Investment Options in India

1. Fixed Deposits
There are many investment options available for the people in the market, but there are
mainly five investment options, which are considered to be as most popular and most
effective investment options available in the current market scenario. In general, almost 95-
98% people do invest in these, since the Expected Rate of Return is much higher than any
other investment options, irrespective of the amount of risk is very high in some of the cases.
These investment options are:
This investment option is most popular and safest option available in the market. With almost
every working people invest in fixed deposits; this investment option leads the chart of four
investment options because of its safety and popularity. Though the amount of return is much
lesser than the other three options, this option heads the table as it has almost no risk of losing
the invested amount. Also, it is the oldest among the other three, so the trust factor of people
is very high. There are mainly three types of fixed deposits available in the market, namely,
viz.
1. Fixed deposits offered by Banks
2. Fixed deposits offered by Post Offices
3. Company fixed deposits
Now, we’ll see these three fixed deposit schemes in details.
(1). Fixed deposits offered by Banks:
Considered as the safest of all options, banks have been the roots of the financial systems in
India. Promoted as the means of social development, banks in India have indeed played an
important role in not only urban areas, but also in rural upliftment. For an ordinary person
though, banks have acted as the safest avenue wherein a person deposits money and earns
interest on it. The two main modes of investment in banks, savings accounts and fixed
deposits have been effectively used by one and all. However, today the interest rate structure
in the country is headed southwards, keeping in line with global trends. With the banks
offering just above in their fixed deposits for one year, the yields have come down
substantially in recent times. Add to this, inflammatory pressure in the economy and we have
a position where the savings are not earning. The inflation is creeping up almost 8% at times,
this means the value of money saved goes down instead of going up. This effectively mars
any chance of gaining investments from the banks.
Banks in India can be categorized into non-scheduled banks and scheduled banks.
Scheduled banks constitute of commercial banks and co-operative banks. There are about
67,000 branches of Scheduled banks spread across India. During the first phase of financial
reforms, there was a nationalization of 14 major banks in 1969.
As far as the present scenario is concerned the banking industry is in a transition phase. The
Public Sector Banks (PSBs), which are the foundation of the Indian Banking system account
for more than 78 per cent of total banking industry assets. On the other hand the Private
Sector Banks in India is witnessing immense progress. They are leaders in Internet banking,
mobile banking, phone banking, ATMs. On the other hand the Public Sector Banks are still
facing the problem of unhappy employees. There has been a decrease of 20 percent in the
employee strength of the private sector in the wake of the Voluntary Retirement Schemes
(VRS).

(2). Fixed deposits offered by Post Offices:

Just like banks, post offices in India have a wide network. Spread across the nation, they offer
financial assistance as well as serving the basic requirements of communication. Among all
saving options, Post office schemes have been offering the highest rates. Added to it is the
fact that the investments are safe with the department being a Government of India entity. So
the two basic and most sought features, those of return safety and quantum of returns were
being handsomely taken care of. Though certainly current market position is not the most
efficient systems in terms of service standards and liquidity; these have still managed to
attract the attention of small, retail investors. However with the government investing its
intention of reducing the interest rates in small savings options, this avenue is expected to
lose some of the investors. Public Provident Funds act as options to save for the post
retirement period for most people and have been considered good option largely due to the
fact that returns were higher than most other options and also helped people gain from tax
benefits under various sections. This option too is likely to lose some of its sheen on account
of reduction in the rates offered.
(3). Company fixed deposits:
Another oft-used route to invest has been the fixed deposit schemes floated by companies.
Companies have used fixed deposit schemes as a means of mobilizing funds for their options
and have paid interest on them. The safer a company is rated, the lesser the return offered has
been the thumb rule.
However, there are several potential roadblocks are there.
Firstly, of all the danger of financial positions of the company not being understood by the
investor lurks. The investors rely on intermediaries who more often than not, don’t reveal the
entire truth.
Secondly, liquidity is a major problem with the amount being received months after the due
dates. Premature redemption is generally not entertained without cuts in the returns offered
and though they present a reasonable option to counter interest rate risk (especially when the
economy is headed for a low interest regime), the safety of amount has been found lacking.
Many cases like the Kuber Group and DCM Group fiascos have resulted in low confidence in
this option.

