Study on

Financial planning & Its relevance in Indian families At

Prepared in partial fulfillment of the degree of Masters of Business Administration (M.B.A)2007-09

Submitted by University enroll

Jaiparvesh 0591483907

MAHARAJA AGRASEN INSTITUTE OF TECHNOLOGY Guru Gobind Singh Indraprastha University Psp Area, Sector-22 Rohini, Delhi- 110085, Ph : 25489493-94

CERTIFICATION
This is to certify that the project entitled Financial planning and its relevance in Indian family made by Priya Bhatia has been completed under my guidance and I am satisfied with the work carried out by her. The project is an original work, has not been submitted earlier to any other institution. The project was successfully carried out for the partial fulfillment of MBA from MAHARAJA AGRASEN INSTITUTE OF TECHNOLOGY -09. Mrs. Mona Kawatra. Project Guide ROHINI DELHI affiliated to GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY, during the academic year 2007

DECLARATION
I here by declare that the project work entitled FINANCIAL PLANNING AND ITS RELEVANCE IN INDIAN FAMILIES, is an authentic work carried out by me under the guidance of administration and this has not been submitted anywhere else for the award of any degree/diploma.

Priya Bhatia.

ACKNOWLEDGEMENT
Acknowledgement is an individuals feeling towards many people who directly or indirectly stimulated and influenced ones intellectual development in ones student and professional life. This formal statement of acknowledgement will hardly meet the ends of justice in the matter of expression of my sense of gratitude and obligation to all those who helped me in the completion of this project. With great reverence I would like to express my profound gratitude to my project guide Mrs. Mona Kawatra for her enormous help and guidance on the topic. A special thanks and gratitude to Mr. Ashwini Kumar Sharma, Relationship Manager (Rajendra Place Branch, way2wealth) for being a mentor and for his unceasing interest, critical evaluation, learned guidance, constant inspiration and immense encouragement there by giving me the chance to look more closely into the field of my interest, during the period of summer training. My sincere thanks also extend to all the staff of Way2wealth for providing a hospitable and helpful work environment and making my summer training an exciting and memorable event. I also wish to thank MAHARAJA AGRASEN INSTITUTE OF TECHNOLOGY for making this experience of summer training in an esteemed organization possible. The learning from this experience has been immense and would be cherished throughout life. Last but not the least I would also like to thank our Institutes Director DR. N.K. Kakkar who helped to the fullest of his extent with his valuable suggestions directly or indirectly at every stage of my training.

TABLE OF CONTENTS
Title page Certificate Declaration Acknowledgement Executive summary Company profile Objective of the study Research methodology CHAPTER NO. Ch #1 Ch # 2 Ch # 3 Ch # 4 Ch # 5 Ch # 6 SUBJECT Financial planning : An overview. Investment through financial planning. Analyzing the different investment avenues. Findings. Conclusions and limitations. Bibliography. Annexure. PAGE NO.

EXECUTIVE SUMMARY
Theoretical and practical knowledge are the two different but interrelated aspects, which makes the concepts clear and vision bright and help in facing the actual situation. Although theory is first and important step which acts as a base and creates a picture in mind for a thing but practical knowledge which bridges the gap between the imaginations and realities, so the practical knowledge is very important for developing thoughts and giving shape to them. This type of training programme is very helpful as : It installs a feeling of belongingness and of expertness. Development of better understanding of concepts. Generate morale. Acquaints student with job performance standards. This practical training could be taken as a beginning of indoctrinate into the ways of business organization and it is the first step towards building a professional career, which would be helpful in future prospects. This project deals with financial planning and its relevance in Indian families. Key to effective planning is the ability to take into account all relevant aspects of your financial situation and to identify and analyse the interrelationships among sometimes conflicting objectives. That is financial planning is a process that determines how you and your family can best meet life goals through the proper management of your financial affair. In other words financial planning means deciding in advance how much to spend, on what to spend according to the funds at your disposal. The objective is to ensure that the right amount of money is available in the right hands at the right point in the future to achieve an individuals life goals. Here it is an endeavor to highlight that a true financial plan does not focus one aspect or product, but instead seeks to take all areas of planning into consideration when making financial decision. Areas in which financial planning can be undertaken are: Cash flow management . Tax planning and management . Risk planning and management. Investment planning and management. Retirement planning and management. Estate planning and management.

For the ease the whole project has been divided into various chapters : . 1) Starting with the introduction of the company. 2) The next chapter briefly introduces the scope of financial planning. 3) The next chapter projects investment through financial planning. 4) Next on the list is the explanation of different investment avenues. 5) A small set of limitations, conclusions and suggestions have also been given in the report to make the study useful.

PROFILE OF THE COMPANY

INTRODUCTION
Way2Wealth is a premier Investment Consultancy Firm, launched with the aim of making investing simpler, more understandable and profitable for the investors. Way2Wealth brings a wide range of product offerings from Equity and Derivatives (NSE), Fixed Income Securities, Insurance (Life & Non-Life), Mutual Funds to Portfolio Management Services for the convenience and benefit of it customers. Way2Wealth today has over 60 easily accessible Investment Outlets spread across 25 major towns and cities in India. HERITAGE Sivan Securities started in 1984, has a long and illustrious track record of being amongst the premier Financial Intermediaries in the country as well as being an incubator for IT start-up firms.The Venture Capital division came to be known as Global Technology Ventures -GTV and the Financial Intermediary Division was spun off as Way2Wealth in the year 2000.Over the years, Way2Wealth has developed a strong reputation for navigating its investors through all the ups and downs in the market. Way2Wealth has inherited these same values in addition to a base of 100,000 individual customers, over 500 corporate/institutional clients.Its group company are listed below : 1. Global Technology Ventures GTV, has provided venture capital to companies such as Kshema Technologies, MindTree, Ivega etc. 2. Amalgamated Bean Coffee Trading Company Ltd. (ABCTCL), Indias largest coffee conglomerate and coffee exporter, pioneering Indias first concept cafs Caf Coffee Day, a chain of youth hangout coffee parlors. From a handful of cafs in six cites in the first 5 years, Caf Coffee Day has today become Indias largest and premier retail chain of cafes with 483 cafes in 84 cities around the country. ACCOLADES

Caf Coffee Day today is Indias largest retail chain of cafes. V.G. Siddhartha is awarded the Entrepreneur of the year 2003 by The Economic Times for crafting a successful pan Indian brand for a commodity business and giving Indian consumers a new lifestyle experience that is within reach of the common man. Amalgamated Bean Coffee Trading Company Ltd. today is the largest exporter of green coffee from India and perhaps one of the two fully integrated coffee companies of Asia, involved in all sectors of Coffee from plantations to retailing to exports. Coffee Day Group today is the only fully integrated and largest coffee conglomerate in India and is attributed with creating the coffee revolution in India - acknowledged by the Coffee Board of India And now, he is actively involved with Way2Wealth and committed in realizing its vision of making way2wealth 'set new standards in the retail financial services in India'.

Mr. V.G. Siddhartha - Chairman He is the visionary behind Way2Wealth and the founder of Sivan Securities. He has been involved in the Indian Capital Markets since 1984. During his early years of his work-life he has 10

spent valuable years with J.M. Morgan Stanley, this experience stood him in good stead when he became a successful investor. Having a Masters in Economics from Mangalore University, he is an avid reader and traveler with a yen for creating companies and brands.Mr Siddharthas business interests spreads across Coffee retailing, Plantations, Real estate, Venture Capital and Financial Services. GTV today a Billion$ company, partners with exceptional entrepreneurs, who have a gut for the original, and are passionately dedicated to building category-leading tech companies. Investing in technology ventures across all stages, GTV provides access to capital and resources to companies with global market leadership potential Took over Sivan Securities Ltd, in 1984 Founded the Amalgamated Bean Coffee Trading Company Limited ABCTCL, in 1994. -Indias largest coffee conglomerate and coffee exporter -Largest exporter of green coffee from India -One of the two fully integrated coffee companies of Asia, involved in all sectors of Coffee from plantations to retailing to exports Pioneered the caf concept in India in 1996 with Caf Coffee Day, popularly know as CCD - Chain of youth hangout coffee parlors Founded Global Technology Ventures in 2000 - a company that identifies, invests and mentors companies engaged in cutting edge technologies. Founded the real estate company Tanling, develops world-class infrastructural facilities for Technology enterprises. Global Village on the outskirts of Bangalore, housing companies like EDS, Mindtree, TechBay on the oceanfront at Mangalore Some of his large investments include: Mindtree, Kshema Technolgies, I-Vega Consulting

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MISSION: To be the pre-eminent destination for personalized financial solutions helping individuals create wealth PHILOSPHY: We believe that "our knowledge combined with our investors trust and involvement will lead to the growth of wealth and make it an exciting experience". LOGO: Blue symbolizes Knowledge. Knowledge is limitless, so is the sky and sea, both of which are blue in colour. Knowledge applied leads to creation of wealth for our Investors. Red symbolizes Trust. Red is the color of blood and the heart. Trust is a matter of the heart. Our knowledge bears fruit only when the investor places his Trust in us. Yellow symbolizes Excitement and Involvement of the investor. We strive to make investing an exciting and involving experience for our investors. Green symbolizes Growth. Growth in Nature is visible in the form of plants and trees; all of which are green. Knowledge, Trust and Excitement should ultimately lead to Growth of the investors wealth. PRODUCTS AND SERVICES : Services and solutions that cater to the retail and institutional investors at large that encompass primary and secondary market instruments: 1. 2. 3. 4. 5. Equity Trading Derivatives Trading Commodities Trading Distribution Services: IPOs, Mutual Funds and Fixed Income products Advisory services: Asset Allocation Planning and End to end personalised investment management services for Wealth Generation, Retirement Planning and Capital Build up at different stages of life. 6. Wealth Management Services: Portfolio Management Services 7. Online Services & Tools - Online Trading, Portfolio tracking in-depth research reports and much more. 8. Insurance Marketing Life and Non-Life Plans 9. In-house Research & Analytics 10. Depository Services 11. Tax planning 12. Financial planning

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THE WAY2WEALTH ADVANTAGE :

Personalised Investment Solutions: All our customers receive individual attention Full choice of Investments: Mutual funds, Life Insurance, Fixed Income Instruments, Equity and Derivatives Processing support: We take care of all your paper work and provide service at your doorstep. Investor eligibility criteria: Customers with a minimum investment amount as low as Rs. 5000 per month can avail of our services.

