Types of Bank Accounts
There are three main types of bank accounts:
01Savings Account 02Current Account 03Fixed Deposit Account
Each type of account has its own set of features. Choose your account based on your needs and requirements. If you are going to use your account for day-to-day money management such as to pay bills, a current, savings or a combined current and savings account will be more useful.
If you are thinking of putting aside a sum of money for medium to long-term savings, then you may prefer to open a fixed deposit account.
Things to know before opening a bank account
Before opening a bank account, do find out about the following:
Savings Account / Current Account
01Minimum balance required 02Charges if minimum balance is not maintained 03Withdrawal limits - at branch or ATM 04Minimum account holding period 05Cheque book charges
Fixed Deposit Account
01Rollover on maturity date 02Premature closure and penalty 03Interest on premature closure
If two or more people want to open an account together, they may open a joint account where the names of all the account holders will appear. You can choose to have the joint account operated on either or survivor / anyone or survivor or joint-all basis.
Anyone or Survivor
In anyone or survivor account, each of the account holders may perform banking transactions on that account (e.g. withdraw money, write cheques or close the account) individually. If the other joint account holder writes a cheque when there is not enough money in the joint account, the bank can hold both liable for the amount outstanding.
For joint-all accounts, the instruction for the banking transactions must be given by all account holders.
Procedure to open or close an account
You can get an application form from the bank: either at a branch, by mail or by downloading the form from bank's website. Get ready supporting documents requested, such as PAN and proof of address. Do ask the bank to explain key terms and conditions which apply to the account.
Before an account is opened, the bank has to conduct a "Know your customer" review to understand a customer's profile and purpose of the account. The identification document is required to verify the identity of the applicant.
Available to savings and current account holdersThe following services are usually available to savings and current account holders. Ask your bank for more details as well as the fees and charges which apply.
With this card, you can deposit, withdraw or transfer money at an Automated Teller Machine (ATM), using your Personal Identification Number (PIN). You can choose which bank account to link your ATM card to. You may also set limits for withdrawals at the ATM.
Debit cards are similar to ATM cards and with your personal identification number (PIN) you can withdraw cash from your account at the bank's ATMs. You can use it to purchase goods and services. For purchases made on debit cards, the card is read and the purchase amount is immediately deducted from your bank account. You can spend only the amount in your account. Make sure your card is safe at all times
Unlike ATM cards, debit cards carry an additional VISA or MasterCard branding which allows customers to perform signature-based Point-Of-Sale (POS) transactions. While this may seem similar to credit cards, do note that through credit cards, you are paying on credit and through debit card, the purchase amount or withdrawal is deducted immediately and directly from your bank account. The banks may charge an annual fee, a replacement fee for lost cards and a fee for withdrawals made abroad.
Risks and safeguards on usage of debit cards
Although banks in India have started replacing magnetic stripe-only debit cards with chip cards, banks continue to keep the magnetic stripe for use which can be cloned. As debit cards allow customers to sign off on the receipt, there is also a risk of forgery. Do ask the merchant for a receipt of the transaction to ensure the correct amount is deducted.Your debit card details may be captured by fraudsters either through skimming or via intercepted online transactions. Fraudsters will then be able to use such information to clone a card or perform fraudulent card-not-present transactions.However, for online purchases with merchants whose websites are enabled with the 3D Secure Technology, you will be asked to enter the PIN before you can complete the transaction. This helps to protect you against online fraud and is a secure way to authenticate that you are making the purchase as the rightful owner of the debit card.If Debit card is lost / stolen
If you lose your debit card, inform the card issuer immediately. If your card is stolen, make a police report and also inform the card issuer. Do check with your bank on its policy for lost or stolen debit cards.
Tips for consumers
01Never leave your debit card or documents containing its details lying around 02Sign the back of your debit card with permanent ink as soon as you receive it 03Keep a record of your card numbers, their expiration dates, and the phone number and address of the bank in a secure place. 04Keep card-related information (i.e.) PIN, separate from your card. 05Safeguard your card details - Do not disclose PIN for cash withdrawals to any one. Memorize your PIN. 06Only shop at reputable and legitimate merchants, avoid shared devices 07When you make small value transactions without the need to sign off on receipt, ask the merchant for a receipt to ensure the correct amount is deducted. 08Check regularly that your cards are with you. 09Call the bank immediately if your card or card information is lost of stolen.
|Basis||ATM card||Debit card||Credit card|
|Transaction mode||Withdrawal amount is deducted from your bank account immediately||Purchase / Withdrawal amount is deducted from your bank account immediately||Purchase / Withdrawal amount is a borrowing that you must repay the bank|
|Payment mode||You need to provide your personal identification number (PIN) to make withdrawals at ATMs||You need to sign off on the receipt for purchases made over POS terminals ... You need to provide your PIN to make withdrawals at ATMs||You need to sign off on the receipt for purchases made over POS terminals with or without the need to provide your PIN. ... You need to provide PIN to make withdrawals or cash advances at ATMs. Note that cash advance is a form of borrowing which carries high interest|
|Main risks||Risk of cloning / card skimming - The banking industry is taking active steps to address this risk, such as migrating ATM cards to the more secure chip technology and providing SMS alerts for the transactions||Risks arising from the payment convenience of debit cards over POS terminals - forgery of signature to make purchases; wrong amount debited for small-value purchases that do not need signature ... Risk of cloning / card skimming - The banking industry has taken steps to address this risk such as migrating to more secure chip cards, and providing SMS alerts. ... Risk of card details compromise through intercepted card-not-present transactions - online or mail-order or telephone-order transactions||Risks arising from the payment convenience of debit cards over POS terminals (e.g. forgery of signature to make purchases; wrong amount debited for small-value purchases that do not need signature) ... Risk of cloning / card skimming The banking industry has taken steps to address this risk such as migrating to more secure chip cards, and providing SMS alerts.|
|Fees||Typically no fees payable. But there might be fees payable for making withdrawals at overseas ATMs||Fees are payable such as annual fee, fee for replacement card and fee for making withdrawals at overseas ATMs||Fees are payable such as annual fee, fee for replacement card and fee for making withdrawals or cash advances at local and overseas ATMs|
Meaning of overdraft facility
An overdraft facility allows you to write cheques or withdraw cash from your current account up to the overdraft limit approved. It is a short-term standby credit facility which is usually renewable on a yearly basis. It is repayable on demand by the bank at any time.
The overdraft limit is the maximum amount that you can overdraw for which interest is debited to the account on a monthly basis. Any unpaid amounts of interest are added to the overdrawn amount in the following month. The interest rate on an overdraft account is usually charged at a percentage over the bank's prime lending rate. Whatever amount you repay into the overdraft account can be withdrawn again as long as the total outstanding amount is within the overdraft limit granted. In this case it is called a "revolving credit facility".
Types of overdraft facilities
An overdraft facility can be granted on a secured or unsecured basis.
A secured overdraft is one where you pledge an asset to the bank as security. The asset could include deposits in the bank, property or shares. If the bank stops your secured overdraft facility and you are unable to repay your debt, the bank has the right to sell your pledged assets to recover what you owe it. If the proceeds are not enough to recover your debt, you are still liable for the difference.
An unsecured overdraft facility is one where no assets are pledged as security.
Features and risks of overdrafts
01Approved credit limit - Every overdraft facility has an approved credit limit. 02Repayable on demand at any time - It is not subject to any repayment as long as the amount used is within the limit and is repayable on demand by the bank at any time. 03No minimum monthly payment - There are no minimum monthly repayments as long as the amount you owe is within the credit limit. But, if the account goes into "excess" you need to repay the excess amount immediately. On failure to pay, the bank can stop the overdraft facility and require you to repay and this affects your credit record. 04Joint borrowers allowed - As a joint applicant of an overdraft facility, you and your joint applicant(s) are equally liable for the outstanding debt. You will be liable for the debt even if it was the other applicant who used the facility. The bank can choose to recover the total outstanding debt from all account holders, partial amounts from each account holder, or the total amount from any one account holder. 05Fees and charges - The overdraft facility has various charges like interest charges, cheque book charges, cheque return charges, etc.
Overdraft and other forms of credit
An overdraft facility, being a revolving short-term credit facility, is not subject to any repayment as long as the amount used is within the credit limit. The overdraft facility however is repayable on demand by the bank at any time. On the other hand, a term loan must be fully repaid over the period of the term loan by regular installment repayments or at maturity.
A comparison of the main characteristics of overdraft facilities and term loans is shown below:
|Loan tenure||Short-term revolving||Fixed term|
|Interest rate charged||Usually higher than term loan||Usually lower than overdraft|
|Interest rate type||Variable, pegged to prime rate||Can be fixed or variable rate|
|Recallable on demand||Yes||No|
|Loan can be partially drawn again after repaying some amount||Yes||No|
A cheque is a paper instrument that orders a payment of money from a bank account. An account holder can write cheques to order the banks to pay money. Cheques are provided when customers open a current / savings account.
On deposit a cheque
When you deposit a cheque received into your account, your bank will send the image of the cheque to payer's bank to collect the amount on the cheque for crediting into your account. This process of one bank collecting funds from another bank is called cheque clearing and requires time. Deposit cheques promptly to avoid the risk of loss and theft. Cheques are generally valid for three months from the date on the cheque.
Point to note for writing a cheque
01Ensure sufficient funds in your account to avoid cheque return charges 02Cross your cheque where appropriate 03Write payee's name clearly and legibly 04Check all details before signing - date, name, sign, amount, etc 05Avoid writing post-dated cheques
Ensure you have sufficient funds in your account
- If you have insufficient funds in your account, your cheque may not be honored (it may be rejected) when it is presented for payment and you will incur these charges to cover bank's loss in overnight interest:
01Handling / administrative fee for return of cheque 02Overdraft (OD) interest charge
Cross your cheque where appropriate
- If you do not want your cheque to be encashed or if you want your cheque to be non-transferable, you should:
01Cross the cheque by drawing two parallel lines across the top left-hand corner of the cheque 02Cancel "or bearer" on the cheque; and add "Account Payee Only" (or "A/C Payee Only") if the payment is meant only for the person written on the cheque. 03A crossed cheque is cleared through the bank account of the payee.