They cover the fixed deposits of varied tenures offered by the commercial banks and other
non-banking financial institutions. These are generally a low risk prepositions as the
commercial banks are believed to return the amount due without default. By and large these
FDs are the preferred choice of risk-averse Indian investors who rate safety of capital & ease
of investment above all parameters. Largely, these investments earn a marginal rate of return
of 6-8% per annum.

2. Government Bonds
The Central and State Governments raise money from the market through a variety of Small
Saving Schemes like national saving certificates, Kisan Vikas Patra, Post Office Deposits,
Provident Funds, etc. These schemes are risk free as the government does not default in
payments. But the interest rates offered by them are in the range of 7% -9%.
3. Stock Market
Indian stock markets particularly the BSE and the NSE, had been a preferred destination not
only for the Indian investors but also for the Foreign investors. Although Indian Markets had
been through tough times due to various scams, but history shows that they recovered very
fast. Many types of scrip had been value creators for the investors. People have earned
fortunes from the stock markets, but there are people who have lost everything due to
incorrect timings or selection of fundamentally weak companies.
Now let us look at the Indian Stock Market in details:-
The Indian Stock Market is also the other name for Indian Equity Market or Indian
Share Market. The forces of the market depend on the monsoons, global funding flowing into
equities in the market and the performance of various companies. The market of equities is
transacted on the basis of two major stock indices, National Stock Exchange of India Ltd.
(NSE) and The Bombay Stock Exchange (BSE), the trading being carried on in a
dematerialized form. The physical stocks are in liquid form and cannot be sold by the
investors in any market.
The equity indexes are correlated beyond the boundaries of different
countries with their exposure to common calamities like monsoon which would affect both
India and Bangladesh or trade integration policies and close connection with the foreign
investors. From 1995 onwards, both in terms of trade integration and FIIs India has made an
advance.
Indian Equity Market at present is a lucrative field for the investors and investing in
Indian stocks are profitable for not only the long and medium-term investors, but also the
position traders, short-term swing traders and also very short term intraday traders. In terms
of market capitalization, there are over 2500 companies in the BSE chart list with the
Reliance Industries Limited at the top. The SENSEX today has rose from 1000 levels to 8000
levels providing a profitable business to all those who had been investing in the Indian Equity
Market. There are about 22 stock exchanges in India which regulates the market trends of
different stocks. Generally the bigger companies are listed with the NSE and the BSE, but
there is the OTCEI or the Over the Counter Exchange of India, which lists the medium and
small sized companies.
In the Indian market scenario, the large FMCG companies reached
the top line with a double-digit growth, with their shares being attractive for investing in the
Indian stock market. Such companies like the Tata Tea, Britannia, to name a few, have been
providing a bustling business for the Indian share market. Other leading houses offering
equally beneficial stocks for investing in Indian Equity Market, of the SENSEX chart are the
two-wheeler and three-wheeler maker Bajaj Auto and second largest software exporter
Infosys Technologies.
Thus, the growing financial capital markets of India being
encouraged by domestic and foreign investments is becoming a profitable business more with
each day. If all the economic parameters are unchanged Indian Equity Market will be
conducive for the growth of private equities and this will lead to an overall improvement in
the Indian economy.
Now apart from all these, the first question that comes in our mind is,
Why do so many people invest in shares?
Simply put, you want to invest in order to create wealth. While investing is relatively
painless, its rewards are plentiful. To understand why you need to invest, you need to realize
that you lose when you just save and do not invest. That is because the value of the rupee
decreases every year due to inflation. Historically shares have outperformed all the other
investment instruments and given the maximum returns in the long run. In the twenty-five
year period of 1980-2005 while the other instruments have barely managed to generate
returns at a rate higher than the inflation rate (7.10%), on an average shares have given
returns of about 17% in a year and that does not even take into account the dividend income
from them. Were we to factor in the dividend income as well, the shares would have given
even higher returns during the same period.
[Inflation: general rise in prices and wages caused by an increase in the money supply and
demand for goods, and resulting in a fall in the value of money. Inflation occurs when most
prices rise by some degree across the economy.]