This unique Way2Wealth concept can be easily experienced through the innovative and customer friendly network of 60 Investment outlets that spans 25 major towns and cities in the country. In addition to the national branch infrastructure, Way2Wealth also has an online presence to enhance its value proposition to its customers.

Established Brand 20+ years in the financial services industry Rich pedigree - part of the billion$ Global Technology Ventures (GTV) group Top quality management having a combined experience of 100+ years in the financial services industry Network of 60 full service branches covering 25 Indian cities / towns Reputed Research Desk for Fundamental & Technical analysis Structured product offering for HNI & Corporate clients 100,000+ client acquaintances (30,000+ satisfied retail relationships) Over 3000+ channels partners 750+ wealth managers across the country Dedicated PEG & PCG Desk for servicing HNI clients Exclusive Corporate Advisory Desk catering to key corporate clients.

PROFESSIONAL EXCELLENCY :

Personalized Investment plan for the short term, medium term and long term goals of the investors. Expert advice on Investment products ranging from the Fixed Return Investments and Life Insurance to the highly volatile Shares and Derivatives Avail Tax saving, Retirement planning and VRS investment services Facilitate Equity, Derivative and Commodities trading, Initial Public offerings (IPO) of Companies, Mutual funds and Make investments Government of India/Infrastructure Bonds Specialized team catering to the distinct needs of Corporate and Institutional clients out of the five regional offices.

UNIQUE INVESTMENT OUTLETS : Way2Wealth Investment outlets are designed to be places where retail investors can come in touch with Investment opportunities in an atmosphere of convenience and comfort. The look and feel of the offices across India project a consistent branch image for the company. The features that enable a unique facility for retailing financial services include among others:Easily visible 13

branches set up in the commercial spaces of potential investment zones ranging between 750sft to 1000sft.

Most branches are located in the ground floor sporting huge glass frontage promoting easy accessibility and reflecting our attitude of complete transparency. The major portion of the branch area dedicated for customer use. The furniture is in CKD formats to add flexibility in using the branch for Investors purposes. Connectivity to NSE for trading facilities. TV and other electronic mediums to facilitate real time update and dissemination of information to the customers.

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OBJECTIVE OF THE STUDY

1) To study the sensitivity of the typical Indian while investing his savings. 2) To study how a financial plan can help the individual to negotiate the twists and turns of the life. Thus highlighting the importance of the right investment strategy based on ones financial goal. 3) To gain an insight into different investment avenues. 4) To describe the fact that the true financial plan does not focus one aspect or product, but instead it seeks to take all areas of planning into consideration when making a financial decisions. That is it includes cash flow management, tax planning and management, risk planning and management, investment planning and management, retirement planning and management, and estate planning and management. 5) To gauge the consumer sentiment on the various services provided by their financial planner.

For the purpose of this study it was absolutely imperative to find out what the consumers want from their financial planners. It was also necessary to find out the consumers profile i.e his monthly income, occupation and also the current financial planner with whom he/she is working. For this purpose a detailed questionnaire was circulated. The total field work was done for 40 days in which a total sample size of 100 investors was covered. Later the analysis was done on the basis of responses obtained.

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RESEARCH METHODOLOGY
Research methodology refers to the tools and methods used for obtaining information for the purpose of subject study. Research refers to the search for knowledge. Research can be defined as a scientific and systematic study for pertinent information on a specific topic. It is an art of scientific investigation. OBJECTIVES OF RESEARCH The purpose of research is to discover answer to questions through the application of scientific procedures. To gain familiarity with a phenomenon or to achieve new insights into it. To portray accurately the characteristics of a particular individual situation or a group. To determine the frequency with which something occurs or with which it is associated with something else. METHODS OF DATA COLLECTION Data can be collected from primary or secondary sources or both. PRIMARY DATA Primary data can be obtained by a study specially designed, the data are original in character and are generated in a large number of surveys conducted mostly by government and also by some individual institutions and research institution and research bodies. The method of collecting primary data are observation method, interview, questionnaire. SECONDARY DATA The secondary data are not originally collected but rather obtained from published and unpublished sources. The method of collecting secondary data are internet, magazines, newspapers etc. SOURCES OF PRIMARY DATA Discussion and observation with customers and staff of way2wealth. Questionnaire. SOURCES OF SECONDARY DATA Internet. Wealth Compass : Investors monthly magazine from way2wealth.

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FINANCIAL PLANNING: AN OVERVIEW

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FINANCIAL PLANNING Financial planning is the process of meeting your life goals through the proper management of your finances. Life goals can include buying a home, saving for your child's education or planning for retirement. The financial planning process consists of six steps that help you take a big picture look at where you are financially. Using these six steps, you can work out where you are now, what you may need in the future and what you must do to reach your goals. The process involves gathering relevant financial information, setting life goals, examining your current financial status and coming up with a strategy or plan for how you can meet your goals given your current situation and future plans. Personal financial planning is broadly defined as a process of determining an individual's financial goals, purposes in life and life's priorities, and after considering his resources, risk profile and current lifestyle, to detail a balanced and realistic plan to meet those goals. The individual's goals are used as guideposts to map a course of action on 'what needs to be done' to reach those goals. Alongside the data gathering exercise, the purpose of each goal is determined to ensure that the goal is meaningful in the context of the individual's situation. Through a process of careful analysis, these goals are subjected to a reality check by considering the individual's current and future resources available to achieve them. In the process, the constraints and obstacles to these goals are noted. The information will be used later to determine if there are sufficient resources available to get to these goals, and what other things need to be considered in the process. If the resources are insufficient or absent to meet any of the goals, the particular goal will be adjusted to a more realistic level or will be replaced with a new goal. Planning often requires consideration of self-constraints in postponing some enjoyment today for the sake of the future. To be effective, the plan should consider the individual's current lifestyle so that the 'pain' in postponing current pleasures is bearable over the term of the plan. In times where current sacrifices are involved, the plan should help ensure that the pursuit of the goal will continue. A plan should consider the importance of each goal and should prioritize each goal. Many financial plans fail because these practical points were not sufficiently considered. BENEFITS Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. For example, buying a particular investment product might help you pay off your mortgage faster or it might delay your retirement significantly. By viewing each financial decision as part of a whole, you can consider its short and long-term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track. SCOPE The only thing permanent in life is change. Times change. People change. So does life. You expect life to be much better tomorrow than it is today. Tomorrow, you hope to fulfil all your dreams and aspirations. But what happens if things take an untoward turn? Or, if there is an eventuality? Perhaps it's time for you to change the way you plan your investments.Financial planning is the process of solving financial problems and achieving financial goals by developing and implementing a personalized "game plan." In order to be effective this "plan" must take into consideration an individuals overall picture. It must be: 18

coordinated comprehensive continuous

Financial planning is like all other phases of life; it involves choices Spend now or save for later? Pay off existing bills or increase retirement savings? Focus savings dollars on short term or long term goals? A true financial plan does not focus one aspect or product, but instead seeks to take all areas of planning into consideration when making financial decisions. IT Includes

Cash Flow Management This aspect of planning deals with the day to day allocation of income; and its effective use in paying for current living expenses and in accumulating assets which will be used in meeting financial goals.

Tax Planning and Management This area focuses on the understanding of and application of federal and state income tax law, estate and inheritance taxes; and, when possible, minimizing these taxes.

Risk Planning and Management This area of planning deals with the risk of losing life, income, or property. It includes the use of insurance products and strategies.

Investment Planning and Management Almost everyone has accumulation goals for which investments must be made and managed. These could include buying a home; planning for college; or providing for retirement.

Retirement Planning and Management

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By far the most common accumulation goal is the ability to become financially independent. Retirement strategies encompass the understanding of the Social Security system; employer-sponsored retirement plans; and personal savings accumulation plans.

Estate Planning and Management The final phase of planning is for the transfer of assets to our heirs with minimization of taxes and other costs.

