Index

A. Basics of Investment
1. How does investing help in retirement planning?
2. Is there a risk-reward tradeoff? What does it mean for my investments?
3. What are the advantages of borrowing through formal channels rather
than local moneylenders?
4. What are the various objectives of investment?
5. What does diversification mean? How is it helpful?
6. What factors should I consider while building my investment portfolio?
7. What is compound interest? How does it impact return on investments?
8. What is the difference between saving and investment?
9. What is the impact of inflation on savings? Can investing help me
beat inflation?
10. What is the 'present value' of money? How is it useful?
11. Why must I invest?
12. Why must I save?
13. Why should I start investing at an early stage?

B. Trading
B. a. Equity
a 14.
a 15.
a 16.
a 17.
a 18.
a 19.
a 20.
a 21.
a 22.
a 23.
a 24.
a 25.
a 26.
a 27.
a 28.
a 29.
a 30.
a 31.
a 32.

How can I invest in the Indian share market?

How do I read a stock table or quote?
How does a stock exchange function?
How is a futures contract different from an option?
How is fundamental analysis different from technical analysis?
How is the Indian stock market regulated?
What are options?
What are stock futures?
What are stocks?
What are the advantages and drawbacks of options?
What are the most commonly used ratios while evaluating stocks?
What do these ratios mean?
What are the various types of options?
What is an IPO?
What is fundamental analysis?
What is margin trading?
What does 'support' and 'resistance' for a stock mean?
What is rollover in the stock market?
What is technical analysis?
What is the meaning of long or short positions?
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a 33. What is the purpose of fundamental analysis?

a 34. What is the purpose of technical analysis?
a 35. What is the relation between the price of a stock and its futures?
a 36. Who are the bulls and who the bears in a stock market?
a 37. Why do I need a stockbroker?
a 38. Why do stock prices change?
B. b. Commodity
b 39. How can I trade in commodities?
b 40. How does a commodities exchange function? Which are the major
commodity exchanges in India?
b 41. What are commodity futures?
b 42. What are the major factors that impact commodity prices?
b 43. What is commodity trading?
b 44. What is hedging? How is it done through commodity markets?
B. c. Currency
c 45. How can I trade in currencies?
c 46. How is the price of a currency determined?
c 47. What are currency derivatives?
c 48. What is currency trading?
c 49. Why do people trade in currencies?

C. Investment
C. a. Mutual Fund
a 50. Benefits of investing in mutual funds
a 51. How can I invest in a mutual fund?
a 52. How can I redeem a mutual fund?
a 53. Tax benefits of mutual funds
a 54. What are my rights as a mutual fund investor?
a 55. What are the costs associated with mutual fund?
a 56. What are the different types of mutual funds?
a 57. What is a mutual fund?
a 58. What is NAV of a mutual fund and how is it calculated?
C. b. Bonds
b 59. Are bonds safer than stocks?
b 60. Face value, coupon and maturity of bonds
b 61. How and where can I buy bonds in India?
b 62. How are bonds rated?
b 63. What are junk bonds?
b 64. Relationship between price of a bond and the prevailing interest rate
b 65. Various types of bonds
b 66. What are bonds?
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b 67.
b 68.
b 69.
C. c. Gold
c 70.
c 71.
c 72.
c 73.
c 74.
c 75.

What are gilt funds?

What are zero coupon bonds?
What is the yield of a bond?
Is there a correlation between gold prices and stock market
performance?
Is there a correlation between gold prices and the US dollar?
What are gold ETFs?
What are the factors that influence gold prices?
What are the various ways in which one can invest in gold in India?
What makes gold a popular savings/investment option?

D. Insurance
D. a. Life Insurance
a 76. How can I file a life insurance claim?
a 77. How to compare different life insurance policies
a 78. Importance of disclosing correct information while buying life insurance
a 79. Types of life insurance products
a 80. What are my rights as a life insurance policy holder?
a 81. What are the factors that affect the premium of your life insurance
policy?
a 82. What are the tax benefits of life insurance?
a 83. What is difference between sum assured and guaranteed returns?
a 84. What is life insurance?
a 85. What is survival benefit? How does it work?
a 86. Who can be a nominee in a life insurance policy? What is the
nomination procedure?
a 87. Why do I need life insurance?
D. b. Health Insurance
b 88. Health insurance exclusions
b 89. Cashless vs reimbursement plans
b 90. Claims processing procedure by health insurance companies
b 91. Impact of your lifestyle on your health insurance premiums
b 92. Tax benefits of health insurance
b 93. Things to look for while buying health insurance
b 94. Types of health insurance plans
b 95. What are my rights as a health insurance policy holder?
b 96. What is cashless hospitalization?
b 97. What is health insurance portability?
b 98. What is health insurance?
b 99. Why do I need health insurance?
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A.

Basics of Investment

A. 1.

How does investing help in retirement planning?

Investment can be an ideal option for individuals who want to be financially independent even after
retirement.

After working hard for several years, every individual dreams of a happy and secure retired life. This goal
is easily achievable if you have accumulated a large sum and are financially independent. One of the
best ways to ensure this is by investing your money in several instruments.

Here is how investing in strong instruments can ensure a financially independent retired life.

Grow your money

Saving money is certainly a good way to accumulate a retirement corpus. However, by investing this
amount in various instruments, you can grow your money and ensure that you get a larger amount for
your retirement. Fixed-income products like bonds, fixed deposits, etc. secure your initial investment
and, at the same time, provide a decent return every year.

Diversify your investment

While it is wise to invest your money in fixed-income products when planning your retirement, it makes
more sense to invest in a wider variety of products that provides you both safety and growth. Instead of
limiting your investments to just fixed deposits and bonds, you can diversify your portfolio by putting
money in high-yielding products like gold, stocks, mutual funds, etc. Such diversification can not only
ensure that you get high returns, but also secure your post retirement life.

Invest in the right schemes

There are various investment schemes available that can be used specifically to plan your retirement.
These schemes can ensure that you get guaranteed returns throughout your life. For example, many
retirement plans offered by PSU banks in India provide regular income from the age of 40 years on
payment of monthly premiums during the pre-retirement period.

If you want to be financially independent even after retirement, investment can be an ideal option for
you.

A. 2. Is there a risk-reward tradeoff? What does it mean for my investments?

Understanding the risks involved in various investments, minimizing them and generating higher returns
is the key to successful investment.

The risk-reward tradeoff is the balance that an investor has to achieve between the risk involved in an
investment and its potential returns.

It is hence the process of deciding how much risk you are ready to take in order to achieve the desired
rewards. While determining this, it is important to note that every investment has some risk associated
with it; only the level of risk differs. Experts are of the opinion that the higher the risk the higher the
returns, and vice versa.

Investments like stocks and junk bonds often fall in the high risk category, while low risk investment
options include fixed deposits and savings certificates. Instruments like mutual funds and corporate
bonds are included in the moderate risk category.

How to determine risk benefit

Determining the amount the risk you can take depends on the type of investor you are. If your objective
is to earn decent returns without taking high risk, you should prefer investing in products like fixed
deposits, government bonds, etc. Similarly, if you are nearing retirement, your investment portfolio
should contain as little risk as possible. Instruments to be considered can be fixed-income products like
public provident fund (PPF), monthly income plans, etc. Conversely, if you are ready to take higher risk,
there are several products that have the potential to provide high returns. These include stocks,
commodities, junk bonds, etc.

Hence, it is first important to determine the level of risk you are ready to take, and then select the
appropriate instruments. This will ensure that your goals are not only met in time, but are also in
accordance to your risk profile.

A. 3. What are the advantages of borrowing through formal channels rather than local
moneylenders?
Borrowing from formal channels like banks and non-banking financial companies is safer when
compared to private moneylenders.

Loan can be a serious liability for an individual and the correct management of the same is a crucial
aspect of business, and even life. The most common form of loan taken by individuals is a personal loan.
However, selecting the right mode of borrowing is crucial for your future years.

When it comes to loans, there are two types of lenders in the market today: formal channels like banks,
non-banking financial companies (NBFCs), etc., and private moneylenders. Before applying for a loan, it
is important that you understand the pros and cons of borrowing from organized and unorganized
lenders.

Risk factor
Availing of a loan from banks, licensed NBFCs and microfinance institutions (MFIs) requires a significant
amount of paperwork, which may seem cumbersome. However, the level of security in loans from such
institutions is higher than that from unorganized lenders. There is little chance that a licensed lender will
overcharge or cheat you. In case of an unorganized lender, the process may be simple and the
paperwork may be minimal; however, the risk associated with such loans is higher, as the lending
process may not be transparent.

Rate of interest
The working of organized lenders is usually regulated by the central bank. In case of India, it is the
Reserve Bank of India (RBI) that puts in place policies to avoid unfair practices and take corrective
measures. Hence, the rate of interest charged by these players cannot exceed a certain level. However,
there is no such governing body when it comes to private money lenders. Consequently, they charge a
rate of interest that is usually much higher than that of banks and NBFCs.

Recovery process

Another key factor that you need to keep in mind while availing a loan is the recovery process. In case of
late payment, organized players such as banks and NBFCs may charge a penalty. However, a similar
situation with an unorganized lender may result in personal visits from the lender or selling of the
collateral.

Benefits
Borrowing from a financial institution like a bank provides a number of tax benefits and improves the
credit rating of an individual or organization, if the debt is managed well. Such benefits are not available
in case of unorganized money lenders, as there is no documented record of the transaction.

A. 4.

What are the various objectives of investment?

Your investment objectives may differ in accordance with your life stage and risk profile. Heres a list of
them.

An investment is made because it serves some objective for an investor. Depending on the life stage and
risk appetite of the investor, there are three main objectives of investment: safety, growth and income.
Every investor invests with a specific objective in mind, and each investment has its own unique set of
benefits and risks. Let us understand these objectives in detail.

Safety
While no investment option is completely safe, there are products that are preferred by investors who
are risk averse. Some individuals invest with an objective of keeping their money safe, irrespective of the
rate of return they receive on their capital. Such near-safe products include fixed deposits, savings
accounts, government bonds, etc.

Growth
While safety is an important objective for many investors, a majority of them invest to receive capital
gains, which means that they want the invested amount to grow. There are several options in the
market that offer this benefit. These include stocks, mutual funds, gold, property, commodities, etc. It is
important to note that capital gains attract taxes, the percentage of which varies according to the
number of years of investment.

Income
Some individuals invest with the objective of generating a second source of income. Consequently, they
invest in products that offer returns regularly like bank fixed deposits, corporate and government bonds,
etc.

Other objectives
While the aforementioned objectives are the most common ones among investors today, some other
objectives include:

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Tax exemption
Some people invest their money in various financial products solely for reducing their tax
liability. Some products offer tax exemptions while many offer tax benefits on long-term
profits.

Liquidity
Many investment options are not liquid. This means they cannot be sold and converted into
cash instantly. However, some people prefer investing in options that can be used during
emergencies. Such liquid instruments include stock, money market instruments and exchangetraded funds, to name a few.

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A. 5.

What does diversification mean? How is it helpful?

Diversification of an investment portfolio can reduce risks and get higher returns in the long term.

Before making an investment, it is essential to not only know where to invest, but also understand how
to invest. This ensures that your returns are high and you are able to meet your financial goals with
ease. In addition, experts suggest that diversification is the way to go for stable returns and protection
of your corpus.

What is diversification?
In investment terms, diversification is a risk management technique that collates a variety of
investments within a single portfolio. In other words, diversifying your portfolio means investing your
money in a variety of instruments to reduce risk and increase your earning potential.

Advantages of diversification
Not all industries or individual companies perform well all the time. Some have the tendency to rise in
value while some can decline. Diversification essentially ensures that the losses incurred on some
investments are compensated by the profits earned on others. Such distribution of investments brings
stability and safety to your portfolio and reduces the risk of losing money.

The ifs and buts

Even though diversification might help lower the risk associated with investments, there are certain
factors that should be kept in mind. If you are investing for short-term, say for 3-6 months, it is advisable
not to diversify too much, and invest in safer products like bonds or term deposits. This would prevent
the value of your investments from fluctuating too much. In other words, diversification in case of shortterm investment is not a good option. Similarly, if you are investing a comparatively smaller amount of
money, diversification is not needed.

Opting for a diversified portfolio requires a lot of research and in-depth knowledge. You must also
clearly understand the investment instruments and the expected returns of each before making the
investment.

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A. 6.

What factors should I consider while building my investment portfolio?

Building an investment portfolio requires proper planning and knowledge. Here are a few pointers to
keep in mind.

Investment can be the means to achieve all financial goals, but it is often a tricky exercise. There are
multiple factors that should be considered and assessed while building an investment portfolio. You
need to ensure that your portfolio is able to meet future requirements, while also giving you peace of
mind. Most importantly, your investment portfolio should be aligned with your goals and risk profile.

Elaborated below are some factors that need to be considered while constructing your investment
portfolio.

Age and time horizon

Age is an important factor while making an investment. If you start investing early, you can have an
aggressive investment strategy, since your risk taking ability is high. You can gradually shift to safer
options as you grow older. If you are nearing retirement, your portfolio should consist mainly of fixed
income products, as you cannot afford to take high risks during your later years.

Investment objectives
Before starting off with your investment, you need to be clear about your objective for investing. If you
want more returns in the short-term, your investment strategy should be aggressive, and vice versa.

Tax implications
Many investment instruments provide substantial tax exemptions. If saving tax is your priority, your
portfolio should contain more tax-saving instruments. You may also have to hold assets for a longer
period to become eligible for long-term tax exemption.

Balancing risk and reward

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One of the most important things to consider while building your investment portfolio is not taking
unnecessary risks. There should be a balance between the amount invested in high-risk and low-risk
options. Government bonds typically offer stable but unspectacular returns. Stocks, on the other hand,
promise higher returns but also carry higher risks. A diversified portfolio can balance risks and returns.

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A. 7.

What is compound interest? How does it impact return on investments?

Compound interest is an essential component of investment, which is calculated on the sum of principal
and accrued interest.

When you deposit money in a bank, you earn interest on the principal amount. If the annual interest is
calculated only on the principal amount every year, it is known as simple interest. However, if the
interest is calculated on the total amount i.e. the principal amount as well as the interest earned in the
past, it is known as compound interest.

The calculation
Calculating compound interest on a given amount is a simple procedure that involves factoring in the
increased principal amount that includes the interest accumulated over the years. The most commonly
used formula is:

A = P (1+r/n)nt

Where
P = Initial investment
r = Rate of interest
n = Number of times the interest is compounded in a year
t = Number of years
A = Amount after adding compound interest

This formula can be explained with the help of a simple example. Say you invest Rs 10,000 for a period
of 5 years at an interest rate of 8 percent per annum. Under simple interest, the interest amount after 5
years would be Rs 4000, whereas the interest for the same period compounded annually would be Rs
4693.28.

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ROI and compound interest

As shown in the example above, investments with a compound rate of interest earn better return on
investment (ROI) than ones with simple interest. For investments in which the interest rate is
compounded twice a year or more, the return on investment (ROI) increases at an even faster rate.
Hence, if given a choice, it would be more profitable if you select a compound rate of interest while
making investments.

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A. 8.

What is the difference between saving and investment?

Although savings and investment can be used for meeting various expenses in life, there are some major
differences between them. Heres throwing light on some of them.

Come month end, and it is time to decide what you want to do with the money left over after paying off
all the expenses. You would typically have two options: you can either save it or invest it. Many people
wrongly assume that both the concepts are same. However, there are some major differences between
the two. Let us understand these two concepts in detail.

Meaning
Saving money means keeping aside a part of your income regularly in order to deal with unexpected
expenses. Investment means putting your saved money in various products in order to earn returns and
grow your wealth.

Time
Savings are usually used to meet your short term needs. People save in order to deal with emergency
situations and meet unexpected expenses. However, investment generally entails a longer horizon of six
months or more. It is designed to provide returns and grow your money over a period of time.

Risk and reward

Another difference between savings and investment is the risk they bear and returns they offer. While
savings stored in a safety vault are very safe, they will not generate any returns over the years. Even if
money is kept in a savings account, it will provide a negligible rate of return. On the other hand, money
invested in various products like stocks, mutual funds, gold, etc. is subject to more risks, but has the
potential to grow over time. If invested wisely, your money can grow manifold over years.

Liquidity
When it comes to liquidity, your savings are the most liquid assets, as they can be accessed at any time.
However, this is not the case with investments. It takes a few days for the money to reach your bank
account after you decide to sell your investments.

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A. 9.

What is the impact of inflation on savings? Can investing help me beat inflation?

Rising inflation increases the cost of living, leaving a dent in your savings; investing in different
instruments can offer a solution to this problem.

In economics parlance, the term inflation means an increase in the price of goods and services,
resulting in a fall in buying power of money. Hence, inflation rate is the percentage of increase in prices.
Now, let us understand how it impacts your savings and what measures can be taken to beat inflation.

Impact of inflation on savings

Increase in inflation indicates an increase in price of goods and services at a certain rate. However, the
amount you save from your income every month may not increase at an equivalent rate. Therefore, the
price rise puts pressure on your savings. After a few years, the amount you have saved will be able to
buy lesser number of units due to increase in prices.

The impact of inflation on savings can be explained with the help of a simple example. Suppose you have
Rs 1,000 today, and the rate of inflation is 1 percent per year over the next 10 years. This means that a
product selling at Rs 1,000 today will cost Rs 1,105 after 10 years. However, the amount that is lying in
your safety vault (Rs 1,000) will remain the same even after 10 years. So, technically, you are losing Rs
105 in 10 years without even spending a rupee from your savings.

Investment can help beat inflation

As seen in the above example, the value of money drops over time if you simply store your savings in a
safety vault. Therefore, in order to beat inflation, you must invest in options that have a higher rate of
return than the rate of inflation. So, using the above example, you must earn at least Rs 105 on your Rs
1,000 in 10 years if you want to beat inflation.

There are several instruments you can invest in: stocks, gold, fixed deposits, corporate and government
bonds, property, etc. are some of them. You can invest a part of your money in each of these
instruments to grow your savings and beat inflation. In case you are unsure about the type of
investment, you can consult with a financial expert who can throw light on the different options that are
suitable for you.

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A. 10. What is the 'present value' of money? How is it useful?

Calculating the present value of money can help you decide whether to accept an amount at a certain
rate now, or wait and take that amount at a higher interest rate later.

Are you an investor looking to make it big in the bond or stock market? Well, before beginning, there
are some basic concepts that you need to acquaint yourself with. One such concept is the Present
value of money. Present value of money refers to the current worth of an amount that you will receive
in future at a specific rate of return.

