Unit Link Insurance Plans - Why Invest

A Unit Linked Insurance Plan or ULIP, is a financial product that is acts both a an investment as well as insurance.

It is one of the best investment options in India and is more reliable when it comes to wealth creation as it invests in debt and equities markets with the fluctuation is counted by the net asset value (NAV).

In such a plan the premium amount, after deduction of charges, is invested into funds of your choice and the fund could be equity based, debt based etc.

The performance of the fund depend on the market although you can switch between the funds.

They are similar to those of mutual funds except that unit linked insurance plans are investment products that comes with insurance benefits.

It can be viewed as a long term investment plan, which provides risk cover for the policy holder along with investment options to invest in any number of qualified investments such as stocks, bonds or mutual funds.
 
 You pay the premium just like for an insurance policy unlike the insurance policy the premium is not just for insurance but also for investment.

After deducting some charges some in beginning, some during the policy term and for insurance ,the amount left gets invested into mutual fund of your choice. have different funds with different risk-return profile.

One may have an allocation of 80-20 to equity and debt ratio and you can switch between the funds 4 free switches in most of the cases , there after some nominal fees.

 These charges are deducted from the premium paid by the client and they account for the initial expenses incurred by the company in issuing the policy.

 These charges are deducted on a monthly basis to recover the expenses incurred by the insurer on servicing and maintaining the life insurance policy like paperwork and it could be throughout the policy term or vary at a pre determined rate.

 A part of the premium from the selected fund , is invested either in equities or debt, bonds, money market instruments etc or a combination of these and managing these investments incurs a fund management charge (FMC).

The FMC varies from fund to fund even within the same insurance company depending on the assets, a fund with higher equity component will have a higher FMC.

 These charges are deducted for managing the funds before arriving at the Net Asset Value (NAV) and the fee is charged as a percentage of funds under management.

 Mortality expenses are charged for providing a life cover to the individual and are deducted on a monthly basis.

The expenses vary with the age and either the sum assured or the sum at risk which is the difference between sum assured and fund value of the insurance policy of an individual.

It is done by including your age, mortality tables used by the industry and also the company’s claim experience though the mortality charges should be the same, some insurers levy differential rates.

 These charges are deducted for premature withdrawal partial or full with guidelines on the maximum surrender charges that can be levied by life companies.

The charges when you switch between funds ex  from Equity to debt with a limited number of switches typically 4 are allowed without any charge.

 In ULIP which offer minimum guaranteed amount or NAV, there is cost of guarantee which is deducted from the total units.

 There are online plans with no charges for premium allocation, policy administration and discontinuance except a percentage of fund management charge per annum and mortality charge from the fund value of customer in order to provide the life cover.

This makes them lower in terms of cost than equity mutual funds and make them attractive with the tax efficient transfer from debt to equity, and vice versa.

The  mortality charges go down as the fund value goes up and in case of death in the initial years of the policy, when the fund value is less than the sum assured, the insurer will pay the agreed sum to the nominee.

When the time the fund’s value goes higher than the sum assured, the death benefit will be the accumulated amount in the fund.

The mortality charge keeps reducing year after year as the sum at risk reduces which is the difference between the accumulated fund value and sum assured under the policy.

There are many nit-linked insurance products to suit your goals for your retirement planning, for your health and marriage or for investment purposes.

These plans are wealth plans that are usually of shorter time frame and focus on getting higher returns to create a good maturity amount.

Child plans are for securing child’s financial future as the money is invested to ensure that the child’s future financial goals like education are secured. Along with it, death benefit in most child plan is very comprehensive so that child’s future is not compromised.

Pension plans focus on the creating of a corpus amount so that the life insured gets regular pension after retirement.

Fixed Maturity Plans - Why Invest

Fixed maturity plans are close ended debt schemes that are open for investment for a few days during launch and then closed until maturity. 