FINANCIAL PLANNER A financial planner is someone who uses the financial planning process to help you figure out how to meet your life goals. Click here for more information. The planner can take a big picture view of your financial situation and make financial planning recommendations that are right for you. The planner can look at all of your needs including budgeting and saving, taxes, investments, insurance and retirement planning. Or, the planner may work with you on a single financial issue but within the context of your overall situation. This big picture approach to your financial goals sets the planner apart from other financial advisers, who may have been trained to focus on a particular area of your financial life. Financial planners job function:A financial planner specializes in the planning aspects of finance, in particular personal finance, as contrasted with a stock broker who is only concerned with the actual investments, or with a life insurance intermediary who advises on risk products Financial planning is usually a six-step process, and involves considering the client's situation from all relevant angles to produce integrated solutions. The six-step financial planning process has been adopted by the International Organization for Standardization (ISO). Financial planners are also known by the title financial adviser in some countries, although these two terms are technically not synonymous, and their roles have some functional differences.Although there are many types of 'financial planners,' the term is used largely to describe those who consider the entire financial picture of a client and then provide a comprehensive solution. To differentiate from the other types of financial planners, some planners may be called 'comprehensive' financial planners.Other financial planners may specialize in one or more areas, such as insurance planning and retirement planning.Financial planning is a growing industry with projected faster than average job growth through 2014. OBJECTIVES People enlist the help of a financial planner because of the complexity of knowing how to perform the following:

Providing direction and meaning to financial decisions; Allowing the person to understand how each financial decision affects the other areas of finance; and Allowing the person to adapt more easily to life changes in order to feel more secure.

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The Financial Planning Process The financial planning process consists of the following six steps: .

Financial Planning Process

1. Determine the financial goals 2. Compilation of necessary data and discussion of strategies

Step by step

3. Setting up a personal analysis 4. Creation of a personal financial plan 5. Implementation of the personal financial plan 6. Periodic review of the personal financial plan Step by step

1.Establishing and defining the client-planner relationship. The financial planner should clearly explain or document the services to be provided to you and define both his and your responsibilities. The planner should explain fully how he will be paid and by whom. You and the planner should agree on how long the professional relationship should last and on how decisions will be made. 2. Gathering client data, including goals. The financial planner should ask for information about your financial situation. You and the planner should mutually define your personal and financial goals, understand your time frame for results and discuss, if relevant, how you feel about risk. The financial planner should gather all the necessary documents before giving you the advice you need. 3. Analyzing and evaluating your financial status. The financial planner should analyze your information to assess your current situation and determine what you must do to meet your goals. Depending on what services you have asked for, this could include analyzing your assets, liabilities and cash flow, current insurance coverage, investments or tax strategies. 4. Developing and presenting financial planning recommendations and/or alternatives. The financial planner should offer financial planning recommendations that address your goals, based on the information you provide. The planner should go over the recommendations with you to help you understand them so that you can make informed decisions. The planner should also listen to your concerns and revise the recommendations as appropriate. 21

5. Implementing the financial planning recommendations. You and the planner should agree on how the recommendations will be carried out. The planner may carry out the recommendations or serve as your coach, coordinating the whole process with you and other professionals such as attorneys or stockbrokers. 6. Monitoring the financial planning recommendations. You and the planner should agree on who will monitor your progress towards your goals. If the planner is in charge of the process, she should report to you periodically to review your situation and adjust the recommendations, if needed, as your life changes. INVESTMENT PLANNING Everyone needs to save for a rainy day. Once you have saved enough to take care of emergencies, you should start thinking about investing and to make your money grow. We can help you plan your investments so that you can reap adequate benefits and achieve your financial goals. Essentially, Investment Planning involves identifying your financial goals throughout your life, and prioritising them. Investment Planning is important because it helps you to derive the maximum benefit from your investments Your success as an investor depends upon your ability to choose the right investment options. This, in turn, depends on your requirements, needs and goals. For most investors, however, the three prime criteria of evaluating any investment option are liquidity, safety and return. Investment Planning also helps you to decide upon the right investment strategy. Besides your individual requirement, your investment strategy would also depend upon your age, personal circumstances and your risk appetite. These aspects are typically taken care of during investment planning. Investment Planning also helps you to strike a balance between risk and returns. By prudent planning, it is possible to arrive at an optimal mix of risk and returns, that suits your particular needs and requirements. IMPORTANCE OF INVESTMENT PLANNING Investment means putting your money to work to earn more money. Done wisely, it can help you meet your financial goals like buying a new house, paying for college education of your children, of your enjoying a comfortable retirement, or whatever is important to you. You do not have to be wealthy to be an investor. Investing even a small amount can produce considerable rewards over the long-term, especially if you do it regularly. But you need to decide about how much you want to invest and where. To choose wisely, you need to know the investment options thoroughly and their relative risk exposures. Investment planning is necessary for every one who wishes to achieve any financial goal. You have to plan your limited resources to avail the maximum benefit out of them. You should plan your investments to fulfill major needs like:

Creating wealth over the long term Acquiring assets like a dream house or a dream car Fulfilling your need for financial security

Thus, Investment Planning is nothing but a holistic approach to meet your life's goals.

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CHOOSING THE RIGHT INVESTMENT The choice of the best investment options for you will depend on your personal circumstances as well as general market conditions. For example, a good investment for a long-term retirement plan may not be a good investment for higher education expenses. In most cases, the right investment is a balance of three things: Liquidity, Safety and Return. Liquidity - how accessible is your money? How easily an investment can be converted to cash, since part of your invested money must be available to cover financial emergencies. Safety - what is the risk involved? The biggest risk is the risk of losing the money you have invested. Another equally important risk is that your investments will not provide enough growth or income to offset the impact of inflation, which could lead to a gradual increase in the cost of living. There are additional risks as well (like decline in economic growth). But the biggest risk of all is not investing at all. Return - what can you expect to get back on your investment? Investments are made for the purpose of generating returns. Safe investments often promise a specific, though limited return. Those that involve more risk offer the opportunity to make - or lose - a lot of money. To a large extent, the choice of the right investment option will also depend upon your financial goals. For example, if you want to invest for funding your vacation next year, don't choose an investment vehicle that has a three-year lock-in. Similarly, if you want to invest for your daughter's marriage after 10 years, don't invest in 1yr bonds for the next 10 years. Instead, choose an option that matches your investment horizon. INVESTMENT STRATEGY Investment Strategies You can make your own investment picking approach or adopt one after consulting financial experts or investment advisors. Whatever method you use, keep in mind the importance of diversification, or variety in your investment portfolio and the need for a strategy, or a plan, to guide your choices. Investment approaches The options you choose to put your money in, reflect the investment strategy you are using whether you realize it or not. Most people adopt the following approaches:Conservative These investors take only limited risk by concentrating on secure, fixed-income investments etc. Moderate Such Investors take moderate risk by investing in mutual funds, bonds, select bluechip equity shares etc. Aggressive 23

These are investors who take major risk on investments in order to have high (above-average) returns like speculative or unpredictable equity shares, etc. As a matter of fact, the investment approach of an investor is directly linked to his or her ability to shoulder risk. The ability to take risks depends largely on personal circumstances and factors like age, past experiences with investing, level of responsiblility, etc. RISK VS RETURN Risk and returns go hand in hand. Higher the risk, higher is the possibility of earning a good return. Thus, it follows that all types of investment have some form of risk attached to it. Theoretically, even 'safe' investments (such as bank deposits) are not without some element of risk. Broadly, here are the various types of risks that you might have to face as an investor. Credit Risk The risk is that the issuer of the security will default, or not repay the principal amount. This is valid for corporate bonds etc. Liquidity Risk If you invest in securities, stocks, bonds, you are risking their sellability. In other words, your money gets stuck unnecessarily, creating an asset-liability mismatch. Market Risk Financial markets are volatile in nature. Volatility means sudden swings in value from high to low, or the reverse. The more volatile an investment is, the more profit or loss you can make, since there can be a big spread between what you paid and what you sell it for. But you also have to be prepared for the price to drop by the same amount. Those who invest in stocks and mutual funds typically run this risk. Interest Rate Risk Depending on the interest rate movement in the economy, the rates of interest investment instruments may go up or come down, resulting in a subsequent reverse movement of their prices. Such a scenario of economic instability might effect mutual funds etc. The whole idea behind investment planning is to evaluate the risk associated with various type of investments and take steps so as to balance it with the desired return. INVESTMENT PLANNING STEPS Investment Planning is the key to successful investing. It is a scientific process, which, if done in the right spirit, can help you achieve your financial goals.

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Here are the basic steps of Investment Planning Step 1 : Identify your financial needs and goals The starting point of a sound investment plan is to begin with a clear understanding of you financial needs and goals. Typically, any financial need or goal would translate into determining the tenure of your investment (investment horizon). All investment needs and goals can therefore be translated into short-term (less than 1 year), medium-term (more than 1 year) and long-term (more than 5 years). Here is an example of the financial goal of a typical household (a couple with two childrens). Financial Goals Anils computer Sunitas school admission Vacation Anils education Sunitas education Retirement Expected Cost (at Time Frame todays prices in Rs) 0.5 Lakhs 0.35 Lakhs 0.5 Lakhs 2 Lakhs 2 Lakhs 20 Lakhs Next month 6 months 1-2 years 2-3 years 10-12 years 12-15 years 20-25 years Investment Horizon Short-term Short-term Medium-term Medium-term Long-term Long-term Long-term

Buying a second car 5 Lakhs

Step 2 : Understanding investment choices There are three basic investment categories: Equity, Debt and Cash. Any investment can be classified into one of these three categories, or asset classes. The key to investment success lies in understanding how each asset class performs over the various investment horizons, the choices within each category and the risks involved in making investment decisions in each of these choices. Equity or Stocks are ownership shares investors buy in a corporation. When you make equity investments, you become part-owner (to the extent of your shareholding) of the company you have invested in. However, there is no particular rate of return indicated while investing. The current value of your holding is reflected in the price at which the stock/share is traded in the stock markets. Hence, these constitute a relatively riskier form of investment. Debt instruments or Bonds are loans investors make to corporations or the government. They promise a fixed return at the time of making the investment. Also the promise of getting the money back is dependent on who is making the promise. In case of the Government, the promise will certainly get fulfilled, but if the issuer of debt is a company or an institution, the quality of the issuer needs to be adjudged, to ascertain its ability to keep the promise. Debt investments, therefore, provide you with the promise that your principal will be returned along with the interest payable thereon.

