Month: May 2020

Long-term care insurance (LTC or LTCI) is an insurance product, sold in the United States, United Kingdom and Canada that helps pay for the costs associated with long-term care. Long-term care insurance covers care generally not covered by health insurance, Medicare, or Medicaid.

Individuals who require long-term care are generally not sick in the traditional sense but are unable to perform two of the six activities of daily living (ADLs) such as dressing, bathing, eating, toileting, continence, transferring (getting in and out of a bed or chair), and walking.

Age is not a determining factor in needing long-term care. About 70 percent of individuals over 65 will require at least some type of long-term care services during their lifetime. About 40% of those receiving long-term care today are between 18 and 64. Once a change of health occurs, long-term care insurance may not be available. Early onset (before 65) Alzheimer’s and Parkinson’s disease occur rarely.

Long-term care is an issue because people are living longer. As people age, many times they need help with everyday activities of daily living or require supervision due to severe cognitive impairment. That impacts women even more since they often live longer than men and, by default, become caregivers to others.

Vehicle insurance (also known as car insurance, motor insurance, or auto insurance) is insurance for cars, trucks, motorcycles, and other road vehicles. Its primary use is to provide financial protection against physical damage or bodily injury resulting from traffic collisions and against liability that could also arise from incidents in a vehicle. Vehicle insurance may additionally offer financial protection against theft of the vehicle, and against damage to the vehicle sustained from events other than traffic collisions, such as keying, weather or natural disasters, and damage sustained by colliding with stationary objects. The specific terms of vehicle insurance vary with legal regulations in each region.

Auto insurance in India deals with the insurance covers for the loss or damage caused to the automobile or its parts due to natural and man-made calamities. It provides accident cover for individual owners of the vehicle while driving and also for passengers and third-party legal liability. There are certain general insurance companies who also offer online insurance service for the vehicle.

Auto insurance in India is a compulsory requirement for all new vehicles used whether for commercial or personal use. The insurance companies have tie-ups with leading automobile manufacturers. They offer their customers instant auto quotes. Auto premium is determined by a number of factors and the amount of premium increases with the rise in the price of the vehicle. The claims of the auto insurance in India can be accidental, theft claims or third-party claims. Certain documents are required for claiming auto insurance in India, like duly signed claim form, RC copy of the vehicle, driving license copy, FIR copy, original estimate and policy copy.

There are different types of auto insurance in India:

Private Car Insurance: Private Car Insurance is the fastest growing sector in India as it is compulsory for all the new cars. The amount of premium depends on the make and value of the car, state where the car is registered and the year of manufacture. This amount can be reduced by asking the insurer for No Claim Bonus (NCB) if no claim is made for insurance in previous year.

Two Wheeler Insurance: The Two Wheeler Insurance in India covers accidental insurance for the drivers of the vehicle. The amount of premium depends on the current showroom price multiplied by the depreciation rate fixed by the Tariff Advisory Committee at the beginning of a policy period.

Commercial Vehicle Insurance: Commercial Vehicle Insurance in India provides cover for all the vehicles which are not used for personal purposes like trucks and HMVs. The amount of premium depends on the showroom price of the vehicle at the commencement of the insurance period, make of the vehicle and the place of registration of the vehicle. The auto insurance generally includes:

• Loss or damage by accident, fire, lightning, self-ignition, external explosion, burglary, housebreaking or theft, malicious act
• Liability for third party injury/death, third party property and liability to paid driver
• On payment of appropriate additional premium, loss/damage to electrical/electronic accessories

The auto insurance does not include:

• Consequential loss, depreciation, mechanical and electrical breakdown, failure or breakage
• When vehicle is used outside the geographical area
• War or nuclear perils and drunken driving

Third-party insurance

This cover is mandatory in India under the Motor Vehicles Act, 1988. This cover cannot be used for personal damages. This is offered at low premiums and allows for third party claims under “no fault liability. The premium is calculated through the rates provided by the Tariff Advisory Committee. This is branch of the IRDA (Insurance Regulatory and Development Authority of India). It covers bodily injury/accidental death and property damage.

Salient Features of Third Party Insurance

• Third party insurance is compulsory for all motor vehicles. In G. Govindan v. New India Assurance Co. Ltd., Third party risks insurance is mandatory under the statute. This provision cannot be overridden by any clause in the insurance policy.
• Third party insurance does not cover injuries to the insured himself but to the rest of the world who is injured by the insured.
• Beneficiary of third party insurance is the injured third party, the insured or the policy holder is only nominally the beneficiary of the policy. In practice the money is always paid direct by the insurance company to the third party (or his solicitor) and does not even pass through the hands of the insured person.
• In third party policies the premiums do not vary with the value of what is being insured because what is insured is the legal liability’ and it is not possible to know in advance what that liability will be.
• Third party insurance is almost entirely fault-based.(means you have to prove the fault of the insured first and also that injury occurred from the fault of the insured to claim damages from him)
• Third party insurance involves lawyers aid
• The third party insurance is unpopular with insurance companies as compared to first party insurance, because they never know the maximum amounts they will have to pay under third party policies.

Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, or boiler insurance. Property is insured in two main ways—open perils and named perils.

Open perils cover all the causes of loss not specifically excluded in the policy. Common exclusions on open peril policies include damage resulting from earthquakes, floods, nuclear incidents, acts of terrorism, and war. Named perils require the actual cause of loss to be listed in the policy for insurance to be provided. The more common named perils include such damage-causing events as fire, lightning, explosion, and theft.

Types of Coverage

There are three types of insurance coverage. Replacement cost coverage pays the cost of repairing or replacing your property with like kind & quality regardless of depreciation or appreciation. Premiums for this type of coverage are based on replacement cost values, and not based on actual cash value. [5] Actual cash value coverage provides for replacement cost minus depreciation. Extended replacement cost will pay over the coverage limit if the costs for construction have increased. This generally will not exceed 25% of the limit. When you obtain an insurance policy, the limit is the maximum amount of benefit the insurance company will pay for a given situation or occurrence. Limits also include the ages below or above what an insurance company will not issue a new policy or continue a policy.

This amount will need to fluctuate if the cost to replace homes in your neighborhood is rising; the amount needs to be in step with the actual reconstruction value of your home. In case of a fire, household content replacement is tabulated as a percentage of the value of the home. In case of high-value items, the insurance company may ask to specifically cover these items separate from the other household contents. One last coverage option is to have alternative living arrangements included in a policy. If property damage caused by a covered loss prevents you from living in your home, policies can pay the expenses of alternate living arrangements (e.g., hotels and restaurant costs) for a specified period of time to compensate for the “loss of use” of your home until you can return. The additional living expenses limit can vary, but is typically set at up to 20% of the dwelling coverage limit. You need to talk with your insurance company for advice about appropriate coverage and determine what type of limit may be appropriate for you.

Fire insurance in India

Fire insurance business in India is governed by the All India Fire Tariff that lays down the terms of coverage, the premium rates and the conditions of the fire policy. The fire insurance policy has been renamed as “Standard Fire and Special Perils Policy”. The risks covered are as follows:

• Dwellings, offices, shops, hospitals:
• Industrial, manufacturing risks
• Utilities located outside industrial/manufacturing risks
• Machinery and accessories
• Storage risks outside the compound of industrial risks
• Tank farms/gas holders located outside the compound of industrial risks

Importance

Protection Against Property Damage. Property insurance offers coverage against a lot of natural disasters including, but not limited to, monsoons and floods, fires, earthquakes, theft, and other weather-related damages. Regardless of your home’s size, location, and other security features that you may have added, no property is invulnerable to fires, floods, or burglaries. In some cases, the land your property is built in can also erode and send your home crashing down. Being a huge structure, homes have a lot of vulnerabilities; cover it with an earthquake or hurricane property insurance.

Protection Against Liability. A less known benefit of property insurance policies is its liability coverage clause. Many other forms of insurance policies including auto insurance include this provision. Sure, being a careful homeowner can help prevent a lot of accidents and injuries, but an incident could include your neighbors or your neighbor’s home. Liability coverage from your property insurance can help protect against these potentially costly incidents.

Protection Against Power Outages. Power outages were more frequent in the past, but still occur from time to time. If you run your computer or other electronics on a power cord, these outages can cause serious damage to your devices and shorten their lifespan significantly due to surges, Power outage can also cause food to spoil, which is why a lot of property insurance from homeowners include a refrigerator-restocking provision that can pay out up to $500.

Protection For Your Art And Jewelry. For homeowners who have expensive jewelry, art pieces, or other valuable possessions in their home, ask your insurance provider about adding a floater to your property insurance. This add-on feature will pay out for any damages to your personal items. Keep in mind, though, that these add-ons only usually have a fixed amount that will be paid.

Protection For Commercial Ventures. If you decide to rent your property out to a third-party, whether as a dorm room for college students, for families with kids, or for singles with pets, you are held responsible for any structural damages or personal injuries that they cause during the occupancy. In the event that your tenant gets hurt and files a law suit, the insurance may also offer some protection. Moreover, if you are caught in a situation wherein you need to file a lawsuit against your tenants for not paying rent or causing damage to your property, property insurance can also pay out for that.

Final Thoughts. These are just some of the many things that a property insurance can protect you from. Note that not all insurance policies are cut from the same cloth. You’ll want to sit down and discuss with a trusted insurance provider about specific coverage features that work best for your property and personal circumstances. For instance, if you live in a neighborhood that has historically withstood power outages, then tailoring your insurance policy to cut that feature from your coverage makes practical sense.