- If the cheque is crossed with only two parallel lines across the top-left-hand corner of the cheque (general crossing) and without cancelling "or bearer", it can be deposited into any party"s bank account. If you want the cheque to be encashed by the holder
01Do not cross your cheque; 02Do not delete the words "or bearer" on the cheque; 03Do not add the words "Account Payee Only" (or "A/C Payee Only").
Write payee"s name clearly
01Write or print the name of the person or entity you are paying clearly and legibly. Cross out any extra space on the line after the name, by drawing a line, to avoid unauthorized alterations later. 02Use dark permanent ink, like ball point, and not ink that can be washed or erased away.
Write amount payable clearly
01Write the amount in words and end with "only". Cross out any extra space to avoid unauthorized alterations later by drawing a line across the extra space. 02In the box, put in the amount in figures. Cross out any extra space with a line. 03The amount in words and amount in figures should be the same. If not, the cheque may be returned and charges may be imposed. 04The decimal point must be clearly seen. Do not use the backslash symbol ("/") in place of the decimal point as it can be misread as the digit one ("1"). For clarity, use the comma when dealing with large numbers with four or more digits, e.g. Rs.10,000.
Check all details before signing
01Never pre-sign cheques. Avoid using signatures that are simple with few strokes, as these are easily forged 02If you alter your cheque, do sign in full against the alteration. If there is more than one alteration, it is better to issue a new cheque to avoid confusion.
Avoid writing post-dated cheques
01Post-dated cheques cannot be cleared immediately when the payee receives them. There may also be processing charges when the cheques are returned.
Stop payment of cheque
If you want to exercise stop payment on any cheque or the entire cheque book (in the event of theft), notify your bank immediately. You can stop pay only issued cheques that has not been cleared or encashed. An administrative fee may be charged by the bank.
On return of unpaid cheque
For a Payee:
01When a cheque that you have deposited into your account is returned unpaid, you will receive an image return document (IRD) instead of the physical cheque. The IRD serves as a notice of dishonor and replaces the original cheque for purpose of re-presentment for clearing. 02The bottom half of the IRD will set out why the cheque was unpaid and whether it can be represented. 03If you can present the IRD to the bank for clearing, you should detach the IRD from the Return Cheque. Advice and deposit it at a branch of the same bank that you deposited earlier or use the bank's Quick Cheque Deposit box. 04If you cannot present the IRD to the bank for clearing, you should return the IRD to the payer and ask for a new cheque.
For a Payer:
01If you have insufficient funds in your account, the cheque may not be honoured when it is presented for payment. You will incur a handling or administrative fee for the return of cheque, and overdraft (OD) interest charges to cover the bank's loss in overnight interest. 02The OD interest charge arises when a cheque is drawn on an account which has insufficient funds. When a cheque is sent for clearing, the payer's bank pays the proceeds of the cheque to the payee's bank and the account of the payer will be debited on the same day. If the payer's bank account has insufficient funds, the bank will reverse the entry (i.e. credit back to the payer's account) on the next business day 03The payer's account will show an OD entry, and an overnight OD interest charge will be imposed on the overdrawn balance in the payer's account. 04For example, if the payer issues a cheque for Rs.12000 when he has only Rs.10000 in his account, he will be charged overnight OD interest on Rs.2000 when the cheque is presented. 05Note that the payer's account will automatically go into an OD position due to insufficient funds, regardless of whether he has a pre-arranged OD facility and interest charges could apply.
Keep track of your transactions
You can keep track of your cheques in the cheque register (counterfoil) provided in your cheque book. This can help you to keep track of the total amount paid out in cheques and can check these transactions against bank statements. If you spot any discrepancies, notify your bank immediately or within the time period required by the bank
A credit card is a form of borrowing. It may be a convenient mode of payment as it allows you to buy goods and services without using cash, but it is not intended to be a long-term credit facility.
How to use a credit card
01You can use your card in any retail outlet that accepts your brand of credit card. When you buy something with a credit card, you sign a sales slip. The merchant keeps a copy and gives you another copy for your record. 02You can also use your card to shop online 03The merchant then sends a record of the transaction to the card issuer to claim the transaction amount. Your card issuer pays merchant the transaction amount. It then sends you a credit card statement which shows your purchases for the past month, and asks for payment by a certain date. Full or partial settlement of the accumulated amount may be made, although partial settlement will attract interest (finance) charges.
To apply for a credit card
01You can apply for a credit card from a card issuer. If your application is accepted, you will be issued a card with a prescribed credit limit. 02The card issuer will assess your repayment ability before deciding whether to accept your application and what credit limits is to be set. Your credit report helps in taking this decision.
Prescribed credit limit
The minimum monthly income requirement for credit cards is set at Rs.15,000. The maximum credit limit, including any other unsecured credit facilities that a financial institution can give to such individuals is limited to four times his monthly income. There are exceptions to these requirements.
Application for a supplementary card
A main (or principal) card member can apply for a supplementary card for someone (min. 18 years) who does not meet the minimum income criteria. The main cardholder will be responsible for all debts incurred by the supplementary card-holder.
Here are some common characteristic features of credit cards :
A form of borrowing (amount due)
A credit card is a form of borrowing and allows you to borrow up to the credit limit set for your card. The outstanding balance on your credit card (usually amounts you have charged to your credit card) represents what you owe. You can pay the bill in full, make a partial payment or pay the minimum sum.
Interest will be charged on the outstanding balance if you choose to pay only the minimum sum or part of the amount due stated in your monthly statement. Interest will also be payable on any new item charged to the card from the moment you make a purchase.
Grace period or free credit period
Usually, there is a grace period of between 20-25 days for you to pay the outstanding balance on your credit card in full, without incurring interest
If you cannot pay the bill in full, you should at least pay the minimum sum by the payment due date and roll over the balance. The minimum amount is usually 3 - 5% of the outstanding balance or a specified amount, for example, Rs.1500, whichever is higher.
You will not incur a late payment fee if you pay the minimum amount. But if you pay the minimum sum and roll over the balance, you will be charged interest on your current purchases as well as on all subsequent purchases. Interest will be calculated on the outstanding balance from either the date each transaction took place, or the statement date. This depends on the card issuer.
Facilities of credit card
1. Balance transfer facility
This enables you to transfer your outstanding balances with other card issuers to your credit card at a lower interest rate for a limited time period. The periods usually range from 6-12 months. After this, the interest rate will revert to the prevailing interest rate (usually 24% per annum).
Other terms and conditions may apply. For example, the lower interest rate may only apply to the transferred balances and not to amounts charged to your card, which could be charged at a higher interest rate. Depending on the card issuer, new amounts charged to the cards may not enjoy the grace period or free credit period once the balance transfer facility on cards is used. It is important to pay off outstanding debts before adding on new debt at higher interest rates.
2. Cash advance facility :
It allows you to get extra cash drawing down from the credit limit available on your credit card.
AA fee of 3-6% of the cash advance (subject to a minimum amount) may be imposed. BInterest is usually charged daily at 2% per month or 24% per annum from the date of the cash advance until full repayment is made. If full repayment is made after the billing statement date, interest is charged between the billing statement date and repayment date.
3. Zero % interest instalment plan (IPP) :
Credit card issuers often tie up with different merchants to offer interest-free instalment plans. Such schemes may allow you to pay the same price as someone who pays the whole sum upfront in cash.
Things to be aware of:
AYou have to pay the monthly instalments on time or the standard interest charge (usually 24% per annum) will apply. BYou may not be able to cancel the card until full repayment is made on your instalment plan. CIf you opt to pay the minimum sum (assuming that it is less than the monthly instalment amount), you will have to pay the usual interest rate on the outstanding balance, in addition to any applicable late payment charges DRefund or exchange of products and services may not be allowed once the instalment plan is approved by the bank. EYou may have to pay a penalty fee should you later choose to opt out of the monthly instalment plan and make full repayment. FYou may have to continue paying the monthly instalments even if the merchant ceases business operations and is unable to continue providing the goods or services you purchased.
4. Free gifts and reward schemes
Credit card issuers may offer free gifts and bonus points when you chalk up spending on your credit card. Certain terms and conditions may apply. For example, you may not be able to cancel your card within the first year after claiming a free gift.
Compare how the bonus points are calculated as different card issuers have different reward schemes.
5. Your monthly statement
The card issuer will send you a monthly statement detailing all the purchases you have made with the card during the month. All transactions recorded between the statement date and the last statement date will appear on this statement.
Check your statement carefully to help you keep track of how much you owe. Inform the card issuer promptly if there are transactions listed which you do not recognise, or if anything is unclear.
The payment due date is the date by which you should pay your credit card bill so that you do not incur late payment charges. You can pay the bill in full, make a partial payment or pay the minimum sum. Read here for a general illustration of the statement.
6. Mode of payment for credit card bills
You can pay by cheque, ATM, Phone Banking, cash via bank branches or online.
Here are some common characteristic features of credit cards :
Non-payment of full amount
If you only pay the minimum sum (usually 3 - 5% of the outstanding balance or a specified amount, for example, Rs.1500, whichever is higher) stated in your monthly statement, you will be charged interest daily, amounting to around 2% per month or 24% per annum of the outstanding balance. Interest will usually be charged on the outstanding balance from the statement date and on any new amounts charged to your credit card.
If you do not charge anything new on your credit card during the month,
The minimum payment will be used to pay the interest charge first before reducing the outstanding balance.
If you do not charge any more spending on your credit card and if you only service the minimum sum every month,
Interest charges actually take up a big proportion of your repayments. These hefty charges can be avoided if you pay the full amount on your credit card statement every month.
In addition, if you fail to make the minimum payment on time, your credit repayment record will be adversely affected. Your credit repayment record forms part of your credit report which is used by lenders to decide whether to lend you money. A report that shows late payments might lower your chances of getting a loan in the future or require you to pay a higher interest rate for a loan. Do protect your credit record and avoid incurring credit card debts where you can, especially if it is for items you do not need.