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Cash includes money in bank savings accounts and other liquid investment options. Asset Classes Instruments Savings deposits in a bank, Liquid Mutual Cash funds GOI Relief Bonds, Public Provident Fund, National Savings Certificate, Company Fixed Debt Deposits, Debt-based Mutual funds ,Debentures/Bonds Equity-based Mutual Funds Stocks/shares Equity issued by various companies Risk Low Low to Medium, depending on the type of issuer. In case the issuer is Govt, the risk of default is negligible High

Step 3 : Decide an appropriate mix of various investment choices (Asset Allocation Plan) Making an asset allocation plan is about determining the proportion of investments in each of the three basic asset classes. Essentially this depends upon your profile as an investor. Whatever stage of life you are at, you would need to invest part of your money for security and liquidity. A part of your investments should generate regular income and part of it should contribute to growth and capital appreciation. The proportion however, will vary based on individual goals, time horizons available to meet those goals and one's risk profile (the tolerance reaction to any down turn in the stock/debt markets). The key to investment success lies in determining the appropriate mix of the above mentioned categories and not just the individual investments that are done within each category. INFLATION DEVIL Inflation, the rate at which the general level of prices for goods and services rises, can steadily erode the purchasing power of your income. That is why you should invest a portion of your savings at a rate higher than the inflation rate to recover the loss of purchasing power. This means that over time a rupee will be able to buy a lesser amount of goods and services. If the inflation rate is 5%, then Rs. 100 worth of goods will cost Rs. 105 after a year. The following table indicates how the value of Rs 1,00,000 will change over time at different levels of inflation . Inflation % p.a. Years 5 10 15 20 25 30 2 3 4 4.5 5 6 90,573 86,261 82,193 80,245 78,353 74,726 82,035 74,409 67,556 64,393 61,391 55,839 74,301 64,186 55,526 51,672 48,102 41,727 67,297 55,368 45,639 41,464 37,689 31,180 60,953 47,761 37,512 33,273 29,530 23,300 55,207 41,199 30,832 26,700 23,138 17,411

Table indicating the value of Rs 1,00,000 at different levels of inflation over time 26

THE POWER OF COMPOUNDING Regardless of where you choose to put your money - cash, stocks, bonds, or a combination of these - the key to saving for the future is to make your money work for you. This is done through the power of compounding. Compounding investment earnings is what can make even small investments become larger, given enough time. You are probably already familiar with the principle of compounding. The money you put into a bank account earns an interest. Then, you earn interest on the money you originally put in, plus on the interest you have accumulated. As the size of your account grows, you earn interest on a bigger and bigger pool of money.The following table shows how much your money would grow when you invest a fixed amount per month over a period of 10, 15, 20, 25, and 30 years, assuming an interest rate of 10% p.a. Amount (Rs) Years 5 10 15 20 25 30 1000 78,082 206,552 417,924 765,697 2000 156,165 413,104 835,849 3000 234,247 619,656 4000 312,330 826,208 5000 390,412 1,032,760

1,253,773 1,671,697 2,089,621

1,531,394 2,297,091 3,062,788 3,828,485

1,337,890 2,675,781 4,013,671 5,351,561 6,689,452 2,279,325 4,558,651 6,837,976 9,117,301 11,396,627

How power of compounding makes your money grow, when you invest a fixed amount every month Here's how much your money would grow if you make an lump sum (one-time) investment and leave it untouched. The interest rate has been assumed to be 10%. Amount (Rs) Years 5 10 15 20 25 30 100000 161,051 259,374 417,725 672,750 200000 322,102 518,748 835,450 300000 483,153 778,123 400000 644,204 500000 805,255

1,037,497 1,296,871

1,253,174 1,670,899 2,088,624

1,345,500 2,018,250 2,691,000 3,363,750

1,083,471 2,166,941 3,250,412 4,333,882 5,417,353 1,744,940 3,489,880 5,234,821 6,979,761 8,724,701

The real power of compounding comes with time. The earlier you start saving, the more your money can work for you. To attain certain amount of corpus within a set period of time, a proactive investment style is preferable. Thus, no matter how young you are, the sooner you begin saving for the future, the better it is.

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NEED FOR INSURANCE PLANNING "Insurance is not for the person who passes away, it for those who survive," goes a popular saying that explains the importance of Insurance Planning. It is extremely important that every person, especially the breadwinner, covers the risks to his life, so that his family's quality of life does not undergo any drastic change in case of an unfortunate eventuality. Insurance Planning is concerned with ensuring adequate coverage against insurable risks. Calculating the right level of risk cover is a specialised activity, requiring considerable expertise. Proper Insurance Planning can help you look at the possibility of getting a wider coverage for the same amount of premium or the same level of coverage for the same amount of premium or the same level of coverage for a reduced premium. Hence, the need for proper insurance planning. Insurance, simply put, is the cover for the risks that we run during our lives. Insurance enables us to live our lives to the fullest, without worrying about the financial impact of events that could hamper it. In other words, insurance protects us from the contingencies that could affect us. So what are the risks that we run? To name a few - the risk on our lives that is, the worries of replacement of the incomes that we contribute to the running of the household), the risks of medical contingencies (since they have the capability of depleting our wealth considerably) and risks to assets (since the replacement of these can have tremendous financial implications). If we can imagine a situation where our goals are disturbed by acts beyond our control, we can realize the relevance of insurance in our lives. Insurance Planning takes into account the risks that surround you and then provides an adequate coverage against those risks. There is no risk not worth insuring yourself against, and insurance should first and foremost be looked as a measure to guard against risks - the risk of your dreams going awry due to events beyond your control. RETIREMENT PLANNING: Some like it. Some dont. But retirement is a reality for every working person. Most young people today think of retirement as a distant reality. However, it is important to plan for your post-retirement life if you wish to retain your financial independence and maintain a comfortable standard of living even when you are no longer earning. This is extremely important, because, unlike developed nations, India does not have a social security net. Retirement Planning acquires added importance because of the fact that though longevity has increased, the number of working years havent. WHY PLAN FOR RETIREMENT ? In simple words, retirement planning means making sure you will have enough money to live on after retiring from work. Retirement should be the best period of your life, when you can literally sit back and relax or enjoy your life by reaping benefits of what you earn in so many years of hard work. But it is easier said than done. To achieve a hassle-free retired life, you need to make prudent investment decisions during your working life, thus putting your hard-earned money to work for you in future. Why is it important? India, unlike other countries, does not have state-sponsored social security for the retired people. And after several decades when pensions provided many people with a large chunk of money they needed to live comfortably after they retired, things are changing. While you may be entitled to a pension, or income during retirement, in the new economic era, you are increasingly likely to 28

be responsible for providing for your own needs. Although the compulsory savings in provident fund through both employee and employer contributions should offer some cushion, it may not be enough to support you throughout your retirement. That is why retirement planning is extreme ly important for every one. There are many reasons for the working individuals to secure their future emergence of nuclear families and its attendant insecurity, increasing uncertainties in personal and professional life, the growing trends of seeking early retirement and rising health risks are among few important risks. Besides falling interest rates and the sustained increase in the cost of living make it a compelling case for individuals to plan their finances to fund their retired life. Planning for retirement is as important as planning your career and marriage. Life takes its own course and from the poorest to the wealthiest, no one gets spared. "Everyone grows older". We get older every day, without realising. However, we assume that old age is never going to touch us. The future depends to a great extent on the choices you make today. Right decisions with the help of proper planning, taken at the right time will assure smile and success at the time of retirement.If you are in young, retirement may be the last thing on your mind. But if you think you have a long way to go for to plan for retirement, think again. It is never too early to prepare for retirement, especially if you want to maintain the same standard of living that you would have got accustomed to by then. Let us take a hypothetical example. Let's assume that you are a 35 year old, earning Rs.3 lakh per annum. Your salary grows at 5% per annum and you plan to retire after 25 years. Under these circumstances, assuming your post-retirement requirement would be 60% of your last annual income (Rs.10 lakh approx), you would need about Rs.6 lakh per annum after retirement. To achieve this, you need a retirement corpus of Rs.75 lakh assuming you earn a return of 5% per annum over a period of 20 years. To meet this goal, you would have to invest more than Rs.9,000 per month at 7% per annum for the next 25 years. Inflation and tax implications have not been considered for simplicity.

Steps for making Retirement a Success.