Exclusions

The following are excluded from insurance coverage:

• Loss or damage caused by war, civil war, and kindred perils
• Loss or damage caused by nuclear activity
• Loss or damage to the stocks in cold storage caused by change in temperature
• Loss or damage due to over-running of electric and/or electronic machines

Claims In the event of a fire loss covered under the fire insurance policy, the insured shall immediately give notice thereof to the insurance company. Within 15 days of the occurrence of such loss the insured should submit a claim in writing giving the details of damages and their estimated values. Details of other insurances on the same property should also be declared.

There are two reasons for it: (a) Government bonds are issued by the central government in India, (b) These bonds are regulated and managed by Reserve Bank of India (RBI).

What makes government bonds risk free is the security of the principal amount, and the certainty of the promised return. A person who wants to invest for long term, but wants to keep it risk-free, Government bonds are the best option.

Government Bonds

What are bonds and T-bills? These are Securities (G-secs) issued by the government of India to borrow money from investors. Who are investors?

• Big Investors: Banks, insurance companies, mutual funds, trusts, corporates etc. These are called big because their size of investment (in G-Secs) are large compared to small investors. Know more about mutual funds.
• Small Investors: HNI’s, NRIs, HUF members, individuals etc. In this group of people, ‘individual investors’ are the ones where we common men are placed. Read more about Peter Lynch a big HNI investor.

Government borrows money from these investors by offering them G-secs through “auctions“. How the auction is done? Through “competitive bidding” process. We will read more about it below.

In good old days, G-sec market was dominated by big players like banks, insurance companies, mutual funds etc. Small investors stood away from investing directly in bonds. Why? 

• First because of the difficult process of investing in bonds. A common man just did not knew how to buy government bonds. The ease with which they can buy stocks, mutual funds etc, Government bonds purchase was not as simple. Read more about how to buy stock online.
• Secondly, because the big players used to deal in much larger volumes, individuals just could not compete with them in the “auction” process. Know if small investors shall invest in debt funds.

Government Bonds – Process of Purchase

Before Nov’2017, Government Securities (G-Secs) like bonds and T-bills were virtually non-accessible for common men (small investors). But then RBI started the “Non-competitive Bidding Facility“. This made G-secs more accessible for common men.

Lets understand more about competitive and non-competitive bidding process:

• Competitive bidding: Example: Government issues a bond of Face Value of Rs.1,000, offering an interest @8.0% p.a. In the competitive bidding process (auction), “investors” will quote a price higher than the face value (Rs.1,000). Suppose based on all bids, RBI accepts a cut-off price as Rs.1,060. In this case everyone who has quoted Rs.1,060 or more will get their quoted lot of the bond. [Note: In this case, their yield will be lower than 8.0%. How much lower? 7.54% (=8.0% / 1,060 * 1000)].
• Non-competitive bidding: RBI’s “non-competitive bidding facility” for retail investors like me and you. Small investors just need to access the mobile and web app of NSE.

mall investors like me and you can buy government bonds in India using a mobile app or a web based app of National Stock Exchange (NSE). This app is called “NSE goBID“. Either of these two apps can be used to buy the following:

• Long-dated government bonds: holding time: 5 to 40 year.
• Treasury bills (T-bills): holding time less than 1 year.

Before one can go ahead and buy the government bonds using NSE goBID, the “process of registration” must be completed. But do not worry, everything is online. 

About NSE goBID APP

To get a better perspective of how/why a common man can invest in bonds, let’s understand why rich and wealthy like bonds.

Why wealthy prefer bonds?

The way high net worth investors think investment is slightly different than majority. They invest money in a backdrop of a condition where they have excess of it (money). How does it make a difference?

As they have money in excess, they can afford to buy bonds and not need it easily for next 10-15 years. This money can stay invested for prolonged period of time, and yield low returns (like 8% p.a.). Wealthy people do not mind it. They invest money mostly for wealth protection.

In the process of wealth protection, if their investment can yield even 8% p.a. odd returns, it is like icing on the cake. Moreover, the returns of the government bonds are almost guaranteed. How? Because they are backed by the Indian government. 

Whereas when we (common men) invest money for time horizons like 10-15 years, we think about growth. For such prolonged horizons we will instead invest in equity. Why? Because our objective is wealth creation. Read more about where to invest money for high returns.

So what does this tell us about bonds? It is only for rich and wealthy, right? But there are conditions where bonds may become good investment option for common men as well. Let’s see how…

When bonds are useful for common men…

Generally speaking, when common men invest money, they do it for wealth creation. Hence, they often invest with a long term perspective (5+ years). Equity based investment options can give much higher returns than bonds.

In India, a government bond will yield returns between 7-8% per annum even in long term. But a good equity based plan can easily give 14% p.a. in a time horizon of 5+ years. Read more about types of mutual funds and their potential returns.

Types of Government Bonds in India

The multiple variants of Government bonds are discussed below:

• Fixed-rate bonds

Government bonds of this nature come with a fixed rate of interest which remains constant throughout the tenure of investment irrespective of fluctuating market rates.