Calculating present value

In order to know the present value of the promised sum, all you need is a simple formula:

P = F / (1 + r)^n

Where
P = Present value of money
F = Future value of the same amount of money after n periods
r = Rate of interest per period
n = Number of periods

Suppose an investment promises to pay Rs 2000 after 2 years at an interest rate of 5 percent. In this
case, the present value of the same amount would be:

P= 2000 / (1+0.05)^2

P= 2000 / 1.1025

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P= 1814.05

Therefore, the present value of Rs 2000 at an annual compounded rate of 5 percent after 2 years is Rs
1814.05.

Usefulness of present value of money

Determination of the present value of money is mainly used to establish whether an investment will
actually be profitable or not. Figures like net asset value (NAV), bond yields, spot rates and pension
obligations can be calculated through this process. It helps investors decide whether to accept an
amount at a certain rate of rebate now, or wait for some time to invest at an appropriate price.

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A. 11. Why must I invest?

Making investments can help you grow your money and meet financial goals.

Investment is the process of putting your money in one or more instruments in order to benefit from
the increase in value of that instrument in the future. In short, it is a method of growing wealth by
putting your money to work. Here are a few reasons why investing may be a good idea for you.

Grows your wealth

Investment instruments are designed to grow your money in a systematic manner. Whether it is highrisk products like stocks or low-risk options like fixed deposits and bonds, most options provide decent
returns in the long term. Such investments provide you an opportunity to put your money to work and
grow it.

Helps beat inflation

Inflation is the rate at which the price of goods and services increases every year. If your money is stored
in a safety vault, it starts losing value, as you would be able to buy less goods in the future due to rise in
prices. You can grow your money by investing it in various products, and beat the effect of inflation.

Helps manage unexpected expenses

Emergency situations and unexpected expenses might arise at any moment. Instead of borrowing during
such crises, it is wise for be prepared in advance. Investing inculcates the habit of saving regularly, and
accumulates a corpus over time, which can be utilized to meet unexpected expenses.

Assists in achieving long term goals

There are several long term goals that every individual wishes to achieve. These may include buying a
car/house, getting married, educating children, a care-free retired life, etc. However, meeting these
goals requires funds. While earning through employment or business is one way of gathering funds,
investing regularly will help you build a corpus to fulfill these goals.

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A. 12. Why must I save?

Saving money is crucial in securing your life from uncertainties and achieving your long-term financial
goals.

In a world where almost everything is available only in exchange of money, buying essential things in life
and securing our future comes at a price. Many a times, living from paycheck to paycheck leaves us with
little additional cash to take care of our future needs. In such a scenario, inculcating a habit of saving
goes a long way in ensuring that all your needs are fulfilled.

Saving is the process of keeping aside a part of your monthly income to accumulate a large sum over a
period of time. This habit essentially serves two important purposes: dealing with emergencies and
achieving long-term goals. Let us discuss these two in detail.

Dealing with emergencies

Unexpected events can arise at any moment. Situations like medical emergencies, job loss or natural
disasters can occur without prior warning. If, during such times, you are not financially prepared,
borrowing money would be the only choice. It is therefore essential to keep some money aside every
month. The cumulated amount will come handy in dealing with such emergencies when they occur.

Achieving long-term goals

Every individual has various goals at different stages in life. However, to achieve these long-term goals
that may range from buying a car, saving for your childs education to planning your retirementyou
will need a lump-sum amount. This becomes difficult, especially if you have fixed spending habits.
Hence, inculcating the habit of saving regularly enables you to accumulate a sum that can achieve all
your long-term goals.

While savings can help you take care of the above-mentioned situations, investing the saved amount in
various financial instruments can help you grow your wealth and deal with situations in a better way.

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A. 13. Why should I start investing at an early stage?

Starting investment early can make your life comfortable and debt-free. Here is how.

Whether its learning a new skill or investing your money, starting early has its own advantages. Working
towards your goal early in life gives you ample time to achieve your goal and make necessary
amendments, if any.

When it comes to investing, there are a host of reasons to start early. Here are a few of them.

Provides compounded return

The earlier you start investing, the more returns you can earn, thanks to the magic of compound
interest. A compound rate of interest ensures that you earn interest on your interest income too.

Here is an example: if you invest Rs 10,000 in an instrument that gives you 10 percent annual interest,
you will earn Rs 1,000 in the first year. So, your total corpus becomes Rs 10,000 + Rs 1,000 = Rs 11,000.
Next year, you will earn 10 percent interest on your new corpus, i.e. Rs 11,000. In effect, you keep
earning more interest. Hence, it pays to start early.

Mends spending habits

You can only spend what you have. You would generally spend more if you have more disposable
income in your hand, often through impulse buying. Keeping aside a fixed amount of your monthly
salary for investment early on can not only help you prevent impulse spending, but also build a corpus in
the long run.

Boosts knowledge
The earlier you start investing, the earlier you learn to manage your finances. Involving yourself with the
actual investment process gives you first-hand, practical knowledge about how investments work, and
gives you personal finance lessons early in life.

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Improves the overall quality of life

Putting into action a well-planned investment plan early in life helps improve your standard of living,
and prevents you from taking hasty decisions during the later part of your life. It ensures a debt-free,
comfortable and a financially free life, even after retirement.

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B.

Trading

25

B.

Trading

B. a. Equity

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B. a. 14.

How can I invest in the Indian share market?

Following the steps mentioned here will help you get started with investing in the stock market.

Stock market investments play an important role in planning of your finances. Profits and bonuses from
such investments can go a long way in adding to your regular income and meeting expenses. Once you
have decided to invest in the share market, there are a number of steps that need to be taken before
you can make your first transaction. Here are the most important ones:

Get educated
Learn how the stock market works and what factors affect the movements of the stocks. Having the
broader picture in mind will enable you to take better investment decisions.

Determine financial goals

Your financial goals will help determine the type of stocks you should invest in. If you are after quick
and aggressive returns, you may opt for volatile, high risk stocks. If you are a steady, long-term
investor, you may opt for blue chip stocks.

Open a demat/trading account

To invest in the stock market, you will need to open a demat account. You can do this either offline
or online.

Offline account: This is a traditional broking account, where you can place an order either
through the telephone or by visiting the brokerage house personally. While there are some
advantages of this method like professional advise, personal service, etc. there are some
drawbacks like longer execution time, high maintenance and service costs, etc. as well.

Online account: You can also open an online account, which is linked to a depository
participant and your bank account. You can place buy/sell orders directly, and the money
will be accordingly debited from/credited into your bank account. Maintaining an online
account is less expensive, and the execution is quick.

Make your first transaction

Once you have identified the stock that has the potential to meet your financial goals, you are
ready to make your first transaction. Note that the stock market is volatile and the stock prices
keep changing every minute. Seek advice from your broker or a financial advisor before buying or
selling any stock.

27

B. a. 15.

How do I read a stock table or quote?

Reading stock tables is easy. The process just involves understanding the abbreviations and making sense
of the numbers.

Almost every financial newspaper carries a page or two covered with numbers and symbols. These are
nothing but stock tables that help you track your investment; interpreting the information from these
tables is as simple as reading other pages of the newspaper. Let us understand what these tables mean
and how to read them.

Tables in most newspapers will look something like this:

Company

Close

% Chg

Open

Day H/L

Vol.

P/E

ABC

29.75

0.2

29.70

30.80/29.55

151K

GHI

44.20

5.0

43.95

44.20/41.50

169K

221.0

XYZ

35.70

-1.7

36.90

38/35.50

87K

30.3

The first column (Company) lists down the name of the companies listed on the stock exchange. The list
is usually sorted in alphabetical order (A-Z). So, if you are looking for a particular stock, search for it
alphabetically.

The second column Close is the price of the stock when the market closed for the day. Similarly, the
fourth column Open is the price when the market had opened. These two prices help you determine
the appreciation/depreciation in the stock price during the day, and your proportionate profit/loss.
However, you do not have to manually calculate the change in the price during the day. The % Chg
column, third in the above table, gives you the exact percentage change in the stock price on a given
day.

28

The Day H/L column indicates the highest and the lowest price the stock has been traded at in a day. In
simple words, this is the maximum and the minimum price people have paid to buy the stock in that
trading day.

Vol. is the volume of the stock traded on that day.

The last column usually carries different information on different days of the week. In this case, it is P/E
(price-to-earnings ratio). Similarly, it may show market capitalization (Mcap), net profit, and so on
throughout the week.

29

B. a. 16.

How does a stock exchange function?

A stock exchange is a marketplace for buyers and sellers of stocks. Here are details of how it works.

A stock exchange is a marketplace, where stocks of several listed companies are traded. Think of a stock
exchange like any other market, where buyers and sellers meet, and carry out transactions at a price
agreeable to both the parties. It provides a single platform for traders all around the country to execute
their trade.

However, a stock exchange cannot function independently. There are several components that come
together when a single trade/transaction is exercised. Here is how it works:

Stock
Exchange

Brokers /
Brokerage
Houses

Buyers
Sellers

Companies Are
Listed Here

Company
When a company requires capital to expand, it can either approach a financial institution to borrow
money or ask the general public to invest in the company. In case of the latter, the company has to
approach an investment bank, which will help it get listed on the stock exchange. Shareholders, traders
and brokers can trade the companys stock once it is listed on the stock exchange.

Stock exchange
A stock exchange serves as a platform that helps companies raise capital by issuing stocks to
retail/institutional investors. Stock that is issued keeps trading hands at the exchange even after the

30

company is listed. The price of the stock is determined by the demand, supply and market demographics
at a particular time, and keeps changing by the minute.

Buyers/Sellers
When a company is listed on the stock exchange, traders/investors buy and sell stocks with the aim of
making money through price fluctuations. These traders/investors can be individuals, corporate entities,
governments, etc.

Brokers
Brokers or brokering houses are middlemen between the buyers/sellers and the stock exchange. They
have the authority to carry out a transaction on the behalf of the buyer or seller. It is mandatory for the
investor to have a broking account in order to trade/invest in stocks. Brokers charge an additional fee
for the service they provide, which is known as brokerage.

31

B. a. 17.

How is a futures contract different from an option?

Here is a comparison between the two most commonly-used methods of trading: futures and options.

While both futures and options are contracts between two parties to exchange a predefined number of
stocks at a fixed price on a future date, there are some differences that set the two apart. Let us
understand what these differences are.

Obligation
The first and the most important difference between a futures and an option contract is the obligation
they put on both the parties involved in the contract. In a futures contract, the buyer and the seller have
to exercise the trade on or before the specified date. However, in options, the buyer has the right, but is
not obliged to carry out the transaction. In case the buyer decides to exercise the option, the seller has
to sell his holdings.

Upfront cost
Apart from the obligations, upfront cost is another differentiator. Traders can participate in a futures
contract without paying any upfront cost. However, buying an option involves paying a premium. This
premium is a kind of fee paid by the buyer for waiver of the obligation to exercise the trade.

Liability
There is one huge difference in both types of trading, one that affects the potential profits and losses
incurred by traders. The buyers liability, in case of a futures contract, becomes unlimited if the prices
start moving in the opposite direction. However, in stock options, the buyers liability is limited only up
to the money invested in buying the options. Only the writers of options are exposed to unlimited
liability.

Expiration
When a futures contract expires, the buyer has to buy the specified number of stocks mentioned in the
contract. On the other hand, if the options are out of the money, the buyer can let the contract expire
and become worthless.

32

B. a. 18.

How is fundamental analysis different from technical analysis?

While the purpose of both the methods is same, there are many differences between both. Mentioned
here are a few of them.

Fundamental analysis and technical analysis are two important methods of forecasting the future trends
of instruments available in the financial markets. Although the two serve the same purpose of predicting
price movements and minimizing risks, there are some major differences between the two.

Heres a look at the differences:

Meaning
Fundamental analysis is a method of evaluating a companys stock in order to find its intrinsic value, and
analyze the factors that might affect the stock price in the future.

Technical analysis, on the other hand, is a statistical method used to find patterns and predict future
movements based on past market data.

Methodology
Fundamental analysis is done mainly by examining the financial data of the company, and other factors
like industry trends, competitors performance, countrys economic outlook, etc.

Technical analysis, however, asserts that there is almost no need to conduct fundamental research, as
most of the factors are accounted for in the price of the stock. It therefore refers to only past price
movements and market psychology to come to a conclusion.

Time horizon
Fundamental analysis takes a long-term approach, while technical analysis has a short-term view. The
former looks at how various factors will impact the stock price in a long duration (mostly in years), and

33

the latter focuses on predicting the immediate (weeks, days and sometimes even minutes) price
movements.

Users
Since fundamental analysis examines all the factors that will impact the stock price in the years to come,
it is mainly used by investors who have a long-term view. However, technical analysis is used by a
different set of people. Traders and short-term investors rely on this method, as it serves as a tool for
forecasting price movements in the near future.

34

B. a. 19.

How is the Indian stock market regulated?

The Indian stock market is regulated as per the guidelines laid down by the Securities and Exchange
Board of India (SEBI). We bring you the details.

A regulating body called the Securities and Exchange Board of India (SEBI) was established in 1992 with a
view of protecting the interest of investors. This body lays down regulations in order to ensure orderly
growth and smooth functioning of the Indian capital market.

Some of the most important functions of SEBI to regulate the Indian stock market are listed below:

Specifying rules and regulations

SEBI has the authority to specify rules and regulations to control the stock exchange. For instance,
the opening (9.15 am) and closing (3.30 pm) time of the market has been determined by SEBI, and
it has the right to change the timing if deemed necessary.

Providing licenses to dealers and brokers

No dealer or broker can start distributing securities to investors without getting a prior approval
and license from SEBI. It also has the right to withhold or cancel the license of brokers and dealers
not adhering to the specified guidelines.

Auditing the performance of various stock exchanges

The regulating body is also responsible for auditing the performances of various stock exchanges
and bringing transparency in their functioning.

Controlling mergers, acquisitions and take-overs of the companies

Some companies try to manipulate stocks and buy a majority stake in other companies with an
intention of a take-over. SEBI controls and prohibits such movements if it is not in the interest of
the company.

Prohibiting unfair trade practices in the market

35

While SEBI has laid down specific guidelines that promote fair trade practices, many companies
occasionally undertake activities that are not healthy for the market. SEBI has the power to prohibit
such activities and take action against the parties involved in such a trade.

Apart from these important functions, SEBI has many other responsibilities, which it exercises
appropriately in order to regulate the Indian stock market.

36

B. a. 20.

What are options?

An option is a contract between two parties to exchange a set of stocks at a future date. Learn more
about options here.

A stock option is a financial derivative that allows you to trade a stock at a specific price on a future
date. Here, the buyer gets the right, but not the obligation, to carry out the transaction on or before the
given date. However, the seller has to sell his holdings if the option is exercised.

Lets take an example to understand the concept better. Say, you find an apartment (for Rs 50 lakh) that
you would love to own, but do not have the money to buy now. You negotiate with the seller, and he
gives you an option to buy this house within 3 months. However, he charges an extra Rs 1 lakh for this
extension.

Now, even if the price skyrockets to Rs 80 lakh, the seller is obliged to sell this house to you if its what
you want, as he had already taken Rs 1 lakh on mutual agreement. In case the price moves down to Rs
30 lakh, you can still buy the house, but you dont have the compulsion to buy it. In the latter case, you
will lose the token amount (Rs 1 lakh) that you had initially paid.

Some of the terminologies used in options market are elaborated below.

Expiration is the date on which the contract expires. A stock option can be exercised on or before this
date. Usually, most options are valid for one month, and they expire on the last Thursday of each
month.

Strike price is the price at which the stock mentioned in the contract will be bought or sold on or before
the expiry date.

In a call option, when the stock price moves above the strike price (and vice versa in put option), the
option is known to be in the money (ITM). On the other hand, in a call option, when the stock price
moves below the strike price (and vice versa in put option), it is known as out of the money (OTM).

37

Premium is the price of the option contract.

38

B. a. 21.

What are stock futures?

Stock futures are contracts between two parties, who agree to exchange stocks at a predetermined price
some time in future.

Stock futures are contracts between the buyer and the seller, agreeing to exchange a predefined
quantity of a stock at a fixed price (which is the future price), at a future delivery date. The specifications
like lot size, price per unit, expiry date, method of settlement, etc. are defined at the time the contract is
made.

Futures are usually traded in lot sizes ranging from 125 to 8000, depending on their underlying price;
multiple lots can be traded in one contract. Since these are futures contracts, the broker usually allows
clients to trade on margin. This means that the trader can buy/sell lots worth more than the available
cash balance in his trading account.

Traders usually take either long position or short position while entering into such a contract. Long
position entails buying the contract at a lower price and selling it within the specified period at a higher
price. Conversely, a short position means selling the contract first at a higher price and then buying it
again at a lower price, thereby making profit from the difference in price.

How are stock futures priced?

While the real price of a futures contract changes according to the change in demand and supply,
theoretically it is the total of the current price and the cost of carrying, minus dividends (if any). The
interest charged from the start of the contract till its maturity is known as cost of carrying.

So, the price of a futures contract = spot price + the cost of carrying dividends

Let us understand this with the help of an example. Suppose the stock of ABC company is traded at Rs
1,000 in the spot market with a prevailing interest rate of 7 percent, and there are no dividends
declared. The price of a futures contract of 1 month for that stock will be calculated as follows:

39

Price of the futures contract = 1,000 + (1,000 x 0.07 x 30/365)

= 1,000 + 5.75
= Rs 1,005.75

40

B. a. 22.

What are stocks?

Stocks are shares in a company listed on the stock exchange. Stock holders are considered owners of the
company. Learn more about stocks here.
Stocks (also known as shares or equities) are a type of financial instrument issued by a corporate
organization with a view to raise capital. When you buy the stock of a company, you are actually helping
the company raise capital; such a transaction gives you proportionate ownership of the company.
Stocks of various companies are listed and traded on the stock exchange. They can be bought and sold
on the stock exchange by anyone who has a demat account. Various individuals, brokerages, traders and
corporate entities trade stocks through the two major stock exchanges in India, namely the National
Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Companies need to meet specific criteria in
order to get listed on the stock exchange and issue shares to investors. Some of the largest Indian
companies have issued stocks to shareholders in order to start a business and raise capital.
Understanding stocks better
Heres an example to understand stocks better: imagine that you want to start a business that requires
an initial capital of Rs 1,00,000. In order to raise these funds, you divide the company in 10,000 pieces
and sell each piece at Rs 10 to people who are interested in investing their money in your business.
All the buyers are owners of your company in proportion to the number of shares they hold.
Consequently, they are given profits of the company in the same proportion. These shareholders elect a
few peopleknown as the Board of Directorsto take active interest in day-to-day operations of your
business. If any of the stock holders wish to quit being an owner, all they have to do is call their broker
or log into their demat account and sell their holdings.

41

B. a. 23.

What are the advantages and drawbacks of options?

Learning about this instruments advantages and drawbacks will enable you to make an informed
decision.

Options are considered to be one of the most versatile financial instruments available in the stock
market today. They provide the buyer the right, but not the obligation to exercise the contract. Before
trading in this instrument however, it would be wise to go through its benefits and drawbacks.