People have different plans for retired life. For example you may think of retirement as a time to relax, to laze around, to spend more time with family, travel or write a masterpiece. Attaining financial independence after retirement will not be just a dream if the following steps are followed with steady discipline, perseverance and if smart investment strategies. Start saving early Nobody takes retirement seriously. But the fact is that even a small sum of money saved regularly and invested regularly makes a big amount which will come in very handy after retirement. One should not believe that after retirement, one can place all savings into income generating investment and spend rest of life in happiness. If you don't plan early, you cound end up eroding your principal savings in order to have to supplement your monthly income. The key to a financially independent future is "sooner the better". Cautious investors believe in this principal and plan their retirement accordingly. They not only save, they save early and regularly. . The catch is to make the power of compounding work one's benefit. Retirement should be your top priority Retirement should be kept as a top priority because if one does not keep it at the top one might end up depending on one's children, which probably no one would relish. 29

Create a Retirement Plan Develop a plan for saving based on your requirements at the time of retirement. The goals you keep for saving depend on your lifestyle but you will need at least about 66% of your preretirement income to maintain your standard of living when you stop working. Understand your pension plan If your employer offers on pension plan, understand carefully your benefit level, financial stability of plan and the vesting period. Use retirement plans even if you already have enough money. With retirement plans your money grows in a tax efficient manner and compounding interest over time makes it one of the best investment options. Balance your risk tolerance and your investment strategy Evaluate your risk profile and then balance your investment strategy to invest in various avenues to get the most out of your retirement money keeping your risk profile unhampered. Diversify your investments & allocate your assets carefully. Depending on your work profile divide your savings into equity , bonds, Mutual Funds, and other investment avenues. Don't invest too heavily in one sector or one company, since the risk associated with putting all your eggs in one basket is indeed very high. Save and Invest Regularly Saving and investing regularly makes a big difference at the time of retirement. Investing at regular intervals builds your retirement fund over time and helps you to minimize risk and gives a tension free retirement-a time to pursue your hobbies, fulfill your dreams and passions. Retirement Planner The amount you would need at the time of your retirement. Rs. Expected rate of Inflation. When do you plan to retire.

Lumpsum amount that you have already saved for retirement. Rs. Return that you expect on your lumpsum amount. How much amount can you save monthly. Rs.

The interest rate at which you will make the monthly investment.

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TAX PLANNING: Proper tax planning is a basic duty of every person which should be carried out religiously. Basically, there are three steps in tax planning exercise. These three steps in tax planning are: Calculate your taxable income under all heads ie, Income from Salary, House Property, Business & Profession, Capital Gains and Income from Other Sources. Calculate tax payable on gross taxable income for whole financial year (i.e.,From 1st April to 31st March) using a simple tax rate table, given on next page. After you have calculated the amount of your tax liability. You have two options to choose from: 1. Pay your tax (No tax planning required) 2. Minimise your tax through prudent tax planning. Most people rightly choose Option 'B'. Here you have to compare the advantages of several tax saving schemes and depending upon your age, social liabilities, tax slabs and personal preferences, decide upon a right mix of investments, which shall reduce your tax liability to zero or the minimum possible.Every citizen has a fundamental right to avail all the tax incentives provided by the Government. Therefore, through prudent tax planning not only income-tax liability is reduced but also a better future is ensured due to compulsory savings in highly safe Government schemes. We sincerely advise all our readers and clients to plan their investments in such a way, that the post-tax yield is the highest possible keeping in view the basic parameters of safety and liquidity TAX SAVING SCHEME: After assessing your tax liability, the next step is tax planning. It involves selecting the right tax saving instruments and making investments accordingly. Deductions from Taxable Income: Deduction under section 80C Under this section, a deduction of up to Rs. 1,00,000 is allowed from Taxable Income in respect of investments made in some specified schemes. The specified schemes are the same which were there in section 88 but without any sectoral caps (except in PPF). Specified Investment Schemes u/s 80C

Life Insurance Premiums Contributions to Employees Provident Fund/GPF Public Provident Fund (maximum Rs 70,000 in a year) NSC Unit Linked Insurance Plan (ULIP) Repayment of Housing Loan (Principal) Equity Linked Savings Scheme (ELSS) Tuition Fees including admission fees or college fees paid for Full-time education of any two children of the assessee (Any Development fees or donation or payment of similar nature shall not be eligible for deduction). Infrastructure Bonds issued by Institutions/ Banks such as IDBI, ICICI, REC, and NHAI. 31

Interest accrued in respect of NSC VIII issue. Notes: 1. There are no sectoral caps (except in PPF) on investment in the new section and the assessee is free to invest Rs. 1,00,000 in any one or more of the specified instruments. 2. Amount invested in these instruments would be allowed as deduction irrespective of the fact whether (or not) such investment is made out of income chargeable to tax. 3. Section 80C deduction is allowed irrespective of assessee's income level. Even persons with taxable income above Rs. 10,00,000 can avail benefit of section 80C. Section 80 CCE Aggregate deduction u/s 80 C, u/s 80 CCC and 80 CCD can not exceed Rs. 1,00,000. Deduction under section 80D. Under This section, a deduction up to Rs 15,000 (Rs 20,000 in case of senior citizens) is allowed in respect of premium paid by cheque towards health insurance policy, like "Mediclaim". Such premium can be paid towards health insurance of spouse, dependent parents as well as dependent children. Deduction under section 24(b) Under this section, Interest on borrowed capital for the purpose of house purchase or construction is deductible from taxable income up to Rs. 1,50,000 with some conditions to be fulfilled CASH FLOW PLANNING: In simple terms, cash flow refers to the inflow and outflow of money. It is a record of your income and expenses. Though this sounds simple, very few people actually take the time out to find out what comes in and what goes out of their hands each month. Cash flow planning refers to the process of identifying the major expenditures in future (both short-term and long-term) and making planned investments so that the required amount is accumulated within the required time frame.Cash flow planning is the first thing that should be done prior to starting an investment exercise, because only then will you be in a position to know how your finances look like, and what is it that you can invest without causing a strain on yourself. It will also enable you to understand if a particular investment matches with your flow requirement.So does it involve looking at future cash flows only? Not really. You should always do a cash flow for yourself as on date, and you will realize that you could have a potential savings amount within each month of your working life. This is the amount that you should look at saving for meeting your financial goals. The best way of doing this is to have a personal budget. CASH FLOW BASICS: The idea behind cash flow planning is to match expenses on life goals with the available income. Cash flow planning begins with identifying the sources and the amount of income and expenditure.'Income' includes maturities of investments, income from other sources, dividends, etc. 'Expenses' include loan repayments, and all other outflows etc. The next crucial step is to list out the life goals and assigning a time frame for achieving them. For example, your list could look like this: 32

Going abroad on a vacation next year Buying a car in 2 years Buying your child a computer next year

The next step is to prioritize these goals. As you will notice, some of these goals (like buying your child a computer, which is important for his or her education; or a wedding in the family) are high priority, while others (such as going abroad on a vacation) could be assigned a relatively lower priority. High priority goals are those where you do not have the liberty of compromising either on the time frame or on the amount. Low priority goals, on the other hand, can be tweaked around a bit. Finally, take care to ensure that you have a contingency fund to tackle an emergency. Ideally, the size of your contingency fund should be two-three times your monthly expenditure, if you are a working person. If you are a retired person, the amount should be three to five times. Thereafter, your financial planner can help you work out the right investment strategy by using the principles of Investment Planning. Essentially, this involves calculating the amount of investment required to realise the goal, taking inflation into account. WAY TO MAKE YOUR PERSONAL BUDGET : The first thing you will need to do is to collect all your bills, receipts and other documents which will help you monitor your spending for the month. A good idea is to jot down all your expenses in a notebook. Include both fixed and variable expenses in your list. Fixed expenses are those that stay the same every month (at least for a relatively long period). These are expenses that have been committed for a long term. For example, rent, school fees of your children, wages paid out to domestic helps, etc are all fixed expenses. Variable expenses, on the other hand, are those that change from month to month. Expenses on food, clothing, electricity and phone bills, entertainment, etc. could be clubbed under this head. You have a relatively higher control over some of these. If you have just started the budgeting exercise, it may be difficult to keep all records. Do not worry, and do your best to keep records. Start keeping track of as many expenses as you can. The more accurate and complete this exercise is, the easier and more effective will your cash flow planning be. Steps to Creating an Effective Personal Budget

Make a list of all of your monthly income. If you have have received an annual bonus, divide this number by 12. Do the same to all other lump sum incomes of an annual nature. It is important to list all sources. Next, make a list of all your monthly expenses. If an expense occurs less frequently, convert it to the monthly format. Be sure to include all expenses as housing, food, transportation, utilities, entertainment, etc. It is wise to track your spending for a full month during this stage. Now you can see for yourself if your income covers all of your current expenses. If the answer is no, then you need to cut down on your expenses. Depending on the amount of the shortfall, you may choose to reduce some of your variable expense (such as spending money on movies or junk food!) or increase your earnings. For example, you could take up a part-time job after your regular work hours, or give tuitions. 33

If your income is in excess of your expenses, consider investing the difference instead of spending it.

Importance of cash flow planning Cash flow plans are commonly used by business houses. Without a viable cash flow plan, a company could easily spend more than its revenue, putting it in peril. Unfortunately, most of us do not realise that a cash flow plan is as important for people like us as well. The principles that apply to corporate finance and to our personal lives are largely the same. There has never been a bigger need than today for families and individuals to work out cash flow plans. Without proper cash flow planning one could easily get caught in the debt trap. Of course, it goes without saying that creating a plan is not enough. One also needs to implement the plan, besides bringing about a change in the spending habits. Cash flow plan brings you face-to-face with what you should ideally be saving, and investing in a systematic and regular manner, and what would it mean to you to withdraw from your portfolio after a couple of years. It brings down in numbers what your financial future has in store for you, and gives a crystal clear view (as much as is possible with inflation and the interest rate scenario). Childrens future planning Like every parent, you too must be overjoyed to watch your child grow. All parents want to give the best possible upbringing to their children. This includes good education and security, in case of any eventuality. Soon, your little bundle of joy will grow up, and it will be time to provide for his or her higher education and wedding. The purpose of Children's Future Planning is to create a corpus for foreseeable expenditures such as those on higher education and wedding, and to provide for an adequate security cover during their growing years. Children's Future Planning acquires added importance because children's education and wedding are high priority life goals, which can neither be postponed nor can there be a compromise on the amount. Good education has always been the passport to a secure future. Today, career opportunities have grown manifold, and there are many professional course that your child can aspire for. However, costs of higher education have also increased exponentially. Like most parents, you might be saving regularly to ensure a safe tomorrow for your child. However, savings alone is no longer enough. For ensuring adequate funding of your child's education, you as a parent, need to do two things: 1. Invest appropriate amount systematically and at regular intervals 2. Provide for a financial security blanket to cover any eventuality It is never too early to start saving and investing for your child's future. Especially in today's context. For example, the cost of a professional degree today is approximately Rs 2.5 lakhs. If your child is one-year-old today, after 17 years when he/she goes to college, you may require a sum of Rs 6.3 lakhs, assuming an annual rate of inflation of 6%.There are many products which your Financial Planner can use to achieve the above objectives. For example, he could suggest a Children's Future Plan offered by any good insurance company, to build a corpus for your child's higher education, and provide for a security cover in the event of the parent's unfortunate demise. Children's plans are also available under unit-linked option. Being unit-linked, they offer access to investments in all kinds of asset classes - equity, debt and cash.