The coupon on a Government Bond is mentioned in nomenclature. For instance, 7% GOI 2021 means the following

Rate of interest on face value	7%
Issuer	Government of India
Maturity year	2021

• Floating Rate Bonds (FRBs)

As the name suggests, FRBs are subject to periodic changes in rate of returns. The change in rates is undertaken at intervals which are declared beforehand during the issuance of such bonds. For instance, an FRB could have a pre-announced interval of 6 months; which means interest rates on it would be re-set every six months throughout the tenure.

There is another variant to FRBs, wherein the rate of interest rate is bifurcated into two components: a base rate and a fixed spread. This spread is decided through auction and remains constant throughout the maturity tenure.

• Sovereign Gold Bonds (SGBs)

The Central Government issues sovereign Gold Bonds, wherein entities can invest in gold for an extended period through such bonds, without the burden of investing in physical gold. The interest earned on such bonds is exempted from tax.

Prices of such bonds are linked with gold’s prices. The nominal value of SGBs is reached by calculating the simple average of closing prices of 99.99% purity gold, three days preceding such bonds’ issuance. SGBs are also denominated in terms of one gram of gold.

As per RBI regulations, there are individual ceilings concerning SGB possession for different entities. Individuals and Hindu Undivided Families can only hold up to 4 kg of Sovereign Gold Bonds in a financial year. Trusts and other relevant entities can hold up to 20 kg if SGBs during a similar time frame. Interest at 2.50% is disbursed periodically on such SGBs and has a fixed maturity period of 8 years unless stated otherwise. Also, no tax is levied on interest earnings through such SGBs.

Investors seeking liquidity from such bonds shall need to wait for the first five years to redeem it. However, redemption shall only take effect on the date of subsequent interest disbursal.

Assuming that Mr A invested in an SGB on 1st April 2014, and interest disbursals are set on 1st May 2014 and every six months from thereon. In case he decides to withdraw it on 1st June 2019, he shall need to wait till 1st November 2019(interest disbursal date) to receive the redemption amount.

• Inflation-Indexed Bonds

It is a unique financial instrument, wherein the principal, as well as the interest earned on such bond, is accorded with inflation. Mainly issued for retail investors, these bonds are indexed as per the Consumer Price Index (CPI) or Wholesale Price Index (WPI). Such IIBs ensure real returns accrued with such investments remain constant, thereby allowing investors to safeguard their portfolio against inflation rates.

Another variant of such inflation-adjusted securities is Capital Indexed Bond. However, unlike IIBs, only the capital or principal proportion of balance is accorded with an inflation index.

• 7.75% GOI Savings Bond

This G-Sec was introduced as a replacement to the 8% Savings Bond in 2018. As noted from its nomenclature, the interest rate of such bonds is set at 7.75%. As per RBI regulations, these bonds can only be held by:

• An individual or individuals who are/are not NRI(s) in any capacity
• A minor with a legal guardian representative
• A Hindu Undivided Family

Interest earnings from such bonds are taxable under the Income Tax Act 1961 as per the investors’ applicable income tax slab. The minimum amount at which these bonds are issued is Rs. 1000 and in multiples of Rs. 1000 thereof.

• Bonds with Call or Put Option

The distinguishing feature of this type of bonds is the issuer enjoys the right to buy-back such bonds (call option) or the investor can exercise its right to sell (put option) them to such issuer. This transaction shall only take place on a date of interest disbursal.

Participating entities, i.e. the government and investor can only exercise their rights after the lapse of 5 years from its issuance date. This type of bonds might come with either:

• Call option only
• Put option only
• Both

In any case, the government can buy back its bonds at face value. Similarly, investors can sell such bonds to the issuer at face value. This ensures the preservation of the corpus invested in case of any downturn of the stock market.

• Zero-Coupon Bonds

As the name suggests, Zero-Coupon Bonds do not earn any interest. Earnings from Zero-Coupon Bonds arise from the difference in issuance price (at a discount) and redemption value (at par). This type of bonds are not issued through auction but rather created from existing securities.

Advantages of Investing in Government Bonds

• Sovereign Guarantee 

Government Bonds enjoy a premium status with respect to the stability of funds and promise of assured returns. As G-Secs are a form of a formal declaration of Government’s debt obligation, it implies the issuing governmental body’s liability to repay as per the stipulated terms.

• Inflation-adjusted 

Balances held in Inflation-Indexed Bonds are adjusted against increasing average price level. Other than that, the principal amount invested in Capital Indexed Bonds is also adjusted against inflation. This feature provides an edge to investors as they are less susceptible to be financially undermined as investing in such funds increase the real value of the deposited funds.

• Regular source of income

As per RBI regulations, interest earnings accrued on Government Bonds are supposed to be disbursed every six months to such debt holders. It provides investors with an opportunity to earn regular income by investing their idle funds.