Advantages of investing in shares:

There are lots of advantages of investment in share market. Some of these are:
Dividend income: investments in shares are attractive as much for the appreciation in the
share prices as for the dividends their companies pay out.
Tax advantages: shares appear as the best investment option if you also consider the
unbeatable tax benefits that they offer. First, the dividend income is tax-free in the hands of
investors. Second, you are required to pay only a 10% short term capital gains tax on the
profits made from investments in shares, if you book your profits within a year of making the
purchase. Third, you don't need to pay any long term capital gains tax on the profits if you
sell the shares after holding them for a period of one year. The capital gains tax rate is much
higher for other investment instruments: a 30% short-term capital gains tax (assuming that
you fall in the 30% tax bracket) and a 10% long-term capital gains tax.
Easy liquidity: shares can also be made liquid anytime from anywhere (on sharekhan.com
you can sell a share at the click of a mouse from anywhere in the world) and the gains can be
realized in just two working days. Considering the high returns, the tax advantages and the
highly liquid nature, shares are the best investment option to create wealth.

How people earn from the investment in shares?

Shares can give us returns in two forms.
A. Appreciation in share prices: You buy shares with the belief that their price will increase
and that when this happens you will be able to sell off your shares and earn profit. For
example, if you bought a share for Rs100 three years ago and it is
Rs500 today, then you have earned Rs400 in three years.
B. Dividend: when a company makes profits, it can choose to share part of its profits with its
shareholders by paying out dividend. This dividend is paid as a percentage of the face value
of the share. For example, a company may declare a dividend of 25%. Then if the face value
of its share is Rs10 you will get Rs2.50 for every share you own of that company, irrespective
of the market price. In itself this might not be much, but over a longer period of time or if you
have a lot of shares, you could earn quite a bit from the dividend itself. The best thing about
dividends is that they are tax-free in the hands of investors. Dividend yield stocks are known
to give returns higher than fixed deposits [dividend yield = (dividend per share / market price
of the share) x 100].

What are the expenses during transaction?

Every share transaction attracts some tax or the other. Some of the main expenses are as
follows.
A. Capital gains tax: If you purchase a share and sell it at a price higher than the purchase
price and if this sale is within a year of the purchase, then a 10% capital gains tax is levied on
the profit that you make. For example, if you bought a share for Rs100 on January 1, 2005
and sold it for Rs150 on July 1, 2005, then you have to pay a tax of 10% on the Rs50 profit
that you make. If you sell after a year of purchase, there is no tax on the long-term gains.
B. Securities transaction tax: Securities transaction tax (STT) is levied by the government
on every transaction you do on a stock exchange. You don’t have to pay this separately; it’s
collected by your broker. As per the Union Budget 2005 the STT will be 0.10% on delivery-
based transactions and 0.02% on intra-day transactions.
C. Brokerage: Brokers get a commission on every trade that they do for you. This
commission varies from broker to broker; at sharekhan.com the brokerage is 0.5% for
delivery-based transactions and 0.10% for intraday transactions. On the brokerage amount
you are required to pay a service tax to the government (to be collected by the broker). The
brokerage varies depending on the service that the broker provides you. Some brokers, such
as Sharekhan, offer its clients regular updates on companies, multiple means to transact and
customer service support.
D. Depository fees: Since most of the shares exist in a dematerialized form, every time you
buy or sell shares the transactions are being noted by your DP. The DPs normally levy a
charge which is an annual charge or a charge on each transaction.

Risks ---the only disadvantage in investing in shares:

There are two types of risk associated with this kind of investment: company specific risk
and market risk.
Set of risks that deals with a company and its sector are referred to as company specific risk.
Examples of company specific risk: bad management, bad marketing strategies, sector
disturbances that have an impact on industry etc.
External factors (economic, global factors) that affect the market as a whole are referred to as
market risk.
Examples of market risk: political instability, high inflation, rupee depreciation, rising
interest rates, global incidents like wars and disasters that throttle the nation's economy etc.