Fees and Charges on credit cards
|Fee or charge||Purpose|
|Annual fee||An annual membership fee for the use of credit card (supplementary card)|
|Cash advance fee||This fee is charged every time you use your credit card to access extra cash. It normally ranges from 3% to 6% of the amount taken, subject to a minimum amount.|
|Late payment fee||This fee is imposed if you fail to pay at least the minimum sum due by the payment due date.|
|Finance charges (interest charges)||If the outstanding balance is not paid in full by the payment due date interest is charged on current and subsequent purchases. Interest will then be calculated based on daily outstanding balance at the rate of 0.066% per day (assuming 24% pa) calculated from transaction date or the statement date ... For cash advances, interest will be charged from the date the withdrawal takes place. ... Ask your card issuer to explain the method of interest computation.|
|Transactions in foreign currency||Overseas transactions charged in a foreign currency will be converted into INR in your statement. The exchange rates used to convert these transactions into local currency may vary day-to-day and from bank-to-bank.|
Tips for wise usage of your card
01Set a monthly budget for your credit card spending and keep track of your expenses. Limit the number of credit cards you hold based on your needs and repayment ability. Cancel cards you do not use. 02Consider carefully before you use your credit card. Once a purchase is made and the charge slip is signed, the consumer is bound to make full settlement of the charges incurred to the credit card issuer. 03Pay your credit card bill in full every month to avoid hefty interest charges. 04Understand the terms and conditions before signing the credit card agreement 05Credit card issuers may change the terms and conditions of your cards by giving you 30 days' prior notice. If you do not agree with the changes, you can choose to terminate the card. If you continue to use the card, you are assumed to agree with the new terms and conditions. 06Pay off the outstanding balance as fast as possible. Interest will be compounded if you continue to roll over your outstanding balance month after month. 07Pay off the outstanding balance as fast as possible. Interest will be compounded if you continue to roll over your outstanding balance month after month. 08Consider using a debit card instead as this limits your spending to what you have in your account. But do remember to set a monthly budget for your expenses and to take precautions to guard against fraud and unauthorised transactions.
Guard your card against fraud
Take the following steps to prevent someone else from using your credit card or your card information:
01Sign your cards with permanent ink as soon as you receive them. 02Keep a record of your card numbers, their expiration dates, and the phone number and address of the card issuers in a secure place. Keep card-related information, such as your password or PIN, separate from your credit card. 03Keep an eye on your card during every transaction. 04Read all details on the sales slip before signing. Never sign a blank sales slip. 05Cross out any blank space for entering money amounts when you sign a sales slip. 06Cancel incorrect sales slips and tear up cancelled slips with carbon copies. 07Save sales slips to compare with billing statements. If you notice any discrepancies, call the card issuer immediately. 08Mail cheques with your card number on them in opaque envelopes. 09Tear up pre-approved credit offers before throwing them away. 10Keep your cards in the same place after use. This way, you will notice immediately if they are lost or stolen. 11Only shop at reputable and legitimate merchants (including online stores). 12Update regularly the firewall, anti-virus and anti-spyware installed in your computer to minimise chances of malicious codes, worms or viruses being loaded into your computer. 13Consider using a credit card with a lower credit limit for telephone and online transactions. 14Shred old charge receipts, credit applications, billing statements & expired cards. 15Never leave your credit cards or sales slips lying around. 16Inform the card issuers immediately when you change your address. 17Ensure that you provide your bank with your current particulars, such las mobile phone number, email address and mailing address. 17Inform your card issuer when you go overseas to allow card issuers to better identify fraud.
01Sign blank sales slips 02Give your credit card details (e.g. card number and expiry date) to someone else. 03Lend your credit card to anyone. 04Keep card related information like PIN or password in the same place as your credit card. 05Perform online transactions in public places such as cybercafe's.
Security features of a credit card
A number of credit card security measures are adopted by banks to provide cardholders security and protection against card fraud. Examples of card fraud include counterfeit fraud, card-not-present fraud, and fraud committed with stolen cards.
EMV, which stands for Europay, MasterCard, and Visa, is a global standard for inter-operation of integrated circuit cards (IC cards or "chip cards") and IC card capable point of sale (POS) terminals and automated teller machines (ATMs), for authenticating credit and debit card transactions.
EMV is a global security standard for chip card technology. With the EMV chip, you are better protected against fraudulent activities. Chip cards are safer than magnetic stripe cards as the chip prevents its contents from being copied and cloned.
Activation of new card
To prevent the unauthorised use of your new card in the event, the card is intercepted or stolen in the mail, credit cards will be issued and mailed to the customer in an unactivated state. Customers will have to activate the card before it can be used. The bank will inform you how your card can be activated.
3D Secure is an added layer of security for online payment card transactions. When a cardholder makes a purchase at a merchant website that uses 3D Secure, the cardholder will be asked to enter a One-Time Password (OTP) before the transaction can be completed. Do not perform online transactions using shared devices such as computers in cyber cafes.
Problems in paying your outstanding credit card bills
If you are unable to pay your credit card bill, or your payment is overdue, do not panic. Take the following steps:
01Contact your creditors immediately and request to work out a repayment plan that can help reduce your payments to manageable levels 02Pay off high interest rate debts first 03Transfer debts with high interest rates to cheaper alternatives 04Reduce credit card expenses and cash advances 05A failure to keep up your repayments will be reflected in your credit report and could adversely affect you loan eligibility.
If card is lost or stolen
If you lose your credit card, inform the card issuer immediately. If your card is stolen, make a police report and inform the card issuer immediately.
Insurance gives some financial protection or coverage against a range of events which could cause loss to you or your dependants.
01Total and permanent disability 02Critical illness 03Loss of your belongings 04Damage to car 05Damage to house
If the event happens, the insurance company or insurer which sold the policy will pay an agreed amount, or an amount to cover some or all of the losses.
Choice of Insurance
|Basis of Concern||Preferred Type of Insurance||Benefits|
|Death of breadwinner||Life||Provides some money for your family|
|Total & permanent disability||Life||Provides some money for your family if you suffer from total or permanent disability.|
|Death of mortgagor/main borrower of home loan||Mortgage term reducing insurance (form of life insurance)||Pays off the mortgage if mortgagor dies.|
|Trauma/ Critical illness||Health||Pays a part or lump sum on first diagnosis of serious illness.|
|Medical bills for major illness or accident||Family Floater Health Plans||Pays a part of hospital /surgical costs if you are ill or suffering from injuries (accident).|
|Loss of income due to hospitalization||Hospitalization||Provides income if you are hospitalized.|
|Loss of or damage to your belongings||Home contents||
|Damage to car/theft||Car||Pays for repairs or replacement if your car is stolen or damaged.|
|Damage to your home||Fire /home||Pays for repairs or replacement if you suffer loss or damage to your home as a result of perils such as fire, flood, burglary|
|Loss of luggage/trip delays/cost of medical care while travelling||Travel||
Insurance - Choice of Type / Amount
Nowadays, it is possible to be insured against all sorts of risks. But, it may not be necessary to cover yourself against all risks.
To decide what insurance you need:
01Make a list of the risks or events that you're concerned 02Assess the likelihood of the event happening and the financial loss you or your dependants may suffer 03Consider the means to cover the financial loss 04The large hospital bills could set back your retirement goals if there is no savings or insurance to cover 05If you have just started work or managing financial affairs for the first time, you are likely to have some life insurance if you have a family or parents to support 06Take healthcare insurance too 07The life insurance coverage depend on number of dependants and their age 08Commit to amount you can afford 09Life insurance is about getting what you need and not about your worth 10If you already have insurance policies, check to see if these cover you for the risks you are concerned about
Need for Life Insurance
1. For financial protection or coverage
A life insurance policy pays out an agreed amount known as the sum assured under certain circumstances. This will be paid to you if you are permanently disabled or critically ill, if your policy provides for this, or paid to your estate if you are no longer around. This money is intended to help you meet your financial needs and / or those of your dependants if these events happen. Life insurance provides financial protection or coverage against these risks.
The life insurance policy contract is between you and a life insurance company. In return for this protection or coverage, you pay a premium for an agreed period of time, depending on the type of policy you purchase.
2. Retirement planning, savings or investments
Life insurance policies are often marketed to meet retirement planning, savings and investment purposes too. For example, an annuity can provide an income during your retirement years.
Life insurance products like whole life and endowment participating policies or investment linked plans (ILPs) bundle together a savings and investment element with insurance protection. Hence, for the same level of insurance cover, the premiums will cost more than for a pure insurance product like term insurance.
Bundled products tend to build up cash values over time. These are paid out when the policy matures or is surrendered. Death benefits that include cash values are paid out upon the death of the insured. Term insurance does not build up cash values.
Bundled products are often marketed as savings products because a part of your premiums is invested to build up cash values. But unlike savings deposits where you generally expect to get back the amount you saved, the guaranteed cash values of an insurance product may be less than the total premiums paid. While part of your premiums will pay for insurance protection while the rest is invested and subject to investment risk.
If your aim is to protect your family's well-being, make sure the product you buy meets your protection needs first. You should consider term insurance if all you want is life insurance coverage.
Things to Watch Out for
Assessment of Your Needs
Buying a life insurance policy is a long term commitment. Take some time to assess what you need and what you can afford. Shop around and compare the different products available before picking the policy you find most suitable.
As we can see, the life insurance needs change at different stages of our lives so we need to assess and make appropriate adjustments accordingly.
Checklist to assess:
1. Risk you are insuring against - The risk could be death, a critical illness, or total and permanent disability.
2. The amount to provide for yourself and / or dependants to cope with financial loss depends on factors such as:
3. Your affordability - Premium depends on the preferred insurance coverage.
In case of both insurance coverage and investment:
In addition to risk you are insuring against and your affordability, the following apply for both insurance coverage and investment objectives
1. Your financial goals
They could be specific like paying for your children's education or saving for your retirement. These goals have specific time frames or investment horizon(s). It can be general to meet up any of your future requirements.
2. Work out how much you need for your goals and when you need the money. Based on what you have today, you may need Rs.5,00,000 more in 5 years' time for your daughter's education or an additional Rs.20,00,000 in 15 years for your retirement. Knowing how much you need and how much capital you have to start with will help you determine the sort of returns you want, subject to the risk you can afford to take and how well you understand the product to be suitable for you.