Disadvantages of Investing in Government Bonds

• Low Income

Other than 7.75% GOI Savings Bond, interest earnings on other types of bonds are relatively lower.

• Loss of relevancy

As Government Bonds are long-term investment options with maturity tenure ranging from 5 – 40 years, it can lose relevancy over time. It means such bonds value loses relevance in the face of inflation, barring IIBs and Capital Indexed Bonds.

Mutual funds are investment vehicles that pool money from many different investors to increase their buying power and diversify their holdings. This allows investors to add a substantial number of securities to their portfolio for a much lower price than purchasing each security individually.

Benefits of Mutual Funds

Risk reduction

As mutual funds are managed professionally it reduces the risk factor. Also, they are invested in a huge number of companies. Thus, the risk factor is reduced more.

Diversification

There are a large number of investors that has savings with them. Thus, these small savings are brought together and a mutual fund is created. So, this can be used to buy the share of many different companies. Also, because of this diversification, the investment ensures capital appreciation and regular return.

Tax advantage

There are many schemes in a mutual fund that provide a tax advantage under the new income tax act. So, the liability of paying the tax of an investor is also reduced. This can be possible only when he/she invests in mutual funds.

Investor protection

Mutual funds are monitored and regulated by the SEBI. Thus, it provides better protection to its investors. Also, this makes sure that there is no legal obligation for the investors.

Disadvantages of Mutual Funds

Although mutual funds can be beneficial in many ways, they are not for everyone.

1. No Control over Portfolio. If you invest in a fund, you give up all control of your portfolio to the mutual fund money managers who run it.
2. Capital Gains. Anytime you sell stock, you’re taxed on your gains. However, in a mutual fund, you’re taxed when the fund distributes gains it made from selling individual holdings even if you haven’t sold your shares. If the fund has high turnover, or sells holdings often, capital gains distributions could be an annual event.
3. Fees and Expenses. Some mutual funds may assess a sales charge on all purchases, also known as a “load” this is what it costs to get into the fund. Plus, all mutual funds charge annual expenses, which are conveniently expressed as an annual expense ratio this is basically the cost of doing business. The expense ratio is expressed as a percentage, and is what you pay annually as a portion of your account value. The average for managed funds is around 1.5%. Alternatively, index funds charge much lower expenses (0.25% on average) because they are not actively managed. Since the expense ratio will eat directly into gains on an annual basis, closely compare expense ratios for different funds you’re considering.
4. Over-diversification. Although there are many benefits of diversification, there are pitfalls of being over-diversified. Think of it like a sliding scale: The more securities you hold, the less likely you are to feel their individual returns on your overall portfolio. What this means is that though risk will be reduced, so too will the potential for gains. This may be an understood trade-off with diversification, but too much diversification can negate the reason you want market exposure in the first place.
5. Cash Drag. Mutual funds need to maintain assets in cash to satisfy investor redemptions and to maintain liquidity for purchases. However, investors still pay to have funds sitting in cash because annual expenses are assessed on all fund assets, regardless of whether they’re invested or not. According to a study by William O’Reilly, CFA and Michael Preisano, CFA, maintaining this liquidity costs investors 0.83% of their portfolio value on an annual basis.

The word “investment” can be defined in many ways according to different theories and principles. It is a term that can be used in a number of contexts. However, the different meanings of “investment” are more alike than dissimilar. Generally, investment is the application of money for earning more money. Investment also means savings or savings made through delayed consumption. According to economics, investment is the utilization of resources in order to increase income or production output in the future.

An amount deposited into a bank or machinery that is purchased in anticipation of earning income in the long run is both examples of investments. Although there is a general broad definition to the term investment, it carries slightly different meanings to different industrial sectors.

According to economists, investment refers to any physical or tangible asset, for example, a building or machinery and equipment. On the other hand, finance professionals define an investment as money utilized for buying financial assets, for example stocks, bonds, bullion, real properties, and precious items.

According to finance, the practice of investment refers to the buying of a financial product or any valued item with anticipation that positive returns will be received in the future. The most important feature of financial investments is that they carry high market liquidity. The method used for evaluating the value of a financial investment is known as valuation. According to business theories, investment is that activity in which a manufacturer buys a physical asset, for example, stock or production equipment, in expectation that this will help the business to prosper in the long run.

Types of Investment in Security Analysis and Portfolio Management

Types of investments

Investments may be classified as financial investments or economic investments.In Finance investment is putting money into something with the expectation of gain that upon thorough analysis has a high degree of security for the principal amount, as well as security of return, within an expected period of time. In contrast putting money into something with an expectation of gain without thorough analysis, without security of principal, and without security of return is speculation or gambling. Investment is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management and finance whether for households, firms, or governments.

