assurance of getting paid back. For example, the U.S. government is far more
secure than any corporation. Its default risk (the chance of the debt not being paid
back) is extremely small - so small that U.S. government securities are known as risk-
free assets. The reason behind this is that a government will always be able to bring in
future revenue through taxation. A company, on the other hand, must continue to
make profits, which is far from guaranteed. This added risk means corporate bonds
must offer a higher yield in order to entice investors - this is the risk/return tradeoff in
action.

The bond rating system helps investors determine a company's credit risk. Think of a
bond rating as the report card for a company's credit rating. Blue-chip firms, which are
safer investments, have a high rating, while risky companies have a low rating. The chart
below illustrates the different bond rating scales from the major rating agencies in the U.S.:
Moody's, Standard and Poor's and Fitch Ratings.

Bond Rating
Grade Risk
Moody's S&P/ Fitch
Aaa AAA Investment Highest Quality
Aa AA Investment High Quality
A A Investment Strong
Baa BBB Investment Medium Grade
Ba, B BB, B Junk Speculative
Caa/Ca/C CCC/CC/C Junk Highly Speculative
 C D Junk In Default

Notice that if the company falls below a certain credit rating, its grade changes from
investment quality to junk status. Junk bonds are aptly named: they are the debt of companies
in some sort of financial difficulty. Because they are so risky, they have to offer much higher
yields than any other debt. This brings up an important point: not all bonds are inherently
safer than stocks. Certain types of bonds can be just as risky, if not riskier, than stocks.

Types of Bonds

In general, there are three main types of bonds:

Municipal bonds
Corporate bonds
Government bonds

Municipal Bonds

These are issued by state and local governments or their agencies to pay for public
improvements, reducing debt, or other public purposes. If you buy bonds issued by your home
state, you will not have to pay state income tax or federal income tax (or city tax, if you have
one). If you buy bonds issued by another state, you will not have to pay federal tax, but you
will pay tax to your own state (and city if applicable).

Corporate Bonds

These are issued by corporations that want to raise money for their business ventures, ranging
from balancing their cash flow to buying new equipment, building new facilities, or spending
on new research.Interest earned from corporate bonds is taxable, so they tend to pay higher
rates than government or municipal bonds, which have some tax benefits. Corporate bonds are
often considered appropriate investments for the bond portion of your retirement plan
investments, because you get the higher interest and still aren't taxed until the earnings are
withdrawn. A municipal or government bond will pay you less interest and already offers a
tax benefit, so they offer less incentive to include them in your retirement portfolio.
Government Bonds

Government bonds are those issued by the federal government or one of its agencies. From a
credit perspective, these are the safest of all investments because they're backed by the "full
faith and credit" of the U.S. government; so unless the U.S. goes bankrupt, you're guaranteed
to get your money back.

Treasuries
Treasury bills, notes, and bonds are collectively called "Treasuries."

Treasury bills (T-bills): These are short-term securities that mature in a year or less.
You buy them at a discount price and at the end of the term, you're repaid the full
price. The difference is what constitutes your earnings. These earnings are exempt
from local and state income taxes, but must be reported on your federal tax return.
Treasury notes: These are issued for the intermediate term, such as 2 years up to 10
years. Expect to earn a little higher interest rate than what you could get from a T-bill.
Interest is paid every six months. Earnings are exempt from local and state income
taxes but must be reported on your federal tax return. You can sell your Treasury note
before it matures, if you wish.
Treasury bonds: These are issued for the long-term, generally from 10 years to 30
years. Expect to earn a higher interest rate than what you could get from a T-note.
Interest is paid every six months. Earnings are exempt from local and state income
taxes but must be reported on your federal tax return. You can sell your Treasury bond
before it matures, if you wish.

Savings Bonds
Savings bonds are government bonds designed especially for individual investors. As such,
they can generally only be redeemed by their original owner, except in limited circumstances.
Savings bonds include:

I Bonds: These are savings bonds that help protect against inflation. They pay a fixed
interest rate combined with a variable interest rate that's updated twice a year based on
the current inflation rate.
EE Bonds: Series EE savings bonds issued on or after May 1, 2005 earn a fixed rate
of interest. They increase in value every month instead of every six months. Interest is
 compounded semiannually. If you cash them in before owning them for 5 years, you
will be penalized the last three months of interest. Interest earned on Series EE bonds
is exempt from state and local income taxes. You can defer federal income tax until
you redeem the bonds, which will stop earning interest after 30 years. Since interest
isn't taxed until you redeem a bond, your savings grow faster. EE bonds can also assist
you with tax planning, as you have the flexibility to redeem the bonds on your own
terms.
HH bonds. HH bonds also earn a fixed rate of interest. Unlike EE Bonds, HH Bonds
pay interest every 6 months until maturity or redemption, whichever comes first. The
U.S. Treasury discontinued the HH series of bonds in 2004, but will continue to honor
outstanding HH bonds still held by investors.

Zero coupon bonds

This is a type of bond that makes no coupon payments but instead is issued at a considerable
discount to par value. For example, let's say a zero-coupon bond with a $1,000 par value and
10 years to maturity is trading at $600; you'd be paying $600 today for a bond that will be
worth $1,000 in 10 years.