They come with a pre determined tenure and are usually offered for tenures varying from 30 days to five years and the most commonly offered tenures are 30 days, 180 days, 370 days and 395 days. 

They invest in highly rated securities, certificate of deposits, money market instruments, bonds and government securities

The basic objective is to seek consistent returns over a fixed period and aiming to protect investors against market fluctuations. 


They are  similar to bank fixed deposits in that the money invested is locked in for the tenure of the scheme and can be described as debt funds that invest in government securities and company debt.

They usually have no equity component, unless you invest in one that chooses to have a limited equity component.

They try to protect investors against market fluctuations and offer flexibility to their fund managers and let them plan on their exact investments at the start.

This allows investors to know and be informed about the approximate returns they can get by investing in these plans.

They are ideal for all investors wanting benefits across different parameters, such as lower market risk and tax efficient returns.

Investors can choose the plan that match their investment requirements and also their cash flow requirements.

You can invest in fixed income instruments like certificate of deposits , commercial papers , other money market instruments, corporate bonds, non-convertible debentures of reputed companies, or in securities issued by the government, maturing in line with the time limit of the scheme.

Since they are closed ended schemes, an investor can invest only during the initial offer period of the scheme, and redeem only at the time of maturity of the series under the scheme.

However, unit holders holding units in demat mode, can exit by selling their units on the stock exchange where units of the scheme are listed.

They are least exposed to interest rate risk, as the fund holds instruments till maturity getting a fixed rate of return.

One can invest in highly rated credit instruments with maturity profiles of the invested securities in line with the maturity of the scheme, so there is low credit risk, with minimal liquidity risk involved.

 It works as asset allocation tools, that endeavor to provide the investor with stable returns for the period of investment.

They are also better as a tax saving instrument and if it is longer than a year, investors may choose to avail indexation benefits to check their taxable liability against prevalent inflation for the period.

When there are high prevailing rates, and with other asset classes not adequately performing,investors can invest in fixed maturity plans which lock in returns by investing in instruments maturing on or before the maturity of the scheme.

They can make use of prevailing high yields, without assuming the volatility risk of investing in a time duration product.

However they are not allowed to provide indicative yields to investors while in fixed deposits the interest rates are known in advance.

If you go for the dividend option ,then they are subject to dividend distribution tax  plus applicable surcharge and cess, which is paid by the fund and is tax free for investors.

If investors opt for the growth option, they are subject to capital gains tax and in case of a growth option with a maturity of more than one year, an individual can use the benefit of long term capital gains where the tax rate is 10% without indexation benefits or 20% with indexation benefits.

Those plans with tenure of less than a year, the dividend option is more appropriate as it results in lower tax incidence compared to the growth option, which would be taxed at the individual income tax slab rates.

It also offer double indexation benefit, which comes into play when the scheme purchase is made in one financial year and the maturity of the scheme is after two financial years.

Indexation for tax purposes allows returns generated to be adjusted for inflation so that the investors are taxed only on the real returns.

Thus, fixed maturity plans maybe riskier but compared with fixed deposits they offer better returns to the investor.

Why Invest In Gold

Gold also known as the yellow metal is an asset valued as a safe heaven in the world of investments and it known for acting as a hedge against inflation.

There are different ways to invest in gold in and we need to be aware of all the options before making a decision.

The most popular and oldest way to invest in gold is in the form of physical gold as this is what most of the people are comfortable with .

There are two ways that one can invest in physical gold

Jewellery is the most common way of investing in physical gold but it is brought by people for consumption rather than investment.

It is easy to invest in it , all you need to do is use cash or cheque and you can buy it however you do not just pay the market price of gold , but also making charges for jewellery .

When it comes to physical gold, there are chances of theft and fraud as you can be sold a inferior quality of gold in the name of high quality gold.

If a marriage going to be there then people prefer to invest in physical gold or if it will not be required for emergency in short term. 

If you do not believe in the online option , that is another reason that you can go for investing in physical gold.