Economic investments are undertaken with an expectation of increasing the current economy’s capital stock that consists of goods and services. Capital stock is used in the production of other goods and services desired by the society. Investment in this sense implies the expectation of formation of new and productive capital in the form of new constructions, plant and machinery, inventories, and so on. Such investments generate physical assets and also industrial activity. These activities are undertaken by corporate entities that participate in the capital market.

Financial investments and economic investments are, however, related and dependent. The money invested in financial investments is ultimately converted into physical assets. Thus, all investments result in the acquisition of some asset, either financial or physical. In this sense, markets are also closely related to each other. Hence, the perfect financial market should reflect the progress pattern of the real market since, in reality, financial markets exist only as a support to the real market.

Nature and Objectives of Investment Management

Nature of investment

The features of economic and financial investments can be summarized as return, risk, safety, and liquidity.

1. Return

• All investments are characterized by the expectation of a return. In fact, investments are made with the primary objective of deriving a return.
• The return may be received in the form of yield plus capital appreciation.
• The difference between the sale price and the purchase price is capital appreciation.
• The dividend or interest received from the investment is theyield.
• The return from an investment depends upon the nature of the investment, the maturity period and a host of other factors.

Return = Capital Gain + Yield (interest, dividend etc.)

2. Risk

Risk refers to the loss of principal amount of an investment. It is one of the major characteristics of an investment.

The risk depends on the following factors:

• The investment maturity period is longer; in this case, investor will take larger risk.
• Government or Semi Government bodies are issuing securities which have less risk.
• In the case of the debt instrument or fixed deposit, the risk of above investment is less due to their secured and fixed interest payable on them. For instance, debentures.
• In the case of ownership instrument like equity or preference shares, the risk is more due to their unsecured nature and variability of their return and ownership character.
• The risk of degree of variability of returns is more in the case of ownership capital compare to debt capital.
• The tax provisions would influence the return of risk.

3. Safety:

Safety refers to the protection of investor principal amount and expected rate of return.

• Safety is also one of the essential and crucial elements of investment. Investor prefers safety about his capital. Capital is the certainty of return without loss of money or it will take time to retain it. If investor prefers less risk securities, he chooses Government bonds. In the case, investor prefers high rate of return investor will choose private Securities and Safety of these securities is low.

4. Liquidity:

Liquidity refers to an investment ready to convert into cash position. In other words, it is available immediately in cash form. Liquidity means that investment is easily realizable, saleable or marketable. When the liquidity is high, then the return may be low. For example, UTI units. An investor generally prefers liquidity for his investments, safety of funds through a minimum risk and maximization of return from an investment.

 Four main investment objectives cover how you accomplish most financial goals. These investment objectives are important because certain products and strategies work for one objective, but may produce poor results for another objective. It is quite likely you will use several of these investment objectives simultaneously to accomplish different objectives without any conflict. Let’s examine these objectives and see how they differ.

Capital Appreciation

Capital appreciation is concerned with long-term growth. This strategy is most familiar in retirement plans where investments work for many years inside a qualified plan. However, investing for capital appreciation is not limited to qualified retirement accounts. If this is your objective, you are planning to hold the stocks for many years. You are content to let them grow within your portfolio, reinvesting dividends to purchase more shares. A typical strategy employs making regular purchases. You are not very concerned with day-to-day fluctuations, but keep a close eye on the fundamentals of the company for changes that could affect long-term growth.

Current Income

If your objective is current income, you are most likely interested in stocks that pay a consistent and high dividend. You may also include some top-quality real estate investment trusts (REITs) and highly-rated bonds. All of these products produce current income on a regular basis. Many people who pursue a strategy of current income are retired and use the income for living expenses. Other people take advantage of a lump sum of capital to create an income stream that never touches the principal, yet provides cash for certain current needs (college, for example).

Capital Preservation

Capital preservation is a strategy you often associate with elderly people who want to make sure they don’t outlive their money. Retired on nearly retired people often use this strategy to hold on the detention has. For this investor, safety is extremely important – even to the extent of giving up return for security. The logic for this safety is clear. If they lose their money through foolish investment and are retired, it is unlike they will get a chance to replace it. Investors who use capital preservation tend to invest in bank CDs, U.S. Treasury issues and savings accounts.

Speculation

The speculator is not a true investor, but a trader who enjoys jumping into and out of stocks as if they were bad shoes. Speculators or traders are interested in quick profits and used advanced trading techniques like shorting stocks, trading on the margin, options and other special equipment. They have no love for the companies they trade and, in fact may not know much about them at all other than the stock is volatile and ripe for a quick profit. Speculators keep their eyes open for a quick profit situation and hope to trade in and out without much thought about the underlying companies. Many people try speculating in the stock market with the misguided goal of getting rich. It doesn’t work that way. If you want to try your hand, make sure you are using money you can afford to lose. It’s easy to get addicted, so make sure you understand the real possibilities of losing your investment.

The secondary objectives are tax minimization and Marketability or liquidity.