How company specific risk can be identified?

With careful scrutiny and proper homework, it might be easy to identify and be forewarned of
the risks a company may be carrying. Specifically check out for the mergers and acquisitions
that do not have a real synergy or are a nightmare after reconciliation (A O L - Time Warner,
Hewlett Packard-Compaq).
Also is suspicious of diversifications that do not really add value to a company's core
offering. A third kind of risk would be with the companies that have bet their stakes on a
single product offering and are high on debt. Likewise companies that depend on research
could be prone to higher risk, if the research doesn't come to fruition.

How to identify sector driven risk?

If steel prices rise, auto companies get affected. If low cost Chinese products invade the
country's market, then local fast moving consumer goods companies might find no takers for
their products. The changing nature of the industry itself may lead to dipping stock prices; a
print publication may see revenue loss if everyone moves to reading on the Internet.

How to predict market risk?

It is difficult to predict market risks. The only thing we can say here is that start noticing all
the small signs early. If the election results are feared to lead to a fall in the stock market,
notice the signals beforehand. Read Sebi's bulletins and track companies whose shares prices
are very volatile.

How people can minimize their risk and maximize their return?
Buy when stocks are falling, sell when these are rising. This works well when you are a long-
term investor and there is an extended bear or Bull Run. Don't try to second guess or predict
that the market will fall today and rise tomorrow. Even seasoned investors cannot do that!

2. Don't try to guess the market's favourites

Your instincts might tell you that pharma or technology stocks are hot due to certain policies
or events, but remember millions of investors have already guessed that and bought these
stocks. The prices of these stocks would therefore be at a higher level when you buy them.
Instead focus on the long term and don't get swayed by short-term events.

3. Aim for the long haul

Short-term investing is prone to higher risks. When investing in stocks, aim to get good
returns after a period of three to five years at the minimum. Also churn your portfolio
periodically and based on the progress that a company makes in a quarter or in six months,
decide whether to hold the stock or get out of it.
4. Avoid hot tips
You may have overheard some news about a stock or your friend may advise that a particular
stock is all geared to move up. Avoid such tips like the plague and your investments will
remain safe.
5. Blue-chips are safe bets
Blue-chip companies are there because they have done well in the past and have a high
market capitalization. It is a likely guess that they will maintain their track record and give
you higher returns even in future. Therefore invest in companies that have a good track
record.
6. Slow and steady stream of investments
Set aside a certain portion of your earnings every month and invest that sum in shares
irrespective of the market conditions. This way, over a period of time you can amass a
substantial number of shares of the stocks in your portfolio.
7. Think portfolio
Don't put all your earnings in a single stock. Try to have a diverse portfolio of stocks. This
way even if one stock doesn't do well, you are still well protected. Also invest across sectors,
since any problem in one sector would affect all stocks in the sector. As a thumb rule, if you
have investments of up to Rs50, 000 invest in two to three stocks. For about Rs150, 000
invest in three to five stocks, for around Rs500, 000 have five to seven stocks and around ten
stocks for higher amounts.
8. Don’t invest all your savings
Always maintain a core set of reserves. You should never touch these reserves for investing,
so that even in the worst case you still have some money. Typically these reserves should be
your salary of about six months.
9. Be level-headed
Invest wisely, don't get swayed by rumours and allow Sharekhan to be your guide at all
times. Investment success won't happen overnight, so avoid overreacting to short term market
swings.
4. Real Estate
Returns are almost guaranteed because property values are always on the rise due to a
growing world population. Residential real estate is more than just an investment. There are
more ways than ever before to profit from real estate investment.