Let us have a look at some advantages.

Leverage
Options allow you to trade on margin. This means that you can invest in a large number of stocks by
paying for only a fraction of them. This enables you to earn more profit if the price moves in the
expected direction.

Hedging
Options can be used to hedge against the risks involved in your holdings. If, for instance, you hold 100
shares of ABC company, and you believe that its price might fall in the near future, you can buy put
options in order to safeguard your current position.

Profit potential
Options give you the opportunity to earn in almost any market condition. Investors can make as much
profit from a falling market as from the markets upward movement.

While options provide good opportunities to make profit with a low investment, there are certain
drawbacks that keep many investors away from this type of trading too.

Lower liquidity

42

Options are traded at different prices with different expiry dates. However, some contracts have a very
low liquidity. There is a strong possibility of an uninitiated trader being stranded with an options
contract that no one is willing to buy, resulting in losses.

Complex
Options are quite difficult to understand, especially for beginners. The complicated nature of this
instrument, along with the fluctuations in the stock price makes it a very risky instrument for amateurs.

Time-bound
Stocks can be held for a long time, even decades. However, options contracts have an expiry date.
Hence, they may not be suitable for long-term investment needs.

43

B. a. 24.
What are the most commonly used ratios while evaluating stocks? What do
these ratios mean?

Mentioned here are the five most important financial ratios used to evaluate a stock before making an
investment.
Making money by investing in the stock market is not as difficult as it seems, especially if you know
where and why you are investing. One of the best methods to evaluate the financial strength of a
company is to understand the various financial ratios, and use them to compare stocks of companies in
the same industry.
Listed below are the five most common ratios used to evaluate stocks.
EPS ratio
Earnings per share (EPS) ratio determines the profitability of the company. It calculates the net income
allocated to each outstanding share of the company. The formula to calculate EPS is:
(Net income Dividend on preferred stock) / Average outstanding shares
P/E ratio
Price to earnings (P/E) ratio is one of the most popular ratios used to evaluate a stock. It is the ratio of
the market share price of the company to its earnings per share. The ratio of one company can be
compared to that of another to determine how expensive their shares are. Usually, the lower the P/E
ratio, the better it is for investors. However, this may not always be the case. The formula of P/E ratio is:
Market price per share / Annual earnings per share
Dividend yield ratio
Since many investors buy stocks solely for the purpose of earning dividend income, it is important to
know how much dividend a stock earns. The dividend yield ratio helps in determining this. It is
calculated by using the following formula:
Dividend per share / Market price per share
ROE ratio
Return on equity (ROE) ratio shows how efficiently a company uses the money raised by issuing shares.
A higher ratio shows that the funds are being well-managed by the company. The formula to calculate
ROE ratio is:
Net income / Shareholders equity
Debt-to-equity ratio

44

This ratio brings out the amount of financial leverage a company is using. It helps investors understand
the proportion of assets owned by the company through debt and equity. Usually, a higher debt-toequity ratio is considered worrisome. The formula of debt-to-equity ratio is:
Total liabilities / Shareholders equity

45

B. a. 25.

What are the various types of options?

Weve simplified the meaning and functioning of the two types of options (call and put), through an easy
example.

There are two types of options contracts available in the market for traders: Call option and put option.
Let us understand these two types in detail.

Call option
In this type of contract, the buyer has the right to buy securities at a given price, on or before a
specified date. However, he is not obligated to undertake the transaction. The seller is obliged to sell the
securities in a call option if the buyer chooses to execute the transaction. The buyer enters into such a
contract with a view of benefiting from the rise in price of the stock in future.

Here is an example of call option:

A trader purchases a call option to buy 1,000 shares of a company with strike price of Rs 300 (with the
current price of the stock being Rs 280) at an option price of Rs 10 per share. Now the initial investment
for the buyer is 1,000 shares X Rs 10 = Rs 10,000.

If the price of the stock goes up to Rs 320, the buyer still buys the stock at Rs 300 per share. So his net
gain is:

{(320 300) x 1,000} - 10,000 (initial investment) = Rs 10,000

Put option
In this type of contract, the option buyer has the right, but is not obliged to sell securities to the option
seller at a given price, on or before a specified date. The buyer enters into such a contract with a view
to benefit from the fall in price of the stock in future. The example given below will make the concept
easier to understand.
46

A trader purchases a put option to sell 1,000 shares of a company with a strike price of Rs 300 (current
price of the stock being Rs 320) at an option price of Rs 10 per share. Now the initial investment for the
buyer is 1,000 shares X Rs 10 = Rs 10,000.

If the price of the stock goes down to Rs 285, the buyer can still sell the stock at Rs 300 per share. So his
net gain is:

{(300 285 x 1,000)} 10,000 = Rs 5,000

47

B. a. 26.

What is an IPO?

A corporate entity issues shares to the general public for the first time through an Initial Public Offering
(IPO). Read on the learn more about it.
Usually, companies fall under two broad categories: private and public. While private companies raise
capital seek bank loans and private investors for funds, public companies usually ask the general public
to invest money in their venture.
When a public company raises capital by issuing shares for the first time to the general public, it is
known as an Initial Public Offering (IPO). Once this process is completed, the issuing company gets listed
on the stock exchange, and its stocks are then traded.
The process
The funds that are raised through the IPO go to the founder of the company, who might use it for the
development of the company. Undertaking an IPO is a lengthy process for any company, and it involves
a lot of paperwork. An IPO can be undertaken either through a fixed price system or book building, or it
could be a combination of both these methods. In the former method, the price of the stock to be
issued is fixed in advance, while in the latter, the price is fixed after the investors bid within the specified
price band.
The advantages
An IPO is beneficial to the issuing company as well as the investors on various levels. One of the major
advantages of an IPO for the issuing company is access to funds. The company gets capital as well as the
prestige of being listed on a stock exchange. The resultant amount collected, if utilized appropriately,
can help the company grow.
The investors too enjoy many benefits from an IPO. The shares of the company are available to only
those who are aware about it. This helps them lay hands on a potential profitable stock before anyone
else does. And if the company performs well after the IPO, the share price is likely to rise, generating
profits for investors.

48

B. a. 27.

What is fundamental analysis?

Fundamental analysis is a method of determining the real value of a stock, which helps an investor
decide whether to buy the stock or not.

For investors, in-depth research is the key to create a strong financial portfolio. While there are several
methods to determine the companys ability to grow and sustain in any type of market condition,
fundamental analysis is one of the most important ones.

The concept
Fundamental analysis is the method of determining a companys health by examining not only its
balance sheet and income statements, but also other unquantifiable factors that could possibly affect
the share price of the company. These fundamentals help investors determine whether the stock is
undervalued, overvalued or fairly valued.

While this analysis begins with a study of the individual stock, it extends to other factors like the
competitiveness of the company within the sector, long-term outlook of the industry as compared to
other industries, etc.

Quantitative and qualitative analysis

Fundamental factors can be grouped under two categories: quantitative and qualitative.

Quantitative analysis evaluates quantifiable factors like:

Price to earnings (P/E) ratio

Earnings per share
Dividend payout
Return on equity (RoE), etc

Qualitative analysis examines less tangible factors like the companys ability to sustain in the long run,
management strategy, etc.

49

A fundamental analysis is a combination of both these factors, besides an economic, industry as well as
company analysis to determine a fair value of the stock. Depending on the difference between its
current stock price and its fair value, the stock is rated as undervalued, overvalued or fairly valued by
the analysts. Experts believe that the stock price gradually moves towards its fair value in the long run.

Companies with strong fundamentals are likely to perform well in the long run as compared to those
with weaker fundamentals. Fundamental analysis is, therefore, very useful for long-term investors.

50

B. a. 28.

What is margin trading?

Margin trading means buying and selling stocks using money borrowed from your broker. Read on to
learn more about this kind of trading.

Margin trading is essentially a method of buying stocks by borrowing money from your broker or
brokerage house. It is a leveraging mechanism that allows you to take positions in the market worth
more than what is possible with your own resources. However, in order to carry out margin trading, you
need a margin account.

Role of the broker

Not every broker has the authority to open a margin account for clients. Only brokerage houses with a
net worth of a minimum of Rs 3 crore enjoy this right. It is the responsibility of the broker to enter into a
margin trading agreement with the client as per the format specified by the Securities and Exchange
Board of India (SEBI).

Role of the trader

In India, an equity trader enjoys the right to borrow up to 50 percent of the total transaction value from
the brokerage house. However, before getting involving in such a transaction, the trader will have to
deposit the required amount (at least 50 percent of the value) with the broker.

A trader who buys stocks on the loan provided by the broker can keep the loan for as long as he intends;
but it comes at a cost. Interest is charged on the amount of the loan, and it keeps accruing until the
trader repays this amount in full.

Example
If you deposit Rs 10,000 in your margin account, you are eligible to buy stocks worth up to Rs 20,000.
However, interest will be changed only if you make a purchase of more than your cash balance, i.e. Rs
10,000 in this case.

51

B. a. 29.

What does 'support' and 'resistance' for a stock mean?

These terms are used to signify the price barriers the stock has experienced in the past. Heres more
information about them.

Support and resistance, in simple terms, are nothing but barriers for a stock price at the lower and upper
level respectively. They are considered to be of paramount importance in the world of technical
analysis. While the two terms may sound alien to beginners, understanding them is quite easy. Let us
learn the meaning and usefulness of these two concepts.

Support
Support is a level where the falling price of a stock usually finds support. This means that the price is
likely to bounce back (based on historic price trends) rather than go down further. However, technical
analysts believe that if the price falls well below the support level, it is likely to keep falling, until it finds
another support level.

Resistance
Resistance is the opposite of support. It is a level where the rising price of a stock finds resistance. This
means that the price is likely to fall rather than continue going up once it reaches this level. Once the
stock price climbs above this level, it is likely to continue its upward movement, until it finds another
resistance level.

Let us have a look at an example to understand the concept better.

52

25
20
15
08

If a trader holds shares of ABC company and is planning to sell his holdings, looking at the above chart,
he can analyze that the stock has found resistance at Rs 20 and Rs 25 in the past. So, he would not wait
for the stock to go higher than these resistance levels , and sell his holdings before it starts moving down
again.

Similarly, there are support levels at Rs 15 and then at Rs 8. So, if the trader intends to buy this stock
again, he would not wait for the stock price to go lower than these support levels, or it might just
bounce back.

53

B. a. 30.

What is rollover in the stock market?

Rollover means carrying forward a contract position to another expiry date. Know the details here.

When it comes to the futures market the price movements can be quite volatile and unpredictable. If
the prices are moving up rapidly one day, there are chances that they might go down the very next day.

A futures contract is all about predicting the future price movements of the stocks. Since the market is
so volatile, many a times the prices might not move in the expected direction. In such a scenario, traders
participate in a rollover to avert potential loss.

Rollover, in laymans language, is carrying forward. Any futures contract in the Indian stock market
expires on the last Thursday of every month. These contracts usually get squared off or exercised on the
last day at the price prevailing in the market. However, if the trader feels that there is too much loss to
be incurred and does not want to exercise the contract, he can choose to rollover. This means he can
opt to carry forward the positions or enter into a similar contract expiring at a future date.

Example: Let us understand the concept better with the help of an example. Say a trader holds 10 long
futures contracts of ABC company expiring on the last Thursday of October. If he decides to rollover, he
will square off his position and buy 10 futures contracts of the same company; however, the new
contract will expire in November.

When can a trader rollover?

While many traders opt to rollover on the day of expiry, it is not mandatory. Rollovers usually start a
week before the expiry date, and can be done until last minute of the market hours on the expiry day.

54

B. a. 31.

What is technical analysis?

Technical analysis is a mathematical technique that is used to predict the price movements of a stock.
Learn how it works.

Fundamental and technical analysis are two common methods investors and traders use in order to
predict the future movements of a given stock. We have a separate article detailing how fundamental
analysis works. Now let us understand what technical analysis is, and how it works.

Technical analysis: The concept

Technical analysis is a method of forecasting a stocks future performance by studying its past
performance. It does not take into consideration the intrinsic or fundamental value of the company. The
analysis is done simply on the basis of certain assumptions, which may or may not be accurate.

The methodology
Through technical analysis, traders and investors study how the market behaves when the stock price
reaches a certain level. This method is based on three main assumptions:

Stock price includes all the factors

Stock price follows certain trends
History repeats itself

Let us understand these assumptions in detail, as they form the foundation of technical analysis.

In the first assumption, it is assumed that the stock price, at any given moment, reflects whatever the
company and the surrounding factors have to offer. This includes the companys fundamentals, market
psychology, previous performances, etc. The price, this method assumes, is the summation of all the
factors. This assumption, hence also eliminates the need for separate research.

55

The second assumption is that the stock price will follow a particular trend. This means that once the
market behaves in a specific manner in response to an event at a given price, it will follow the same
trend in the future as well.

Lastly, technical analysts believe that history repeats itself. This denotes that what has happened in the
past (related to price moments) is likely to happen again, irrespective of the market conditions or the
economic outlook.

After these three assumptions are factored in, the analysts examine previous price charts, and come to a
conclusion about the stocks future price movements.

56

B. a. 32.

What is the meaning of long or short positions?

Long and short positions are nothing but two methods of trading stocks. Heres throwing light on them.

Many investors use a host of strategies to earn profits by trading stocks. One such strategy is going long
or going short on a stock. Let us understand what these phrases mean and how are they useful to
traders.

Long position
Taking a long position means buying a contract with the intention of selling it at a higher price later and
thereby making profit. However, if the price goes down, the trader has to bear the loss up to the extent
of the fall in price. Many traders use the terms buy and long, inter-changeably.

Example: Say you purchase 100 shares of ABC at Rs 20 per share. So, you pay a total of Rs 2,000 for this
transaction. If a month later the price of this stock moves up to Rs 25, you sell these stocks and earn a
profit of Rs 500 (Rs 5 x 100 shares).

Short position
Taking a short position means selling a stock first with the intention of buying it back at a lower price,
thereby making a profit from the difference in price. In such a transaction, the trader borrows a set of
stocks from the broker, and sells it in the open market. He has to buy these stocks later since the
borrowed stocks must be returned to the broker. In such a scenario, if the price of the stock falls, the
trader will make a profit, and in case it goes up, he will incur losses.

Example: Say you sell 100 shares of ABC at Rs 10 per share. So, you receive a total amount of Rs 1,000.
If, after a month, the price of this stock comes down to Rs 7, you buy 100 shares again for Rs 700,
making a total profit of Rs 300 (Rs 1,000 Rs 700).

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B. a. 33.

What is the purpose of fundamental analysis?

Investors carry out fundamental analysis for a variety of purposes. Some of them are elaborated here.

Fundamental analysis is a method of evaluating various factors that might affect the future performance
of a given stock. Apart from analyzing the financial statements of the company, this method also
considers various non-quantifiable factors like the expected performance of the industry, national
economic outlook, competitors performance, etc.

Since this type of analysis provides a broader picture of why the company is performing in a specific
manner, it serves various purposes. Mentioned below are a few of them:

Determining the intrinsic value of a company

The stock price never usually reflects its real value, as it is subject to speculation and difference in
demand and supply. It hence becomes difficult to determine the real value of the stock. However, since
fundamental analysis examines various aspects of the company and the factors that can affect its
growth, traders and investors utilize this method to find out the intrinsic value of the stock/company.

Making long-term investment decisions

This type of analysis gives you a rough representation of how the company would perform in the time to
come. It considers various factors/events that might take place over the next few months or even years,
and analyzes how these events would impact the given company. The investor can take his decision on
the basis of this analysis if it matches his investment horizon.

Reducing loss and maximizing profits

Fundamental analysis helps in determining the real value of a stock. Once you compute this value, you
know that any price below this value is a bargain and anything above is a premium. You can enter and
exit a stock accordingly, which helps reduce your risks and maximize profits.

While there are several other methods that help people invest smartly, fundamental analysis is
considered to be one of the most comprehensive.
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B. a. 34.

What is the purpose of technical analysis?

The core purpose of technical analysis is to carry out stock price forecast by looking at past data.

While fundamental analysis is one of the most effective methods of determining the long-term
movements of a stock, technical analysis provides a similar tool for short-term traders. The latter is
used universally by a large number of traders as it is quite important to them for various reasons. Some
of them are elaborated below.

It identifies a pattern of fluctuations

One of the most important assumptions that is made while undertaking technical analysis is that the
stock price follows a trend, and this trend repeats itself in a logical pattern. While identifying these
patterns can be complex at times, it enables traders to make sense of the short-term fluctuations a
stock experiences. More importantly, it helps in predicting the future movements of stock prices.

It enables effective decision making

Since most traders buy stocks and sell them (or vice versa) on the same day, they need to decide quickly
on the purchase and sale price. However, using fundamental analysis for such a short-term trade is not
possible. In such a scenario, technical analysis is the only type of research that can provide traders some
idea about the direction of the stock price. There are several automated tools available today that can
pull out technical information according to your preference.

It is important to note here that this type of analysis is based on a number of assumptions, and it gives
utmost important to the price movement, ignoring other factors. Hence, the predictions related to price
movements may not be always accurate. Despite this, it is widely used by traders mainly because it
serves the above-mentioned two purposes.

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B. a. 35.

What is the relation between the price of a stock and its futures?

Since the futures price of a stock is a reflection of its spot price, they share a direct relationship, with
certain exceptions. Heres more about this correlation.

The current market price or the spot price of the stock is the price at which the given stock is currently
being traded in the cash market. Here, you pay for the number of stocks you intend to buy, and get the
delivery in a day or two.

However, the futures price of the same stock is slightly different. It is the predicted price of the stock at
a future date. This price is fixed when two parties enter into a contract, agreeing to exchange a fixed
number of stocks at an agreed price at a future date.

Difference between spot price and futures price of a stock

The only difference between the spot price and futures price of a stock is the cost of carrying. When a
trader enters into a futures contract, he holds a set of stocks for a fixed period. Hence, he is liable to pay
interest for this period. The futures price is nothing but spot price plus interest payable (minus
dividends, if any have been received).

Relationship between spot price and futures price of a stock

Since futures price is just a reflection of the spot price, any change in the latter is bound to have a
proportionate effect on its futures price. In such a scenario, these two prices are directly proportionate
to each other.

However, since futures price is subject to speculation, it might sometimes fluctuate without any relative
fluctuation in the spot price. So, changes in the futures price might not have a similar impact on the spot
price, unless the transaction volume is huge.

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B. a. 36.

Who are the bulls and who the bears in a stock market?

The terms bull and bear represents the rise or fall in the stock market respectively. Heres detailing
more about the concepts.

Bulls and Bears are the two most commonly used terms in the stock market. Let us understand what
these terms mean and why these terms are used in the market.