EARNINGS

The amount that you earn will be based on the bond's face value, coupon rate and yield.The
face value, or par value, of a bond is the value of the bond at maturity, the date when the loan
is paid off. A common face value is $1,000 per bond. It's important to keep in mind that the
actual market price of a bond may be higher or lower than the bond's face value. A bond's
market price can fluctuate over time, depending on a variety of factors including investor
demand, interest rate movement, the bond's maturity date and the creditworthiness of the
issuer.A bond's coupon rate refers to the interest that will be paid based on the face value of
the bond. A bond with a face value of $1000 and a 7% coupon will pay $70 a year in interest.
Interest may be divided into quarterly, semiannual or annual payments, depending on the
issuer and the individual bond.If you purchase a bond at face value, your coupon rate and
actual earned yield will be the same. However, bonds are often sold at higher or lower prices
than their face values. As a result, your actual yield can be different from the bond's coupon
rate. Buying a bond at a discount, or less than its face value, results in a higher yield than the
stated coupon rate. In contrast, buying a bond at a premium, or more than its face value,
results in a lower yield than the stated coupon rate.
SAFETY COVER

When you buy bonds, you're taking a risk that borrowers with poor credit ratings may not
repay their loans on time, or even at all. Two major services, Moody's and Standard & Poor's,
rate the creditworthiness of bonds. Ratings are based primarily on the credit history and
current status of the issuer.The ratings use a letter system. They go by letters, like at school.
The ones with only As in their rating are of high quality. The ones with a B in the rating are of
medium quality (except for Moody's B rating, which is below medium quality). Bonds with a
C are either low quality or extremely low quality.

Bonds are commonly labeled either "investment grade" or "junk" quality (often called "high
yield" instead). The less creditworthy the borrower, the higher your risk is of not being repaid
what you lend. For that reason, higher risk bonds usually provide a higher interest rate.

You can avoid the issue of creditworthiness entirely by investing in bonds issued by federal
government agencies. Repayment of these loans is guaranteed by the Full Faith and Credit of
the U.S. Government.

WHAT DO BOND RATING MEAN?

1. Moody's Bond Ratings

Aaa Best quality, with the smallest degree of investment risk.

Aa High quality by all standards; together with the Aaa group they comprise what are
generally known as high-grade bonds.

A Possess many favorable investment attributes; considered upper-medium-grade bonds.

Baa Medium-grade bonds (neither highly protected nor poorly secured). Bonds rated Baa
and above are considered investment grade.

Ba Have speculative elements; futures are not as well-assured. Bonds rated Ba and below
are generally considered speculative.
B Generally lack characteristics of a desirable investment.

Caa Bonds of poor standing.

C Lowest rated class of bonds, with extremely poor prospects of ever attaining any real
investment standing.

2. Standard & Poor's Bond Ratings

AAA 'AAA' is the highest rating assigned by Standard & Poor's. The bond issuer's capacity
to meet its financial commitment is extremely strong.

AA A bond rated 'AA' differs from the highest-rated obligations only to a small degree.
The bond issuer's capacity to meet its financial commitment on the bond is very strong.

A A bond rated 'A' is somewhat more affected negatively by changes in world and
economic conditions than bonds in higher-rated categories. However, the bond issuer's
capacity to meet its financial commitment on the bond is still strong.

BBB A bond rated 'BBB' show signs of adequate financial protection. However, unfavorable
economic conditions or changing circumstances are more likely to weaken the bond issuer's
ability to meet its financial commitment

'BB', 'B', 'CCC', 'CC', and 'C'

Bonds with these ratings are regarded as having significant risk, even though they may have
some positive qualities. 'BB' indicates the least degree of risk and 'C' the highest.

D A bond rated 'D' is in payment default.

READINGS OF THE BOND TABLE
Column 1: Issuer - This is the company, state (or province) or country that is issuing the
bond.
Column 2: Coupon - The coupon refers to the fixed interest rate that the issuer pays to the
lender.
Column 3: Maturity Date - This is the date on which the borrower will repay the investors
their principal. Typically, only the last two digits of the year are quoted: 25 means 2025, 04 is
2004, etc.
Column 4: Bid Price - This is the price someone is willing to pay for the bond. It is quoted in
relation to 100, no matter what the par value is. Think of the bid price as a percentage: a bond
with a bid of 93 is trading at 93% of its par value.
Column 5: Yield - The yield indicates annual return until the bond matures. Usually, this is
the yield to maturity, not current yield. If the bond is callable it will have a "c--" where the
"--" is the year the bond can be called. For example, c10 means the bond can be called as
early as 2010.
INSURANCE

BASICS OF INSURANCE

Insurance is a form of risk management primarily used to hedge against the risk of contingent
loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to
another, in exchange for a premium .Insurance provides financial protection against a loss
arising out of happening of an uncertain event. A person can avail this protection by paying
premium to an insurance company. Insurance works on the principle of risk sharing. A great
advantage of insurance is that it spreads the risk of few people over a large group of people
that promises to honour the claim in case such los is actually incurred by the insured is termed
as insurer. In order to get insurance, the insured is required to pay the insurance company (ie
the insurer) a certain amount termed as premium on a periodical exposed to same types risk
of similar type. Insurance is a basic form of risk management which provides protection
against possible loss to life or physical assets .A person who seeks protection against such loss
is termed as insured and the company basis (say monthly, quarterly ,annually or even one
time).
Insurance provides compensation to a person for an anticipated loss of life, business or an
asset. Insurance is broadly classified into 2 parts covering different types of risk:

1. LONG TERM(life insurance)

2. GENERAL INSURANCE(non life insurance)

Life insurance is one of the only tool where you create asset at the start (life cover) as
compared to any other options where your savings build up over a time period. Life insurance
is a contract between the policy owner and the insurer where the insurer agrees to pay a sum
of money upon occurrence of the policy owners death. In return the policy owner (or policy
payer) agrees to pay a stipulated amount called a premium at regular interval. As with most
insurance policies life insurance is a contract between the insurance company and the policy
owner (policy holder) whereby a benefit is paid to the designated beneficiary (or
beneficiaries) if an insured event occurs which is covered by the policy. To be a life policy the
insured event must be based upon life (or lives) of the people named in the policy. Insured
events that may be covered include:

Death

Accidental death

Life policies are legal contracts and the terms of the contract describe the limitation of the
insured events. Life based contract tend to fall into 2 major categories:
 I. PROTECTION POLICIES: Designed to provide a benefit in the event of specified
event, typically a lump sum payment.