5. Mutual Funds
There is a collection of investors in Mutual funds that have professional fund managers that
invest in the stock market collectively on behalf of investors. Mutual funds offer a better
route to investing in equities for lay investors. A mutual fund acts like a professional fund
manager, investing the money and passing the returns to its investors. All it deducts is a
management fee and its expenses, which are declared in its offer document.
 Mutual Funds are essentially investment vehicles where people
with similar investment objective come together to pool their money and then invest
accordingly. Each unit of any scheme represents the proportion of pool owned by the unit
holder (investor).
Mutual Funds in India are financial instruments. These funds are
collective investments which gather money from different investors to invest in stocks, short
term money market financial instruments, bonds and other securities and distribute the
proceeds as dividends. The Mutual Funds in India are handled by Fund Managers, also
referred as the portfolio managers. The Securities Exchange Board of India regulates the
Mutual Funds in India. The share value of the Mutual Funds in India is known as net asset
value per share (NAV). The NAV is calculated on the total amount of the Mutual Funds in
India, by dividing it with the number of shares issued and outstanding shares on daily basis.
Mutual funds in India – Advantages:
 The Mutual Funds in India offer flexibility by means of dividend reinvestment,
systematic investment plans and systematic withdrawal plans.
 · These funds are available in small units, so they are affordable to the small
investors.
 The fees charged for to the custodial, brokerage and others services are very low in
case of Mutual Funds in India.
 These funds have the option of redeeming or withdrawing money at any point of time.
 The Mutual Funds in India have low risk as it is managed professionally.
Like most developed and developing countries the mutual fund cult has been catching on in
India. The important reasons for this interesting occurrence are:-
 Mutual funds make it easy and less costly for investors to satisfy their need for capital
growth, income and/or income preservation.
 Mutual fund brings the benefits of diversification and money management to the
individual investor, providing an opportunity for financial success that was once
available only to a select few.
Understanding Mutual funds is easy as it's such a straightforward concept. A mutual fund is a
company that pools the money of many investors, its shareholders to invest in a variety of
different securities. Investments may be in stocks, bonds, money market securities or some
combination of these.
For the individual investor, mutual funds propose the benefit of having someone else manage
your investments and diversify your money over many different securities that may not be
available or affordable to you otherwise. A mutual fund, by its very nature, is diversified -- its
assets are invested in many different securities. Beyond that, there are many different types of
mutual funds with different objectives and levels of growth potential, furthering your odds to
diversify.

Benefits of Mutual Funds:-

Investing in mutual has various benefits, which makes it an ideal investment avenue.
(1). Professional investment management:
One of the primary benefits of mutual funds is that an investor has access to professional
management. A good investment manager is certainly worth the fees you will pay. Good
mutual fund managers with an excellent research team can do a better job of monitoring the
companies they have chosen to invest in than you can, unless you have time to spend on
researching the companies you select for your portfolio. That is because Mutual funds hire
full-time, high-level investment professionals. Funds can afford to do so as they manage large
pools of money. The managers have real-time access to crucial market information and are
able to execute trades on the largest and most cost-effective scale. When you buy a mutual
fund, the primary asset you are buying is the manager, who will be controlling which assets
are chosen to meet the funds' stated investment objectives.

(2).Diversification:
A crucial element in investing is asset allocation. It plays a very big part in the success of any
portfolio. However, small investors do not have enough money to properly allocate their
assets. By pooling your funds with others, you can quickly benefit from greater
diversification. Mutual funds invest in a broad range of securities. This limits investment risk
by reducing the effect of a possible decline in the value of any one security. Mutual fund unit-
holders can benefit from diversification techniques usually available only to investors
wealthy enough to buy significant positions in a wide variety of securities.
(3). Low Cost:
A mutual fund let's you participate in a diversified portfolio for as little as Rs.5, 000, and
sometimes less.
(4). Convenience and Flexibility:
Investing in mutual funds has its own convenience. While you own just one security rather
than many, you still enjoy the benefits of a diversified portfolio and a wide range of services.
Fund managers decide what securities to trade collect the interest payments and see that your
dividends on portfolio securities are received and your rights exercised. It also uses the
services of a high quality custodian and registrar. Another big advantage is that you can move
your funds easily from one fund to another within a mutual fund family.
(5). Liquidity:
In open-ended schemes, you can get your money back promptly at net asset value related
prices.
(6). Transparency:
Regulations for mutual funds have made the industry very transparent. You can track the
investments that have been made on your behalf and the specific investments made by the
mutual fund scheme to see where your money is going. In addition to this, you get regular
information on the value of your investment.
(7). Variety:
There is no shortage of variety when investing in mutual funds. You can find a mutual fund
that matches just about any investing strategy you select. There are funds that focus on blue-
chip stocks, technology stocks, bonds or a mix of stocks and bonds. The greatest challenge
can be sorting through the variety and picking the best for you.