Bull market
A bull market, in simple words, is a rapidly rising market. Such a market is usually associated with
buoyant investor confidence, increased investment, and an overall improvement in the economic
conditions. When an upward movement continues for a many days in a row, it is considered to be a bull
run. And if someone expects the market to go up, he or she is said to have a bullish outlook.
Technically, when prices move up by more than 20 percent, it is considered to be a bull market.

Bear market
A bear market is the opposite of the bull market. When the stock market keeps declining for several
days, it is known as a bear market. Such a trend can be commonly noticed when the economy is weak,
and there is widespread pessimism and fear among investors. Technically, a fall of more than 20 percent
in the stock price is considered to be a bear market.

The origin of the terms bull and bear is unknown. However, many believe that it has to do with the
way these animals attack their enemies. Bulls usually toss their horns upwards and bears swing their
paws downwards. Regardless of how the terms were derived, they are now commonly used by market
traders and investors to indicate the direction the markets are moving in.

61

B. a. 37.

Why do I need a stockbroker?

A stockbroker is the agent between the stock exchange and the buyer/seller. Learn about stockbrokers
here.

By definition, a stockbroker is an individual or an organization having the authority to buy or sell stocks
on the stock exchange on behalf of clients. He is an agent who exercises a transaction as directed by the
buyer or the seller, and charges a fee for this service.

Do I need a stockbroker?
Yes. In order to invest/trade in the stock market, it is important to open a demat/trading account, and
only stockbrokers have the authority to open such an account for investors. These brokers are governed
by Securities Contracts (Regulation) Act, 1956, SEBI Act, 1992, and SEBI Rules and Regulations, 1992.

Apart from this service, stockbrokers provide many other optional services that might be useful for
investors. Beginners often find it difficult to understand how the stock market works, and how to pick
winning stocks. The terminologies, the rules and regulations, market trends, etc. seems a bit alien to
new investors.

In such a scenario, stockbrokers can play an important role. They have the requisite knowledge and can
explain the fundamentals of the market, the tips and tricks to participate in the trade, and help you
invest according to your financial goals.

How do I register with a stockbroker?

There are a number stockbrokers/brokerage houses all over India. These brokers are required to follow
uniform rules pertaining to service tax, security transaction tax, stamp duty, etc. However, other charges
like brokerage amount, annual maintenance fee, etc. varies from broker to broker. Conduct some
research online and consult with family and friends if they trade in the market to find a few choices. If
not, a financial advisor can refer one for you. After selecting the one that suits your requirements, you
can enter into a broker-client agreement to start using your brokers service.

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B. a. 38.

Why do stock prices change?

A number of factors are responsible for a change in stock prices. We explain some of them here.

The demand for and supply of a particular stock is responsible for the price fluctuations it experiences
over a period of time. In simple terms, if demand for a particular stock is higher than its supply, the price
goes up. Similarly, if the demand is lower than the supply, the price goes down.

However, why does the demand for a particular stock fluctuate? What makes investors like or dislike a
stock? There are several factors that trigger such a response. Listed below are a few of them.

Profit of the company

One of the most important factors that influence stock prices in the long run is profit or earnings of the
company in question. If a company is doing well, it will expand, and its value will increase. Consequently,
an increasing number of people would want to take advantage of such growth.

Company announcements
Depending on the type of news the company announces, its stock price is likely to rise or fall. Favorable
news like expansion plans, strong financials, appointment of new members on the board, etc. is likely to
attract more buyers and take the price northwards. On the other hand, negative announcements like
weak financials, quitting of critical members of the board, huge debts, etc. can bring the price down.

Economic outlook
If the economic condition of a country is weak, investors are likely to be wary, and move to safer
investment options like fixed deposits or pension funds. During such a scenario, the overall stock
market, and therefore, the share price of any given company is likely to fall. Similarly, a strong economic
condition boosts stock prices.

Technical analysis

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Technical analysis is a method of predicting the future movement of a stock price by studying its past
movements. Most traders who actively participate in trading follow this method to buy and sell stocks.
Hence, the outcome of this analysis affects the stock price significantly.

While the aforementioned points are the most important factors, others like interest rates, inflation and
deflation, competition and industry outlook, etc. too play a crucial role in price fluctuations of a stock.

64

B.

Trading

B. b. Commodity

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B. b. 39.

How can I trade in commodities?

Investors can trade in commodities through offline as well as online channels. Read on to learn more
about them.

Once you understand what the commodity market is and how it works, the next logical step is to learn
the process of commodity trading. Commodities can be bought and sold through online as well as offline
channels. Let us understand the meaning, advantages and shortcomings of the two channels.

Offline channel
One of the most common ways to buy/sell commodities is to hire a broker. Brokerage houses or brokers
are institutions or individuals licensed to buy/sell commodities on behalf of others. Once you have given
the responsibility of trading commodities to your broker, you can easily manage your portfolio without
actually spending time on it. Since these brokers are experts in commodity trading, they offer
professional advice and personal services to clients.

However, brokers usually charge an annual fee and brokerage commission that is much higher than the
fee charged by online accounts. Besides, it usually takes more time to execute an offline transaction,
which at times may result in losses.

Online channel
If you have an online commodities trading account, you can carry out all the transactions yourself. Since
this mode of trading requires no professional service and personal time of brokers, it is usually cheaper
than offline channels. Most companies charge a one-time membership fee, after which you are not
required to pay any maintenance charges. The brokerage fee per transaction is quite low too. This mode
is one of the quickest methods of trading, as it allows you to conduct real-time transactions.

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B. b. 40.
How does a commodities exchange function? Which are the major commodity
exchanges in India?
The working of a commodity exchange is very similar to that of a stock market. Read on to know more.

A commodity exchange acts as a portal or a common place where traders can buy and sell commodities.
Such exchanges enable seamless trading, eliminate the need for middlemen and allow the market to fix
a price that is driven purely by demand and supply of the product.

How does a commodity exchange work?

Just like the stock market, a commodity exchange serves as a marketplace for buyers and sellers to
engage in trading commodities directly. Trading can be done in two ways: cash/spot and futures. In the
former method, the buyer and seller agree upon a common price of the commodity, and actual physical
delivery of that commodity takes place. The latter is different. Futures contract do not involve spot
delivery of commodities; delivery is fixed for a future date at a price agreed by both the parties.

People engage in this kind of trading mainly because each party gets something out of the deal.
Commodity manufacturers/producers want to hedge their produces against fall in price in the future. On
the other hand, commercial consumers want to lock in goods at a favorable price in order to avoid
paying a higher price later. And individual traders wish to benefit from future movements of commodity
prices.

The entire process is done electronically. The producer submits an offer price and the future delivery
date of the commodity on this exchange. The seller, who agrees to pay that price, enters into a contract
with the buyer. Almost all transactions take place in the similar manner, allowing the actual demand and
supply to determine the price.

In India, there are three major national commodities exchanges: National Commodity and Derivatives
Exchange Ltd, Multi Commodity Exchange of India Ltd and National Multi Commodity Exchange of India
Ltd. In addition to these, 18 more domestic commodity exchanges in India are known to function.

Any commodity exchange serves three main functions:

67

Defines rules and regulations of trading to carry out uniform trading practice
Provides dispute settlement mechanism
Circulates price movements and market news to the participating members

68

B. b. 41.

What are commodity futures?

Commodity futures are buy/sell contracts of commodities at a price fixed today, but realized on a future
date. Read on for more information.

Commodity futures are contracts or agreements between two parties, agreeing to buy or sell certain
units of a commodity on a future date at a fixed price. On this future date, the buyer has to pay the price
that was agreed when the contact was made, and the seller has to transfer the ownership of the said
commodities to the buyer.

So, if you believe that the price of a certain commodity, say coffee, will rise in the next couple of weeks,
you can buy a futures contract which promises to sell coffee at todays price. When this commodity is
transferred in your name, you can sell it at a profit. However, if the price falls, you will have to sell your
contract at a loss.

Where to trade?
Commodity transactions take place on a regulated commodity exchange. While any individual or
institution can take part in such trading, it needs to be done through a broker, who is a member of an
exchange and has the authority to carry out transactions on behalf of the traders.

Commodity futures, like currency derivatives, allow you to operate on a margin. This means that you
need to invest only a small percentage of the total transaction value while trading. This allows you to
earn more profit with a lesser amount (while exposing you to a higher risk).

For instance, many brokers might allow you to buy a futures contract of 1,000 barrels of oil worth
$50,000 for with an initial amount of $5,000. With such exposure, even a small rise in the price could
result in huge profits, and vice versa.

Things to remember
While entering into a commodity futures contract, it is important to note that the buyer should sell his
holdings before the expiry of the contract. Not closing an existing position might result in possession of a
large quantity of unwanted commodities.
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B. b. 42.

What are the major factors that impact commodity prices?

Since commodities are traded in the world market, many factors are responsible for the price movements
of these commodities. Heres a look at some of them.

On basis of the sheer volumes traded every day, the commodities market is the worlds second largest
market after the currency market. Given the size of the market and the variety it offers, it is difficult to
identify the precise reasons that bring fluctuations in this market. However, there are a few general
factors that affect the movements of commodity prices in the long and short run. Mentioned below are
a few of them.

Demand and supply

When demand for a commodity is higher than the supply, its price increases, and vice versa. There is
always some imbalance between the two when it comes to commodities, which results in constantly
fluctuating prices.

Weather conditions
A majority of commodities traded in the world markets are agricultural goods, and the production of
these goods depends on the weather. Sudden changes in climatic conditions like inadequate rainfall or
draughts might affect the availability of agricultural goods in the world market, causing scarcity and
pushing commodity prices northwards.

Economic and political conditions

The prices of commodities are also impacted by the economic and political conditions of the countries
that are producing and consuming them. For instance, during the Gulf War in Iraqwhich was a major
producer of oilthe price of oil fluctuated very frequently. Moreover, weak economic conditions reduce
the spending power of consumers, leading to fall in demand, which results in movement in prices.

Government policies
Any changes in the government policy, especially the ones impacting import/export cost to the buyer or
seller will have a huge impact on commodity prices. If, for instance, the Indian government increases
import duty on edible oil, its price will show a proportionate increase, and vice versa.
70

These and some other factors like inflation, seasonal variations, currency movements, etc. are majorly
responsible for price fluctuations in the commodity market.

71

B. b. 43.

What is commodity trading?

When physical substances like metals, food grains, etc. are traded in the global market to profit from the
expected changes in price, it is called commodity trading.

Commodity trading is the act of buying and selling commodities on major exchanges through
standardized contracts. Before we learn about how this market works, it is essential to understand what
commodities are and why people trade them.

Unlike products with brand names, commodities are essentially goods that have a common price per
unit across geographies (for instance, gold). Raw products that are used to produce other goods and
services are considered commodities. Some of the most common commodities traded around the globe
include metals like gold, silver, copper, etc.; energy products like oil, gas, etc.; agricultural outputs like
corn, sugar, coffee, cotton, etc. The prices of these commodities are determined mainly by the supply
and demand of these goods in the global market.

There are three major national commodities exchanges in India. These are National Commodity and
Derivatives Exchange Ltd, Multi Commodity Exchange of India Ltd and National Multi Commodity
Exchange of India Ltd. Apart from these, about 18 other domestic commodity exchanges are also
operating in India.

Why commodity trading?

While earning profit is one of the chief reasons why people trade in commodities, several other
advantages of this investment also propel investors towards it. One such advantage is liquidity. Due to
the participation of several traders and speculators, the commodity market is among the most liquid in
the world.

Apart from liquidity, commodity trading also provides leverage, which allows traders to operate on
margin. This means that people can make large-value transactions by paying a small part of the total
transaction value.

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Moreover, commodities allow you to profit from the falling market as well. You can put your money on
the upside as well as the downside movement of commodity prices.

Constant fluctuation in this market is certainly a risk, but it also opens up the opportunity to earn higher
profits. Besides, if positions are hedged appropriately, risk is reduced substantially.

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B. b. 44.

What is hedging? How is it done through commodity markets?

Hedging is the act of reducing your risk of losing money in the future.

Simply put, hedging is a kind of insurance for your portfolio. When people hedge, they are, in reality,
insuring their investment against any unpredicted events. Hedging does not prevent such events, but
reduces the impact they might otherwise have on your portfolio.

Portfolio managers, retail investors, corporations as well as governments use hedging to reduce their
risk exposure. However, when it comes to trading in commodities, hedging is not as simple as paying
your insurance premium. To offset the risk arising from one instrument, traders use other instruments.

How does it work in commodity trading?

The prices of commodities fluctuate constantly. If traders want to protect themselves from the risk of
future fluctuations, they buy or sell positions in the futures markets.

Let us understand this with the help of an example. If an individual involved in sugar processing believes
that the price of sugarwhich is currently say Rs 20/kgwill increase in the coming months, he will buy
a position in the futures market at todays price. So, even if the price rises from Rs 20/kg to Rs 23/kg in a
month, he will get a price of Rs 20/kg from the seller at the end of the contract. This act of buying long
positions to avoid upside risk in the futures market is called long hedging.

Similarly, if a farmer anticipates that the price of wheat might fall from Rs 50/kg to Rs 40/kg, he will sell
future contracts at todays price (i.e. Rs 50/kg). So, even if the price falls to Rs 40/kg, he will still get Rs
50/kg according to the contract. This act of selling positions in the future market in order to protect
ones investments against downside risk is called short hedging.

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B.

Trading

B. c. Currency

75

B. c. 45.

How can I trade in currencies?

New to currency trading? This 5-step procedure will help you get started.

Before you start trading in currencies, you need to first understand what it is and how the market works.
Once your basic understanding is clear, you can try your hand at currency trading.

Elaborated below is a simple 5-step process that will help you get started.

Step1: Select a broker

In order to buy and sell various currencies, you will need to hire the services of a currency broker. There
is a plethora of brokers to choose from today; make the right selection by reviewing and comparing the
services and benefits offered by them.

Step 2: Open a demo account

After selecting the broker of your choice, ask for a demo account. Most brokers today offer this service,
which allows you to use their trading platform for a few weeks (usually 30 days) to trade without any
service cost. This demo account will help you understand how to use the platform without actually
trading in real-time market.

Step 3: Understand about leveraging

Leverage is a kind of loan provided by the broker to the trader. So, if the trader offers a leverage of
200:1, you can use up to 200 times the money you are actually investing. Although this facility allows
you to carry out huge transactions with little money and provides an opportunity to earn huge returns, it
can be very risky if not used carefully. It is crucial to fully understand this concept before you start
trading.

Step 4: Learn to read charts

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Various types of currency charts with different time frames show past trends in the currency market.
Most charting softwares display information in the form of bars, candlesticks and lines. Spend some
time to understand the data these charts reveal, and select the software you are most comfortable with.

Step 5: Make your first trade

Making your first trade in a live market is very different from practicing it on your demo account. In this
case, real money is involved, with a potential for real profit or loss. Invest your money only if you
strongly believe in the news and facts that triggered your decision to trade.

Currency trading, or Forex trading as it is known, can be risky if you take hasty decisions. If you want to
become a good trader, learn everything about this type of trading before getting started.

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B. c. 46.

How is the price of a currency determined?

There are various factors that affect the price of any given currency. Read on to know what they are.

The value of a specific currency is not determined by any government or regulating body. It is the result
of a number of factors that come into play. Heres a look at some of these factors.

Demand and supply

The demand for a specific currency is mainly driven by the demand of goods, services and investments
offered by the issuing country. For instance, if the demand for Indian IT services is high, more
international players will need Indian Rupees to buy these services, thereby pushing the value of Indian
currency up.

Speculators
If major buyers in the currency market believe that a specific currency will gain more value in the near
future, and consequently, buy more of that currency, its price will rise due to this increase in demand,
and vice versa.

Political and economic conditions of the country

The stability of the government and the economic condition of a country also affects the price of its
currency. If, for instance, the US government is unstable or the country is facing a financial crisis, the
development of the country will certainly slow down. This will cause the value of the US dollar to fall.
Similarly, if these conditions are favorable, its value will move upwards.

Other factors
Currency value is mainly determined by the future prospects of the country it belongs to; it is hence
affected by a number of factors. These include population demographics, prevailing interest rates, war
and conflict situations, unemployment rate, inflation reports, budget announcements, etc.

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It would be appropriate to conclude that the price of a specific currency is determined by not just one,
but many factors. Understanding these factors will not only educate you on the currency markets
mechanism, but also help you trade currencies efficiently.

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B. c. 47.

What are currency derivatives?

Currency derivative is a contract between two traders agreeing to exchange currency at a fixed price at a
future date.

Currency derivatives, in simple words, are contracts between the buyer and the seller trading in
currencies. According to this contract, both the parties decide to exchange one currency for another on
a future date at a price that is set at the beginning of the contract.

One of the main reasons why people enter in such an agreement is hedging. Hedging is a risk
management tool or insurance against any unwanted movements in the currency rates in future.
Through currency derivatives, traders protect themselves from any upside or downside risk.

Let us consider an example to understand the concept better. Say a company (ABC Ltd) in the UK, doing
business with another company (XYZ Ltd) in the US, usually receives payment a month after the delivery
date. In case of an unstable economic condition in the UK, there is a risk of currency value depreciation
in the future, which might result in a loss for ABC Ltd.

In such a scenario, ABC Ltd will enter into a currency derivative contract today to ensure that it gets a
fixed rate of exchange in the future.

Investors trade in currency derivatives mainly due to the following advantages:

Fixed lot size

The lot size, that is, the number of currency units per lot is determined by the regulating exchange. One
of the main advantages of currency derivatives is that traders, when participating in such contracts, can
trade multiple lots per contract.

Highly liquid

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The foreign exchange market is considered to be the most liquid market in the world. This means that
traders can enter or exit the market at any moment, in any given market condition, due to the
availability of multiple buyers and traders.

No manipulation
Given the size of the market and the number of players involved, it is impossible for a single entity or an
individual to manipulate the market. Even central banks with their high volume of transactions cannot
push the market in the desired direction.

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B. c. 48.

What is currency trading?

Currency trading is the process of buying and selling currencies with an aim of earning profit.

Each currency has a specific value in relation to another currency. The act of buying and selling different
currencies in order to earn profit is known as currency trading. This process is also referred to as Foreign
Exchange or Forex trading.

Who trades currencies?

While banks and corporations usually trade currencies to carry out international business processes,
individual investors also undertake such trading, mainly to make profit from fluctuations in currency
value.

Major currencies
Each transaction involves two currencies, wherein one is sold or purchased against the other. The two
currencies involved in a transaction are referred to as a pair. While any currency can be traded for
another, there are some major pairs that are most liquid in the world. These are:

EUR/USD (Euro/US Dollar)

USD/JPY (US Dollar/Japanese Yen)
GBP/USD (British Pound/US Dollar)
USD/CHF (US Dollar/Swiss Franc)
AUD/USD (Australian Dollar/US Dollar)
USD/CAD (US Dollar/Canadian Dollar)
NZD/USD (New Zealand Dollar/US Dollar)

It is evident from the above-mentioned list of pairs that the US Dollar is the most actively traded
currency in the world market. Besides, these currencies, along with different combinations like
EUR/GBP, EUR/JPY, etc., comprise more than 95 percent of the total transactions in the world market.