II. INVESTMENT POLICIES: Where the main objective is to facilitate the growth of
capital by regular or single premiums.

PARTIES TO CONTRACT

There is a difference between the insured and the policy owner (policy holder) although the
owner and the insured are often the same persons eg if joe buys a policy on his own life ,he is
both the owner and the insured. The policy owner is the guarantee and he/she will be the
person who will pay for the policy. The insured is a participant in the contract but not
necessarily a party to it.

ROLES OF LIFE INSURANCE : Risk and uncertainties are part of Lifes great adventure-
accident, illness, theft, natural disaster; they are all built into the working of the universe,
waiting to happen. Its role can be summarized as:

1. LIFE INSURANCE AS INVESTMENT: Insurance is an attractive option for

investment. While most people recognize the risk hedging and tax saving potential of
insurance, Many are not aware of its advantages as an investment option as well.
Insurance products yield more compared to regular investment options, and this is
besides the added incentives (read bonuses) offered by insures. You cannot compare
an insurance product with other investment schemes for the simple reason that it
offers financial protection from risks, something that is missing in non insurance
products. Infact the premium you pay for insurance policy is an investment against
risk. Thus before comparing with other scheme you must accept that a part of the
total amount goes towards providing for the risk cover, while the rest is used for
savings. In life insurance, unlike non life products you get maturity benefits on
survival at the end of the term. In other words if you take a life insurance policy for
20years and survive the term the amount invested as premium in the policy will come
back to you with added returns. In the unfortunate event of death with in the tenure of
the deceased will receive the sum assured.
 Now lets compare insurance as an investment option. If you invest Rs 10,000
in PPF your money grows to Rs 10,950 @ 9.5% interest over a yes. But in this case,
the access to your funds will be limited. One can withdraw 50% of the initial deposit
only after 4 years. The same amount of Rs 10,000 can give upto approximately Rs
5,00,00 to Rs 12,00,000(depending upon the plan, medical conditions of the life
insured) and this amount can immediately can become available to the policy holder
on death. Thus insurance is a unique investment avenue that delivers sound returns in
addition to protection.

2. LIFE INSURANCE AS RISK COVER: First and foremost insurance is about risk
cover a protection; financial protection, to be more precise to help outlasts lifes
unprecedented losses. Designed to safeguard against losses suffered on account of
any unforeseen event, An insurance provides you with that unique sense of security
that no other form of investment provides. By buying life insurance you buy peace of
mind and are prepared to face any financial demand that would hit the family in case
of untimely demise. To provide such protection insurance firms collect contribution
from many people who face the same risk. A lose claim is paid out of the total
premium collected by the insurance companys who act as trustees of the monies.
Insurance also provides a safeguard in the case you have a wide range of products of
accidents or a drop in income after retirement. An accident or disability can be
devastating and an insurance policy can lend timely support to the family in such
time. It also comes as a great help when you retire, in case no untoward happens
during the term of the policy. With the entry of private sector players in insurance,
you have a wide range of products and services to choose from .Further many of
these can be further customized to fit individual specific needs. Considering the
amount you have to pay now it is worth buying some extra sleep.

3. LIFE INSURANCE AS TAX PLANNING: Insurance serves as an excellent tax

saving mechanism too. The government of India has offered tax incentives to life
insurance products in order to facilitate the flow of funds into the productive assets.
Under SEC 88 of the INCOME TAX ACT,1961 an individual is entitled to a rebate of
20% on the annual premium payable on his/her life or life of his/her children or adult
children. The rebate is deductible fro tax payable by the individual or a Hindu
undivided family. This rebate can be availed upto a maximum of Rs 60,000.By
 paying Rs 60,000 a year , you can buy anything upwards of Rs 10,00,000 in sum
assured(depending upon the policy) .This means that you get a Rs 12,000 tax benefit.
The rebate is deductible from the tax payable by an individual/Hindu undivided
family.

TYPES OF INSURANCE

What you should know about various types of insurance policies before getting insurance
insured. All policies are not the same. Some give coverage for your life time and other cover
you a specific numbers of years. Here is a snapshot of the policies and what they offer.

1. TERM INSURANCE: Term insurance covers you for a term of one or more years.
It pays a death benefit only if the policy holder dies during the insurance is in force.
Term insurance generally offers the cheapest form of life insurance. You can renew
most term insurance policies for one or more terms even if your health condition has
changed. However each time you renew the policy term premiums may climb higher,
just like a rent agreement every time you renew the lease. This policy is particularly
useful to cover any outstanding debt in the form of mortagage, home ;loan etc. Eg ; if
you have taken a loan of Rs 10,00,000 you will have an option of taking an
insurance to protect the loan in case of passing away before the debt is repaid.

2. WHOLE LIFE INSURANCE: Whole life insurance covers you for as long as you
live if yours premiums are paid. You generally pay the same premium amount
throughout your lifetime. Some whole life policies let you pay premiums for a
shorter period such as 15,20,25 years. Premiums for these policies are higher since
the premium payments are made during a shorter period. There are options in the
market to have a return of premium option in a whole life policy. That means after a
certain age of paying premiums the life insurance company will pay back the life
assured but the coverage will continue.