Mutual fund risks:

Having understood the basics of mutual funds the next step is to build a successful
investment portfolio. Before you can begin to build a portfolio, one should understand some
other elements of mutual fund investing and how they can affect the potential value of your
investments over the years. The first thing that has to be kept in mind is that when you invest
in mutual funds, there is no guarantee that you will end up with more money when you
withdraw your investment than what you started out with.
That is the potential of loss is always there. Even so, the opportunity for investment growth
that is possible through investments in mutual funds far exceeds that concern for most
investors.

Here's why:-
At the cornerstone of investing is the basic principal that the greater the risk you take, the
greater the potential reward. Risk then, refers to the volatility -- the up and down activity in
the markets and individual issues that occurs constantly over time. This volatility can be
caused by a number of factors -- interest rate changes, inflation or general economic
conditions. It is this variability, uncertainty and potential for loss, that causes investors to
worry. We all fear the possibility that a stock we invest in will fall substantially. Different
types of mutual funds have different levels of volatility or potential price change, and those
with the greater chance of losing value are also the funds that can produce the greater returns
for you over time. You might find it helpful to remember that all financial investments will
fluctuate. There are very few perfectly safe havens and those simply don't pay enough to beat
inflation over the long run.

Number of available options:

· Diversification
· Professional Management
· Potential of returns
· Liquidity
Besides these important features, mutual funds also offer several other key traits.
Important among them are:
 Well Regulated
 Transparency
 Flexible, Affordable and a Low Cost affair
Structure of the Indian mutual fund industry:
The Indian mutual fund industry is dominated by the Unit Trust of India, which has a total
corpus of Rs. 700bn collected from more than 20 million investors. The UTI has many
schemes in all categories i.e. equity, balanced, income etc with something open ended and
some being closed ended. The unit scheme 1964 commonly referred to as US 64, which is a
balanced fund, is the biggest scheme with a corpus of about Rs. 200bn. UTI was floated by
financial institution and is govern by a special act of parliament. Most of its investors believe
that the UTI is government owned and controlled, which, while legally uncorrected, is true
for all practical purposes.

Recent trends in mutual fund industry:

The most important trend in the mutual fund industry is the aggressive expansion of the
foreign owned mutual fund companies and the decline of the companies floated by
nationalized banks and smaller private sector players. Many nationalized banks got into the
mutual fund business in the early nineties and got off to a good start due to the stock market
boom prevailing them. These banks did not really understand the mutual fund business and
they just viewed it as another kind of banking activity. Few hired specialized staff and
generally chose to transfer staff from the parent organizations. The performance of most of
the schemes floated by these funds was not good. Some schemes had offered guaranteed
returns and their parent organizations had to bail out these AMCs by paying large amounts of
money as the difference between the guaranteed and actual returns. The service levels were
also very bad. Most of these AMCs have not been to retain staff, float new schemes etc, and
it is doubtful whether, barring a few exceptions, they have serious plans of continuing the
activity in a major way.

The foreign owned companies have deep pockets and have come in here with the expectation
of a long haul. They can be credited with introducing many new practices such as new
product innovation, sharp improvement in service standards and disclosure, usage of
technology, broker education and support etc. In fact, they have forced the industry to
upgrade itself and service levels of organizations like UTI have improved dramatically in the
last few years in response to the competition provided by these.