Where is currency traded?

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Unlike stocks, currencies are not traded on regulated exchanges. The market is not controlled by any
governing body. The trade is essentially carried out on the basis of credit agreements between parties.

In order to start trading in currencies, you will have to select a broker that offers benefits that suit your
requirements. Some of the important things to consider while selecting a broker are low spreads, low
initial deposit, wide range of leverage options and good customer service.

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B. c. 49.

Why do people trade in currencies?

People trade in currencies with the motive of earning high profits by predicting future movements.

The currency market is considered to be the most liquid market in the world. It is open 24 hours a day,
for 5 days every week, and players like governments, financial institutions, corporations and retail
investors take part in this trading. Although currency trading is considered to be risky due to constant
volatility, the average daily turnover of the currency market is increasing everyday.

Mentioned below are the two main reasons why there is a constant increase in transactions in this
market.

Profits
People trade in currency markets mainly due to the large earning potential it provides. The value of
different currencies keeps changing constantly, which provides investors an opportunity to predict
future movements and lay bets on the favorable direction. Apart from this, it also gives investors and
traders an opportunity to earn a lot of money with a small investment. This method is known as
leveraging.

Leveraging
Earning huge profits in currency is possible largely because most brokers today offer an option to trade
with leverage. Leverage is a temporary loan provided by the broker to the investor.

Usually, brokers allow leverage of 50:1, 100:1 or 200:1, depending on the total amount of transactions.
So, for instance, if you are given the leverage of 100:1, you are required to deposit only 1/100=1 percent
of the total transaction value to carry out the transaction. This essentially means that you can invest up
to 100 times the amount you actually have. Hence, your earning potential also grows 100 times.

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C.

Investment

85

C.

Investment

C. a. Mutual Fund

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C. a. 50.

Benefits of investing in mutual funds

Here are some reasons why investing in mutual funds is a good idea.

A mutual fund is a financial instrument designed to cater to different types of investors. Whether you
are looking for tax savings, liquidity, diversification or convenience, mutual funds can meet these needs.
Heres a look at some important benefits of investing in mutual funds.

Diversification
The money you invest in a mutual fund is distributed in a number of instruments like shares, bonds, etc.
Thus, even if one of the instruments does not perform well, others compensate for it and stabilize the
overall returns over a period of time. The main aim of such a structure is lowering risks and maximizing
returns for investors.

Professionally managed
A certain amount of knowledge and in-depth research is required to understand the dynamics of various
markets, industries and stock movements. However, while investing in mutual funds, you dont have to
worry about conducting research and gaining knowledge. Mutual funds are managed by fund managers
who are experts in the field. Investment actions are taken by these fund managers according to the goal
of the mutual fund in order to maximize the returns to investors.

Variety
There are many types of mutual funds available for investors today. From equity, debt and hybrid funds
to sectoral and international funds, there is a wide variety to choose from. Besides, these funds also
offer flexibility of investment through options such as systematic investment plans (SIP), systematic
withdrawal plans (SWP), dividend reinvestment, etc.

Convenience
Investment in mutual fund ensures that you sit back and relax, while the fund manager, who has the
requisite expertise and knowledge, undertakes the responsibility of managing your investment.

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Liquidity
Apart from a few schemes that have a fixed lock-in period, most mutual funds are quite liquid. In case of
an urgent requirement, you can sell your mutual fund units and get your money back within a few days.

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How can I invest in a mutual fund?

There are many ways in which money can be invested in mutual funds. Here are some of them.

Mutual funds are one of the best ways to diversify your portfolio and invest according to your risk
profile. Once you have selected the type of mutual fund scheme that suits your requirements, the next
logical step is to learn about the various methods in which you can make the investment.

You can choose to invest in mutual funds through a one-time lump sum investment, a systematic
investment plan or a systematic transfer plan. Some information regarding each is elaborated below.

One-time investment
Many investors choose to put in a lump sum amount and buy mutual fund units at once. However, over
a longer period of time, this method may prove disadvantageous as the performance of the investment
depends majorly on the market conditions and NAV of the fund at the time of purchase.

Systematic Investment Plans (SIP)

SIP is fast becoming one of the most popular and simplest ways to put money in mutual funds. Such a
system allows you to invest a fixed amount at regular intervals in a particular scheme. Consequently,
you buy more units when the stock market is down and fewer units during an upsurge. This method is
also known as Rupee Cost Averaging.

Systematic Transfer Plan (STP)

STP is a method wherein you invest a lump sum amount in one scheme and then transfer a small
amount at regular intervals to another scheme. This facility not only saves time while redeeming an
investment from one scheme and re-investing it in another, but also allows you to adhere to the asset
allocation that is suitable for you. In addition, it provides you with an opportunity to earn higher returns
from the scheme that performs better.

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How can I redeem a mutual fund?

To redeem or sell your mutual fund investment, you need to follow specific steps. Heres how to go about
it.

The procedure of redeeming your investment in mutual funds is as simple as making an investment in
them. Here are a few steps you need to follow:
Step 1: Contact the Asset Management Company (AMC) or the agent
Once you decide to redeem your mutual fund units, contact the mutual fund company or agent from
whom you had purchased the mutual fund. The company or agent will provide you with a redemption
form that needs to be filled out.
Step 2: Fill out the redemption form
Filling the redemption form involves furnishing your personal details, fund name, number of units held,
etc. The completed form needs to be submitted to the broker or the company.
Step 3: Receive money
Usually, the mutual fund company takes 2 to 4 working days to transfer the money in your bank
account. In case you need money urgently, make sure you initiate the process at the start of the week to
avoid the gap of a weekend in processing.
Points to remember
NAV
As an investor, you need to keep in mind that the NAV of the working day is applicable till 3 pm during
redemption. Therefore, if you apply for redemption after 3 pm, you will receive the NAV of the next day.
Funds with a lock-in period
While you can redeem units of most mutual fund schemes any time you want, there are some that
cannot be cashed instantly. Funds like Equity Linked Savings Scheme (ELSS) come with a minimum lockin period. Under such plans, you cannot redeem your investment for the initial three years. On
completion of the lock-in period, the units can be sold like normal mutual fund schemes.
Mode of redemption
Mutual fund companies provide various options when it comes to the mode of redemption. You can ask
the organization to transfer funds to the bank account registered with it. In case the account is inactive,
you can request for a cheque payment. If you have purchased the mutual fund online, you can apply for
redemption in a single click through your online account.

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Tax benefits of mutual funds

Mutual funds not only allow you to enjoy tax benefits, but also earn higher returns.

If you think investing in a mutual fund can only help you gain higher returns, think again. One of the
major advantages of investing in mutual funds is the tax benefits they offer. Lets have a look at how
mutual fund investments can help you maximize your returns and meet your financial goals.

Equity Linked Savings Schemes (ELSS)

ELSS is a hybrid fund that invests about 80-90 percent of your money in equities and the rest in debt
funds and money market options.

Investments of up to Rs 1,00,000 in ELSS are exempt from income tax under Section 80C of the Income
Tax Act, 1961. That means, if you fall in the highest tax bracket of 30 percent and invest Rs 1,00,000, you
can save up to Rs 30,900 every year.

However, ELSS comes with a minimum three year lock-in period. In other words, you have to stay
invested in the scheme for at least three years, subsequent to which you are free to sell your investment
whenever you want. In addition, the impact of the proposed Direct Taxes Code, which has suggested
eliminating the tax exemptions provided by ELSS from the year 2013-14, also needs to be considered.

Other mutual funds

Mutual funds other than ELSS funds also offer certain tax benefits. For instance, if equity mutual funds
are held for more than one year, you do not have to pay any taxes on the profits earned on them. In
other words, long-term capital gains on equity mutual funds are not taxable. Also, dividends earned
from equity mutual funds are exempt from taxes.

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What are my rights as a mutual fund investor?

It is crucial for you to know your rights after you put money in a mutual fund.

According to the regulations laid down by the Securities and Exchange Board of India (SEBI), you enjoy
certain rights as a mutual fund investor. These rights are mentioned in the contract investors receive
when they make an investment, but are usually overlooked as they are in fine print.

Heres a highlight on your rights.

As a mutual fund investor, you have the right to know everything about your fund. This includes
queries like how your investment is performing, what the investment objective of the mutual fund
scheme is, where your money is invested, etc.
After buying units of a mutual fund scheme, you should receive a certificate from the asset
management company (AMC) that clearly mentions how many units of that fund you own. In case you
do not receive this certificate within six months of the investment date, you have the right to question
the mutual fund company regarding the delay.
You also have the right to know all the relevant information about the company that has undertaken
the responsibility of managing the assets of the mutual fund. It is the companys responsibility to keep
you updated on any developments or changes that can impact your investment.
If any dividend is declared on your mutual fund scheme, you are entitled to receive the proceeds
within 42 days from the date of declaration by the company.
Unit holders of a mutual fund scheme also possess the right to wind-up the scheme if 75 percent or
more investors pass a resolution.
The AMC of a mutual fund can be terminated in case 75 percent of the total unit holders of that AMC
vote for the same in a special meeting.

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What are the costs associated with mutual fund?

While mutual funds are a good investment option, they come at a cost. Here is a brief note on various
expenses related to a mutual fund.

When you plan to invest your hard-earned money in a mutual fund scheme, it is important to know how
much of it is being invested and how much you are paying as expenses. Contrary to popular belief,
expenses related to a mutual fund investment are easy to understand and not very complicated.
Although these costs are minor compared to the returns offered by mutual funds, you need to be aware
of them.

Entry and exit load

There are some expenses that mutual fund companies incur to float, operate and administer a fund.
These expenses are collected from the investors as a percentage of their total investment, and are called
loads.

There two types of loads: entry load and exit load. The fee collected at the time of buying mutual fund
units is called entry load, whereas the amount charged while selling the units is called exit load. While
entry loads are not allowed in India, many mutual fund companies still charge exit loads.

Distributors charge
The Securities and Exchange Board of India (SEBI) recently introduced a distributor charge for investors
that use agents or distributors. As part of this rule, a fee of Rs 150 for new investors and Rs 100 for
existing investors is applicable for investments above Rs 10,000. However, this fee is not applicable for
investors who buy mutual funds directly from the company or for investments below Rs 10,000.

Fees for fund management

The mutual fund company charges a feea small percentage of the funds total value in order to
manage the investments on your behalf. This amount is usually paid to the fund manager as a fee to
carry out the management procedure associated with your mutual fund. The fee is charged as a
percentage of the funds value on an annual basis.

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Transfer/exchange fee
Investors have to incur this expense when they transfer their investment from one mutual fund scheme
to another one.

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What are the different types of mutual funds?

Knowing about the various types of mutual funds will help you select the best possible option.

Irrespective of the kind of investor you are, there is a mutual fund in the market that will suit your
requirements. For selecting the right one, knowing about the different types of mutual funds is crucial.

Depending on where the money is invested, mutual funds can be broadly classified into three different
categories.

Equity funds
Equity funds invest your money primarily in shares. As this kind of investment is linked to stocks of
companies, the returns go up if the stock market rises and vice versa. However, despite this volatility,
investing in an equity mutual fund is comparatively safer than putting money directly in the stock
market, as it invests in different companies at the same time.

Debt funds
This category of mutual funds invests in debt instruments like bonds, which are usually considered to be
stable investment options. Besides, this type of mutual fund also allows you to acquire tax efficient
returns when compared to other investment options like fixed deposits.

Hybrid funds
A hybrid fund is a combination of equity and debt instruments, with money invested in both shares and
bonds. This ensures that while one part of the investment yields higher returns, the other provides
stability to your portfolio.

Apart from these, some other funds that are gaining popularity are:

Exchange Traded Funds (ETFs)

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An ETF is a type of fund that invests money in a commodity, an index or a mix of assets, and is traded on
stock exchanges like any other stock. As a result, its price changes many times a day as opposed to the
once-a-day change in the price of a mutual fund. Apart from ease of trade, ETFs offer many other
advantages like lower investment costs, tax efficiency, diversification, etc.

Fund of Funds (FOF)

A FOF invests your money in several mutual fund schemes instead of directly in stocks, bonds, etc. One
of the major advantages of investing in this instrument is that it diversifies your portfolio by distributing
your risk among many funds administered by different fund managers.

International funds
A mutual fund that invests your money in stocks or bonds of companies outside India is known as an
international fund. Such a fund allows you to invest in foreign markets and take advantage of
opportunities outside India.

As a mutual fund investor, it is important for you to know that each type of fund has different risks and
rewards. Hence, before making an investment, understand the type of fund thoroughly. This will ensure
that you are investing in the mutual fund that suits your risk profile and financial requirements. In case
of any confusion, you can consult your financial advisor.

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What is a mutual fund?

A mutual fund is an investment option that puts your money in many instruments to reduce market risks
and get high returns.

A mutual fund is a financial instrument that pools in money from multiple investors and invests this
amount in various instruments like equities, bonds, etc. A major advantage of investing in a mutual fund
is that you do not have to keep a track of the instruments it is invested in. The money is managed by a
fund manager, who actively manages the fund and takes decisions on investments. Since your
investment is distributed in a variety of products, the overall risk is reduced to a great extent when
compared to other avenues like equity shares.

NAV
When you invest in a mutual fund, you are allocated units of the fund, and the price at which you buy
these units is called Net Asset Value (NAV). Consequently, the growth of the NAV indicates the growth of
your asset. Unlike shares, the NAV of a mutual fund changes just once a day, ensuring more stability for
your portfolio.

Regulation
Mutual funds are regulated by the Securities and Exchange Board of India (SEBI). These regulations are
beefed up further by an industry association called the Association of Mutual Funds in India (AMFI),
which ensures that specific standards are maintained by mutual fund houses.

Investment process
Investing in mutual funds is quite simple and does not involve any lengthy paperwork. You can either
invest all your money at once or invest small installments every month through a systematic investment
plan (SIP).

Many types of mutual funds are available in the market today, each offering different benefits like high
returns, tax savings, additional source of earning, retirement savings, etc. You can select a fund based on
your requirements and start investing. However, make sure you read the offer documents and know the
terms and conditions before investing.
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What is NAV of a mutual fund and how is it calculated?

The net asset value (NAV) of a mutual fund indicates the price at which the units of that mutual fund are
bought or sold. It represents the funds market value after subtracting the liabilities. The NAV per unit is
derived after dividing the net asset value of the fund by the total number of its outstanding units.

The formula for calculating NAV:

NAV of a mutual fund = (Assets of the fund Liabilities of the fund) / Number of outstanding units of the
fund

NAV is an indicator of the market value of the funds units. Hence, it helps track the performance of the
mutual fund you have invested in. The percentage increase in your funds NAV over time is the actual
increase in the value of your investment. Therefore, an investor can gain accurate information about his
investment by studying the NAV movements of a fund over a period of time.

Many investors assume that putting money in mutual funds with a lower NAV may offer them better
returns compared to a mutual fund with a higher NAV. However, this is a misconception and often leads
investors to invest in underperforming mutual funds. Low NAV of a mutual fund may suggest that the
fund was either floated recently or the fund has poor performance and return history.

Therefore, low or high, NAV does not impact the return on investment from the mutual fund.

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C.

Investment

C. b.

Bonds

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Are bonds safer than stocks?

Safety is an important aspect when it comes to an investment option. We run this filter on bonds and
stocks, so that it makes the choice easier for you.

Stocks and bonds are two different instruments catering to different types of investors. Bonds are like
fixed deposits, as the issuing company promises to repay the amount after a specific period, and pays
interest until its maturity. Stocks, on the other hand are different altogether: prices keep fluctuating,
and the issuing company is not obligated to pay dividends regularly.

Prima facie, bonds appear safer and more stable than stocks. However, this might not always be the
case. While government bonds are usually secure, the stability of a corporate bond depends on the
financial strength of the issuing company. Junk bonds are the riskiest type, which have a lower
investment grade due to a high default risk. However, they provide a higher rate of return to attract
investors.

Generally speaking, bonds are considered a safe bet compared to stocks, unless they are junk bonds. So
let us make a comparison between junk bonds, the riskiest of bonds, and stocks. While stocks and junk
bonds offer different levels of safety in different circumstances, it is important to take the following
factors into consideration while selecting any one:

Company stability
While you can invest in stocks of companies with better stability, you do not enjoy this benefit while
investing in junk bonds. This is because most companies issuing junk bonds have weak financial strength.

Bankruptcy
In case of bankruptcy, the company is obligated to repay its debt first. Since junk bond is a form of debt,
its investors receive payments before shareholders. Usually, shareholders are last on the list of
repayment.

Volatility

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Some stocks are volatile, while some are stable in nature. However, junk bond prices change
dramatically with change in the economic cycle. In a rising economy, the value of junk bonds increases
significantly, whereas during times of recession, its value depreciates.

Junk bonds usually provide higher returns than many traditional investment instruments. Likewise,
stocks too have the potential to grow significantly. While both these options come with a certain degree
of risk, investing some amount of your total investment in both these instruments provides a balance to
your portfolio.

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Face value, coupon and maturity of bonds

Investing in bonds can be tricky in todays market. Heres a look at some terminologies that will make it
easier for you.

It is essential to understand basic terminologies like face value, coupon and maturity of bonds before
investing in the debt market. An elaboration of these terms is given below.

Face value
When a bond is issued, the price paid for it is called the face value of that bond. This is the amount the
issuing company owes the investor at the time of maturity. The investor typically gets a fixed interest for
the period he holds the bonds.

Since bonds are governed by market fluctuations, the selling price of the bond may be lower or higher
than the face value at the time of maturity. If sold at a higher price than their face value, bonds are said
to be selling at a premium. The ones that are sold below their face value are termed as being sold at a
discount.

Coupon
Coupon is the periodic interest payment that the investor receives. Coupon rate refers to the rate of
interest offered by the issuing company, calculated as a percentage of the face value of a bond. While
most bonds offer interest on your investment, there are some like zero-coupon bonds that offer
discount on the face value of the bond instead of paying interest.

Maturity of bonds
Maturity of a bond indicates the date on which the investor gets back his principal amount. Usually, the
bond maturity period ranges from one day to 30 years, depending on the type of bonds issued. Shortterm investment in bonds generally has a lower rate of return than mid and long-term investments.

Understanding these terminologies through an example is much simpler. Say for instance a company
issues a bond of Rs 10,000 for a tenure of 5 years, providing an interest of 10 percent every year. In this
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case, the face value of the bond is Rs 10,000, coupon rate is 10 percent and the maturity period is 5
years.

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How and where can I buy bonds in India?

Want to invest in bonds but dont know where to start? Read on to get a clear idea.