Gold coins and bars are another way to invest in physical form of gold and they are sold by all the banks and jewelers . 

The good thing is that depending on the requirement you can either buy more gold bars and coins and easily available at banks and jewellery shops , but banks only sell it not buy it back. 

There is no consumption done on regular basis so a person can keep it in locker or some safe place for a long time. 

The disadvantage is that they are available at a premium price of 5-10% and at the time of selling, you will get a discounted price of 5-10% , so overall your returns will decrease.
  
Gold ETF’s which is an online version of physical gold are just like stocks , you can invest in these if you have a demat account . 

It is convenient to invest in Gold ETF if you already have a demat account and can start with a small amount of 1 gm value and as and when you want you can invest from time to time. 

However you have to pay the brokerage and you do not get a feel of gold in your hands which you get with physical gold . 

The gold ETF can also be converted to cash at times if you have not chosen the right one and there are chances that you will sell then in the time of small emergencies which you will not do with physical gold. 

The expectation is liquidity with exposure to gold for investment point and you can buy gold ETF with a demat account.

 You can invest and can consider them as liquid as you can sell them in the stock market.

Gold Mutual funds are those mutual funds which invest in another parent mutual fund which are related to gold related activities and buy physical gold , but in very small quantities .

This is not a good investment for those who track gold prices , because these funds do not invest most of their money in gold , but gold related companies .

So its mainly a equity fund which invests in companies which does nothing but invests in its parent mutual fund which finally invests in different companies .

The good part of these funds is that if you are optimistic about the future of those companies involved in gold but you will pay expense ratio two times because it is fund of funds.


These are the mutual funds which invests in real gold, pool in money from people and buy gold and you can buy the units of these mutual funds .  

The best part of these funds is that you can invest in gold through SIP route and you do not need to have a demat account to invest in gold saving funds . 

You also can invest regularly in gold through SIP through this funds but you pay administrative charges and expense ratio just like any other mutual funds. 

If you do not have a demat account and would like to regularly invest on monthly basis as this is highly liquid option also because you can anytime sell the gold fund units like any other mutual funds unit .  

e-Gold was started in India from the exchange called NSEL , which also has other commodities in e-format . 

Its is like Gold ETF , where you can invest in Gold in online format for investing in E-Gold you need a demat account, but with one of the companies that are authorized by NSEL. 

You can also take physical delivery of gold with some terms and conditions. but not all big brokerage houses demat account can be used to buy this, you need to open another demat account for this and this option is not popular with retail investors . 

You can buy this if you need physical delivery of gold at some future point of view but you also want to benefit from the online advantages like the market price and no storage cost at your side.  

Invest in gold can also be done through Gold Futures, but it more of a trading activity because its short term in nature. 

You can use Gold Future to protect the pricing, then you can lock the price so that when you want to buy the gold after 3 months, you get it at the same value .   

This option is bit technical and one should only use it if you have the knowledge of how it works.. 

You need to know when to lock the price of gold which you want to buy in future, if you fear that prices can go very high and which option are you going to choose and why it will work.

  

Bank Fixed Deposits - How To Invest

Bank deposits are one of the most preferred investment options in India as they are known for being safe and not risky, especially in comparison with other investment option like the stock market and mutual funds.

A fixed deposit (FD) is a financial instrument provided by banks which gives investors a higher rate of interest than a regular savings account, until the given maturity date.

It may or may not require the opening of a separate account and are they are considered to be very safe investments with term deposits being used to denote a larger class of investments with varying levels of liquidity.

In a fixed deposit investment, the money cannot be withdrawn from the FD as compared to a demand deposit or recurring deposit before maturity.

Banks may offer additional services to FD holders such as loans against FD certificates at competitive interest rates.

 The banks may offer lesser interest rates under uncertain economic conditions that varies in percentage terms with the time period that can vary from the short term such as 7 days to a long term of 10 years.