Schemes of a Mutual Fund:

• The asset management company shall launch no scheme unless the trustees approve such
scheme and a copy of the offer document has been filed with the Board.
• Every mutual fund shall along with the offer document of each scheme pay filing fees.
• The offer document shall contain disclosures which are adequate in order to enable the
investors to make informed investment decision including the disclosure on maximum
investments proposed to be made by the scheme in the listed securities of the group
companies of the sponsor a close-ended scheme shall be fully redeemed at the end of the
maturity period. “Unless a majority of the unit holders otherwise decide for its rollover by
passing a resolution”.
Rules Regarding Advertisements:
• The offer document and advertisement materials shall not be misleading or contain any
statement or opinion, which are incorrect or false.
Investment Objectives and Valuation Policies:
• The price at which the units may be subscribed or sold and the price at which such units
may at any time be repurchased by the mutual fund shall be made an available to the
investors.
Restrictions on Investments:
• A mutual fund scheme shall not invest more than 15% of its NAV in debt instrument issued
by a single issuer, which are rated not below investment grade by a credit rating agency
authorized to carry out such activity under the Act. Such investment limit may be extended to
20% of the NAV of the scheme with the prior approval of the Board of Trustees and the
Board of Asset Management Company.
• A mutual fund scheme shall not invest more than 10% of its NAV in unrated debt
instruments issued by a single issuer and the total investment in such instruments shall not
exceed 25% of the NAV of the scheme. All such investments shall be made with the prior
approval of the Board of Trustees and the Board of Asset Management Company.
• No mutual fund under all its schemes should own more than ten percent of any company’s
paid up capital carrying voting rights.
• Such transfers are done at the prevailing market price for quoted instruments on spot basis.
The securities so transferred shall be in conformity with the investment objective of the
scheme to which such transfer has been made.

6. INSURANCE
Introduction to insurance:
The business of insurance is related to the protection of the economic values of the assets.
Every asset has a value. The asset would have been created through the efforts of the owner.
The asset is valuable to the owner, because he expects some benefits from it. It is a benefit
because it meets some of his needs. But every asset is expected to last for a certain period of
time during which it will provide the benefits. After that the benefit may not be available. The
owner is aware of this and he can so manage his affairs that by the end of that period or life-
time, a substitute made available. Thus he makes sure that the benefit isn’t lost. Here comes
the thought of insurance.
Purpose and needs of insurance:
Assets are insured, because they are likely to be destroyed or made non-functional before the
expected life time, through accidental occurrences are called perils.
Fire, floods, breakdowns, lightning, and earthquakes such things are called perils. If such
perils can cause damage to the assets, we say that the asset is exposed to that risk. Perils are
the events. Risks are the consequential losses or damages.
The risk only means that there is a possibility of loss or damage. The damage may or may not
happen, but the word ‘possibility’ implies uncertainty. Insurance is relevant only if there are
uncertainties. If there is no uncertainty about the occurrence of an event, it can’t be insured
against.
Insurance doesn’t protect the asset. It does not prevent its loss due to the peril. The peril can’t
be avoided through the insurance. The risk can sometimes be avoided, through better safety
and damage control measures. Insurance only tries to reduce the impact of the risk on the
owner of the asset and those who depend on that asset. They are the ones who benefit from
the asset and therefore, would lose, when the asset is damaged. Insurance only compensates
for the losses-and that too, not fully.
An example of how insurance works:
In a village, there are 4000 houses, each valued at Rs.20000. Every year, on an average, 4
houses get burnt, resulting into a total loss of Rs.80000.if all the 400 owners come together
and contribute Rs.200 each, the common fund would be Rs. 80000. This would be enough to
pay Rs.20000 to each of the 4 owners whose houses got burnt. Thus the loss of Rs.20000
each of 4 owners is shared by 400 house-owners of the village, bearing Rs.200 each. This
works out to 1% of the value of the house, which is the same as the probability of risk (4 out
of 400 houses).
The business of insurance:
Insurance companies are called insurers. The business of insurance is to,
 Bring together persons with common insurance interests (sharing the same
risks)
 Collect the share or contribution (called premium) from all of them
 Pay out compensations (called claims) to those who suffer from the risks.
The premium is determined on the same lines, but with further refinements.
In India, insurance business is classified primarily as life and non-life or general. Life
insurance includes all risks related to the lives of human beings and general insurance covers
the rest. General insurance has 3 classifications viz. fire (dealing with all fire related risks),
marine (dealing with all transport related risks and ships) and miscellaneous (dealing with all
others like liability, fidelity, motor, crop, etc).
Personal accident and sickness insurance, which are related to human beings, is classified as
‘non-life’ in India but is classified as ’life’, in many other countries.
What is ‘non-life’ in India is termed ‘property and casualty’ in some other countries.
In India, the IRDA has, in 2005, issued regulations enabled micro insurance (broadly
meaning insurance for small sums assured, like 5-50 thousands) to be done by both life and
general insurers on the basis of mutual tie-ups. A policy may be issued by a life insurer
covering both life and non-life risks, but premium on account of the nonlife business will be
passed on to a general insurer and the claim amount collected from the latter.