3. Do compare the investment features and risks of the insurance product with other types of financial products (e.g. shares, bonds, deposits, unit trusts, or exchange traded funds).
Make sure you understand the factors that affect the product's returns. Choose a product that fits your risk profile, i.e. how much loss you are willing to and able to bear in exchange for the potential returns of the investment. Do not over-state your ability to take risk in the hope of a higher expected return.
5. Type of Investor
Even if you are a passive investor and take a long-term buy and hold approach, you should still monitor your insurance products regularly. You may need to take action if investments appear unlikely to achieve the amounts you need for your financial goals.
Take time to think through your needs and personal circumstances, and also the product that is recommended to you. You must not feel obligated to sign up right away or even with the financial adviser representative you are talking to if you are unsure or uncomfortable with the recommendation/advice. You can always engage another financial adviser representative.
Bundled insurance and investment product?
Life insurance products like whole life and endowment participating policies and ULIPS provide both protection coverage and investment benefits and build up cash values. Insurance-only products such as term insurance do not build up cash values. For the same level of insurance cover, the premium for a term insurance product will be lower than the premium for a bundled product.
If you have both insurance and investment objectives, there are two options for you to consider:
|Option 1 Buy a separate product each for insurance coverage and for investment returns, e.g. you could consider buying term insurance and investment products like bonds, shares and unit trusts, depending on what suits you.||Products are unbundled so you know how much of your money is going into insurance coverage and how much is going into investments. You can make changes to your investments without affecting the insurance policy and vice-versa.||You need to be pro-active about identifying and building a portfolio of investment products to suit your financial goals, risk profile and personal circumstances. You also need to actively monitor your portfolio's performance and make adjustments.|
|Option 2 Buy a product which bundles the two objectives, e.g. you could consider whole life or endowment plans or ULIPs.||If premiums are paid on a regular basis, this is attractive as it instils discipline for regular savings.||Products are bundled so unless it is an ULIP, you won't know how your premiums are allocated between insurance and investment. If you are unhappy about the returns you are getting and want to terminate the policy prematurely, you might also find the accumulated cash values disappointing.|
If you are considering a bundled product, do compare its projected returns and risks with other investment products. Ask your financial adviser representative to help you make this comparison.
01Term insurance provides you with insurance protection for only a fixed period of time. This makes sense if you plan to provide for your dependants for a limited time, for example, only until your youngest child completes university or is financially self-reliant. 02It pays the sum assured only upon the death of the insured or if the insured becomes totally and permanently disabled (if this benefit is provided) during this period. 01There is no savings or investment feature, so there is no cash value if the policy ends or is terminated prematurely. Term insurance costs less than whole life and endowment insurance policies for the same level of coverage. 02The fixed term of coverage may range from 5 to 40 years. Choose the term you want carefully. If you choose too short a period, your dependants will have no coverage to benefit from after the term expires. If you want to buy another term insurance policy after the first policy expires, you will be subject to medical or financial underwriting. The premiums also cost more with age, so it will be increasingly costly to purchase term insurance policies over time. Do consider buying a term insurance product for a longer period of coverage when you are younger. 03Do pay premiums on time as unlike investment linked policies and participating whole life and endowment polices, there are no cash values to draw from to help you pay the premiums. If the policy lapses, a reinstatement of policy is subject to underwriting.
Whole Life Insurance
1. For financial protection or coverage
Whole life insurance provides life-long protection for your dependants. It pays out the death benefit upon the death of the insured. Before you buy a whole life policy, ask yourself if you need to provide for your dependants for the rest of your life or just until they are financially self-reliant.
Whole life insurance policies cost more because in addition to paying for insurance coverage, some of the premiums are invested to build up cash value.
The amount of premium paid throughout the policy may be constant or subject to change depending on the policy you have.
Other small benefits
There are few other benefits that one can get from insurance company - few are priced in the premium & for others you need to pay additional premiums. These can be like
01Emergency ambulance charges 02Education fund for kids 03Medical expenses 04Family transportation 05Imported medicines 06Etc...
Endowment policies are often marketed to help you meet a financial goal like paying for your children's education, or to build up savings over a fixed policy term. But unlike savings deposits, the guaranteed cash values you get back may be less than the sum of the premiums paid. This is because part of the premiums will pay for insurance protection while the rest is invested and subject to investment risk.
Endowment policies usually mature after a fixed period of time, e.g. 10, 15 or 20 years.
The insurance protection provided by endowment policies is usually small so make sure your insurance protection needs are sufficiently covered by the policy if this is important to you. You could also consider another insurance product.
On the other hand, if you are buying an endowment policy to help you save or invest but already have sufficient insurance coverage from other insurance products, do consider carefully whether to proceed, as you could be paying for something that you don't really need. Remember to compare the product's features, returns and risks with other investment products.
Monitor your endowment policy on a regular basis, especially when you are nearer the time you need the money e.g. to pay for your children's education.. If needed, you may have to save more or consider other investments or take steps to preserve what you have accumulated.
Units Linked Insurance Policy (ULIP)
01A ULIP is a life insurance policy which provides a combination of risk cover and investment. 02The dynamics of the capital market have a direct bearing on the performance of the ULIPs. 03The investment risk is generally borne by the investor 04Most insurers offer funds to suit one's investment objectives, risk profile and time horizons. Different funds have different risk profiles and returns 05ULIPs offered by different insurers have varying charge structures. Broadly the different fees and charges include-Premium allocation charges, mortality charges, fund management fees, policy/administration charges and fund switching charges
ULIPs can be classified into two categories :
|Single premium ULIPs||You pay a lump sum premium to buy units in a sub-fund. Single premium ULIPs provide lower insurance protection than regular premiums ULIPs.|
|Regular premium ULIPs||You pay premiums on an on-going basis. Regular premium It allows you to vary the level of insurance coverage.|
ULIPs do not have guaranteed cash values. The value of the ULIP depends on the price of units in the fund which in turn depends on fund's performance. While the premiums remain constant throughout the life of policy, the cost of insurance coverage increases every year as you get older. This means more units may be sold to pay for insurance charges, leaving fewer units invested to accumulate cash values.
Benefits of ULIP
1More exposure to investments than other life insurance products
2There is a range of funds to choose from
3lexibility to vary the insurance coverage and investment mix according to your changing financial needs.
Choice of funds
ULIPs offer a range of funds that you can choose from. It is important to understand the fund's investment strategy and approach, as well as the potential risks.
1Choose a fund(s) that suits your investment objectives, risk profile and time horizon.
2Do not assess the fund's return only.
3Make sure you are comfortable with the fund's risks and that these are consistent with your risk profile.
Some investments offer greater potential for higher returns but come with an increased risk. On the other hand, cash funds may be expected to yield more modest returns in exchange for relative safety. Do not be tempted to take on more risk in exchange for potentially higher returns. Do compare the suitability of the ULIP with other investment products.
To switch funds
ULIPs allow you to move your money from one fund to another. This is known as fund switching and may be helpful if there is a change in financial circumstances and risk appetite has changed and you no longer find your current fund suitable.
When switching fund(s), do take into consideration your ability and willingness to take risk, investment objectives, time horizon and other personal circumstances. Most insurers offer a limited number of free switches and charge a nominal fee per switch thereafter.
Most regular premium ULIPs give you the flexibility to vary the insurance coverage and investment mix if your financial needs change. You may top up your investments, make withdrawals and switch funds. But any increase in coverage will be subject to underwriting.
Returns are not guaranteed
ULIPs carry investment risks. The value of an ULIP varies, depending on how the fund you have chosen performs. The returns are not guaranteed. Do note that the past returns of a fund are not necessarily indicative of the future performance of the fund.
Cost of an ULIP - Fees and Charges
|Fees and charges||Applicability|
|Insurance coverage charges||• Pays for death and other coverage provided for.
• Charges depend on factors, such as amount of coverage you want, age, gender and whether you smoke.
• Charges increase with age and are usually funded by the sale of units purchased with your premium.
|Fund management fees||• Payable to the fund manager for managing the fund.|
|Policy/administration charges||• Fees for administration of the policy.|
|Surrender charges||• Payable for partial or full sale of units before a certain time period.
• Before selling your units, make sure there are enough units left to sustain the insurance cover you want.
|Fund Switching Charge||• A limited number of fund switches are allowed each year without charge.
• Subsequent switches will be subject to a charge.
Note that fees and charges may not be guaranteed and are subject to change. These are typically deducted from the (monthly) sale of units.
ULIPs for older people
You may not need life insurance if you do not have any dependants. If you are considering an ULIP, do think about whether you can keep up with the premiums if you no longer earn an income. Also, it is suited for investors with a longer investment horizon. There may be other investment options that could better suit your needs.
Similarly, if insurance protection is a significant objective, but coverage is required only for a limited period, there could be other insurance options you should consider.
Keeping track of your ULIP
An annuity is a type of insurance policy which guarantees fixed payments at regular intervals (usually monthly), for as long as the policyholder lives or for a fixed period of time. It is usually purchased to provide income during retirement. The premium is usually payable as a lump sum but there can also be regular premium payments for an agreed time period.
To consider before buying an insurance
Disclose all required information
You must truthfully disclose all the information asked for in the proposal form (application form). If you are not sure about including some particular information, it is recommended that you disclose it anyway. This includes any information you may have given to your financial adviser representative but was not included in the proposal form.
Make sure that the form is properly completed. If you spot any inaccuracies or missing information, ask for the document to be amended immediately. Do not sign the application form if there is inaccurate or missing information as the policy could be voided by the insurance company and you or your dependants could end up without protection when it's most needed.
Make sure you understand the policy
1Make sure that the recommended policy suits your needs.
2Do take time to read the documentation carefully.
3Ask your financial adviser representative to explain all calculations in writing and for all verbal explanations and promises about returns and benefits to be confirmed in writing
4If you realize that the policy is not what you wanted or not what was promised or if some of your personal details are inaccurate, you must contact your insurance company within 14 days (from the date of receiving the contract) to clarify or cancel your policy.
5Do find out if the policy has any exclusions on coverage. In addition, find out about the claims process:
6how to make a claim
7how the assessment is made
8how long it will take
1Never sign blank or incomplete forms.