These investments are safer than Post Office Schemes as they are covered by the law and that guarantees a specific amount per depositor per bank with income tax and wealth tax benefits.

 Those from reputed banks are a very safe investment because such banks are carefully regulated by the Reserve Bank of India, RBI, the banking regulator in India. 
 
It is important to note that company FD is not reliable as compared to a bank FD because if the company goes bankrupt you may lose your money.

 You need to check the credit rating of a company before investing and be careful of companies which offer interest rates that are significantly higher than the average to attract your money.

An FD gives you the option of receiving regular income through the interest payments that are made every month or quarter and this is especially useful for the retired.

It must be noted that a fixed deposit will not give you the same returns that you may get in the stock markets but the risks of investing in stocks are higher.

A fixed deposit is not helpful against inflation and if inflation rises steeply during the maturity of the FD your inflation adjusted return will fall. 

There are two types of term deposits - fixed deposits and recurring deposits.

A fixed deposit is where you invest all your money at one-go whereas a recurring deposit is when you invest your money in installments.

When you opt for a term deposit, you are placing your funds in a particular bank deposit for a fixed period of time and for this banks offer you to pay a fixed interest and makes it a safe alternative because the interest payment acts as your profit from the investment.

Senior citizens usually get a higher interest and while fixed deposits offer higher interest rates, recurring deposits usually offer a lower interest rate than fixed deposits.

You can decide when you want to receive the interest due once the deposit matures, you can opt for regular interest payments on quarterly, half-yearly or annual periods of time and some banks also offer you a choice to reinvest your interest payments.

Term deposits offer a wide variety of interest rates that changes with the duration of the deposit with the greater the duration, larger is the interest rate offered.

This makes investors deposit money for as longer a time as the bank pays interests regularly and over a period of time, this money can either be reinvested in the same deposit or saved in your bank account that would earn you additional interests, thus increasing your total return.

The money you deposit with the bank acts as a source of cheap borrowing for the bank but the money in the savings accounts could be withdrawn any moment by depositors.

This increases risks for the banks and that is why banks actively try to attract deposits to invest in term deposits because the amount in deposits are unlikely to be touched for a longer period of time.

The only rule of a term deposit is that once you deposit, you cannot withdraw this money and if you want to reclaim your deposit amount, you will be fined a particular sum or your total interest payment may be reduced.

Banks may only allow you to withdraw the money after a certain minimum period.

Breaking a fixed deposit means withdrawing the money before the maturity expires and this may be necessary if you urgently require the funds or if there are better investment opportunities elsewhere. 

If you are in need of liquid cash, and you have withdrawn all of your funds in your bank accounts, you can borrow on the basis of your fixed deposits and this is called the overdraft facility.

There is a limit to how much you can borrow under this service and it may not be interest-free.

Interest payments on fixed deposits are taxable and this depends on your overall income tax bracket to which you belong.

If you fall in the 20% income tax bracket, your interest payments would be taxed at the same rate and this is why fixed deposits are usually not preferred by those in the 30% bracket.

Also, if your total interest payment in a year exceeds Rs 10,000, then the bank cuts 10% as tax deducted at source (TDS).

However, if you submit the Form 15G/H to the bank stating you have no taxable income, then the bank will not deduct tax. 

You can also split your term deposits across banks to ensure the interest is not more than the amount of INR 10,000 in a single bank.

Banks offer fixed deposits for tax-saving purposes and the amount you save in such deposits can reduce your total taxable income and thus help you save taxes.

Tax-saving deposits have a minimum tenure of 5 years and a maximum of 10 years and the government has also kept the maximum amount you can invest in such a deposit for tax purposes to Rs 1 lakh per year but the interest you earn will be taxable.


 

Micro Finance - An Overview

Micro finance refers to providing financial services, credit and savings to the poor who are running small businesses or would like to start one and are in need of capital.