Advantages of life insurance:

Life insurance has no competition from any other business. Many people think that life
insurance is an investment or a means of saving. This is not the correct view.
When a person saves, the amount of fund available at any time is equal to the amount of
money set aside in the past, plus interest. This is so in the fixed deposit in a bank, in national
savings certificate, in mutual funds or any other savings instruments. If the money is invested
in buying shares and stocks, there is the risk of the money being lost in the fluctuations of the
stock market. Even if there is no loss, the available money at any time is the amount invested
plus appreciation. In life insurance, however, the fund available is not the total of the savings
already made (premiums paid), but the amount one wished to have at the end of the savings
period (which is next 20/30 years). The final fund is secured from the very beginning. One is
paying for it over the years, out of the savings. One has to pay for it only as long as one life
or for a lesser period, if so chosen. The assured fund is not affected. There is no other scheme
which provides this kind of benefit. Therefore life insurance has no substitute.
A comparison with other forms of savings will show that life insurance has the following
advantages:
 In the event of death, the settlement is easy. The heirs can collect the money
quicker, because of the facility of nomination and assignment. The facility of
nomination is now available for some bank accounts, provident fund etc…
 There is a certain amount of compulsion to go through the plan of the savings.
In other forms, if one changes the original plan of savings, there is no loss. In
insurance, there is a loss.
 Creditors can’t claim the life insurance moneys. They can be protected against
the attachments by courts.
  There are tax benefits, both in income tax and in capital gains.
 Marketability and liquidity are better. A life insurance policy is property and
can be transferred or mortgaged. Loans can be raised against the policy.
 It is possible to protect a life insurance policy from being attached by debtors.
The beneficiaries’ interest will remain secure.
The following tenets help agents to believe in the benefits of the life insurance.
Such faith will enhance their determination to sell and their perseverance.
 Life insurance is not only the best possible way for family protection. There is
no other way.
 Insurance is the only way to safeguard against the unpredictable risks of the
future. It is unavoidable.
 The terms of life are hard. The term of insurance is easy.
 The value of human life is far greater than the value of any property. Only life
insurance can preserve it.
 Life insurance is not surpassed by any other savings or investment instrument,
in terms of security, marketability, stability of value or liquidity.
 Insurance, including life insurance, is essential for the conservation of many
businesses, just as it is in the preservation of homes.
 Life insurance enhances the standards of living.
 Life insurance helps people live financially solvent lives.
 Life insurance perpetuates life, life, liberty and the pursuit of happiness.
 Life insurance is a way of life.
7. Money-back insurance - Insurance in India is mostly sold and bought as investment
products. They are preferred because of their add-on benefits like financial life-cover, tax-
savings and satisfactory returns. Even if one does not manage to save money and invest
regularly in financial instruments, with insurance, the policyholder has no choice. If he does
not pay his premiums on time, his insurance cover will lapse. Money-back Insurance schemes
are used as investment avenues as they offer partial cash-back at certain intervals. This
money can be utilized for children’s education, marriage, etc.
8. Endowment Insurance – These policies are term policies. Investors have to pay the
premiums for a particular term, and at maturity the accrued bonus and other benefits are
returned to the policyholder if he survives at maturity.
9. Unit Linked Insurance Plans - ULIPs are remarkably alike to mutual funds in terms of
their structure and functioning; premium payments made are converted into units and a net
asset value (NAV) is declared for the same. In traditional insurance products, the sum assured
is the corner stone; in ULIPs premium payments is the key component.