3. MONEY BACK INSURANCE : The money back insurance plan not only covers
yours life ,it also assures you the return of a certain percent of the sum assured as
cash payment at regular interval. It is a savings plan with the added advantage of life
cover and regular cash inflow. This plan is ideal for planning special moments ; like
a wedding, your childs education or purchase of an asset.
4. ENDOWMENT ASSURANCE : It is a level premium plan with a saving feature.
At maturity, a lumpsum is paid out equal to the sum assured (plus dividends in a par
policy). If death occurs during the term of the policy then the total amount of
insurance and any dividend(par policy) are paid out. There are number of products in
the market that offer flexibility in choosing the term of the policy namely .You can
choose the term 5 30 years. There are products in the market that offer non
participating (no profits) version, the premiums for which are cheaper.

5. UNIVERSAL LIFE INSURANCE : This is a flexible life policy and is also market
sensitive. You decide on the several investment options on how your net premium are
tobe invested. While the money invested has the potential for significant growth,
such funds are subject to market risks including the loss of the principal.

6. UNIT LINKED PRODUCT : Market linked plans or unit linked plan are similar to
traditional insurance policies with the exception that your premium amount is
invested by the insurance company in the stock market. Market linked insurance
policies mimic mutual funds and investment in a basket of securities allowing you to
choose between the investment options predominantly in equity, debt or a minimum
of both(called balanced funds).The major advantage of market linked product is that
they leave the asset allocation decision in the hands of investors themselves. You are
in control of how you want to distribute your money among the broad class of
instruments and when you want to do it or pull out.

RIDERS

Riders are additional add-on benefits that you could opt to include in your policy
over and above what the policy may provide. However these additions come at an
extra premium charge depending of the rider you opt for. These riders cannot be
bought separately and independently. The extra premium, nature and characteristics
of the riders are based on the base policy that is offered.

Some riders available in the market are :

 ACCIDENT DEATH BENEFIT : Provides an additional amount in case
death occurs as a result of an accident.

TERM RIDER: It allows the payment of an additional amount should death

of the insured happens.

WAIVER OF PREMIUM : In case of total and permanent disability of life

insured due to accident or any other means ,this rider allows premium on base
policy or riders to be waived.

CRITICAL ILLNESS : It allows payment of an additional amount on the

diagnosis of some critical illness.

Unit Linked Insurance Plan (ULIP) Plan Overview

ULIP is an abbreviation for Unit link insurance plan .A ULIP is a insurance policy which
provides a combination of risk cover and investment. The dynamics of the capital market have
a direct bearing on the performance of the Ulip. In unit linked policy the investment risk is
generally borne by the investor.Unit Linked Insurance Plan (ULIPs) are insurance policies
that combine risk coverage with investing in the stock/debt markets. In effect, they are
designed to behave as normal insurance policies plus mutual funds.An investor contribution to
ULIPs gets invested in specific types of portfolios that he/she chooses. The policy typically
pays back based on market returns on investments at the end of the insured period. Therefore,
it forms an interesting savings instrument that can get good risk cover.Unit Linked Insurance
Plans (ULIP) are the fastest growing category in the financial products market of our country.
It is a hybrid of Insurance and Mutual funds in which the customer decides the premium
he/she is willing to pay as well as the sum assured. In the case of conventional plans the client
decides the sum assured and the premium is fixed depending on the age. The minimum sum
assured one now has to take (post June 2006) is five times the annual premium and the
maximum risk cover can be a multiple of more than 100, depending on the company, scheme
and the age of the applicant. You can also opt for accidental and critical illness riders in most
of the plans.

To decide the quantum of insurance required, you should get a human life value analysis
done, which will determine your insurance needs depending on a number of factors like age,
income, outstanding loans and other liabilities like number of dependents etc. This analysis
can be done by any financial planner or a life insurance advisor. It is advisable to take a higher
multiple of sum assured; not less than 20 times the annual premium. If you are 30 years of
age, it is possible to pay a premium of Rs.2000 per month and get a risk cover of Rs.21.60
lakhs. This multiple goes down with age but still there are plans in the market, like a ULIP by
TATA AIG offers a risk cover of up to 60 times the annual premium up to an entry age of 60.
Taking a lower multiple of risk cover is not desired since we have to be clear that the primary
purpose of a ULIP is to take insurance and not just investment, for which there are mutual
funds.

How does a ULIP work?

To understand how a ULIP works, let us assume an annual premium of Rs. 25,000. The life
insurer will first deduct an up front charge which varies from 5% to 7% in the first year. IRDA
has not decided so far to cap the allowable up front charges, which are strictly controlled in
the mutual fund market. Let us assume a charge of 20%, which is very common in the
industry. So out of 25,000 rupees, 5000 are deducted up front and they will take care of the
cost of issuance of policy, agents commission etc. This charge is higher in the first year and
goes down subsequently. Balance Rs. 20,000 is then used to allot you some units at the
current price which is exactly like a mutual fund. The price of the units can go up and down
depending on the market price of the securities it has purchased which can vary from 100%
debt to 100% equity in various combinations offered by different insurers and schemes. These
units are then used to deduct the cost of risk cover given to you and the cost of fund and
policy management. Every investment made by you in the form of premium or Top-up
(money you can pay in addition to the premium), adds to your balance of units and any charge
towards risk cover or policy administration etc. reduces your number of units. The balance
units multiplied by the current NAV (Net Asset Value) is your fund value for any given day,
which changes almost every day.