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How To Make Financial Planning Work For You You are the focus of the financial planning process. As such, the results you get from working with a financial planner are as much your responsibility as they are those of the planner. To achieve the best results from your financial planning engagement, you will need to be prepared to avoid some of the common mistakes shown above by considering the following advice:

Set measurable financial goals. Set specific targets of what you want to achieve and when you want to achieve results. For example, instead of saying you want to be comfortable when you retire or that you want your children to attend good schools, you need to quantify what comfortable and good mean so that you'll know when you've reached your goals. Understand the effect of each financial decision. Each financial decision you make can affect several other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. Or a decision about your child's education may affect when and how you meet your retirement goals. Remember that all of your financial decisions are interrelated. Re-evaluate your financial situation periodically. Financial planning is a dynamic process. Your financial goals may change over the years due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth, house purchase or change of job status. Revisit and revise your financial plan as time goes by to reflect these changes so that you stay on track with your long-term goals. Start planning as soon as you can. Don't delay your financial planning. People who save or invest small amounts of money early, and often, tend to do better than those who wait until later in life. Similarly, by developing good financial planning habits such as saving, budgeting, investing and regularly reviewing your finances early in life, you will be better prepared to meet life changes and handle emergencies. Be realistic in your expectations. Financial planning is a common sense approach to managing your finances to reach your life goals. It cannot change your situation overnight; it is a lifelong process. Remember that events beyond your control such as inflation or changes in the stock market or interest rates will affect your financial planning results. Realize that you are in charge. If you're working with a financial planner, be sure you understand the financial planning process and what the planner should be doing. Provide the planner with all of the relevant information on your financial situation. Ask questions about the recommendations offered to you and play an active role in decision-making.

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Common Mistakes Consumers Make When Approaching Financial Planning 1. Don't set measurable financial goals. 2. Make a financial decision without understanding its effect on other financial issues. 3. Confuse financial planning with investing. 4. Neglect to re-evaluate their financial plan periodically. 5. Think that financial planning is only for the wealthy. 6. Think that financial planning is for when they get older. 7. Think that financial planning is the same as retirement planning. 8. Wait until a money crisis to begin financial planning. 9. Expect unrealistic returns on investments. 10. Think that using a financial planner means losing control. 11. Believe that financial planning is primarily tax planning.

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INVESTMENT THROUGH FINANCIAL PLANNING

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Section 80C: Rooting for financial planning

The annual tax-planning exercise for most investors tends to be divorced from their financial planning process. As a result factors like risk appetite, investment objective and tenure of investment are often overlooked when tax-planning investments are made. While apathy or lack of awareness on the investors' part could be partly 'credited' for this, the restrictive nature of Section 88 of the Income Tax Act should also shoulder the blame. Section 88 Investors are required to make investments in stipulated tax-saving instruments for claiming tax rebates under the given section. the investor's income level is the key in determining the rebate he was entitled to; a higher income level translated into lower rebates. Investments eligible for the purpose of claiming tax benefits included Public Provident Fund (PPF), National Savings Certificate (NSC) and tax-saving funds among others. The upper limit (in monetary terms) for the purpose of tax-saving investments was pegged at Rs 100,000. However the hitch was that 'sectoral caps' existed on the various investment avenues. For example investments in tax-saving funds (also referred to as ELSS) of upto Rs 10,000 were eligible for claiming tax benefits. Similarly investments in instruments like PPF, NSC, tax-saving funds and avenues like insurance premium, repayment of home loan (principal component of the EMI only) among others accounted only for a Rs 70,000 benefit. The balance Rs 30,000 (Rs 100,000 less Rs 70,000) was reserved for infrastructure bond investments. Effectively, the investor had little choice in selecting the tax-saving investments. Instead it was Section 88 which determined how each individual would make his investments. An investor with a high risk appetite had to choose the same investment avenues as a low risk investor because of Section 88's restrictive nature. Enter Section 80C Section 88 was scrapped in Finance Bill 2005, instead Section 80C was introduced. All avenues which were eligible for tax benefits under Section 88 were brought under the Section 80C fold. However instead of offering tax rebates, investments (upto Rs 100,000) under Section 80C qualified for deduction from gross total income. Hence a new system of claiming tax benefits was introduced; furthermore a new tax structure was introduced as well.

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PERSONAL TAX RATES For individuals, HUF, Association of Persons (AOP) and Body of individuals (BOI): For the Assessment Year 2008-09 Taxable income slab (Rs.) Up to 1,50,000 Up to 1,80,000 (for women) Up to 2,25,000 (for resident individual of 65 years or above) 1,50,001 3,00,000 3,00,001 5,00,000 5,000,001 upwards Rate (%) NIL 10 20 30*

*A surcharge of 10 per cent of the total tax liability is applicable where the total income exceeds Rs 1,000,000. Note :

Education cess is applicable @ 3 per cent on income tax, inclusive of surcharge if there is any. A marginal relief may be provided to ensure that the additional IT payable, including surcharge, on excess of income over Rs 1,000,000 is limited to an amount by which the income is more than this mentioned amount.

Agricultural income is exempt from income-tax The biggest advantage Section 80C offered was that sectoral caps on tax-saving instruments were removed. As a result investors were given the freedom to select investment avenues of their choice for tax-planning purpose. Why Section 80C scores over Section 88: Investing in line with one's risk appetite is a tenet of financial planning and Section 80C promotes the same. Removal of sectoral caps on investments for the purpose of tax-planning means investors can invest in line with their risk appetites and needs. A risk-taking investor can invest his entire corpus of Rs 100,000 in a high risk instrument like ELSS; conversely a riskaverse investor can select small savings schemes like PPF and NSC. As a result, every investor's tax-saving portfolio can now reflect his individual preferences. Another advantage Section 80C offers is for investors whose gross total income is greater that Rs 500,000. Under the earlier tax regime, these investors were not eligible for Section 88 tax rebates. However Section 80C has done away with this disparity and investors across tax brackets can claim the Rs 100,000 deduction.

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Eligible avenues for Section 80C 1. Payment of life insurance premium. 2. Contribution to provident fund. 3. Repayment of principal amounts on housing loans. 4. Payment of tuition fees. 5. Investments in PPF 6. Investments in NSC. 7. Investments in ELSS 8. Investments in Infrastructure Bonds. What should investors do? Clearly Section 80C has ensured that the onus of conducting the tax-planning exercise in line with one's risk profile has shifted to investors. Investors now need to utilise the opportunity by making the right investments. Investors would do well to remember that investments made for the purpose of tax-planning can have a significant impact on their finances over the long-term horizon, hence due importance should be accorded to it. Our advice - engage the services of a qualified investment advisor, make an investment plan for your tax-planning investments and stick to it; finally don't deviate from your risk appetite.

Tax-saving schemes at a glance Particulars Tenure (years) Min. investment (Rs) Max. investment (Rs) Safety/Rating Return (CAGR) Interest frequency Taxation of interest PPF 15 500 70,000 Highest 8.00 NSC 6 100 100,000 Highest 8.00 ELSS 3 500 100,000 High Risk 12.00 - 15.00 Infrastructure Bonds 3 5,000 100,000 AA/AAA 5.50 - 6.00

Compounded Compounded half annually yearly Tax free Taxable

No assured Options available dividends/returns Dividend & capital gains tax free Taxable

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Money control section 80c : Choices galore