Small loans for small businesses, with focus on providing credit is the way that the industry has changed over the past few decades.

Banks are reluctant to give loans to the poor as they often do not have the required collateral and are considered high risk for them when it comes to repayment.

Since the banking system is out of reach for the poor they often often go to private moneylenders who lend at high interest rates, making the poor debtors for life and continuing in poverty as they cannot pay back the loans for years to come.

Financial services have been lacking for the poor who are totally ignored by the banks and exploited by money lenders.

The access to financial services through micro finance allows the poor to obtain small loans at nominal interest to expand or start new businesses.

This generates income to improve their living conditions.and by starting small business such as tailoring, masonry, they are able to create employment for themselves and others including facilities for depositing savings that makes savings a habit.

Micro-finance institutions provide financial services that were made available to the poor to provide them loans to run small businesses, build assets, ease consumption, and manage risks in addition they offered freedom from moneylenders.

 Micro finance is a source of financial services for the small businesses, entrepreneurs, social sector and viewed as a way to reduce poverty.

In rural areas and urban slums, small groups of family members and friends are created and these groups mostly consist of women as they are considered to be more responsible when it comes to managing money.

These groups are supervised by who create rules around savings and lending among group members and after a few members of the group that are accepted for a loan, the rest have to wait for that loan to be repaid before they can obtain their own loans.

Peer pressure from other group members to repay the initial loan amount helps maintain a higher rate of loan repayments.

Micro finance which proved poor to be credit worthy, it has blossomed all across in the developing world having provided loans to millions of clients.

 The high repayment rates have led commercial banks to join in to provide loans and make profit from those previously known as unbankable.

The profitability from lending to the poor has led micro finance institutions to raise money from commercial investors such as banks, private equity firms went public.

 High repayment rates due to group lending and nominal interest rates helps to achieve economic sustainability and to scale and grow their financial services for the poor.

In recent years the micro finance industry has shifted from its original goal of social maximization to profit maximization.

 The coming of commercial investors has led to high profits are being made by hidden charges and high prices leading to the poor suffering the consequences.

High interest rates, multiple lending and group pressure from non-repayment has caused problems in the functioning of these institutions.

Due to these challenges, it is not yet known if the loans that are made for starting micro enterprises are valid, since the borrowers often lack business knowledge to grow and sustain the business and often leads to failure.

The long-term impact of micro finance remains to be seen due to unfortunate but avoidable misuse of the facility for the poor.


Micro finance can has made an impact on global poverty for certain people like those with an entrepreneurial spirit in certain places, those where entrepreneurs are that free to grow and sustain a business.

It is not something that will lead to the eradication of poverty, but it can and should be a part of the solution.

Financial Markets - An Overview

A financial market or a capital market is a part of the financial sector where people trade shares, bonds, derivatives, securities, commodities, and other items of value at low transaction costs and at prices that reflect supply and demand. 

 Securities include stocks and bonds, equities and commodities include precious metals or agricultural products.

These markets are the place where businesses go to raise cash to grow, enabling companies reduce risks, and giving investors and shareholders an opportunity to make money. 

It is the true economic center of the country, where major financial transactions are carried out and millions of people are affected by the trading that goes out on the trading floor.

Everyday, stocks, futures, options, and bonds are traded and one will find both domestic and international corporations that are traded on a stock exchange daily and the money involved in these trades does not go directly to the trading companies listed.

A share or stock is defined as a portion of ownership in a given company and most stock holders do not own major stakes in a company to play a role in the management of the company.

Stockholders can purchase stocks, so that their investments rise in price, and those stocks can be sold at a profit at the right time.

Futures trading can be defined as a trading instrument that can be used for trading grains and other agricultural products.

It is a financial contract where you have to predict the future value of a commodity that must be delivered at a specific time in the future.

Commodities include oil, silver, natural gas, cotton and minerals that are bought and sold on a commodity exchange.