2Do not release your identity card to someone you do not know or without first clarifying why it is needed.
3Be careful of verbal promises and guarantees of high returns and insist on written confirmation before committing to buy a product.
The premium you pay for your insurance policy depends on the insurance coverage and / or the savings or investment benefits you prefer. Take time to think about what you can afford when deciding on the type of insurance policy and the amount of coverage.
On-going responsibility as a policy-holder
Always check the statements and read the letters sent by your insurance company. If you do not understand, ask your financial adviser representative or the insurance company for an explanation.
What is health insurance?
An accident, illness or disability may leave you with some financial loss. Besides incurring medical and /or hospitalisation costs, you may be unable to work, whether partially or fully, during your recovery.
There are different health insurance policies to help you and your family cope with expenses at these times. Some policies provide cash to help make up for income loss while you are disabled or hospitalised. Other policies help cover the cost of medical treatment or nursing care.
Get health insurance while you are still young and healthy. If you apply for insurance after you have developed some health conditions, the insurer may exclude those conditions from coverage. Most policies also have a last entry age after which you will not be able to apply for coverage.
Healthcare coverage provided by your employer enough?
Your employment benefits may include group health insurance coverage. Find out whether you have such a benefit, and if so, what you are covered for. Group insurance policies may not cover you when you change employer or retire so you should consider having a personal policy as well.
Types of Health Insurance
Health Insurance policies insure you against several illnesses and guarantee you stay financially secure should you ever require treatment. They safeguard your peace of mind, eliminate all worries about treatment expenses, and allow you to focus your energy on more important things.
There are several health insurance or medical insurance plans in India. These can be divided into the following categories based in the coverage offered:
1Comprehensive health insurance coverage
3Critical illness plans
3Specific conditions coverage
Comprehensive health insurance coverage: These plans provide you complete health coverage through a hospitalization cover while at the same time also creating a health fund to cover any other healthcare expenses
Do note that:
1The policy may not fully pay for actual medical expenses incurred.
2The policy will usually include limits for each illness, disability, by policy year or lifetime.
3Certain conditions and pre-existing conditions may be excluded from cover. Treatment that is not for medical reasons may also be excluded.
4Investigative procedures such as tests / biopsies for diagnosis purposes, for example to detect a specific illness or medical condition may or may not be included.
5Waiting periods may also apply. If so, expenses will not be paid during the waiting period.
With medical expense insurance, the total reimbursement you will get from all your policies is limited to your actual expenses. So buying additional medical expense insurance policies does not necessarily provide extra
Hospitalisation plan: These health insurance plans cover your expenses in case you need to be hospitalised. Within this category, products may have different payout structures and limits for various heads of expenditure. The hospitalisation coverage may be reimbursement based plans or fixed benefit plans. These plans aim to cover the more frequent medical expenses.
Do note that:
1A hospital cash insurance policy may have a waiting period. This means benefits are paid only after you have been hospitalised for more than a set number of days.
2Benefits may also be paid for only a fixed number of days each year or the life of the policy. If it's for a fixed number of days over the life of the policy, the policy will end once the lifetime limit has been reached.
3Waiting periods and benefit limits may vary across policies.
Critical Illness Plans:
These health insurance plans provide you coverage against critical illness such as heart attack, organ transplant, stroke, and kidney failure among others. These plans aim to cover infrequent and higher ticket size medical expenses.
Do note that:
1The benefits are paid only if the disease or surgery exactly meets the definition stated in the policy. Definitions of diseases covered by a standard critical illness policy are fixed across all insurance companies.
2There is usually a waiting period for certain diseases or types of surgery. If any disease or type of surgery specified by the policy is diagnosed or carried out during the waiting period, no benefits will be paid.
Some critical illness policies pay a smaller amount for earlier stages of cancer, or make several payments upon diagnosis of different insured critical illnesses, subject to the sum insured or policy limits.
Specific Conditions Coverage: These plans are designed specifically to offer health insurance against certain complications due to diabetes or cancer. They may also include features such as disease management programs which are specific to the condition covered.
General insurance gives you some financial coverage against a range of events or loss which could be suffered, for example
1Comprehensive health insurance coverage
2Loss of your belongings
3Damage to car
4Damage to house
If the event happens, your insurance company will pay you an agreed amount, or an amount to cover some or all of the loss.
Personal Accident Insurance
Impact from accident can be as small as a scratch to as big as death - impact can be temporary or sometime even permanent. Accidental insurance policy covers this risk but first check the definition of accident. Accident or Accidental means a sudden, unforeseen and unexpected event caused by external, violent and visible means which results in physical bodily injury.It excludes suicides, self injury, armed force operations, war etc.
In case of death term plan will help family to cope up with financial hardship but what about an accident where one looses body parts & that impacts his earning abilities. In such situation Accidental Insurance can be very helpful.
Features of Accidental Insurance
1Yearly Contract: Accidental insurance is yearly contract that you can renew every year.
2Maximum Insurance: It depends on your income - some insurance companies give 60-100 times of your monthly income others give 8 to 10 times of your yearly income.
3For Non Earning Members: Few insurance companies provide accidental insurance to dependents but have limitation in sum assured. 25% to 50% of the proposers sum insured with maximum limits in rupee terms.
Benefits of Accidental Insurance Policy
Comprehensive Accidental Insurance policy provides benefits in 4 cases:
1If an insured died due to an accident his nominees will get 100% sum insured. So it's very important to have right nominee in any kind of insurance policy whether accidental or life.
Permanent Total Disablement
Some time a person met with an accident & loses his body parts - may not be able to work in future. In case of Permanent total disability 100% sum insured is given to the insured person. It covers:
1Loss of your belongings
2Complete and irrecoverable loss of sight of both eyes
3Loss of both hands or both feet or one hand and one foot
4Complete and irrecoverable loss of speech & hearing of both ears
Permanent Partial Disablement
1As the name suggest this benefit is given if someone losses one hand or one leg or even small body part like finger/toe. For this every insurance company have their own tables - what they will cover & how much they will pay depends upon the age limit of the person as per policy documents.
Temporary Total Disablement
1Sometime it can happen that anyone met with some serious accident but there is no permanent loss. But doctor suggested a complete bed rest of 5 weeks or a complete checkup of any part of the body. This will impact an earning for a small period so in such case accidental insurance can compensate for this income loss. Weekly benefit is normally 1% of your sum assured for maximum 100 weeks. There is also a maximum limit according to your income.
Other small benefits
1There are few other benefits that one can get from insurance company - few are priced in the premium & for others you need to pay additional premiums. These can be like emergency ambulance charges, education fund for kids, medical expenses, family transportation, imported medicines etc.
Understanding saving and investing
Saving and investing are important parts of your financial plan. What you save and invest should help you reach your financial goals. But all investments come with risk. Investments offering potentially higher expected returns also expose you to a higher risk of losing money. This is known as the risk-return tradeoff.
Before investing, know about the basic investing concepts like relation between return and risk, managing risk through diversification and asset allocation, investment horizon and rupee cost averaging and market timing. Be clear about your needs, your ability to withstand risk and losses, and suitable product.
Return / Income
The return on an investment is the gain or loss made on the investment. It can be income earned from a product and / or the capital gain or loss (price gain or loss) on the product.
Examples of income include interest from a bank deposit, coupon received from a bond, dividend payment from shares or unit trusts held. At times, in order to meet its income payout objective, managers may even facilitate a payment out of a fund's capital.
Capital gain or loss
This is the gain or loss you make on selling an asset at a higher or lower price than the price you originally paid when purchased.
Remember to deduct any transaction costs when working out net returns. There could be sales charges, management fees and brokerage charges depending on the type of product. There may be financing / borrowing costs if you buy a product using margin or leverage.
What is risk?
The actual return from an investment may be more or less than what expected at the time you bought the product - this is the risk you take when investing.
1It can be lower than expected returns, example, due to share price volatility or the underperformance of a fund
2There is the possibility of losing money invested, e.g. default by bond issuer on interest or principal repayments.
3In some cases, you may lose all of the money you invested.
All investments come with the risk of losing money, whether it's the amount you invested or a loss in earnings.
Meaning of investment horizon
An investment horizon is the time period you have to invest in order to achieve your financial goals. A longer time horizon may mean you have more time to ride out short-term price fluctuations on investments. If you cannot afford to lose money, invest only in less risky assets with a short investment horizon.
The longer your investment horizon, the more time you have to grow your savings through compounding. Compounding is about earning returns on previous returns. In other words, earnings that you earn are reinvested and increase the amount upon which more earnings are generated. If you start early, your investments will be able to compound over a longer time period. The earliest returns are reinvested for the longest time and therefore generate greater returns.
Invest in one product or diversify among products
Some consumers buy one specific product to meet one goal, for example an endowment policy for children's education. If you invest all your money in a single product, you may lose all of your investment if the issuer becomes insolvent or bankrupt. A diversified portfolio helps to reduce the risks that a pool of similar assets is exposed.
Meaning of diversification
The idea that the prices of some assets historically move together in the same direction is called correlation. Diversification is about building a portfolio of lowly-correlated investments. They do not move in the same direction / degrees at the same time.
Diversification means giving up some gains and at the same time reduces risk of losses in your portfolio. A diversified portfolio might comprise of different asset classes like cash, bonds, shares, commodities and even properties. It may also be spread over local, regional and global markets, and different economic sectors and industries. It helps to withstand the fluctuations of economic and market conditions and cycles.
Meaning of asset allocation
Asset allocation is about deciding what proportion of your investment portfolio is to be invested in different asset classes to achieve diversification and ultimately desired balance of risk and return.
Factors to be considered for asset allocation
i) Your age and investment horizon
If you are young and retirement is still far away, you might have a relatively longer investment horizon ahead. But if you are nearer the time you need money for a goal, example if retiring in a few years, your investment horizon will be relatively shorter.
ii)Your risk profile
This is mainly about your ability to absorb or tolerate losses.
iii) Your investment objectives and risk-returns from different assets
Make sure your investment objectives are clear. If you are accumulating capital, find products suitable for this objective and if you are nearing retirement and cannot afford to take risks with your money, choose conservative products.