Tax Minimization:

An investor may pursue certain investments in order to adopt tax minimization as part of his or her investment strategy. A highly-paid executive, for example, may want to seek investments with favorable tax treatment in order to lessen his or her overall income tax burden. Making contributions to an IRA or other tax-sheltered retirement plan can be an effective tax minimization strategy.

Marketability/Liquidity:

Many of the investments we have discussed are reasonably illiquid, which means they cannot be immediately sold and easily converted into cash. Achieving a degree of liquidity, however, requires the sacrifice of a certain level of income or potential for capital gains.

Common stock is often considered the most liquid of investments, since it can usually be sold within a day or two of the decision to sell. Bonds can also be fairly marketable, but some bonds are highly illiquid, or non-tradable, possessing a fixed term. Similarly, money market instruments may only be redeemable at the precise date at which the fixed term ends. If an investor seeks liquidity, money market assets and non-tradable bonds aren’t likely to be held in his or her portfolio.

Despite its popularity and presence in the news, the stock market is just one of many potential places to invest your money. Investing in stock is often risky, which draws attention to the huge gains and losses of some investors. If you manage the risks, you can take advantage of the stock market to secure your financial position and earn money.

Investment Gains

One of the primary benefits of investing in the stock market is the chance to grow your money. Over time, the stock market tends to rise in value, though the prices of individual stocks rise and fall daily. Investments in stable companies that are able to grow tend to make profits for investors. Likewise, investing in many different stocks will help build your wealth by leveraging growth in different sectors of the economy, resulting in a profit even if some of your individual stocks lose value.

Dividend Income

Some stocks provide income in the form of a dividend. While not all stocks offer dividends, those that do deliver annual payments to investors. These payments arrive even if the stock has lost value and represent income on top of any profits that come from eventually selling the stock. Dividend income can help fund a retirement or pay for even more investing as you grow your investment portfolio over time.

Diversification

For investors who put money into different types of investment products, a stock market investment has the benefit of providing diversification. Stock market investments change value independently of other types of investments, such as bonds and real estate. Holding stock can help you weather losses to other investment products. Stock also adds risk to a portfolio, as well as the potential for large, rapid gains, helping investors avoid risk-averse or overly conservative investment strategies.

Ownership

Buying shares of stock means taking on an ownership stake in the company you purchase stock in. This means that investing in the stock market also brings benefits that are part of being one of a business’s owners. Shareholders vote on corporate board members and certain business decisions. They also receive annual reports to learn more about the company. Owning stock in the company you work for can be a way to express loyalty and tie your personal finances to the success of the business as a whole.

Higher Liquidity:

In the Indian stock market, two exchanges, the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) play important roles. Most companies trade their shares on either or both of these exchanges. This provides higher liquidity to investors because average daily volumes are high. Therefore, if an investor wants to buy or sell any product on the stock exchanges, this liquidity makes it easy.

Versatility:

The stock market offers different financial instruments, such as shares, bonds, mutual funds, and derivatives. This provides investors a wide choice of products in which to invest their monies. In addition to providing investment choices, this flexibility is beneficial in mitigating the risks inherent to stock investing by enabling diversification of investment portfolios.

Higher Returns in Shorter Periods of Time:

Compared to other investment products like bonds and fixed deposits, stock investing provide investors an excellent possibility of making greater returns in comparatively shorter time periods. Adhering to the stock market basics, such as planning the trade, using stop-loss and take-profit triggers, doing the research and due diligence, and being patient can significantly mitigate the risks inherent to stock investing and maximize the returns on share market investments.

Acquire Ownership and Right to Vote:

Even if an investor acquires a single share in a company, he acquires a portion of ownership in the company. This ownership, in turn, provides investors the right to vote and offer his contribution in the strategic movement of the business. Although this may seem like an exaggeration, it is true and there are several instances when shareholders have prevented company management from making unreasonable decisions that are detrimental to their interests.

Regulatory Environment and Framework:

The Indian stock market is regulated by the Stock Exchange Board of India (SEBI). The SEBI has the responsibility of regulating the stock exchanges, its development, and protecting the rights of the investors. This means when investors invest in financial products on the stock market, their interests are well-protected by a regulatory framework. This significantly helps in reducing risks due to fraudulent activities of companies.

Convenience:

Technical development has influenced every aspect of modern living. The stock exchanges are also using various technical advancements to provide greater convenience to the investors. The trades are all executed on an electronic platform to ensure the best investment opportunities to investors in an open environment. In addition, broking service providers offer online share trading facilities that make investing convenient, because investors can place their orders through a computer from the comfort of their homes or offices. The demat account makes it easier for investors to hold all the products within their investment portfolio electronically in a single location, which makes it easier to track and monitor the performance.

Although stock investing has several benefits, investors must also be cautious while making their decisions. Understanding the stock market basics and doing their research before investing is advisable to mitigate risks and maximize returns.