Futures contracts have a seller and a buyer and one can also can speculate on the contract depending on which side you are on and the contract states the price at which you agree to pay for or sell a certain amount of this future product when it is delivered at a specific future date.

 Most futures contracts are based on a physical commodity, but some futures contracts also are sold based on the future value of stock indexes.

You cannot take delivery or actually provide the commodity for which you are trading a futures contract but you can sell the futures contract you bought before you actually have to accept the commodity from a commercial customer.

Futures contracts are the contracts that can be used as financial instruments by producers, consumers, and speculators.

Bonds are loan instruments that allow companies sell bonds to borrow cash.

If you buy a bond, you are holding a company’s debt or the debt of a governmental entity and the company that sells the bond agrees to pay you a certain amount of interest for a specific period of time in exchange for the use of your money.

The difference between stocks and bonds is that bonds are debt obligations and stocks are equity wherein stockholders actually own a share of the corporation.

Bondholders lend money to the company with no right of ownership however bonds are considered safer, because if a company files bankruptcy, bondholders are paid before stockholders.

 Bonds act as a precaution and not actually a part of the trading world for position traders, day traders, and swing traders.

An option is a contract that gives the buyer the right, but not the option, either to buy or to sell the asset upon which it is based at a price specified in the contract on or before a date that is specified in the contract.

Before the options period expires, a purchaser of an option must decide whether to exercise the option and buy the asset at the target price.

 If the options buyer decides not to buy the asset, his or her initial investment in the option is lost. Options also are called derivatives.

Mutual Funds - An Investment Option

Mutual funds are a means of investment and can be viewed as a financial trust in which many investors pool their funds keeping in mind a predetermined objective of investment.

 The funds are pooled together and they are invested in various instruments of the capital market like securities,bonds, shares and debentures and other money market instruments.

These funds are managed and watched over by a financial expert who studies the market conditions and invests the money accordingly.

The profits earned on the investments are shared between the investors according to the number of units of shares held by them.

Types of Mutual Fund Schemes

Open - ended schemes are all about liquidity and are generally available throughout the year, they are bought and sold on demand at their net asset value, or NAV, which is based on the value of the funds securities and is generally calculated at the close of every trading day. 

Investors buy shares directly from a fund. they do not have a fixed date of maturity and can be bought and sold as per their requirements.

Close - ended schemes is a fund with a pre-determined maturity period and investors can directly invest the open ended scheme during the initial issue.
There are two types of exit options in this kind of schemes depending on the type of the scheme and it raises a fixed amount of capital through an initial public offering (IPO). 
The fund is then structured, listed and traded like a stock on a stock exchange.

Interval Schemes are a combination of both open-ended and close-ended schemes and one can trade the units directly or redeem them at the NAV related rates.

Currently investing in mutual funds is considered to be one of the most beneficial forms of investments available in comparison to the other investments instruments. 

Mutual funds are comparatively cost efficient and also carry a low level of risk.

The biggest advantage of investing in mutual funds is that they are managed by qualified and professional expertise.

Investing in diverse group of mutual funds does not require the investor to buy individual bonds and stocks he purchases units of different mutual funds thereby distributing the amount of risk. 

When investing in different assets the investor it reduces the risk factor and he is sure that if he incurs losses in any particular fund then he might gain from another investment and you can liquidate your investment as and when you like.

Investing in mutual funds is very easy and simple to understand and does not require large amounts of money to invest.

One must be careful while investing as mutual fund managers are not experienced enough and do not research all the available opportunities in the market.

When you purchase a unit of a mutual fund there is an entry load charge which is an extra cost and when exiting from the mutual fund you are again charged extra as an exit cost.

Since investors have their money spread across different assets the high returns earned can be diluted due to diversification and as result do not have an impact on your earnings.

Tax is something that is often ignored as the mutual fund manager sells a particular security it triggers the tax of the individual thereby making it useless as a tax savings investment.