So to sum up:

ULIP is a hybrid plan, provides the qualities of both insurance and mutual funds
Gives you the flexibility to chose your premium as well as risk cover
Gives you the flexibility to stop premium payments if so desired or needed

ULIPs vs Mutual Funds

 ULIPs Mutual Funds
Minimum investment
Determined by the
Investment amounts are
investor and can be
amounts determined by the
modified as well
fund house
No upper limits, Upper limits for
expenses expenses chargeable
Expenses
determined by the to investors have been
insurance company set by the regulator
Portfolio Quarterly disclosures
Not mandatory
disclosure are mandatory
Modifying Generally Entry/exit loads have
asset permitted for free to be borne by the
allocation or at a nominal cost investor
Section 80C Section 80C benefits
benefits are are available only on
Tax benefits
available on all investments in tax-
ULIP investments saving funds
The important differences between traditional plans and ULIP :

S.NO ULIP TRADITIONAL PLANS

1 The premiums in excess of risk cover, All the premiums go into a common fund
is invested as desired by the policy and are invested at the insurers direction.
holder.
2 The investment return may vary There are 2 categories of benefits -
depending on the market movements guaranteed and non guaranteed. For
and the investment risk is borne by the guaranteed benefits, the insurer bears the
policy holder. investment risk. However non guaranteed
benefit such as bonuses depend on the
performance of insurer.
3 Withdrawals are allowed. Loss if any, Surrenders are allowed but at a loss. Loss
depends on NAV ;loans are not may be provided.
allowed.
4 There are no bonuses, except royalty For participating policies, bonuses
bonuses in some cases. are payable.
5 The amount of premium used for The premium amount used for insurance
insurance coverage,other charges and coverage, other charges and investment are
the purchase of units are unbounded bundled up and not known.
and transparent .
6 Benefits are variable. Benefits are pre determined.
7 Loss is likely. Gains depending on Loss is unlikely. Gains are also unlikely
market movements. except through bonuses.
FIXED DEPOSIT

FDs are one of the oldest and most common methods of investing. Incase you do not know
how it works, you have to give the financial institution a certain sum of money for a certain
fixed period of time. After that time period is over you will get the original amount with some
interest that you have earned for the time period you invested your money. FDs are not very
liquid investments. If you invest your money in FDs, you will not be able to withdraw it
until the FD matures. Generally, if you need to remove your money before the maturity of the
investment, you will be able to do so but you will loose the interest that you were supposed to
earn. There are some FDs that allow you to claim your interest every month or every 6
months etc. There are many different schemes with many different offers! Besides this, if a
particular interest rate is decided at the time of investing and the interest rate goes up while
your money is invested, you will not be able to enjoy the higher interest rate. However, now-
a-days the banks and the financial market is becoming very competitive. You need to check up
on the different types of FD schemes available before making any FD investments. There are
FDs offered by non-financial institutions like companies etc. also. These are generally FDs
that will give good rate of returns. They are called Company FDs.

However, the risk involved is also moderately high. However, the companies try to get
themselves an AAA rating according to the specifications of the RBI. If a company has an
AAA rating, then it can be considered to be a safe investment. Company Fixed Deposits forms
are available through various broking agencies or directly with the companies. Minimum
investment in a Company Fixed deposit varies from company to company. Normally, the
minimum investment is Rs.5,000. For individual investors, there is no upper limit. In case of
recurring deposits, the minimum amount is normally Rs.100 per month.

Duration of the Company FD scheme:

Company Fixed Deposits have varying duration; they may vary from a minimum of 6 months
to 5 years or even more.
PROVIDENT FUND

Provident fund scheme is a retirement benefit scheme .Under this scheme, a stipulated sum
is deducted from the salary of the employee as his contribution towards the fund. The
employer also, generally, contributes simultaneously the same amount out of his pocket to the
fund. The employees and employers contribution are invested in gilt edged securities.
Interest earned theron is also credited to the provident fund account of employees. Thus credit
balance in a provident fund account of an employee consists of employees contribution,
interest on employees contribution, employers contribution and interest on employers
contribution. The accumulated sum is paid to the employee at the time of his
retirement/resignation. In the case of death of an employee, accumulated balance is paid to his
legal heirs. Since the scheme encourages personal savings at micro level and generates funds
for investment at the macro level, the government provides tax incentives under Sec 88.Thus
it is a social security measure to provide for the old age of the employee. Provident fund is
calculated as a percentage of your salary (Basic pay and dearness allowance if any).The
present rate is 12% and the same will be cut from your salary and a matching contribution will
be paid from employer pension fund. It is deducted from your salary if you are government
employee. According to the new pension policy it is not deducted for employees in service
after 1.1.2007.

To sum up:

Benefit is payable in lumpsum.

12% contribution from both employer and employee.

8.33% of employers contribution to EPS95

Tax benefit to approved fund.

Accumulated value with interest is returned on leaving the service.

Provident fund is thus defined as a benefit scheme where benefits are paid in lumpsum or on
exit. It is mandatory for all organization employing more than 19 employees. Employer and
employee both conyribute 12% of the wage bill to the fund. The accumulated amount with
interest is returned to employee on the retirement. After the introduction of EPS-95 part of the
contribution to provident fund is diverted to state pension scheme, which provides salary
linked benefits on superannuation.

PUBLIC PROVIDENT FUND

Public provident fund is established by the Central Government for the benefit of general
public to mobilize public savings. The ppf is a government run fund where the entire
contribution is voluntarily made by the individual himself. Interest is credited every year but
payable at the time of maturity. PPF is among the most popular small saving schemes.
Currently, this scheme offers a return of 8 per cent and has a maturity period of 15 years. It
provides regular savings by ensuring that contributions (which can vary from Rs.500 to
Rs.70,000 per year) are made every year. For efficient "tax saving" there is nothing better than
PPF!But for those who are looking for liquidity, PPF is NOT a good option. Withdrawals are
allowed only after five years from the end of the financial year in which the first deposit is
made.PPF does not provide any regular income and only provides for accumulation of
interest over a 15-year period, and the lump-sum amount (principal + interest) is payable on
maturity. The lump-sum amount that you receive on maturity (at the end of 15 years) is
completely tax-free!! One can deposit up-to Rs 70,000 per year in the PPF account and this
money will also not be taxed and be removed from your taxable income.