Stock Investment

Stock investment is one of the most preferred investment options due to the high return potential. As the stock investments carry a little higher risk and hence are also capable of generating high returns.

You can expect an annual return of 15% – 18%, if you know the art of investing in the right stocks at the right time. I would recommend you to start with a small investment in stock with an intent to learn before making big investments.

Best Investment Options for a Salaried Person

1. Public Provident Fund (PPF)

Apart from your regular pension contribution, an investment in PPF account can save lots of tax as all the deposits made are deductible under section 80C.

Further, all the accumulated principal and interest are exempted from tax at the time of withdrawal.

2. National Pension System (NPS)

NPS scheme is portable across jobs and locations. The added benefit is the returns from equity and debt investments.

All your contributions up to Rs. 1.5 Lac to Tier I capital are exempted under section 80C. Plus you can claim an additional up to Rs. 50,000 of tax benefits.

So here you can save Rs. 2 Lacs of tax.

3. Equity Linked Savings Scheme (ELSS)

You get a higher return of 15% to 18% while investing in ELSS. Investment in ELSS funds have a lesser lock-in period of 3 years and any earning over Rs. 1 Lac are taxable.

4. Tax Savings Fixed Deposit

If you want to have a safe investment option without investing in equities then pick tax saving fixed deposit of any bank or post office.

The interest rates vary from bank to bank and are in the range of 6% to 8.5%.

5. Unit Linked Insurance Plans (ULIPs)

Investments in ULIPs gives you wealth creation option along with life cover. Premium paid are eligible for deduction under section 80C. Plus the returns on maturity are exempt under section 10(10D).

The returns vary depending on the combination of equity, debt or hybrid funds.

Best Investment Plan with High Returns

6. Direct Equity Investment

All the equity investments carry higher risks and hence are also capable of generating very high returns. Opt for equity investment option if you are comfortable losing as much as 50% of the capital.

The last 1-year return of NSE is 12.40% and in the last 2 year generated a 26.5% returns. Likewise, shares of blue-chip companies have delivered huge returns in the near past.

7. Mutual Funds

Mutual funds are the safest and the most convenient way of investing in the markets when you do not have the time and expertise.

The equity mutual funds have generated consistently higher returns. With funds like L&T India Value, Mirae Asset India and ICICI Prudential Blue Chip delivering 3 years return in the range of 14% to 18%.

The investment in mutual funds can be a lump sum or monthly SIP for an amount as low as Rs. 500.

8. Commercial Real Estate

Commercial real estate provides rental income and capital appreciation. The higher appreciation is due to demand for office space and growth of corporate environment.

But the location, building quality, market space rent and the demand-supply plays a major factor in deciding returns.

A good investment in office and shop spaces not only fetches higher returns but also helps in the diversification of investment assets.

9. Initial Public Offer (IPO)

The best part of investing in IPO is that the money gets blocked only for 7 to 15 days. Prudent investment in a good company coming out with IPO can fetch returns as high as 20-25% over a period of time.

Best Investment Plan for 1 Year

10. Fixed Deposit

FDs are the safest and secure investment options provided by banks and post offices which earn higher interest rates than a savings account.

Any excess amount which you are not going to use for a certain period of time can be safely put into a fixed deposit.

11. Recurring Deposit

Like fixed deposit, RD to earns a higher interest rate than a savings account.

RD let you invest any amount which can be as small as Rs. 5 per month and is the best option for promoting the habit of savings.

12. Liquid Mutual Fund

The option carries the least amount of risk and is for persons who have idle money for short period of time.

The mutual fund invests your money in the highly liquid short term instruments like the bank’s CD, T-bills and commercial papers generally with a maturity period of less than 91 days.

13. Ultra Short Term Debt MF Plans

Unlike, liquid MF the money is invested in bonds and other instruments with maturity more than 91 days and less than 1 year.

Ultra ST debt MF does carry interest rate risk, are not so liquid and hence gives you higher returns.

Best Investment Plan for 3 Years

14. Savings Account with Sweep in Facility

The sweep in option lets you enjoy flexibility in managing your savings and also enjoy higher returns from a fixed deposit.

Here, any excess money lying in your savings account, above a particular threshold level gets automatically converted into a fixed deposit and vice versa.

15. Short Term Debt MF

Is a good option for generating stable returns with modest risk.

The funds are locked for up to 3 years and there is a 1% penalty for premature redemption. Still you can expect returns a bit higher than the fixed deposit in a range of 8-10%.

16. Equity Linked Savings Scheme (ELSS)

There are numerous benefits when you invest in ELSS like tax savings, higher returns (15% to 18%), option to invest monthly (SIP) and can be started with as low as investing Rs. 500.

17. Fixed Deposit

Returns on a 3-year FDs vary from bank to bank, usually in a range of 6.5% to 8%. Also there are no associated tax benefits in this investment option.

8. Recurring Deposit (RD)

The returns generated are almost the same as a fixed deposit for a 3 year period.