Arriving at a suitable asset allocation is a balancing act. You need to understand the different asset classes and how they might work together or offset each other's gains and losses. Take care when selecting a product from the asset classes, example, if you choose to invest in junk bonds or emerging market bonds for the potentially higher returns, your risk exposure is quite different from better rated sovereign bonds. Review your asset allocation regularly.
Rupee cost averaging and market timing
Rupee cost averaging involves investing a fixed sum of money at regular intervals, whether the market is up or down. For the same amount of money, you buy more shares when the market is down and fewer shares when the market is up. With Rupee cost averaging, the total average cost per share could be lower. It is also a disciplined approach to investing compared to market timing.
If you adopt a market timing approach, you buy or sell shares when you think the market is favorable for you. The difficulty of the market timing approach is in taking timely decisions.
Things to Watch
Getting started to invest - Things to watch out
We are likely to save or invest money for some future goal. If you are new to investing, here are some steps to get you started on an investment plan.
i) Setting goals
1Common goals include paying off your student loans, accumulating funds for retirement or children's education.
2Work out how much money you need and when you need it.
3The time available to invest your money till it is needed is known as investment horizon.
ii) Amount affordable to invest
1The money available to invest, after meeting household expenses, insurance premiums and debts, as well as some savings decides the amount you can afford.
2The possibility to cut some expenses to free up more money for saving or investing (one lump sum or fixed amounts in a regular basis) and the risk tolerance can be taken into consideration.
3Do not commit to pay or invest more than you can comfortably afford and always look for a cost-effective alternative.
4Your age also matters as a longer investment period helps to ride out short term fluctuations or losses, and to benefit from compounding.
iii) Know yourself and some suitable investing basics
|To know or understand||Meaning|
|Understand your risk profile or your need, ability and willingness to take risk.||Your need to take risk largely depends on the returns you want. But your ability to take risk depends on factors such as current commitments, investment horizon, and capital you have and can afford to lose. Willingness to take risks is curtailed if need and ability to take risk are low.|
|Understand the basics of investing.||Know about risk-return tradeoff. If you do not want to lose money, consider less risky products which may provide lower expected returns. Understand how portfolio diversification and asset allocation can help to achieve your investment objectives.|
|Understand your investment objectives.||
|Work out the returns you need to achieve your goals.||Work out the returns (adjusting for transaction costs and inflation) you need to achieve your goals given the starting capital and how much required in future. But do manage your expectations for returns (based on a comfortable risk level). When looking for a product suitable for you, do shop around and compare what's available before making a decision.|
|Know what products you already have and consider how to build a diversified portfolio.||You might already have some shares or insurance products that are bundled with investments, e.g. whole life or endowment participating or investment linked policies. Know how the new product could enhance existing portfolio. It may be to replace, supplement or complement your existing portfolio.|
iv) Consolidate and prioritize your goals
1After examining what you need, when you need, how much you can invest, and the risk you can afford to take, you may need to reprioritize your goals. You might need to settle for a smaller house or smaller car, but it would be unwise not to build up adequate retirement savings and provide for adequate healthcare cover.
v) Steps to achieve your goals
1This could be saving or investing in a diversified portfolio of financial products to achieve your needs. Always keep the steps above in mind when considering your action. Choose investments based on your suitability, personal circumstances, understandability of the product, and your diversified portfolio to reach your investment objectives.
2Do find out whether you can manage risks or limit losses once you are invested. Remember there are products where you can lose all initial investment, more than your initial investment and products whose market values go up and down. Be aware that markets could be at a downturn when youwant to take out your money. It is important to monitor your investments carefully in case you need to liquidate them. 3Do consider rupee cost averaging as a means of accumulating the assets you want.
vi) Monitoring performance, rebalancing and adjusting your investments
1Investing is an on-going responsibility. Even if you choose to be passive (investing in unit trusts or funds that track indices), you should regularly review the performance of investments to see if you are on track to achieving your goals. Do watch factors influencing the performance of your investments and take action if it is underperforming.
Types of Deposits and its Key Features
i) Savings Bank Account
1The first banking product people use
2Low interest and highly liquid
3Suitable for inculcating the habit of savings among the customers
ii) Recurring Deposit Account
1Some fixed amount is deposited at monthly intervals for a pre-fixed term
2Earns higher interest than Savings Bank Account
3Helps in the saving of a fixed amount every month
iii) Special Term Deposit Schemes
1Tax Saving Scheme available with banks
2Relief under Section 80C of the Income Tax, Act is available
3Term Deposit of 5 years of maturity in a Scheduled Bank is mandatory
Government Tax Savings Schemes
The incomes from the investment are exempt from tax and the investments in these schemes are deductible subject to certain limits from the taxable income.
i) National Savings Certificate (NSC)
1Popular Income Tax Savings scheme, available throughout the year
2Interest rate of 8.50 to 8.80%
3Minimum investment is Rs. 100/- and with no upper limit
4Maturity period of 5-10 years
5Transferable and a provision of loan on the basis of this scheme
ii) Public Provident Fund (PPF)
1Interest rate of 8.70% p.a.
2Minimum investment limit is Rs.500/- and maximum is Rs.1,50,000/-
3Maturity period of 15 years
4First loan can be taken in 3rd FY from the date of opening the account, or up to 25% of credit at end of 1st FY. Loan can be returned in max. of 36 installments
5Can withdraw not more than 50% of balance every year from 7th year onwards.
iii) Post Office Scheme
1It is one of the best Income Tax Saving Schemes
2It is available throughout the year
3Post Office Schemes depend on type of investment and maturity period, which can be divided into following categories:
iv) Equity Linked Savings Schemes (ELSS)
1Mirror image of a Diversified equity fund with the tax benefit U/s 80C
2Lock in period of three years
3Dividends are also tax free
4Minimum investment is Rs.500 and then multiples thereof
5Investor can opt for systematic investment plan
A Bond is a loan given by the buyer to issuer of instrument, in return for interest. Bonds are issued by companies, financial institutions, or Government. The buyer receives interest income from seller and par value of bond is receivable on specified maturity date.
Investors earn returns when they receive coupons and if the price of the bonds gains in value. Investors receive a regular coupon. If you buy a bond at 100% of the face value and hold the bond until maturity, return is equal to the coupon you receive. If you buy at more or less than the face value, your return is based on the coupon you receive plus any capital gain or loss from holding the bond (i.e. difference between price paid and the price sold). Bondâ€™s return is usually called its yield.
Why invest in bonds?
Bonds may be attractive for investors who want a source of regular income or to diversify their portfolio of investment assets. A diversified portfolio helps to reduce the risks caused by a concentration in similar assets. By including assets whose values do not always move in the same direction or same degree as other assets in the portfolio, you may give up some gains but also reduce some losses in portfolio. For example, certain market conditions do not support the price of shares, but may be positive for bonds.
Maximum amount you can lose and the worst that can happen in bonds
Apart from market driven price fluctuations, an issuerâ€™s bond price will suffer if investors doubt the issuerâ€™s creditworthiness (its ability to repay its debt obligations). For instance, if the issuer gets into serious financial difficulties, the likelihood of a default will increase. A missed coupon can also result in a default and may lose all or a substantial amount of the money invested.
The bondholder is a creditor. If the bond issuer becomes insolvent/bankrupt, creditors are generally repaid first, before shareholders. Bonds are regarded as less risky than shares.
Suitability of bonds
Not everyone should invest in bonds. Do not consider this type of investment if you:
1Do not understand or are unclear about factors and scenarios that affect returns
2Do not understand the risks associated with bonds
3Want potentially higher returns but are not prepared for risks
4Cannot build a sufficiently diversified portfolio of assets; Are not prepared to leave your money tied up for long periods of time
5Do not have the time and resources to monitor markets or corporate performance
Types of Bonds
Tax-Saving Bonds offer tax exemption up to a specified amount of investment, depending on the scheme and Government notification. Examples are:
1NABARD / NHAI /REC Bonds under Section 54EC of the Income Tax Act, 1961
2RBI Tax Relief Bonds
Regular Income Bonds
Regular-Income Bonds provide a stable source of income at regular, pre-determined intervals. Examples are:
1Step-Up Interest Bond
5Money Multiplier Bonds
6Deep Discount Bonds.
1Rated by specialized credit rating agencies like, CRISIL, ICRA, CARE, Fitch etc.
2Suitable for regular income-Interest received semi-annually, quarterly or monthly
3Bonds available in both primary and secondary markets
4Market price depends on yield at maturity, interest rates, and rating of issuer
5One can borrow against bonds by pledging the same with a bank
6Minimum investment ranges from Rs. 5,000 to Rs. 10,000
7Duration usually varies between 5 to 7 years
8Can be held in demat form
Key questions to ask before investing in bonds
Consider investment in bonds in light of your own circumstances. In particular, you should consider whether you:
1Have sufficient knowledge and experience to make a meaningful evaluation of the merits and risks of investing in the bonds
2Understand thoroughly the terms and conditions of the bonds
3Have access to, and knowledge of, appropriate analytical tools to evaluate the investment in bonds and its impact on your overall investment portfolio
4Have sufficient financial resources and liquidity to bear all the risks of bands
5Are able to monitor or evaluate (by yourselves or a financial adviser) changes in economic or other factors that may affect the issuer or the bonds.
Key Features of Debentures
01Fixed interest debt instruments with varying period of maturity, similar to bonds, but are issued by companies 02Either be placed privately or offered for subscription 03May or may not be listed on the stock exchange. 04Maturity period normally varies from 3 to 10 years
Types of Debentures
01Non convertible debentures (NCD) â€“ Total amount redeemed by the issuer 02Partially convertible debentures (PCD) â€“ Part is redeemed and part is converted to equity shares with or without the option to investor. 03Fully convertible debentures (FCD) â€“ Whole value is converted into equity. The conversion price is stated when the instrument is issued.