The last few budgets have thrown open a variety of investment options to invest to save tax. The most important question is which area of investment to choose. Three most important investments which as far as possible should be taken advantage of by all individual tax payers in particular are: (a) Investment in a residential house property; (b) Investment upto a maximum of Rs 1 lakh so as to enjoy the tax deduction u/s 80C / 80CCC; (c) Investment upto Rs.10,000/- in a mediclaim medical insurance policy, popularly known as Mediclaim Policy. If you want to achieve the highest score of tax planning with reference to your investments, then one must make it a point to buy one residential house property for self-occupation especially when you do not own a residential property in your name. As per the provisions contained in section 24 of the Income Tax Act, 1961, a deduction equal to Rs 1,50,000 is permissible for every individual in respect of interest on loan for residential self-occupied house property. This interest on loan is allowed as a deduction irrespective of the person from whom you take the loan. Hence, even if you take a loan not from a banker but from a relative or your spouse and make the payment of the interest still then the deduction in respect of interest on loan would be allowed. The maximum amount of deduction as per section 24 in respect of interest on loan for residential house property is Rs 1,50,000 per year. If you don't have a housing loan, it really makes sense right now to start hunting for housing loan and try to get the occupation of the property before the close of 31st March so as to enjoy the full deduction on account of interest on the housing loan. Please do remember that in case the house is not ready the benefit of deduction will not be available in this year. Your investment in residential house property for self-occupation can also get you another tax deduction in terms of section 80C whereby deduction from your income upto Rs 1 lakh is permissible even in respect of repayment of the housing loan to bank, financial institution, employer etc. Those interested should refer to the exact provisions of section 80C.Now, it is time to judge your preference for making investment in various vistas available as per section 80C of the Income Tax Act, 1961. However, please do remember that one or more items taken together the total investment amount should be a maximum of Rs 1 lakh to entitle you to a deduction u/s 80C. One can also opt for contribution to the Pension Plan whereby deduction u/s 80CCC is permissible upto Rs 1 lakh. However, the combined deduction of section 80C and section 80CCC for Pension Plan is Rs 1 lakh only. Hence, it implies that there is no separate specific deduction for pension plan contribution.Now coming to the most important area of tax deduction by making investment in tune with the provisions contained in section 80C of the Income Tax Act, 1961, we find that the comparatively popular areas in which investment can be made by the tax payers are payment of life insurance premium, contribution to public provident fund, investment in NSC, investment in NSS (National Saving Scheme), payment of the children tuition fee, investment in ELSS and repayment of the housing loan. Thus, all together one can pick and choose from all these investment options as 41

also the pension plan and thereby target the total investment to the figure of Rs 1 lakh, which happens to be the maximum amount which one can contribute by way of investment for tax benefit. Another happy news of making investment for the purposes of section 80C is investment in bank fixed deposit of any scheduled bank having a maturity period of minimum five years. Thus, your investment in bank fixed deposit during the current year for five years or more will entitle you to tax deduction in terms of section 80C of the Income Tax Act, 1961.

How to choose the best investment?

Now let us try to analyze which investment is good for which category of tax payer. It is a wellknown fact that the tax payers can be classified into different categories depending upon the tax bracket in which they are assessed. For example, the first category of tax payers would be persons having income in excess of Rs 1 lakh but upto Rs 1,50,000. All those tax payers coming into this category are required to pay income tax of just 10%. I would like to recommend this group to make investment especially in insurance, NSC, NSS and bank fixed deposit. Now comes the next category of those tax payers who are having annual income exceeding Rs 1,50,000 per annum and going upto Rs 3,00,000 per annum. All those tax payers coming in this bracket are required to pay income-tax at 20%. The best module of investment for this category of tax payers would be insurance, payment of tuition fees of the children, ELSS, repayment of housing loan and PPF. Now comes the last category of tax payers who come within the income bracket of more than Rs 3,00,000 where the maximum marginal rate of income tax is 30%. This category of individual tax payers should invest in insurance, PPF, ELSS and repayment of the housing loan. However, the investment in various investment instruments can vary from person to person depending upon his profile of investment and his liking or otherwise. However, purely from the point of view of tax and investment planning it makes no sense to invest in bank fixed deposit especially by those tax payers who are having high income and high rate of income tax. This conclusion is drawn from the fact that if a person having, say, income in excess of Rs 3,00,000 makes investment in the bank fixed deposit for five years to achieve the benefit of section 80C deduction, he enjoys tax deduction but on his income from bank fixed deposit he will be required to make payment of income tax at the rate of 30%. Hence, we would like to recommend investment in bank fixed deposit as a part of investment strategy to achieve tax deduction u/s 80C only for those tax payers who are coming within the lowest income bracket.

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ANALYZING: DIFFERENT INVESTMENT AVENUES

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Avenues of investment
An investor has wide array of investment avenues available. They are as under: 1. Mutual funds. 2. Bonds. 3. Life insurance policies . 4. Non marketable financial assets: Bank deposits. Post office deposits. Company deposits. Provident fund deposits.

5. Precious metals : These are items generally small in size but highly valuable in monetary terms. They are : Gold and silver. Precious stones. Other valuable objects. 6. Financial derivatives. 7. Real estate. 8. Equity shares and preference shares.

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MUTUAL FUND Understanding Mutual Funds Mutual fund is a trust that pools money from a group of investors (sharing common financial goals) and invest the money thus collected into asset classes that match the stated investment objectives of the scheme. Since the stated investment objectives of a mutual fund scheme generally forms the basis for an investor's decision to contribute money to the pool, a mutual fund can not deviate from its stated objectives at any point of time. Every Mutual Fund is managed by a fund manager, who using his investment management skills and necessary research works ensures much better return than what an investor can manage on his own. The capital appreciation and other incomes earned from these investments are passed on to the investors (also known as unit holders) in proportion of the number of units they own.

When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder. Any change in the value of the investments made into capital market instruments (such as shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets by the total number of units issued to the investors.

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For example : A. B. C. D. E. If the market value of the assets of a fund is Rs. 100,000 The total number of units issued to the investors is equal to 10,000. Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or 10.00 Now if an investor 'X' owns 5 units of this scheme Then his total contribution to the fund is Rs. 50 (i.e. Number of units held multiplied by the NAV of the scheme)

MUTUAL FUND INDUSTRY IN INDIA. The mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under. First Phase - 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management. Second Phase - 1987-1993 (Entry of Public Sector Funds) Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47,004 as assets under management. Third Phase - 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds. Fourth Phase - since February 2003 This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2003). The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. 46

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of AUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes. Mutual Funds are among the hottest favourites with all types of investors. Investing in mutual funds ranks among one of the preferred ways of creating wealth over the long term. In fact, mutual funds represent the hands-off approach to entering the equity market. There are a wide variety of mutual funds that are viable investment avenues to meet a wide variety of financial goals STRUCTURE OF MUTUAL FUND SEBI Regulations 1996 defines a mutual fund established in the form of a trust to raise money through the sale of units under one or more schemes for investing in securities. So a mutual fund is constituted in the form of a trust under the Indian Trust Act, 1882. There are several constituents of a mutual fund structure. Different constituents of a mutual funds structure are : a) SPONSOR: Sponsor means any person who, acting alone or in combination with another body corporate, establishes a mutual fund. Sponsor also creates a Board of Trustees. b) BOARD OF TRUSTEES: The Board of trustees holds the property of the mutual fund in the trust for the benefit of the unitholders. The board has a responsibility to ensure that the mutual fund is managed under the statutory provisions and the relevant guidelines. c) Asset Management Company (amc): A mutual fund is set up as a trust which has a sponsor AMC. The AMC must be recognized by SEBI. It manages the funds of the mutual funds scheme by making investment in various types of securities SEBI Regulations require that 50% of the directors of the AMC must be independent. d) CUSTODIAN, etc: Custodian, bankers and registrar and transfer agents are other constituents of the mutual fund structure. They are appointed by the board of trustees and provide various types of financial services to the mutual fund. Constituents of a Fidelity mutual fund are: NAME Sponsor Trustee AMC : : : : Fidelity mutual fund. Fidelity international investment advisors (liability limited to 1 lakh) Fidelity trustee company (p) ltd. Fidelity fund management (p) ltd.

In case of UTI mutual fund, there are 4 sponsors: The SBI, PNB, BOB, LIC (liability of each sponsor limited to RS 10,000).

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STRUCTURE OF MUTUAL FUND

RETURN FROM A MUTUAL FUND Return from a mutual fund depends upon the objective of the scheme .In general, the return from the mutual funds may consist of the following: 1. Periodic dividends in cash(generally annual), 2. Distribution of the capital gains,and 3. Increase(change) in NAV over the period. Annual percentage return from a mutual fund may be calculated as follows: RETURN = Div + CG + (NAV1 - NAV0) / NAV0*100 Where; Div = Dividends for the period. CG = Capital gain distributed ,if any NAV0 = NAV in the beginning. NAV1 = NAV at the end of the year. NAV :The net asset value, or NAV, is the current market value of a fund's holdings, less the fund's liabilities, usually expressed as a per-share amount. For most funds, the NAV is determined daily, after the close of trading on some specified financial exchange, but some funds update their NAV multiple times during the trading day. The public offering price, or POP, is the NAV plus a sales charge. Open-end funds sell shares at the POP and redeem shares at the NAV, and so process orders only after the NAV is determined. Closed-end funds (the shares of which are traded by investors) may trade at a higher or lower price than their NAV; this is known as a premium or discount, respectively. If a fund is divided into multiple classes of shares, each class will typically have its own NAV, reflecting differences in fees and expenses paid by the different classes. 48