If you are relatively young and have time on your side, then PPF is for you. PPF account can
be opened with a minimum deposit of Rs.100 at any branch of the State Bank of India (SBI)
or branches of it's associated banks like the State Bank of Mysore or Hyderabad. The account
can also be opened at the branches of a few nationalized banks, like the Bank of India, Central
Bank of India and Bank of Baroda, and at any head post office or general post office. After
opening an account you get a pass book, which will be used as a record for all your deposits,
interest accruals, withdrawals and loans.

National Savings Certificate (NSC)

The National saving scheme popularly referred to by its acronym NSC. NSC is a post office
saving scheme backed by the government, it is one of the safest investment option. That is
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 year. 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. 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. One person can be
nominated for certificates of denomination of Rs. 100- and more than one person can be
nominated for higher denominations. 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. 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. 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
Certificate of Rs 1000.NSC for that year and tax benefits can be claimed under section 88. eg
a Rs1000 denomination certificate will increase to Rs. 1601 on completion of 6 years.
Interest rates for the NSC

Year Rate of Interest

1 year Rs 81.60
2 year Rs 88.30
3 year Rs 95.50
4 year Rs103.30
5 year Rs 111.70
6 year Rs 120.80
COMPARING NSC WITH PPF

NSC versus PPF: Post- tax

returns

PPF NSC

Coupon rate (pa) 8.00% 8.00%

Interest frequency Compounded annually Compounded half-yearly

Effective rate (pa) 8.00% 8.16%

Interest receipt On maturity On maturity

Tax benefit on investment Deduction under Section 80C Deduction under Section 80C

Tax benefit on interest earned Exempt under Section 10 Nil

Tax rates Post-tax returns*

Nil 8.00% 8.16%

10% 8.00% 7.33%

20% 8.00% 6.50%

30% 8.00% 5.66%

(*Education cess charged at 2.00% has been considered while computing post-tax returns.)

NSC scorecard

Risk No risk
Returns Average-
good
Liquidity Medium
Other tax benefits Average
Pluses

The interest that accrues is eligible for a deduction of up to Rs 12,000 from your
taxable income. In other words, the interest that accrues (and is not received) is
exempt from income tax up to Rs 12,000.
The interest that accrues is automatically reinvested and is eligible for rebate of upto
30 per cent, thereby reducing the requirement limit for investment next year.
You can pledge NSCs with banks and other lending institutions to get a loan of 75 per
cent of the value of the certificates. This is particularly useful for contractors and other
people who regularly need loans against security.
The lock-in period is for six years only.

Minuses
The post-tax returns are lower than that offered by the Public Provident Fund (PPF)
and infrastructure bonds.
Premature withdrawals are not allowed.
Interest income is subject to a maximum exemption of Rs 12,000; interest income in
excess of Rs 12,000 is taxable.

GOLD AS AN INVESTMENT

Investment in gold has always played a significant role in religion, rituals and human
sentiments, making it an indispensable investment option. Gold with its traditionally negative
correlation with other assets classes such as stocks, fixed income securities, and commodities,
has made it a popular investment for portfolio diversification. n individual can invest in gold
through various routes. The most conventional route is to possess it in physical form.
However, this kind of investment is not only risky but also requires high carrying cost. The
other option is to invest in gold bonds or certificates issued by various central and commercial
banks. These bonds generally carry interest rates and a lock- in period varying from three
years to seven years. On maturity, depositors can take the delivery of gold or amount
equivalent depending on their option. In the recent past, launch of Gold ETF( Exchange
traded fund) has been a welcome development. World gold options are the latest option for
investing in gold. These are mutual funds, specializing in investing in the shares of gold
companies. It would be misleading to equate investment in gold bullion as the appreciation
potential of the gold mining company share depends on market expectations of the future
price of gold, the costs of mining it, the likelihood of additional gold discoveries and several
other factors.

Most gold mining equities tend to be more volatile than the gold itself. Gold mining stocks
have earnings and resources to leverage the price of gold. Hence as the price of gold rises,
profit of gold mining stocks rises more in percentage terms. As supply side of gold is not
increasing, existing gold mining companies are likely to witness a significant increase in
profitability and value in the next couple of years. Hence as long as demand for gold rises
world gold funds are likely to be the most remunerative option for investors.

DERIVATIVES

A derivative is a financial instrument that derives or gets it value from some real good or
stock. It is in its most basic form simply a contract between two parties to exchange value
based on the action of a real good or service. Typically, the seller receives money in exchange
for an agreement to purchase or sell some good or service at some specified future date.The
largest appeal of derivatives is that they offer some degree of leverage. Leverage is a financial
term that refers to the multiplication that happens when a small amount of money is used to
control an item of much larger value. A mortagage is the most common form of leverage. For
a small amount of money and taking on the obligation of a mortgage, a person gains control
of a property of much larger value than the small amount of money that has exchanged hands.
 ANALYSIS AND FINDINGS OF THE QUESTIONNAIRE RESPONSES

For judging the investors perception about different investment avenues , I have taken a
sample of 100 investors. The analysis was done using the responses obtained.