There are different kinds of debentures, which can be offered. They are as follows:
Company Fixed Deposits
01Fixed deposit scheme offered by a company 02Used by companies to borrow from small investors 03The investment period must be selected carefully as most FDs are not encashable prior to their maturity 04Company deposits are â€˜unsecuredâ€™ (i.e.) not as safe as a bank deposit. 05Offer higher returns than bank FDs, since they entail higher risks 06Rating can be a guide to their safety
A mutual fund pools money from many investors and invests them in stocks, bonds, short-term money-market instruments, other securities / assets, or some combination of these investments. The combined holdings the mutual fund owns are known as its portfolio. Each unit represents an investorâ€™s proportionate ownership of the fundâ€™s holdings and the income those holdings generate.
Salient Features of Mutual Funds
1Professional Management â€“ Money is invested through fund managers
2Diversification â€“ Diversification is an investing strategy, summed up as â€œDonâ€™t put all your eggs in one basketâ€. By owning shares in a mutual fund instead of owning individual stocks or bonds, the risk is spread out
3Economy of Scale â€“ Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than individual transactions
4Liquidity â€“ Just like individual shares, mutual fund units are convertible into money by way of sale in the market
5Simplicity â€“ Buying a mutual fund unit is simple. Many banks have sponsored their own line of mutual funds and the minmum investment amount is small
Investors should examine the above features carefully before investing in mutual funds
Types of Mutual Funds
Each fund has a predetermined investment objective that tailors the fundâ€™s assets, regions of investments and investment strategies. At the fundamental level, there are three varieties of mutual funds:
1Equity funds (stocks)
2Fixed-income funds (bonds)
3Money market funds
All mutual funds are variations of these three asset classes. For example, while equity funds that invest in fast-growing companies are known as growth funds, equity funds that invest only in companies of the same sector or region are known as specialty funds.
Mutual Funds can also be classified as open-ended or closed-end, depending on the maturity date of the fund.
1An open-ended fund does not have a maturity date
2Investors can buy and sell units of an open-ended fund from / to the Asset Management Company (AMC), at the mutual fund offices or their Investor Service Centres (ISCs) or through the stock exchange.
3The prices at which purchase and redemption transactions take place in a mutual fund are based on the net asset value (NAV) of the fund.
1Closed-end funds run for a specific period
2On the specified maturity date, units are redeemed and scheme comes to a close
3The units shall be listed on a stock exchange to provide liquidity
4Investors buy and sell the units among themselves, at a price prevailing in market
Money Market Funds
1Invest in extremely short-term fixed income instruments
2The returns may not be very high, but the principal is safe
3These offer better returns than savings account but lower than fixed deposits without compromising liquidity
Bond / Income Funds
1Purpose is to provide current income on a steady basis
2Invests primarily in government and corporate debts
3While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady cash flow to investors
1Objective is to provide a balanced mixture of safety, income and capital appreciation
2Strategy is to invest in a combination of fixed income and equities
1Invest in shares and stocks
2Represent the largest category of mutual funds
3Investment objective is long-term capital growth with some income
4Many different types of equity funds because of different investment objectives
Foreign / International Funds
1An international fund (or foreign fund) invests in the equity of companies which are outside the home country
1These are targeted at specific sectors of the economy â€“ financial, technology, health, etc.
1This type of mutual fund replicates the performance of a broad market index such as SENSEX or NIFTY
2An index fund merely replicates the market return and benefits investors in the form of low fees.
Questions to ask Yourself
1 What is my investment objective? For example, is it for my retirement or for my childrenâ€™s education? How much funds do I need and when do I need them?
2. How much can I afford to invest, after setting aside funds for daily needs and savings for emergencies? Do I intend to invest in single sum or fixed sums on a regular basis?
3. How much return on investment do I need, after taking into consideration the effects of inflation, to meet my investment objective? 4. What is my risk profile?
5. Does the product I am considering meet my investment objective and needs? Which benefits are guaranteed and which are not?
6. What is the potential return offered? Is it realistic? [Be careful of verbal promises and guarantees of high returns. Make it a point to understand what is guaranteed and what is not, and insist on written confirmation from the representative]
7. When are the proceeds payable? Can I afford to stay invested for that duration? Do I need the proceeds earlier?
8. Am I comfortable with the level of risk that comes with the product I am considering? How much loss I am prepared to incur? What are the potential losses in the worst-case scenario for the product I am considering?
9. Have I read and understood all the information, including the prospectus / term sheet / benefit illustration and product summary, contracts, warnings, exclusions and disclaimers, terms and conditions, relating to the product I am considering?
10. Is the financial adviser / representative regulated by the Regulator?
11. Are there alternative products that offer similar benefits and risks to those of the product I am considering? How is the product compared to these alternative products?
Do compare key areas like the scope of benefits, risks levels and total costs.
Are funds suitable for everyone?
Investing in funds may not be for everyone. For example, they may not be suitable if you:
1Want potentially higher returns BUT are not prepared to take the risk of losing a substantial part of the money invested.
2Do not understand returns calculation or are unclear about factors and scenarios that can affect returns; or fundâ€™s investment objective, strategy or approach.
3Do not understand the risks associated with the fund. Some funds use financial derivatives to hedge risks and / or to improve performance. Investors should be aware of the risks associated with the use of financial derivatives.
4Are not prepared to have your money tied up for long periods of time. As funds are exposed to market ups and downs, investors who stay invested long enough may be better able to ride out the downturns.
5Are not familiar with the fund manager and fundâ€™s track record.
Asset Classifications of Mutual Funds
There are different types of funds available with its own investment objective and investment approach or strategy (i.e.) capital appreciation or income. The fund manager decides fundâ€™s investment strategy and what assets to buy / sell. Funds may be divided into three main categories-shares, bonds, and balanced funds (combine shares & bonds). Aside from shares and bonds, funds can invest in assets or combination of assets such as:
2Cash or cash-equivalent products
4Units in other funds
Funds offered to retail investors are not permitted to invest in physical commodities directly. They may however obtain exposure to commodities by using financial derivatives. It is important to choose a fund that meets your investment objective and risk profile. The diagram below shows the potential risk and return profile of different types of funds:
Note that the chart above is for general guidance only. Bond funds which focus on emerging market government bonds or high yield corporate bonds may not be safer than funds that invest in â€˜blue chipâ€™ equities. This is because high yield corporate bonds may expose the fund to significant credit risks.
Key considerations before buying a fund
Funds differ in terms of investment objectives, strategies, risks and costs. Think if you want the fund to provide regular income or initial capital to grow. Choose one that matches your investment objectives and risk profile. When choosing a fund, consider the following:
1Your needs and goals / objectives, personal circumstances and risk profile
2Find out more about the unit trust you are considering to:
aEnsure that fundâ€™s investment strategies are in line with your investment objective
bEnsure you understand all the risks and are comfortable with your risk profile
cYou should be comfortable that the fund manager has the necessary resources, experience and skills to manage your investment. Check that both the firm and the individuals managing the fund have a credible performance track. However, do note that past performance is not necessarily an indication of future performance.
3Find out about alternative investment products and compare their risk-return profile and features with the product you prefer.
The ownership interest in a company of holders of the common and preferred stock is known as equity. A stock market is a public market for trading of company shares at an agreed price; these are securities listed on a stock exchange.
The shares are listed and traded on stock exchanges which facilitate the buying and selling of stocks in the secondary market. The prime stock exchanges in India are The Stock Exchange Mumbai, known as BSE and the National Stock Exchange known as NSE. The purpose of a stock exchange is to facilitate the trading of securitie s between buyers and sellers, thus providing a marketplace. Investing in equities is riskier and definitely demands more time than other investments.
There are two ways in which investment in equities can be made:
1Through the primary market (by applying for shares offered to the public)
2Through the secondary market (by buying shares listed on the stock exchanges)
Having understood the markets, it is important to know about selecting a company, a stock and the right price. A little bit of research, some diversification and proper monitoring will ensure that the investor earns good returns.
In order to invest in shares, it is necessary to understand the term â€œDematerialisation of Sharesâ€, as almost all shares are now in â€œDematâ€ form. Earlier, physical share certificates were issued, which are now converted to Electronic form. For this, an understanding of the depository system becomes essential.
A depository is an organization which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in securities. It can be compared with a bank, which holds the funds for depositors.
At present two Depositories viz. National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) are registered with SEBI.
A Depository Participant (DP) is an agent of the depository through which it interfaces with the investor and provides depository services. Public financial institutions, scheduled commercial banks, foreign banks operating in India with the approval of the Reserve Bank of India, state financial corporations, custodians, stock-brokers, clearing corporations / clearing houses, NBFCs and Registrar to an Issue or Share Transfer Agent complying with the requirements prescribed by SEBI can be registered as DP. Banking services can be availed through a branch whereas depository services can be availed through a DP. It is now compulsory for every investor to open a beneficial owner (BO) account to trade in the stock exchange or apply in public issue.
Benefits of availing depository services include:
1A safe and convenient way to hold securities
2Immediate transfer of securities with no stamp duty
3Elimination of risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc.
4Reduction in paperwork involved in transfer of securities
5Reduction in transaction cost
6No odd lot problem, even one share can be traded
8Change in address recorded with DP gets registered with all invested companies electronically eliminating the need to correspond with each of them separately
9Transmission of securities is done by DP eliminating correspondence with companies
10Automatic credit into demat account of shares, arising out of bonus / split / consolidation / merger, etc.
11Holding investments in equity and debt instruments in a single account.
Shares are issued by companies to raise capital or financing from investors. When you buy a companyâ€™s shares, you become a shareholder of the company entitled to a share of dividends that are declared and paid. If the company you have invested in is wound up or liquidated, you are entitled to any assets that remain only after companyâ€™s creditors are paid.
Shareholders earn returns when they receive dividends and if they decide to sell their shares when the prices of the shares gain in value. Dividends are paid out of the companyâ€™s profits. Not all the profits may be distributed. Companies may choose to re-invest profits generated from their operations into their business. A companyâ€™s share price reflects, amongst others, its growth prospects and future earning potential.
Why invest in shares?
Investors buy shares in the expectation that the share price will rise. Some may also buy shares as a hedge against inflation or for dividend income.
Maximum amount you can lose and the worst that can happen in shares
Apart from market driven price fluctuations, a companyâ€™s share price will be under pressure if the company performs badly and / or gets into serious financial difficulties. Shareholders bear more risk than bondholders and other creditors if the company fails and is wound up. In the worst case scenario, a shareholder may lose up to the amount invested in the company.