If you read up on bonds, you will find that they are fixed-income instruments that offer regular interest.
In addition, the principal amount is also repaid when the tenure ends. The popularity of bonds lies in the
guarantee they offer in terms of return on investment. Many Indian investors tend to prefer the safety
of bonds with fixed returns rather than the volatility of the stock market with potentially higher profits.

Depending on the type of bonds, they can be issued by public sector units (PSUs), governments as well
as corporate organizations in order to raise capital. Before investing in these bonds however, it is
important that you have a clear idea of how and where to invest in order to achieve maximum returns.

Corporate bonds
The process of investing in corporate bonds is as simple as investing in any other instrument. When a
company issues bonds, you will have to fill out an application form and submit it to any branch of the
issuing company with the application fee and required documents. These documents may include a copy
of your PAN card, address proof, identity proof, etc. If you have a demat account, you can fill out the
details in the form, and the bonds will get credited to it. In case you do not have a demat account, you
can choose to receive the bonds in a physical format.

Government bonds
Government bonds, unlike shares, are not traded on the stock market. They are sold through official
distributors and designated branches of banks and post offices. To invest in bonds, you will need to visit
any branch designated with applications and submit a filled-up application form. After your request is
processed, you will receive a bond certificate in your name.

Consulting a financial professional

While the process of investing in bonds is quite simple, selecting the best type of bond might be difficult,
especially if you are new to making investments in the debt market. If you are unsure of the facts or
need guidance in the process, taking professional advice can clear the picture for you.

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How are bonds rated?

Bonds are rated by various credit rating agencies in accordance with the level of safety they offer to
investors.

A bond is essentially a loan given by an investor to a company or a government for a specific period. The
investor earns regular, predetermined interest on this amount, and receives the initial amount back at
the end of the specified period.

One of the most important reasons why investors are attracted to bonds is the interest they earn over
time. Some bonds offer higher interest rates than others. However, before investing in any bonds, you
need to first know how safe they are.

Rating agencies like CRISIL, ICRA and CARE rate these bonds based on the level of safety, that is, the
ability to repay the amount on maturity, offered by the bonds. Some of the factors they consider while
rating bonds are mentioned below.

Internal factors
Bonds are issued by various companies to finance their business operations. Apart from paying interest
to the investors, these companies promise to repay the principal amount on a future date. However,
whether or not the companies keep their promise depends on their financial strength. Therefore, rating
agencies analyze fundamental business factors like strength of the balance sheet, profitability, revenue
sources, growth potential, etc. in order to rate bonds. The greater the financial strength, the higher the
rating the bond will get.

External factors
Rating agencies also look at several external factors while determining the rating of a bond. Factors like
parentage, government intervention, industry outlook and competition also play an important role in
analyzing long-term prospects of the company. If these factors portray a favorable picture, bonds get
higher ratings.

The rating scale used by most Indian rating agencies is as below:

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AAA Highest safety

AA High safety
A Adequate safety
BBB Moderate credit risk
BB Moderate default risk
B High default risk
C Very high default risk
D Default

While investment grading methods of different agencies might differ slightly, most of them use the
above mentioned rating scale to categorize bonds.

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What are junk bonds?

Junk bonds can boost an investors portfolio, given the immense growth potential they hold.

Junk bonds are a form of fixed income security that is rated below investment grade by one or more
rating agencies due to the weak financial condition of the issuing company. The low credit quality of
these bonds makes them a risky investment option, wherein the issuer may not be able to repay the
original principal. As a result, junk bonds offer higher interest than other bonds. Hence, they are also
known as high-yield bonds.

Investor perspective
Usually, asset management companies maintaining a bond fund add a few junk bonds to their portfolio
to benefit from their growth potential. If, as an individual investor, you have a portfolio consisting of
several investment grade bonds and one or two junk bonds, loss on one of these bonds can be
recovered from the high returns of other bonds.

Upgrade and downgrade

Junk bonds are usually purchased by institutional investors as well as investors who are looking to
diversify their portfolio. Under certain circumstances, a junk bond may be upgraded to investment grade
due to good performance of the organization.

The reverse is also possible (a downgrade), when the financial condition of the organization issuing an
investment grade bond deteriorates. Experts believe that in India, junk bonds can effectively help small
and mid-sized businesses cope with inadequate credit flow.

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Relationship between price of a bond and the prevailing interest rate

The price of a bond is inversely proportional to the rate of interest in the economy.

Making an investment in bonds can be quite a daunting process that not many investors opt for. That is
so because it requires some amount of knowledge on how the economy works, so that one can decipher
the effect of various factors on bond prices.

For instance, the prevailing rate of interest has a deep impact on the price movements of bonds.
Usually, an inverse relationship can be traced between the two. This means that the value of a bond
goes up when the interest rate goes down and vice versa.

How does it work?

It is important to note that if you hold the bond until maturity, you are entitled to receive the face value
of the bond, irrespective of the prevailing interest rate. The change in interest rate affects the price of
your bond only if you decide to sell it in the secondary market before maturity.

Let us understand this with the help of an example. Say you buy a bond with face value of Rs 10,000
with a coupon rate of 10 percent and maturity of eight years. This means you should get Rs 1,000 as
interest every year, and Rs 10,000 on maturity.

However, if the prevailing interest rate increases after four years of investment, then new bonds issued
by same company would offer a higher rate of return, say for instance 12 percent. If you decide to sell
your bond (that offers 10 percent interest) in the secondary market at this point of time, not many
investors would be interested in buying it, since they would prefer newly-issued bonds at 12 percent.

If you still want to sell your holdings, you would have to sell them at a price below the face value in
order to attract buyers, effectively reducing their price.

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The value of a bond hence decreases if the interest rate increases and vice versa.

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Various types of bonds

Investing in bonds can yield high returns, but the sheer variety available in the market can be confusing.
Knowing the types of bonds will help you decide which one to pick.

Investment in bonds can be a wise decision, given the fact that you can earn high returns upon maturity.
However, bonds can assume many additional features that may complicate the way prices and yields
(the overall return on the investment) are calculated. Knowledge of the various types of bonds is
necessary before finalizing your investment decision.

While classifying the different types of bonds, various factors like issuer, priority, redemption features
and coupon rates are taken into consideration. Let us take a look at the various types of bonds:

Government bonds
These kinds of bonds are issued and backed by the Government of India. In other words, the Indian
government offers investors bonds at a fixed rate. The government also employs an investment banker,
whose main responsibility is to serve as a middleman. However, it is difficult for retail individuals to
invest directly in these bonds as the minimum investment amount is very high.

Corporate bonds
These bonds are offered by corporate houses and are open to everyone. However, these bonds are not
as safe as government bonds as the issuing companies are subject to market volatility, industry ups and
downs, etc.

Zero coupon bonds

Usually, most types of bonds are offered at a fixed interest rate. However, zero coupon bonds do not
come with any specific coupon rate or interest rate. They are offered at a discount on the face value,
and on maturity, investors get the face value back. The difference between the two is the profit.

Junk bonds

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These bonds are issued by companies that are financially not very stable. These bonds are considered
below the investment grade. Since it is a risky trade for an investor to put money in such bonds, the
issuing company usually offers a high rate of return.

Tax-saving bonds
By investing in this type of bond, you receive exemption from paying taxes on the interest income as
long as you hold the bond or until its period of maturity.

While there are many other types of bonds available in the market, the ones mentioned above are some
of the most common ones in India.

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What are bonds?

In simple words, a bond is a loan that you give to a corporate entity or the government, and earn regular
interest in return.

If a company intends to expand or diversify its business, one of the methods it uses to raise money is
issuance of bonds. By investing in these bonds, you loan your money to the issuing company, which
promises to return your investment after a certain period; until then, it pays interest.

Apart from corporate entities, governments also issue bonds to reduce fiscal deficit and fund other
financial activities.

Understanding bonds
When a bond is issued, the price you pay is called the face value of that bond. The rate of interest is
known as the coupon rate, and the date at which it matures is the maturity date.

This can be further explained with the help of an example. Say for instance, you buy a bond with Rs
20,000 face value at a 5 percent coupon rate and a 10-year maturity. You will receive Rs 20,000 (your
initial investment) at the end of 10 years, plus Rs 10,00 every year for 10 years as regular interest
payment.

While most bonds offer interest on your investment, there are exceptions like zero-coupon bonds,
which, as the name suggests, do not pay interest. Instead, they offer discount on the face value while
buying.

How are bonds different from stocks?

When you purchase a stock, you become one of the owners of the company. As a result, you receive
profits of the company in the form of dividends.

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In case of a bond, you are not the owner, but rather a lender to the issuing company. Hence, instead of
dividends, you receive regular interest for the amount you lend.

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What are gilt funds?

A gilt fund is a type of mutual fund that offers decent returns with a high security factor. Learn more
about gilt funds here.

Ever wondered if you can get an investment option that is safe and also ensures decent returns? If so,
gilt funds may be the product you are looking for. Gilt funds are not as complicated as they may sound
to a new investor: they are mutual funds that invest only in government securities.

Government securities, also referred to as gilts, are units of debt issued by the Reserve Bank of India
(RBI) to raise money and help the government reduce its fiscal deficit. However, for a retail investor, it is
quite difficult to buy gilts directly, as the minimum investment amount is usually in crores. In such a
scenario, the only way to put money in these securities is through a gilt fund, which requires an
investment of as little as Rs 5,000.

Why should you invest in gilt funds?

One of the main advantages of investing in a gilt fund is the level of security it provides. Although
investment in these funds does not guarantee very high returns, it provides a higher level of security to
your portfolio. Since the RBI issues most of the securities in which gilt funds invest, you can rest assured
that your money is in safe hands.

When to invest?
Timing the investment is crucial when it comes to this investment option, as the price of gilts is inversely
proportional to the movement of interest rates. These rates, in turn, are subject to change due to
macro-economic factors. It would be wise to invest in gilt funds when the interest rates are high. Over
the long term, appreciation in the price of government securities also enhances the Net Asset Value
(NAV) of a gilt fund.

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C. b. 68.

What are zero coupon bonds?

Zero coupon bonds do not pay regular interest to the investor. Yet, the demand for such bonds is quite
high. Heres explaining why.

Zero coupon bonds are bonds that are issued at a price lower than their face value (at a discount).
However, the bond holder receives the full face value of the bond at the time of maturity. Since these
bonds do not make regular interest payments (known as coupons), they are known as zero coupon
bonds.

How a zero coupon bond works

These types of bonds are made available to an investor at a deep discount and no interest payment. On
maturity, the investor gets the face value of the bond. When it comes down to calculation however,
these bonds too pay interest. The difference between the discounted rate and the face value is the
actual interest earned on the investment.

Instead of making regular interest payments on the discounted value, zero coupon bonds reinvest the
interest in the bond, thereby increasing the value of the bond over time. The amount keeps accruing
until the bond reaches its face value on maturity.

So, for instance, if a bond with face value of Rs 2,000 is issued at a discounted rate of Rs 1,500 for a
period of two years, you still get Rs 2,000 at the end of two years. The additional Rs 500 is your interest
income.

Why invest in zero coupon bonds

While absence of regular interest payments might discourage some investors, zero coupon bonds are
actually a very useful instrument for many. Its long-term maturityusually ten years or morecan help
you take care of future needs like childs education, etc. Besides, its discounted rate may help you build
a larger corpus over the years by investing a small amount.

Just like any other bonds, zero coupons too can be traded in the secondary market. Hence, if you wish to
liquidate your investments at any point after buying them, you can do so in the secondary market at the
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prevailing market rates. However, in order to benefit from these bonds, it is wise to hold your
investment until maturity.

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C. b. 69.

What is the yield of a bond?

Bond yield is the percentage return the investor receives on his investment.

One of the chief reasons why investors buy bonds is the interest they earn every year. While yield refers
the return earned by the investor on a bond, it is important to note that the current yield of a bond is
different from its nominal yield (also known as the coupon rate).

Let us understand these two concepts in detail and learn the difference between the two.

Nominal yield or coupon rate

Nominal yield or coupon rate is the predetermined rate of interest of the bond. It is usually a percentage
of the bond value.

So, for instance, if the face value of your bond is Rs 1,000 and the coupon rate is 9 percent, you are
entitled to receive Rs 90 every year on your bond.

Hence,

Nominal yield = Annual interest payment/Face value of the bond

Current yield
Since bonds are bought and sold in the secondary market, the market price of your bond is likely to
fluctuate. In such a scenario, the rate of return on your bond would be different from the coupon rate.
This rate of return is known as the current yield.

Let us use the above example to understand the concept of current yield better.

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The face value of your bond, when you invested in it, was Rs 1,000 with a coupon rate of 9 percent. So,
accordingly, you receive Rs 90 every year. However, due to volatile market conditions, say its market
price goes down to Rs 900. Since you are entitled to receive a predetermined amount as interest, you
continue to receive Rs 90. So in this case, the current yield of your bond will be Rs 900/Rs 90 = 10
percent.

Hence,

Current yield = Annual interest payment/Current market price of the bond

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C.

Investment
C. c. Gold

119

C. c. 70.

Is there a correlation between gold prices and stock market performance?

If the past performance of these instruments is anything to go by, there is a deep connection between
the two.

While there is no accurate theory that brings out a concrete correlation between the value of gold and
the performance of the Indian stock market, a brief look at the history of investing habits of Indian
investors paints a complicated picture.

In the 70s, the value of gold soared significantly, while the stock market remained flat. However, in the
two decades that followed, gold prices remained comparatively stagnant, and the stock market gave
exceptional returns. From the above data, it can be derived that these two shared an inverse
relationship until 2002.

But such a relationship ceased to exist after 2002. Both the instruments moved upwards in tandem for a
few years. They gave investors an opportunity to benefit from the bull market until the global recession
of 2008, the year when stock markets around the world collapsed, and gold too gave very moderate
returns.

Though cyclical in nature, there was a certain connection between the two instruments until 2008. But
post the recession, gold continues to offer good returns continually till today, while the stock market
remains volatile; this indicates that there is little correlation between both.

It would therefore be futile to invest in one instrument today by simply observing the performance of
the other.

If you are considering both instruments for investments, financial experts suggest having a balanced
portfolio, which consists of not only stocks and gold, but also other avenues like fixed deposits, bonds,
etc.

Source Links:

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http://www.dnaindia.com/money/report_gold-an-effective-hedge-in-volatile-markets_1293380
http://www.bestcashcow.com/articles/unprecedented-correlation-between-sp500-and-gold-5946

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C. c. 71.

Is there a correlation between gold prices and the US dollar?

The prices of gold and the US dollar share different relationships in different circumstances. Heres
throwing light on some of them.

Gold is considered to be a hedge against inflation, recession, and other times of uncertainties, especially
due to its high demand and finite supply. This precious metal was, for a long time in history, used as
currency, and is still a safe haven for investors. Consequently, most central banks around the world
invest more in gold to preserve their assets during volatile economic conditions.

On the other hand, the US dollar is widely accepted as an instrument of global currency exchange.
Hence, most central banks also invest their funds in the US dollar.

The link between the two

There is an intrinsic co-relation between gold prices and the US dollar. When the demand for the US
dollar falls, banks as well as investors around the world invest more in gold. This measure helps them
protect their money and hedge against uncertainties. The demand, and consequently the value of gold
hence increases.

Similarly, when the US dollar appreciates, an increasing number of investors shift their investments from
gold to the US dollar. This fall in demand causes the value of gold to depreciate. This behavior of
investors creates an inverse relationship between gold and the US dollar.

However, it would not be appropriate to conclude that the price of gold and the US dollar always move
in opposite directions, mainly because other external factors also impact the prices of these two
instruments. Some people, for instance, might invest heavily in gold during a recession, whereas others
might consider the US dollar to be a safer investment. In such a situation, the value of both these
options might go up.

Source links:
http://www.investopedia.com/terms/i/inverse-correlation.asp#axzz25181NRmn

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http://seekingalpha.com/article/220772-why-the-u-s-dollar-will-fade-as-gold-heads-higher

123

C. c. 72.

What are gold ETFs?

Gold Exchange Traded Funds (ETFs) are open-ended mutual funds that help you invest in pure gold.

Experts typically consider gold to be one of the most important elements of any investment portfolio,
mainly due to its high demand, finite supply and value growth over time. While buying gold in the
physical form is a common method of investing in this precious metal, gold Exchange Traded Funds
(ETFs) have gained popularity lately.

Gold ETF is an investment instrument that is specifically designed to emulate the price of gold. It invests
your money in pure gold, so that you benefit from its growth in value, without actually owning physical
gold.

There are several other benefits of investing in gold ETFs.

Firstly, the brokerage cost you pay to buy the units of this fund is much lower than the cost of
owning physical gold.
Secondly, profits earned on selling units after one year of investment are considered long-term
investment gains, whereas in case of physical gold, you have to wait for three years for the same
benefit.
Lastly, neither do you have to pay for the security of gold (locker charges for storage, etc.), nor
do you have to worry about theft or loss.

Getting started
Gold ETFs, like stocks of companies, can be easily traded on stock exchanges. Generally,
each unit represents one gram of gold that is 99.99 percent pure. Since the money is invested in pure
gold, these funds closely follow the performance of gold in the commodities market.

To get started with investing in a gold ETF, you will need a demat account with a brokerage fund or a
bank. This account will enable you to buy units of gold ETFs online on stock exchanges like Bombay Stock
Exchange (BSE) and National Stock Exchange (NSE).

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C. c. 72.

What are the factors that influence gold prices?

A variety of factors influence the price of gold in the global economy. Read on to know more about these
factors.

Gold is a popular investment option that has traditionally yielded good returns. However, gold prices
have a tendency to fluctuate. As a result, investors in gold futures and physical gold need to keep a
close watch on the prices.

A number of factors contribute to the changes in gold prices. Mentioned below are a few of them.

Demand and supply

Gold prices are essentially determined by the demand and supply of this precious metal. The price of
gold is on the rise continually due to its high demand and finite supply. Apart from an investment
instrument, it is also used widely for industrial purposes due to its high resistance to corrosion and
thermal conductivity. In light of the supply, persistent increase in demand causes the price to go up and
vice versa.

Dollar strength
Another factor that influences the gold prices the world over is the strength of the US dollar. If the dollar
weakens, investors around the world begin to sell the currency and buy gold for security. This causes a
jump in demand and consequently, a rise in gold prices. On the other hand, when the US dollar
strengthens, it causes a fall in demand for gold.

Central banks and mining companies

Central banks and mining companies usually hold large reserves of gold. They buy and sell this precious
metal according to the movements of their currency and the overall economic scenario. Drastic changes
in the price of gold are mainly due to frequent transactions by these bodies.

Economy

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One of the most crucial factors influencing the gold prices is the state of the global economy. When the
economic situation is weak with most investments providing low returns, investors are likely to put their
money in gold, as it is known to perform well during crisis situations.

While these are some of the major factors that affect the price of gold, there are several others like
trading and speculation, national emergency situations, increase in per capita income, government
policies, etc. that play an important role in the process.