(1) Monthly income (in Rs) :

(a) Below 15,000 (c) 15,000 - 30,000
(b) 30,000 45,000 (d) above 45,000

3.01
INTERPRETATION:
Survey results shows that people having income below Rs 30,000 are taking the mutual fund
route for investing their money .That is they dont want inflation to eat up their money in a
savings bank account.Thus they take balanced approach to investment i.e upper middle class
segment of our society is diversifying their investment .Diversification is a nuclear weapon
in the investors arsenal to fight against risk: in simple terms it means spreading your
investment across different securities stocks, bonds, real estate, money market instruments,
real estate, fixed deposit etc) and different sectors ( auto, textile, IT) .Upper middle class is
investing in various types of instruments which are hard to predict.These days demand for SIP
is on the rise particularly among middle class investors for the simple reason SIP is very
similar to regular saving scheme like a recurring deposit i.e. it is a method of investing a
fixed sum regularly in a mutual fund .Thus investing savings that too without much savings is
like a dream come true.
(2) Savings that go in investment :

3.02
INTERPRETATION:
Investment means putting your money to work to earn more money. Investment planning is a
holistic approach to meeting your lifes goalsi.e. investment planning is a key to successful
investing. It is a scientific process, which if done in a right spirit can help you achieve your
financial goals like buying a new house, enjoying comfortable retirement, paying for
education of children etc. You do not have to be wealthy to be an investor. Investing even a
small amount can produce considerable rewards over the long term .especially if you do it
regularly.But you need to decide about how much you want to invest and where.. on analysis
it was found that 64% respondents have invested 10% of their savings in different investment
avenue.
(3) Preference for investment avenues :

3.03
INTERPRETATION :
On analysis it was found that mutual funds have graduated into a flexible and innovative
investment avenue for investors. The reason why mutual funds appeal to investors across the
spectrum is because as an investment avenue they offer a lot more variety and flexibility than
stocks, NSC, PPF and bonds . Eg: For a low risk investor debt funds and MIPs are the most
sought after fund. High risk investors prefer investing in equity and balanced funds. Now if
you have money that you want to invest for a single day there are liquid funds . Another
way is to start investing piecemeal with as little as Rs 500 p. m through SIP.Today Mutual
funds have finally come into their own as an independent investment avenue Mutual funds
IPOs attract as much investor attention as stock.

Next on the list comes the small savings segments - small saving continues to be a popular
investment avenue.PPF is an ideal tool while planning for long term objectives as it scores
high in terms of tax benefit i.e. interest earned is exempt under section 10 of the Income Tax
act . Assured return life insurance schemes have now become a thing of the past. Ulip have
been a rage of late. Ulip work like a mutual fund with a life cover thrown in.

Finally comes the real estate sector Rising income levels of a growing middle class along
with increase in nuclear families, low interest rates , modern attitude to home ownership and a
change in attitude amongst the young working population from that of save and buy to buy
and repay have all combined to boost housing demand.
(4) Analyzing the different risk levels :

3.04

INTERPRETATION :

Risk and return go hand in hand. Higher the risk, higher is the possibility of earning a
good return. Theoretically even safe investments such as (such as bank deposits) are not
without some element of risk .Conservative investor is not very open to market but they
are smart enough to take a conservative amount of risk. Conservative people are very
stringent about their investing decision. They invest most of their fund in debt funds. For
them cash & capital investment is most important and prioritized. They invest most of
their fund in debt fund and dont even think about entering into high end equity market.
Conservative investors take only limited risk by concentrating on secure fixed income
instruments. Moderate investors take moderate risk by investing in mutual funds, bonds,
select bluechip equity shares etc. Aggressive investors are the masters of the field. They
play aggressively in the market as they take higher risk so they are entitled to higher
returns. Aggressive investors take major risk on investments in order to have high(above-
average) returns like speculative or unpredictable equity shares.
(5) Investment with the help of a financial advisor :

3.05

INTERPRETATION :
According to the survey it has been found that investors want their money to be in proper
hands that is why they consider professional management to be the most important thing
while investing their hard earned money. People enlist the help of financial planner because
of the complexity of knowing how to perform the following:

Providing direction and meaning to financial decisions.

Allowing the person to understand how each financial decision affects the other
areas of finance.
Allowing the person to adapt more easily to life changes in order to feel more
secure.
(6) Source of information :

3.06

INTERPRETATION :
There are many factors which influence the investment decision of the investors. It may be
current news (political, technological, financial etc ) , magazines, friends etc. In the study it
proved that many people trust only the people working in that investment advisory company
for the investment decisions. Friends, relatives i.e. personal source is the next major factor. It
is to be noted that experienced person trust himself thereafter he/she invests. Magazines and
current news also matters and bad news can make a person change his/her decision.
(7) Rating the services of the financial advisors :

3.07
INTERPRETATION :

The service of the service provider is the factor which makes a person from shifting from
one investment advisor to another. The hard task is to retain an investor with the company
over a period of time. Business lost for once is lost forever . The word of mouth
communication plays important role in attracting most investors. There were many who
remained unsatisfied with the services of their brokers. The facilities must be attractive .
The investors dont want to keep any tensions in their mind apart from investments. Still
the majority was of those who are partially satisfied. There is always room for
improvement. The services can be improved and many others can be made to work with
the organization.
(8) Appropriate time for consulting the financial planner :

3.08
INTERPRETATION :
The experience in the market is the factor which influences the investment .Major part of
the sample was having vast experience thus they prefer consulting their advisor once in a
year i.e. the smart investors decides in advance for how much time he would be keeping
his money in the market and when he should leave squaring up. There are many who are
somewhat conservative and are inexperienced i.e they entered the market after noticing
the rise in the market. That is they are the ones who consult their advisor every time they
invest.
CHAPTER FOUR

CONCLUSION
 CONCLUSIONS

Our parents and the generation before them used to generally deploy all their savings in bank
fixed deposits, national savings certificates , post office deposits , RBI bonds and so on. These
fixed return generating instruments used to meet perfectly well their capital protection and
growth objectives. Unfortunately, in todays globalize world, the above referred fixed coupon
instruments yield on an average around only 8% and being taxable end up providing a net
return of around 5.5% percent . This in a scenario where average inflation is around 7-8%,
results in a negative net income and depletion of corpus in true sense of the term.