Other risks include companies requesting for a trading halt or trading suspension for the purpose of disseminating material information to the investing public. SGX may also suspend trading of a companyâ€™s shares in certain circumstances. As an investor, you should not overlook rights issues and other corporate actions. Leverage trading can be risky and can lead to unlimited losses depending on the positions you take.
Suitability of shares
Share investing may not be suitable for everyone. For example, shares may not be suitable if you:
1Are not familiar with or are unclear about the factors and scenarios that affect share prices
2Do not understand the risks associated with shares
3Want potentially higher returns but are not prepared for risks
4Cannot build a sufficiently diversified portfolio of assets
6Are not prepared to leave your money tied up for long periods of time
7Do not have the time and resources to monitor the markets, corporate performance as well as react to corporate actions such as rights issues.
Changing share prices
Share prices are driven by economic and market conditions, as well as industry and company specific conditions. Much of the price movement may be explained by the performance of overall market. But not all shares react in the same way to the same set of economic, market or business conditions.
Blue chips, large caps, growth or cyclical shares
Shares are often sorted into categories based on the characteristics â€“ blue chips and growth or cyclical shares. Such categorization is based on market conventions and may change over time.
A companyâ€™s market capitalization is the total market value of its shares. Shares may also be sorted by market capitalization â€“ small caps, mid-caps and large caps. What constitutes a small, mid or large cap depends on the market you are interested in. Stocks with smaller market capitalization may be newer companies, and not very well-researched.
Selection of shares for investing
1Be clear about your investment objectives first (i.e.) building up capital or looking for income, and how your risk profile. This will narrow down your search.
2nvestors may use fundamental analysis or technical analysis or a mixture of both when deciding which shares to invest in.
3Be familiar with the company â€“ business operations, growth outlook, the type of industry, its financial performance, corporate governance, whether there are any weaknesses and other factors which could affect its performance and share price.
Dividends, share placements, rights and bonus issues and other factors
Companies may carry out various corporate actions such as bonus or rights issues and share buybacks. As a shareholder, find out how these corporate actions will affect you.
Points to remember
01Participants range from small individual stock investors to large fund traders 02One of the most important sources for companies to raise money 03Allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market 04Stock market is often considered the primary indicator of a countryâ€™s economic strength and development 05Stock prices fluctuate, in marked contrast to the bank deposits or bonds 06The reasons for investing in equity must be reviewed periodically 07Sometimes the market seems to react irrationally to economic or financial news 08Over the short-term, stocks and other securities can be battered by number of fast market-changing events, making the stock market behaviour difficult to predict.
01Evaluate risk of every investment 02Have clarity on short term and long term needs of the family 03Decide the investment based on the needs 04Do not invest on trust. Have everything backed up by documents 05Take into account tax implication of every income 06Do not blindly follow market tips and rumors 07Anything that appears unnaturally high or low will have some â€˜catchâ€™ disguised 08Do not consider schemes where you may protect the interest but lose the principal 09Invest with knowledge after understanding the product well
Key questions to ask or considerations before investing in shares
Consider the suitability of an investment in shares in light of your own circumstances. In particular, you should consider whether you:
01Have sufficient knowledge and experience to make a meaningful evaluation of the merits and risks of investing in shares 02Have access to, and knowledge of, appropriate analytical tools to evaluate the investment in shares and how it will impact your overall investment portfolio 03Have sufficient financial resources and liquidity to bear all the risks of investing in shares, including the risk of losing all or a substantial part of your investment 04Are able to monitor or evaluate (by yourselves or through financial adviser) changes in markets, economic or other conditions that affect issuer or trading.
Purchase of Financial Products â€“ Sellers, Intermediaries or Brokers
01Intermediaries / Distributors â€“ In IPOs, subscription can me made through brokers and forms can be obtained from brokers and distributors 02Brokers â€“ Brokers offer several services like purchase / sale of equity, debt and derivative products, mutual fund units, IPO subscription, etc. 03Internet â€“ Mutual funds and banks that are in mutual funds business facilitate online buying of mutual funds and exchange traded funds 04Stock Exchanges â€“ Closed-end mutual funds are traded on stock exchanges and can be brought through brokers 05Mutual Fund Companies â€“ Open-end funds can be bought at the NAV from mutual fund company
Selection of a Broker
1The broker must be registered with SEBI.
2The stock exchanges provide details of the complaints pending/resolved against the brokers. An investor can peruse this list before making his choice.
Steps to Become a Securities Markets Investor
1The first criterion is to obtain a PAN Card. This is mandatory for all investors.
2The next step is to open a bank account and a demat account. The demat account is normally linked to a bank account in order to facilitate paying in and out of funds and securities.
3Once these are obtained, the next step is to select a broker and fill a KYC form and enter into a broker-client agreement. 4The broker then allocates a unique client ID, which acts as his identification. However, the PAN Number acts as identification across the markets and exchanges as a single investor identity.
Now, you are ready to begin investing in the stock markets!
Exchange Traded Funds
Exchange traded funds (ETFs) are open-ended investment funds listed and traded on a stock exchange. Your money is pooled with money from other investors and invested according to the ETFâ€™s stated investment objective.
An ETFâ€™s objective is to produce a return that tracks or replicates a specific index such as a stock or commodity index. They are passively managed by ETF managers and do not try to outperform the underlying index. Hence, ETFs have fees and charges that are usually lower than those of actively managed investment funds.
ETFs may have complex structures. They may be structured as cash-based ETFs or as synthetic ETFs, which involve the use of derivatives.
You invest in an ETF by buying units in the ETF. There is capital gain when the price of the units rises above the price paid for them. Some ETFs also pay dividends.
Preference to invest in ETFs
1There are many ETFs to choose from. If you buy an ETF which tracks a share index, you gain exposure to the performance of the index.
2You can gain this exposure without having to spend more money buying the component stocks of the index. In addition, fees and charges for ETFs tend to be lower than for actively managed investment funds as ETFs have lower management fees. There is usually no sales charge, although any transactions on the Exchange would still be subject to brokerage commissions or transfer taxes.
3As ETFs are traded on a stock exchange, you can buy and sell units of ETFs throughout the trading day.
Suitability of ETFs
Investing in ETFs may not be for everyone. They may not be suitable if you:
1Want potentially higher returns BUT are not prepared for variable returns which include the risk of losing all or a substantial part of original investment amount
2Do not understand how returns are determined or if you are unclear about the factors and scenarios that can affect returns
3Do not understand the risks associated with the ETF. Investors should be aware of the risks associated with the use of derivatives by ETFs
4Are not prepared to leave your money invested for long periods of time. A longer time horizon is generally preferred to ride out short term price fluctuations.
5Are not familiar with the ETF manager and the ETFâ€™s track record.
Maximum amount you can lose
ETFs are not principal-guaranteed and may lose all or a substantial amount of the money invested in certain situations. The risks of investing in ETFs are described in the prospectus and product highlights sheet.
Fees and Charges
1Know about transaction charges like brokerage charges and clearing fees
2There are usually no sales charges for ETFs. However certain charges payable are fees that the fund manager, trustee and other parties charge to the ETF. Although the fees are paid by ETF and not investor, they will increase tracking error.
Key questions to ask or considerations before buying an ETF
ETFs differ in terms of complexity, investment objectives, strategies, risks and costs.
When choosing an ETF, consider the following:
i) Your needs and investment objectives, personal circumstances and risk profile.
ii) Find out more about the ETF you are considering:
01Ensure that ETFâ€™s investment strategies are in line with your own investment objectives 02Ensure that you understand all the risks and are comfortable with your risk profile 03Ensure that the fund manager has the necessary resources, experience and skills to manage your investment. 04Check that both the firm and the individuals managing the ETF have a credible performance track record. However, do note that past performance is not necessarily an indication of future performance.
National Pension System
Defined contribution scheme opened to any Indian Citizen between the age of 18 and 55 years.
The individual invests a certain amount in a pension scheme till he retires. At retirement, he is allowed to either withdraw the money that has accumulated or buy an immediate annuity from an insurance company to generate a regular income or do both.
A minimum of 40% needs to be used to buy an immediate annuity; a maximum of 60% of the money accumulated can be withdrawn.
01Buying an immediate annuity assures a regular payment from the insurance company. This payment can be monthly, quarterly, half yearly or once a year 02The minimum amount that needs to be invested per contribution is Rs. 500. Minimum number of contributions per year is one ie., a minimum of Rs 6,000 needs to be invested per year 03There are no upper limits on the amount of money that can be invested as well as the number of contributions that can be made 04The money you invest in NPS will be managed by professional managers 05You can switch fund managers if you are not satisfied with the performance of your fund manager 06This is a non-withdrawal account and investments in this keep accumulating till you turn 60. Withdrawal is allowed only in case of death, critical illness or if you are building or buying your first house 07Under Section 80CCD(1B) of the Income Tax Act investments of up to Rs.50,000 in the NPS can be claimed as tax deductions. Remember that this Rs.50,000 limit is over and above the Rs.1.5 lakh limit available under Section 80C 08Also no return is guaranteed as in case of PPF. The money you make is dependent on how well chosen fund managers performs.
Key Questions to Ask Yourself before Buying an Investment Product
A minimum of 40% needs to be used to buy an immediate annuity; a maximum of 60% of the money accumulated can be withdrawn.
01This guide highlights key questions to consider before committing to any investment product such as structured deposits, unit trusts, investment linked insurance and life insurance policies. 02While representatives require having a reasonable basis to recommend investment products to you, take steps to ensure that you understand the product before buying it.
A minimum of 40% needs to be used to buy an immediate annuity; a maximum of 60% of the money accumulated can be withdrawn.
01There is no one best investment product for everyone. Determine your investment objective and needs before assessing which product is suitable for you. 02Do not rush through the process. Take time to understand the product and consider whether it meets your needs before you finalize your decision. 03Read all documents and forms before you sign anything. Never sign blank forms. 04Remember that you may have to bear fees, expenses and / or investment losses if you change your mind about purchasing the product, or decide to sell it or switch to another product prematurely. It may also be too late to reverse your purchase decision if you subsequently find that the product is not suitable.