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C. c. 74.

What are the various ways in which one can invest in gold in India?

There are various ways in which you can invest in gold. Before you opt to buy the precious metal, you
must know the pros and cons of each type.

Research proves that gold is one of the most popular forms of investment in India. The cultural
significance of the metal also plays a significant role in its popularity. There are several ways to invest in
gold and each has its own advantages and drawbacks. Heres a look at them:

Physical gold
The most common and popular form of investment in gold is the physical form. This is the oldest and
most trusted type of investment where gold is purchased by investors. It can be bought in the form of
coins, bars and jewellery.

However, certain risks are associated with this form of investment. Storing physical gold at home
increases chances of burglary and theft. If stored in bank lockers, one has to pay a certain fee for such a
service. Moreover, one also has to pay additional labor cost if it is purchased in the form of jewellery.

Gold Exchange Traded Funds (ETFs)

Gold ETFs are a type of funds that invests your money in pure gold. This eradicates the need to buy and
store physical gold in order to benefit from its growth in value. The brokerage to be paid while buying a
gold ETF is also very low. Besides, there many tax benefits of investing in this form of gold.

Gold funds and futures

Certain mutual funds invest your money in companies that are involved in gold-related businesses.
Usually referred to as gold funds, this category of investment is independent of gold prices in the
market, as the funds are usually invested in companies that mine, extract or fabricate gold.

Gold futures, like gold ETFs, invest your money in pure gold, but the investment is made only for a short
term. This type of investment has also grown in popularity in recent years, but the short-term nature of
the investment makes it a slightly more risky proposition than other forms of investment in the metal.
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C. c. 75.

What makes gold a popular savings/investment option?

Gold can be an ideal investment instrument if you are looking for a long-term investment with high
returns.

Investors always look for investment options that provide high returns and stability even during
uncertain economic times. While many instruments offer high returns, they fail to perform in volatile
market conditions. Gold, however, is the only asset that has continued to offer both benefits for years.
The popularity of gold as an investment option has increased manifold due to the security it ensures.

Let us have a look at some of the reasons why investing in gold can be profitable.

High value
Gold has a long history of retaining its value in the market even when other options depreciate. It was
used as a global currency for a long time, and now serves as an instrument to hedge investments against
inflation, recession and uncertain economic times.

Hedge instrument
Due to the value retention characteristic of gold, people turn towards it when the value of the national
currency dips. This leads to increase in demand, which in turn, raises gold prices, giving investors
reasons to cheer.

Limited supply
The supply of gold is limited because it cannot be artificially produced. It is this scarcity of supply that
pushes gold prices up and makes it a lucrative investment option.

Ever increasing demand

Gold has always been in demand in India due to its stability as an investment instrument as well as the
cultural significance of the precious metal in festive occasions like marriages. The growth of emerging

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markets has further boosted its demand. This ever rising demand has ensured that the price chart of
gold keeps moving north consistently.

Apart from these benefits, gold can also help investors diversify their investment portfolio. Although the
prices might seem a little volatile in the short-term, gold can be an ideal option for long-term
investment.

129

D.

Insurance

130

D.

Insurance

D. a.

Life

131

D. a. 76.

How can I file a life insurance claim?

To receive the death benefit of a life insurance policy, filing a claim is necessary. Here are some essential
steps for filing a claim.

Filing a life insurance claim can be a painful task, especially if it is in the aftermath of the loss of a loved
one. However, it is very important to have a clear idea about how the claim settlement procedure works
and what you need to do.

In a life insurance policy, there can be two types of claims: maturity claim and death claim. Let us have a
look at the steps involved in filing both the types of claims.

Maturity claim
As a policy holder, you are required to send the original policy bond as well as a filled-up maturity claim
form to the insurance provider before the maturity date. On receipt of such a request, the insurance
company will arrange for a post-dated cheque or transfer the amount to you through Electronic Clearing
Service (ECS) on the maturity date.

Death claim
If you are a nominee of a life insurance policy, you need to carry out the following procedure to file a
death claim:

Step 1: Claim notification

As a nominee of the policy, you are required to communicate important details to the insurance
company in writing. These details include:
-

Name of the policy holder and the nominee

Policy number
Date and cause of death
Place of death

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You can also send these details to the insurance provider through a notification form available at any of
its branch offices.

Step 2: Submitting the necessary documents

You will need to furnish the death certificate, post mortem report (if any), original policy documents,
police FIR and other any other additional documents required by the insurance company as proof of
death. You will also have to fill out a claim form issued by the company and send it along with these
documents.

Step 3: Follow up and settlement

Once all the formalities are completed from your end, ask the insurance provider about the time period
for settlement of the claim. As per IRDA Regulations 2002, the insurance provider must send across the
claim amount within 30 days of receiving all the necessary documents. Keep contacting the company to
receive timely updates related to the settlement process.

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D. a. 77.

How to compare different life insurance policies

With a wide range of life insurance policies available in the market today, it is important to know how to
select the best option.

With rising awareness about financial products and its benefits, an increasing number of individuals are
investing in different types of life insurance policies. However, the array of plans available may be
confusing if you are buying life insurance for the first time. One simple method of choosing the right
plan is comparing different policies and then making the selection according to your requirements.

While most people still depend on insurance agents for such information, the process of comparison has
become quite simple and convenient today. By simply going online, you can get all the required
information at the click of a button.

Here are some of the factors you need to consider while comparing different life insurance policies:

Cost
The premium you need to pay on an insurance policy varies from company to company. Shortlist plans
that interest you and compare the premiums of each in consideration to the coverage they provide. You
can then choose the one that best fits your needs and budget.

Benefits
Different policies offer different benefits. Some are cost-effective, whereas some provide extensive
coverage. Select the ones that provide benefits you are looking for.

Reputation
Buying a life insurance plan from a reputed insurance provider is always a good investment decision as
such a company ensures reliability and good customer service.

Exclusions
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Most life insurance plans have certain exclusions, that is, situations that are not covered under the plan.
While knowing the benefits of an insurance policy is important, it is also crucial to understand the
exclusions. For instance, death by suicide or terrorist attack is not covered by most life insurance
policies. While making your selection, ensure that your plan covers major risks and has minimum
exclusions.

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D. a. 78.

Importance of disclosing correct information while buying life insurance

Providing the right details while buying life insurance can help you make the most of the plan.

Opting for a life insurance policy is probably one of the most important decisions in a persons life.
However, if you do not maintain complete transparency with the insurance provider, your claim may be
rejected at time of settlement. Hence, before buying a policy, it is important to disclose all the
information honestly, as requested by the provider.

Let us understand why providing right information to the insurance company is crucial.

Health/medical history
When disclosing details related to your medical condition or history, do not withhold any information.
Disclosing the correct medical information helps the insurance provider to offer you the most
appropriate life cover. Besides, it also eliminates any discrepancies during the claim settlement process
due to incorrect or inadequate details.

Contact information
The life insurance provider will communicate important messages, changes in the policy or any new
updates on the contact details mentioned in the application form. It is therefore crucial to provide
correct and complete contact details to the company. While filling the form, ensure that your address,
phone number and alternate contact number are correct.

Maintaining a good reputation

By providing misleading information to your insurance provider, you run the risk of damaging your
reputation. This might reduce your chances of getting another insurance policy, as insurance companies
now conduct elaborate background checks before offering any plan.

While filling up the life insurance application form, keep the following pointers in mind:

136

Fill out the form according to specific instructions given on the form
In case of any doubt, contact the company representative
Ensure that all the details provided are correct
Re-check the information you have filled out

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D. a. 79.

Types of life insurance products

Understand the various types of life insurance plans before investing your money.

A life insurance policy can be regarded as an asset for your family, as it offers financial protection in the
unfortunate event of your death. However, life insurance comes in different forms, and it is extremely
important to understand the various types of plans before making an investment.

Life insurance plans can be classified under three broad categories: Term life, whole life and
endowment.

Term life insurance

Term plans offer pure life insurance cover for a specific tenure. In this type of insurance, a fixed amount
or the sum assured is paid to the family of the policy holder in the event of his/her death within the
policy term. This type of plan does not include any investment component. No monetary benefits are
payable if the policy holder survives the policy tenure.

Whole life insurance

Under whole life insurance, the policy holder is covered for his entire life. The policy holder pays regular
premiums till death, after which the sum assured is paid to his/her family.

Endowment policy
Endowment policies offer the dual advantage of risk coverage as well as monetary benefits. While some
policies offer fixed returns at regular intervals, some provide a lump sum amount at the end of the
policy tenure. Endowment policies can be further divided into two sub-categories: Money back policies
and unit-linked insurance plans (ULIPS).

Money back policy

In such a policy, a part of your premium is invested in various financial instruments.
The return on these investments is paid out at regular intervals.

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ULIPs
When you buy ULIPs, a partial amount of the premiums will be used to provide life coverage. The
rest is invested in equity and debt instrumentsusually chosen by the policy holderto earn profit.
The returns can either be received at regular intervals or at the end of the policy tenure.

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D. a. 80.

What are my rights as a life insurance policy holder?

Life insurance policy holders enjoy certain rights as per law. Here is a list of some of these rights.

Today, there are several insurance companies offering a variety of life insurance products to customers.
But there is one thing all the plans have in common rights of the policy holder. No insurance provider
can deny its customers these elementary rights.

Heres a look at some of the basic rights that a policy holder enjoys.

Complete knowledge on the policy/plan

According to the guidelines laid down by the Insurance Regulatory and Development Authority (IRDA),
the insurance company or agent must provide complete information about the policy to the buyer. As a
policy holder, you are entitled to demand information on all the policies you own.

Documented proposal for insurance

It is the insurance companys responsibility to provide a free copy of the proposal form within 30 days of
acceptance of a proposal.

In case there is no proposal form, the insurance company needs to record the information obtained
orally or in writing, and confirm it within 15 days. The policy holder is entitled to take a final decision to
accept or refuse the proposal within these 15 days.

Cancellation of policy
If the purchased plan is not what you were looking for, you have the right to cancel the policy within 15
days of the transaction and receive all your money back. The insurance provider cannot deduct any
expenses other than those incurred on medical tests, cover for 15 days and stamp duty.

Procedure for a claim

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If the policy holder files a claim, he/she will provide all the necessary documents. In case the insurance
company needs any additional documents, it has to make the request within 15 days of receipt of the
claim.

The claim can either be paid or declared as disputed by the insurance company. In any case, the
organization has to provide specific reasons for dispute or pay the claim amount within 30 days from the
date of receiving the documents from the policy holder.

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D. a. 81.

What are the factors that affect the premium of your life insurance policy?

Your life insurance premiums are determined by various factors including age, lifestyle and occupation,
among others.

The term insurance premium refers to a certain amount that one has to pay at regular intervals or as a
lump sum to an insurance company in order to keep an insurance policy active. However, the amount of
premiums varies for different policy holders.

While determining a premium for your plan, the insurance company takes various factors like age,
lifestyle, profession, etc. into consideration. A general rule of thumb is higher the risk, higher the
insurance premium.

Heres a closer look at how these factors affect the premium of your life insurance policy.

Age
At a younger age, you are healthy and fit. However, as you get older, you may become prone to major
diseases and health problems. Hence, at a higher age, the risk increases, and consequently, your
insurance premium goes up.

Lifestyle
A persons lifestyle plays a significant role in determining the premium for a life insurance policy. A
lifestyle marked by habits like smoking, drinking and chewing tobacco increases the possibilities of
health disorders. Therefore, the premium amount for individuals leading such a lifestyle is higher.

Profession
Many industries like oil and gas, mining, fisheries etc. have risky working conditions. If you are
associated with any such profession, your premium will be higher than that of a person in a corporate
set-up.

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Type of policy
Group insurance plans can be more beneficial for the company as well as the policy holder. In a larger
group, the policy risk is uniformly spread, which minimises the chances of loss for the insurance
company, and ensures more security to the policy holder. Hence, the premium of a group insurance
policy is always lower when compared to an individual plan.

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D. a. 82.

What are the tax benefits of life insurance?

The primary purpose of life insurance is to provide financial protection to loved ones and securing their
future. But a life insurance policy can also be an effective way of saving tax.

When you invest in a term insurance, endowment or a retirement plan, the government deducts the
premium amount you pay towards insurance from your taxable amount. And you end up saving tax on a
maximum taxable income of Rs 1 lakh per year.

Listed below are a few tax exemptions provided to a life insurance investor:

Premiums paid for all life insurance policies are exempt from tax up to a maximum of Rs 1 lakh
under Section 80C of the Income Tax Act, 1961. Also, the claim amount received by the
beneficiaries or bonus in the hands of the policyholder is tax free under Section 10 (10D) of the
Income Tax Act.
Investment in ULIPsmarket-linked insurance policies that provide the combined benefits of
insurance and investmentup to Rs 1 lakh are deductible from your taxable income.
For retirement plans, Section 80CCC of the Income Tax Act provides an exemption of up to a
maximum of Rs 1 lakh for premiums paid towards pension plans.

However, please note that Section 80C encompasses investments from all the sources life and health
insurance premiums, investments in PPF, government bonds, etc. to a ceiling of Rs 1 lakh per annum.
That means, even if you pay premiums worth Rs 1.5 lakh for multiple policies, the maximum rebate you
can avail of is Rs 1 lakh.

But dont lose heart. The basic objective of a life insurance policy is to provide protection. Tax saving is
an icing on the cake.

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D. a. 83.

What is difference between sum assured and guaranteed returns?

Understanding the difference between sum assured and guaranteed returns will help you make the right
choice.

Sum assured and guaranteed returns are the two commonly used terms when it comes to insurance
plans. Although both the terms are linked with monetary benefits of a policy, there is a significant
difference between the two.

Heres a closer look at both these concepts.

Meaning
Sum assured is the minimum amount payable by the insurance company in case of death of the policy
holder. This is hence the actual coverage, which determines the amount of premium payable by the
policy holder. Guaranteed return, on the other hand, is the minimum amount that the insured person
receives when he/she outlives the life insurance policys tenure.

For instance, if a 20-year life insurance policy provides a coverage of Rs 10 lakh to the beneficiaries on
death of the policy holder and Rs 6 lakh on maturity, the former is sum assured while the latter is
guaranteed returns.

The main difference

While the policy holder can select the sum assured or coverage, it is mandatory for insurance companies
to pay out this sum in case of the unfortunate death of the policy holder. The amount of guaranteed
return is determined solely by the insurance company. Different plans may have different guaranteed
returns as specified in the terms and conditions. Many insurance companies today offer guaranteed
returns to attract customers who seek returns on their premiums.

Which is suitable for you?

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A policy buyer looking at insurance as an investment tool is more likely to look at the guaranteed returns
aspect, while those intending to secure their loved ones future will probably opt for a plan that has a
higher sum assured.

While these are two different elements of a life insurance policy, you do not have to buy different
policies to avail both. Most endowment policies offer sum assured as well as guaranteed returns, as the
policy holder will be able to avail of only one benefit.

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D. a. 84.

What is life insurance?

Life insurance is a coverage that provides financial assistance to dependents in case of the policy holders
death.

Human life is subject to many risks. In case an untoward incident happens with the main breadwinner of
the family, there is a loss of income, and the dependents may face financial hardships. In some cases,
even the survival of dependents is at stake.

While a loved one can never be compensated, a life insurance cover can take care of the financial aspect
of the loss. In case of the death of the policy holder, such a plan provides a lump sum amount to the
family members.

With life insurance, the following aspects come into the picture:

Protection
The primary benefit of a life insurance policy is to provide protection to the family of the policy holder. It
ensures that dependents never face a severe financial crunch in case of an unfortunate incident.

Tax savings
If you are looking to save on your income tax, investment in life insurance policies can be an excellent
avenue. Under section 80C of the Income Tax Act 1961, life insurance premiums are exempt up to Rs 1
lakh per annum.

Liquidity
A life insurance policy can be used as collateral to obtain loans. For instance, if you require a personal
loan for unplanned expenses, you can offer your life insurance plan as collateral to the lending
institution.

Money when you need it

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Most life insurance policies provide a lump sum amount at regular intervals, which help you take care of
needs arising from time-to-time, such as marriage, childrens education, etc.

Variety of plans
There are many types of life insurance plans available in the market today. From child insurance policies,
pension schemes to Unit Linked Insurance Plans (ULIPs), you can choose an appropriate plan as per your
specific requirements.

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D. a. 85.

What is survival benefit? How does it work?

Survival benefit is the amount you receive at the end of your insurance policy tenure.

Investing in a life insurance policy ensures that your familys financial needs are met in case something
happens to you. However, if you survive till the end of the policy tenure, this policy can take care of your
financial needs as well.

Various life insurance plans provide a certain percentage of the sum assured when the policy matures,
irrespective of your health conditions at that time. This is known as survival benefit. It might include a
number of elements like returns on your investments, accrued bonuses, etc.

Say, for instance, you buy a 10-year life insurance policy that promises Rs 10 lakh as sum assured. Your
family receives this amount if something happens to you in these 10 years. This is known as sum assured
or death benefit. However, if you survive this period, you receive a part of the sum assuredthe
amount of which varies according to the type of planas survival benefit.

The amount to be paid as survival benefit is determined when you sign the policy document, and is
mentioned in the terms and conditions of the policy.

Different amounts with different policies

The survival benefit may differ depending on the type of insurance policy that you purchase.

In case of term insurance plans, you receive only life cover. No amount is payable to the policy holder
on completion of the tenure.
In case of endowment policies, you receive an added bonus, profit or guaranteed amount as survival
benefit, as specified in policy documents.

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 In case of money back policies and unit-linked insurance plans (ULIPs), the insurance company
provides returns at regular intervals. On maturity of the policy, you receive a pre-determined amount,
along with any guaranteed additions as survival benefit.

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D. a. 86.
procedure?

Who can be a nominee in a life insurance policy? What is the nomination

A nominee is the person who receives the proceeds of a life insurance plan in case of death of the policy
holder during the policy term.

Buying a life insurance policy is one of the best ways to protect the future of your dependents. However,
to ensure that the proceeds of your policy reach your loved ones in case of your death, you need to
assign a trustworthy person as your nominee while signing up for your insurance plan. This nominee is
entitled to claim and receive the policy amount in the unfortunate event of your death during the policy
tenure.

In case your nominee is not your legal heir, mention in your will that the proceeds of your life insurance
plan will be received by the nominee. This will prevent any disputes during the time of settlement of the
claim.

Nomination procedure
You can appoint the nominee for your life insurance policy while filling out the plans application form.
You will need to furnish additional details, such as the nominees full name, address, age, relation with
you, etc. in the nomination form.

If you wish, you can also appoint more than one person as nominee for your life insurance plan. If the
nominees are your legal heirs, you can specify the percentage of the sum assured you want each to
receive in case of your death. As a policy holder, you have the right to cancel or change the nomination
any time before the policy matures.