Thus arises the current desperate need for financial literacy and financial planning among
mass investors. In order to protect capital , today investors need to necessarily deploy atleast a
part of savings in risk financial instruments. To understand and appreciate these instruments
prior to such deployment, we need financial literacy and correct advice. In this context the
role of the intermediary, financial planner or advisor gains significant importance. It is
expected from them that correct knowledge would be imparted and appropriate product would
be sold. Unfortunately the financial landscape is littered with tales of mis-selling. To protect
themselves from such mishaps, an investor should look for an unbiased and trustworthy
intermediary. He should ideally look for not a product seller but a financial planner who
would be more like a doctor and not a pharmaceutical salesman. The basic questions an
investor should ask an intermediary should include the following:

1) What is the commission he would getting out of the sale?

2) What are the competing products in the same space and how the product suggested is
superior.

3) Are there any some other domain which may lead to fulfillment of similar financial
objectives at a lower cost ? ( Unit linked insurance plans vs mutual funds , for
instance.)

4) Does the intermediary sell all the competing products or only few specific products?
 5) Who will provide the after sales service. That is, will the intermediary remain engaged
even after selling the product.?

6) Would the intermediary facilitate timely renewals ( if appropriate) on a regular basis?

The principle of caveat emptor that is buyer bewares also applies to a financial
service buyer and abundant caution should be exercised while selecting the intermediary
through whom the product or service is being acquired.

Earlier people used to decide how to invest their savings based on what every one else is
doing. But its painfully clear that no one else can make the right decision for ones investment
strategy which brings fore the importance of financial plan. Today investment planning is no
more an alien concept for the Indian populace. The people are better aware of the art of
managing their hard earned money. Today as we see economy booming another boom to
investor is a lot of information, awareness, new opportunities and innovative tools of
investment. An individual investor knows about and looks beyond traditional avenues of
investing like bank FD, post office saving or long term insurance and is more courageous to
take more risk for higher returns.
CHAPTER FIVE

SUGGESTIONS
 SUGGESTIONS
To help consumers make informed decisions, financial education is very important.
thus there is a need of Financial literacy.
Asset management companies(AMC) should conduct more and more mass awareness
campaigns on systematic investment planning, power of rupee compounding , need to
insure financial goals etc .
AMCs should also lower the minimum investment bar to as minimum as possible
thus making it affordable to smallest of the small investor to participate in financial
markets.
Easy access to simple products will be key factors in improving investors financial
learning.
Going ahead ,low risk mutual funds products can be made available like any other
FMCG product over the counter, packaged and delivered instantly. This will improve
the acceptance and access to the industry and will open the gates for masses to
improve and experiment with their wealth-building endeavor.
CHAPTER SIX

LIMITATIONS OF STUDY
 LIMITATIONS

1) Time constraints: Time is the most important thing in every bodys life which flows
like a running water in the sea. There was limited time for conducting the study.

2) Sample size: The study was done for only 100 people, so the actual figures can be
different, more geographical sample may show greater difference in perceptions.

3) Since the project was undertaken at the student level, the analysis, results and findings
could not be cent percent accurate, although full and sincere efforts have been made to
reach the accurate results.

4) Unnatural circumstances: Public is little hesitant in disclosing their financial dealings.

On being questioned/ observed people tend to act artificially- this psychology must
have led to hide and reveal certain false facts. They wont talk about investment made
by them so far the business level is concerned they are far still comfortable to share
information.
 BIBLIOGRAPHY

LITERATURE

KOTHARI, C.R., RESEARCH METHODOLOGY. New Age International

Publishers.
PANDIAN, PUNITHAVARTHY, Security analysis & portfolio management. Vikas
publications.
CHANDRA, PARSANNA, Financial management Principles and practice
WEALTH COMPASS: The investors monthly magazine from Way2wealth.

WEBSITES

www.pensionindia.com/about.html
www.mutualfundindia.com/funds/equity.html
www.amfi.com/mutualfunds/comparison/
www.bajajcapital.com//investmentfunds/derivatives
www.moneycontrol.com/investment/equity/comparison
www.valueresearchonline.com/retirementplanner.html
 ANNEXURE

QUESTIONNAIRE

Financial planning (In the Indian Context)

(1) Respondents name

(2) Age (in years):

Under 25 25 - 50
50 75 above 75

(3) Occupation:
(a) Business (b) Service.
(c) Others

(4) Monthly income (in Rs)

(a) Below 15,000 (b) 15,000 - 30,000
(c) 30,000 60,000 (d) above 60,000

(5) How much percentage of your income goes into investment?

(a) <10% (b) 10% - 20%
(c) 20% - 30% (d) > 30%

(6)Where do you prefer to invest your savings?

(a) Equity (b) Mutual fund
(c) Bonds (d) Real estate
(e) Fixed deposit (f) any other please specify_______________

(7) What are your financial goals?

(a) Reducing income tax (b) Protection from inflation.
(c) Insurance cover. (d) Liquidity.
(e) Investing for a long term goal like retirement, childs education.
(8) Choose one of the following risk levels.
(a) Conservative (b) Some what conservative
(c) Moderate (d) Some what aggressive.
(e) Aggressive.

(9) Have you ever taken an expert advice while investing your savings in different
avenues?
(a) Yes (b) no

(10) How did you come to know about the investment guide ?
(a) Through magazines, newspapers, journals.
(b) Internet
(c) Through friends, relatives already taking guidance.
(d) People working in that investment advisory company/institution etc.

(11) What is your overall rating in respect of that investment guide?

(a) Excellent (b) Good
(c) Fair (d) Poor
(e) Very poor

(12) How often do you consult your investment advisor ?

(a) Every time you invest (b) once in a month
(c) Once in a year. (d) cant say.

(13) Are you satisfied with the services of your current investment guide ? If not,What
specific services you would like them to introduce for you?
Please suggest..................................................
.