You can also appoint a minor child (below 18 years of age) as your nominee. However, you need to
designate an adult as an appointee for the nomination.

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Why do I need life insurance?

A life insurance cover can help to secure your familys future even when you are not around.

Since financial planning also includes protection and planning for contingencies, investing in life
insurance is a wise decision. With a life insurance policy in effect, the family members of a policy holder
receive a fixed amount in case of his/her death. This ensures that the familys financial needs are met
and they receive adequate funds despite the death of the breadwinner.

Let us look at some of the advantages that make life insurance an important aspect of your financial
health:

Protecting your familys interests

The primary benefit of life insurance is that it provides financial assistance to your family members in
the unfortunate event of your death. In your absence, it can become burdensome for your family to
meet financial requirements. During such a time, a life insurance cover can come in handy as it provides
a lump sum amount to your beneficiaries.

Emergency funds
In many cases, death due to a critical illness may result in huge medical bills. There are also additional
expenses related to a death, like completing the last rites, legal formalities, etc. A life cover serves as an
emergency fund in such cases, helping in payment of unexpected bills and additional expenses of the
family.

Meeting long-term goals

Many life insurance policies (like money back or unit-linked insurance plans) provide returns at regular
intervals. Such returns can add to your steady income and help you meet long-term financial goals like
buying a home, marriage, childrens education, etc. You can plan to invest in such policies on a yearly
basis in order to save enough for meeting specific goals.

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Insurance

D. b.

Health

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D. b. 88.

Health insurance exclusions

Heres a list of some exclusions that are common for most health insurance policies.

Health insurance policies can offer you excellent protection in times of medical emergency and also help
save tax. However, there are certain ailments and situations that health insurance policies do not cover.
Before purchasing a health insurance policy, you need to read the offer documents and examine these
exclusions carefully.

Here is a list of some common situations and diseases that are usually not covered by most health
insurance plans.

Pre-existing conditions
When the insured person has an existing disease at the time of purchasing the policy, it is termed as a
pre-existing condition. Usually, insurance providers do not cover these diseases for the initial few years,
often the first 4 years of continuous coverage. Many companies might also deny coverage if the
condition is severe or in an advanced stage.

Waiting period
When you buy a health insurance policy, you are not provided cover immediately. Insurance providers
may impose an interim waiting period for the policies to be active. If the insured person is hospitalized
during this period, he would not get the benefits of the health plan.

Specific diseases
Some of the common diseases and situations that are excluded from a health insurance policy include
venereal diseases, fertility treatments, physical therapy, congenital external defects, AIDS, cost of
spectacles and lenses, hearing aids, cosmetic surgery, etc.

Additional services

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Most health insurance policies available in the market do not provide end-to-end solutions. In such
cases, you may be asked to pay for ambulance fees, X-Ray reports, certain pre and post hospitalization
expenses, etc. If you wish to include these services in your health plan, you will have to convey this to
the insurance provider before buying the policy. The resultant premium amount may be a little higher,
but it may free you from making cash payments when the medical situation arises.

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D. b. 89.

Cashless vs reimbursement plans

Understanding the differences between cashless and reimbursement plans is crucial while buying a
health insurance policy.

Health insurance policies compensate for your medical expenses either through reimbursement or a
cashless facility. If you are planning to buy a health insurance policy, understanding the difference
between the two is imperative.

Cashless facility
In cashless hospitalization schemes, your insurance provider pays for your treatment directly to the
hospital. You simply have to notify both the parties about your hospitalization as well as provide the
details of your health insurance policy. However, the hospital should be registered with the health
insurance company as a network hospital, and the disease should be covered under the health insurance
policy. The verification of the illness and basic documentation is done as soon as the treatment
commences.

Reimbursement plans
In a reimbursement plan, the patient can be admitted in any hospital, which may or may not be in the
network hospitals list, wherein the money spent on the treatment is compensated by the insurance
company at a later stage. To make a reimbursement claim, documents related to the treatment like bills,
original test reports, etc. have to be produced while filing a claim. The health insurance provider then
starts processing the claim and determines the amount that will be reimbursed.

To seek reimbursement from your health insurance provider, you have to submit the following
documents:

Discharge summary
Hospital and pharmacy bills
Doctors prescriptions
Diagnosis reports

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Hence, policies with cashless hospitalization enable the policy holder to receive immediate medical
attention without having to worry about payments and processing. However, the hospitals one can go
to need to be within the network of the insurance company. In the case of reimbursement plans, one
can go to any hospital, but at a later stage, the reimbursement needs to be filed for and claimed.

While both forms of health insurance policies are common today, the cashless hospitalization facility is a
more convenient way to combat medical emergencies.

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Claims processing procedure by health insurance companies

A policy holder should have a clear idea about how a claim is processed by his health insurance provider.

Protecting your family from a medical emergency by getting health insurance is an intelligent step to
take. However, do you know the procedure followed by your health insurance provider while processing
your claim? After buying a health insurance plan, ensure that you understand each aspect of claim
processing from hospitalization notification to the final billing.

The procedure for filing a claim differs in accordance to the type of plan: cashless facility or
reimbursement.

Here is a step-by-step procedure of how the claim is processed by your insurance company.

In case of cashless hospitalization

Step 1: When the insured person is hospitalized, his family members and treating doctors fill out a form
to request cashless treatment. In most cases, this form needs to be submitted within 24 hours of
admitting the patient in the network hospital.

Step 2: The form is sent to the insurance company or the third party administrator (TPA) by the hospital.

Step3: Once the insurance provider or the TPA receives the request, it validates the health insurance
policy as well as other documents.

Step 4: If the documents are appropriate, the insurance provider or the TPA communicates with the
hospital and agrees to pay on behalf of the policy holder.

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Step 5: Before discharge, a claim form along with complete treatment documents is sent to the
insurance company or the TPA for final approval.

In case of reimbursement

Step 1: Once the medical treatment is over, the policy holder can contact the health insurance company
or the third party administrator (TPA), which manages insurance processes on behalf of the insure
provider.

Step 2: The policy holder needs to submit medical documents like doctors prescriptions, pathological
reports, hospital bills, discharge summary, pharmacy bills, etc. and details of the expenses incurred.

Step 3: A completed claim form along with all the documents has to be submitted to the insurance
provider.

Step 4: After verifying the documents and coordinating with the hospital, the insurance company
reimburses the total claim amount to the policy holder.

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D. b. 91.

Impact of your lifestyle on your health insurance premiums

Your lifestyle and habits can play a vital role in determining your health insurance premiums.

Before determining the premium for any health insurance plan, insurance providers take into
consideration a number of factors like lifestyle, habits, profession, health conditions, etc. If they identify
certain risks, the premiums will be higher, while a healthy lifestyle will ensure lower premiums. Heres a
look at these factors in detail.

Health conditions
Many health insurance companies require applicants to undergo health check-ups before the policy is
issued. This is mainly to check for pre-existing conditions such as diabetes, high blood pressure, liver
problems, etc. A policy proposal may be rejected in case a number of pre-existing illnesses are detected,
which require regular medical help.

Many companies today offer coverage to people with pre-existing diseases on certain conditions. One of
these conditions may be that the pre-existing illness will not be covered for the initial few years of the
policy. In such cases, the premium amount is slightly higher.

Age and occupation

Age can also be an important factor in determining the amount of your insurance premium. The amount
is generally higher for older people and lower for young applicants.

Also, people with jobs that involve health risks or hazards (such as sportsmen, security personnel, etc.)
are required to pay slightly higher premiums due to their risky job profile.

Habits
Unhealthy lifestyle choices attract higher premiums, mainly because of the risks associated with them.
For instance, health insurance will be more expensive for a person addicted to cigarettes, alcohol or
tobacco compared to someone without such addictions.

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To ensure that your health insurance premiums remain affordable, lead a healthy lifestyle, get regular
health check-ups and buy a plan at a young age.

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D. b. 92.

Tax benefits of health insurance

Apart from providing financial assistance during medical emergencies, health insurance can also be an
effective tax saving tool. Heres how.

Health insurance policies not only cover you and your family for medical emergencies, but also help you
save tax. Under section 80D of the Income Tax Act, 1961, an individual can get an annual deduction of
up to Rs 15,000 on the premium amount paid for health insurance. Senior citizens are allowed a
deduction of up to Rs 20,000. If you pay health insurance premium for your parents who are senior
citizens, you can get an additional annual deduction of up to Rs 20,000.

Additional tax exemptions

You can also enjoy tax benefits under section 80DD of the Income Tax Act, 1961, if you support a
handicapped dependant. In such cases, you can get a tax exemption of up to Rs 50,000. This amount
increases to Rs 1 lakh in case of severe handicap conditions like blindness, mental retardation and
hearing impairment.

Section 80DDB under the Income Tax Act, 1961 provides deduction of up to Rs 40,000 for individuals
and Rs 60,000 for senior citizens for treatment expenses related to specific illnesses. Malignant cancer,
renal failure, hemophilia and thalassaemia are some of the illnesses eligible for this exemption.

While purchasing a health insurance policy or filing taxes, you need to keep the following points in mind:

The premiums should be paid from your taxable income and not gifts.
In case of premium payments in installments, deduction is calculated on the annual amount
paid.
Cash payment of premiums is not eligible for tax deductions.

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Things to look for while buying health insurance

Keep these things in mind to make sure that you get the most out of your plan.

Medical emergencies can come like a bolt from the blue. To ensure that you are ready with a solution if
and when such a scenario arises, all you need is a health insurance policy, which covers medical
expenses for you and your family members. However, it is important that you weigh all the factors while
selecting the health insurance policy.

Here are some crucial factors to consider before buying a health insurance plan:

Policy information
While selecting a health insurance policy, it is vital to know various details related to the policy. This
includes benefits offered by the policy, exclusions, claim filing time, etc.

Premiums
The premium amount can be paid either monthly, quarterly, bi-annually or annually. Premiums usually
vary on the basis of the sum assured or amount of coverage provided by the plan. Based on your
requirements and budget, select the policy that offers the maximum benefits. One of the most
convenient ways to find the right policy is to compare various plans online before coming to a
conclusion.

Network of hospitals
There are a number of health insurance companies that offer cashless facilities. This facility allows you
to receive treatment in any hospital that is registered with the health insurance company without
paying bills upfront. If you are opting for such a plan, ensure that the company has a wide network of
hospitals that would come handy during an emergency.

Maximum renewal age

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Some health insurance plans limit the age till which the policy holder can renew the plan. The older you
get, the lower are the chances of your health cover being renewed. Ensure that you select a health
insurance policy that has a higher renewal age limit.

Copay
Copay is the amount that you need to pay from your pocket, even if your medical bill is lower than the
total cover. This amount is calculated as a certain percentage of the claim amount. While comparing
different policies, you can select the one which has the lowest copay amount.

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D. b. 94.

Types of health insurance plans

Have you made sure that you have the right kind of health insurance policy?

There are various types of health insurance plans available in the market today, offering different
advantages. Before you decide to invest, it is important to have a fair idea about different plans.

Heres an elaboration about the different types of health insurance plans.

Individual insurance plan

Individual plans provide coverage to individuals, which is limited to the sum assured. The premium is
determined after considering a number of factors like age, health conditions, amount of coverage, etc.

Group insurance plan

As the name suggests, a group insurance plan offers health cover to a group of people. It is usually
offered to professionals or employees of a company by the employer. Members of a co-operative
society or association can also opt for such a plan. Group plans are usually less expensive than individual
and family plans as they cover a large number of people. However, the group should not be formed for
the specific purpose of buying cheaper insurance.

Family floater plan

This type of plan can be availed by two or more individuals of a family. Rather than a specific sum
assured for every individual, all the members under this plan are covered under a common sum assured.
The premium for such plans is usually lower than the cost of separate insurance polices for each family
member.

Depending on the type of cover it provides, health insurance can also be categorized under two broad
categories: hospitalization and critical illness.

Hospitalization plan
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This kind of insurance offers coverage for expenses related to hospitalization. The expenses you incur
are either paid to the hospital directly or reimbursed by the insurance company at a later stage.

Critical illness plan

Such plans cover critical illnesses like cardiac arrest, organ transplantation, kidney failure, etc. Usually,
critical illness plans offer coverage only for extremely serious illnesses listed in the policy document.
Before purchasing such a plan, refer to the list of illnesses your chosen plan covers.

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What are my rights as a health insurance policy holder?

Health insurance policy holders enjoy some fundamental rights, regardless of the nature of policy they
own.

While buying a health insurance policy is important, knowing your rights as a policy holder is equally
important. It not only helps you make an informed decision, but also ensures that you receive what you
are entitled to.

Mentioned below are some of the most important rights of a health insurance policy holder.

Free look period

As a policy holder, you have the right to return or cancel the policy if you are not satisfied with it.
However, this is valid only within the free look period, which is typically around 15 days after you receive
the policy. In case you receive the policy documents after the free look period, you can register a
grievance with the Insurance Regulatory and Development Agency (IRDA).

Renewal of a policy cannot be rejected by the provider without stating a valid reason
Your insurance provider cannot reject your policy renewal request without giving a reason. There are
certain valid reasons under which policy renewal can be refused. These are:
-

The policy holder crossing the age limit

Provision of false details by the policy holder
Failure to pay premiums on time

The insurance company must settle your claim within the specified deadlines
Insurance companies must process your claims within 30 days of receipt of your documents and claim
form. If the claim is not settled within this period, you have the right to ask for interest on the claim
amount for the delayed period.

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What is cashless hospitalization?

Cashless hospitalization can be of great help during emergencies, and is an important feature of health
insurance policies.

While hospitalization of a family member can be disturbing, paying for the treatment can become a
harried task. During such times, cashless hospitalization can come handy.

Cashless hospitalization is a facility provided by health insurance providers or their third party
administrators (TPAs) that allows you to get medical treatment without paying cash at any of the
network hospitals registered with the insurance provider. This facility can be a life-saver, especially
during emergencies, when you may not have adequate cash for the required treatment.

How it works
Under the cashless hospitalization facility, the hospital coordinates directly with the insurance company
or its TPA to get the bills settled.. However, there are certain expenses that are not covered under this
facility and may have to be borne by you as a policy holder. It is therefore important that you read the
applicable conditions and exclusions carefully before signing the policy documents.

Planned and unplanned hospitalization

Another important point to remember is that this facility can be availed in two situations: planned and
unplanned hospitalization. In case of planned hospitalization, you need to inform the insurance provider
or its TPA in advance about the reason for the hospitalization. If it is an unplanned medical situation, you
can inform the insurance provider or its TPA soon after the hospitalization.

Know your policy

There are a few things that you need to keep in mind regarding cashless hospitalization. Here are some
of them:

- Firstly, not all health insurance policies come with cashless hospitalization benefit. Hence, while
selecting a plan, make sure you look for this facility.
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- Secondly, since this facility can be used only at the hospitals that come under the companys list of
network, ensure that the policy covers hospitals that are located close to your residence.

- It is also important to know that some diseases are exempt from the cashless hospitalization facility.
Learn about such exclusions before buying a plan.

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What is health insurance portability?

Health insurance portability allows policyholders to switch to a new insurance company while retaining
the credits gained for continuity and other benefits from the previous insurance company. This facility
was introduced to the Indian market on October 1, 2011. Let us take a look at how exactly the
procedure works.

For example, you have a health insurance policy with Company A, and you are dissatisfied with the
service provided. You can now shift to Company B and retain the advantages which Company A offered
you, such as cover for pre-existing diseases and time-bound exclusions. Before health insurance
portability came into force, shifting to a new insurer would mean losing all the continuity benefits you
enjoyed as a policyholder of Company A and starting as a new policyholder all over again. The
introduction of health insurance portability has come as a shot in the arm for the consumer.

However, there are some conditions governing this portability. Switching only for the sake of saving the
premium amount is not advisable. It is important to have a clear understanding of the new benefits that
await a customer in Company B. Also, companies allow portability only in case of individual policies.
Therefore, an insured person who is part of a family insurance policy will need to switch to an individual
policy in Company B before applying for porting for the entire family after one year. Moreover, to avail
of portability benefits, the customer must apply for a switch to Company B at least 45 days before his
policy with Company A expires.

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What is health insurance?

Health insurance can provide your family the required monetary assistance during medical emergencies.

In simple words, health insurance is a coverage that gives you money to pay for hospitalization or other
medical expenses incurred during an illness. In order to avail of this coverage, you have to pay premiums
at regular intervals.

Listed below are a few pointers that will help you understand health insurance better.

Financial security
The key benefit of having health insurance is that it covers you against medical expenses when you or a
member of your family suffers from an illness or is hospitalized. The health insurance provider will
reimburse your medical expenses, provided you are hospitalised for at least 24 hours. Most health
insurance companies also provide cashless facility, whereby you can get medical treatment at any of
their network hospitals without paying cash.

Expenses covered
On buying a health insurance policy, your coverage may include expenses for surgery, doctors fees,
diagnostic tests, hospital accommodation, and other medical charges. And keeping your health
insurance policy active is simple; all you need to do is pay your premiums regularly.

Multiple plans
There are various types of health insurance plans available in the market today. If you want coverage for
a single person, you can opt for an individual plan. To procure health cover for more than one individual
in the family, you can go for a family health plan. Group insurance plans are also available, which are
usually chosen by organizations to provide health coverage to their employees.

While providing health coverage is the prime objective of a health insurance policy, it also offers tax
benefits as per the Income Tax Act, 1961.

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Why do I need health insurance?

Health insurance policies can be highly beneficial for individuals as well as their family members to cope
with medical emergencies.

Imagine someone taking care of all your expenses when a medical emergency occurs. That is precisely
what health insurance promises to do. It helps pay for your/loved ones treatment. Apart from this, it
also offers other benefits.

Elaborated below are some reasons why you need a health insurance policy.

Planning for emergencies

With the cost of medical treatment increasing by the day, you need to prepare yourself for emergencies.
While building a huge corpus is one way of dealing with such emergencies, buying a health insurance
plan is the most convenient and advantageous.

Affordability
By paying a small premium towards your health plan, you receive comprehensive medical coverage.
Health insurance hence becomes an affordable way to ensure the financial security of your family.

Better treatment
On hospitalization, you may incur additional expenses like special tests, charges of the visiting doctor(s),
etc. As a result, while being discharged from the hospital, you might have to pay an amount that far
exceeds your calculations. With health insurance into the picture, you do not have to worry about these
expenses, as the insurance provider either reimburses them or deals with them directly. You can choose
any hospital within the companys network, and your policy will ensure that your medical bills are paid.

Health benefits
Health insurance plans promote good health and better lifestyles as most policies make regular health
check-ups mandatory, helping prevent major diseases indirectly.
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Tax benefits
Apart from providing financial assistance during medical emergencies, a health insurance plan also
offers certain tax benefits. As a policy holder, you are eligible for an annual tax deduction of up to Rs
15,000 under section 80D of the Income Tax Act, 1961.

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