The Value of Your Fund Net asset value (NAV), which is a fund's assets minus liabilities, is the value of a mutual fund. NAV per share is the value of one share in the mutual fund, and it is the number that is quoted in newspapers. You can basically just think of NAV per share as the price of a mutual fund. It fluctuates everyday as fund holdings and shares outstanding change. When you buy shares, you pay the current NAV per share plus any sales front-end load. When you sell your shares, the fund will pay you NAV less any back-end load. Investors are the owners of the mutual fund. Fund s collected under a particular scheme are invested in different securities. So the ownership interest of the unitholders is represented by these securities. Net assets refers to the ownership interest per unit of the mutual fund i.e NAV refers to the amount which a unitholder would receive per unit if the scheme is closed.NAV is represented as follows: NAV = Value of securities - Liabilities/No. of unit outstandings COSTS AND LOADS IN THE MUTUAL FUNDS INVESTMENT Investors in mutual funds bear following costs. These are: Operating expenses : Operating expenses are the costs incurred by mutual fund in respect of management of portfolio of assets on behalf of the investors. The operating expenses include the administrative expenses and the advisory fees payable is added to the cost of the asset. The operating expenses may be expressed as a percentage of the total assets under management of the mutual fund. The Expense Ratio is also known as Annual Recurring Expenses. This basket of charges comprises the fund management fee, agent commission, registrar fees and the selling and promotion expenses. The expense ratio is disclosed every March and September and is expressed as a percentage of the funds average weekly net assets. A funds expense ratio states how much you pay a fund in percentage terms to manage your money. For example, lets assume you invest Rs 10,000 in a fund with an expense ratio of 1.5 per cent. This means that you pay the fund Rs 150 to manage your money. The expense ratio affects the returns you get as well. If the fund generates returns of 10 per cent, what you will get is just 8.5 per cent after the expense ratio of 1.5 per cent has been deducted. Hence, this makes it necessary for investors to know the expense ratio of the funds he invests in. Since the expense ratio is charged every year, a high expense ratio over the long term can eat into your returns massively. For example, Rs 1 lakh invested over a period of 10 years would grow to Rs 4.05 lakh if the fund delivers returns of 15 per cent per annum. But when we deduct the expense ratio of 1.5 per cent per annum, then your returns come down to Rs. 3.55 lakh, down by almost 14 per cent over the period of 10 years.Different funds have different expense ratios. However to keep things in check, the Securities & Exchange Board of India (SEBI) has stipulated an upper limit that a fund can charge. The limit stands at 2.50 per cent for equity funds and 2.25 per cent for debt funds. The largest component of the expense ratio is the management and advisory fees. Then there are marketing and distribution expenses and all those involved in the operations of a fund like the custodian and auditors also get a share of the pie. Interestingly, brokerage paid by a fund on the purchase and sale of securities is not reflected in the expense ratio. Funds state their buying and 49

selling price after taking the transaction cost into account.Now that you know everything about expense ratios, lets see if it really matters. The answer is yes, it does, especially in the case of debt funds. Debt funds generate about 7 9 per cent returns and any percentage of expense ratio becomes a substantial amount in the case of such low yields. On the other hand, in the case of actively managed equity funds, the issue of expenses is more complicated. The wide divergence of returns between good and bad funds makes the expense ratio secondary. However, if you are stuck between two similar funds, the expense ratio can be a good differentiator. But keep in mind, expense ratio is charged even when the funds returns are negative. Overall, before you invest in a mutual fund, it is imperative that you check out the funds expense ratio. But remember that a low expense ratio doesnt necessarily mean that the fund is good. A good fund is one that delivers good returns with minimal expenses. The unitholders do not pay directly for the operating expenses. Rather the operating expenses are deducted from the closing NAV(assets). The unitholders bear these costs in terms of reduced NAV . Expense ratio = Total operating expenses/Average asset under management. Loads : The mutual funds comes with a sales charge or commission.The fund investor pays the load which goes to compensate a sales intermediary(broker,financial planner ,investment advisor etc).Or his/her time and expertise in selecting an appropriate fund for the investor. The load is paid at the time of purchase when the shares are sold or as long as the fund is held by the investor. Loads typically come in 3 varieties and the funds are typically noted as class a, class b, class c. The first is a front end load where the fee is paid up front(when you buy the fund). The second category is a back end load (you pay on your way out of the fund) and the third is a constant load where you are charged each year.If a fund limits its level load to no more than .25%(the maximum is 1%) it can call itself a no load fund in its marketing literature. Front end and back end loads are not part of mutual fundss operating expenses but level loads called 12b-1 fees are included.The record shows that the performance of load and no load funds is similar. 12 b1 is taken from a funds prospectus, 12b-1 fee represents the annual charge deducted from fund assets to pay for distribution and marketing costs. If fee levels have changed since the end of the most recent fiscal year, the actual fees will most commonly be presented as a recalculation based on the prior year's average monthly net assets using the new, current expenses. Although contract-type distribution costs are listed in a fund's prospectus, these are maximum amounts and funds may waive a portion, or possibly all, of this fee. Actual fees thus represent a closer approximation of the true costs to shareholders. How you can invest in a mutual fund There are two ways in which you can invest in a mutual fund. 1. A one-time outright payment If you invest directly in the fund, you just hand over the cheque and you get your fund units depending on the value of the units on that particular day. Let's say you want to invest Rs 10,000. All you have to do is approach the fund and buy units worth Rs 10,000. There will be two factors determining how many units you get. 50

Entry load This is the fee you pay on the amount you invest. Let's say the entry load is 2%. Two percent on Rs 10,000* would Rs 200. Now, you have just Rs 9,800 to invest. NAV The Net Asset Value is the price of a unit of a fund. Let's say that the NAV on the day you invest is Rs 30. So you will get 326.67 units (Rs 9800 / 30). 2. Periodic investments This is referred to as a SIP. A Systematic Investment Plan is not a type of mutual fund. It is a method of investing in a mutual fund.That means that, every month, you commit to investing, say, Rs 1,000 in your fund. At the end of a year, you would have invested Rs 12,000 in your funLet's say the NAV on the day you invest in the first month is Rs 20; you will get 50 units. The next month, the NAV is Rs 25. You will get 40 units. The following month, the NAV is Rs 18. You will get 55.56 units. So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit. This is because, when the NAV is high, you get fewer units per Rs 1,000. When the NAV falls, you get more units per Rs 1,000. The Systematic Investment Plan (SIP) is a simple and time honored investment strategy for accumulation of wealth in a disciplined manner over long term period. The plan aims at a better future for its investors as an SIP investor gets good rate of returns compared to a one time investor. What is Systematic Investment Plan

A specific amount should be invested for a continuous period at regular intervals under this plan. SIP is similar to a regular saving scheme like a recurring deposit. It is a method of investing a fixed sum regularly in a mutual fund. SIP allows the investor to buy units on a given date every month. The investor decides the amount and also the mutual fund scheme. While the investor's investment remains the same, more number of units can be bought in a declining market and less number of units in a rising market. The investor automatically participates in the market swings once the option for SIP is made.

SIP ensures averaging of rupee cost as consistent investment ensures that average cost per unit fits in the lower range of average market price. An investor can either give post dated cheques or ECS instruction and the investment will be made regularly in the mutual fund desired for the required amount. SIP generally starts at minimum amounts of Rs.1000/- per month and upper limit for using an ECS is Rs.25000/- per instruction. For instance, if one wishes to invest Rs.1, 00,000/- per month, then they need to do it on four different dates. 51

Benefits of Systematic Investment Plan Power of compounding: The power of compounding underlines the essence of making money work if only invested at an early age. The longer one delays in investing, the greater the financial burden to meet desired goals. Saving a small sum of money regularly at an early age makes money work with greater power of compounding with significant impact on wealth accumulation. Rupee cost averaging: Timing the market consistency is a difficult task. Rupee cost averaging is an automatic market timing mechanism that eliminates the need to time one's investments. Here one need not worry about where share prices or interest are headed as investment of a regular sum is done at regular intervals; with fewer units being bought in a declining market and more units in a rising market. Although SIP does not guarantee profit, it can go a long way in minimizing the effects of investing in volatile markets. Convenience: SIP can be operated by simply providing post dated cheques with the completed enrolment form or give ECS instructions. The cheques can be banked on the specified dates and the units credited into the investor's account. The SIP facility is available in the Principal Income Fund, Monthly Income Plan, Child Benefit Fund, Balanced Fund, Index Fund, Growth Fund, Equity fund and Tax Savings Fund. SIP features Disciplined investing is vital to earning good returns over a longer time frame. Investors are saved the bother of identifying the ideal entry and exit points from volatile markets. SIP options such as equity, debt and balanced schemes offer a range of investment plans. While there is no entry load on SIP, investors face an exit load if the units are redeemed within a stipulated time frame. The success of your SIP hinges on the performance of your selected scheme Benefits of Mutual Fund investment 1. Professional Management Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. 2. Diversification Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. 3. Convenient Administration Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient. 4. Return Potential 52

Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. 5. Low Costs Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors. 6. Liquidity In open-end schemes, the investor gets the money back promptly at net asset value related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund. 7. Transparency You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook. 8. Flexibility Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. 9. Affordability Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy. How to choose a right mutual fund scheme. Once you are comfortable with the basics, the next step is to understand your investment choices, and draw up your investment plan relevant to your requirements. Choosing your investment mix depends on factors such as your risk appetite, time horizon of your investment, your investment objectives, age, etc. What should be kept in mind before investing in Mutual Funds ? Mutual Fund investment decisions require consistent effort on the part of the investor. Before investing in Mutual Funds, the following steps must be given due weightage to decide on the right type of scheme: 1. Identifying the Investment Objective 2. Selecting the right Scheme Category 3. Selecting the right Mutual Fund 4. Evaluating the Portfolio 53

A) Identifying the Investment Objective Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, level of income and expenses, among many other factors. Therefore, the first step is to assess you needs. Begin by asking yourself these simple questions: Why do I want to invest? The probable answers could be:

"I need a regular income" "I need to buy a house/finance a wedding" "I need to educate my children," or A combination of all the above

How much risk am I willing to take? The risk-taking capacity of individuals vary depending on various factors. Based on their risk bearing capacity, investors can be classified as:

Very conservative Conservative Moderate Aggressive Very Aggressive

What are my cash flow requirements? For example, you may require:

A regular Cash Flow A lumpsum after a fixed period of time for some specific need in the future Or, you may have no need for cash, but you may want to create fixed assets for the future

B) Selecting the scheme category The next step is to select a scheme category that matches your investment objectives:

For Capital Appreciation go for equity sectoral funds, equity diversified funds or balanced funds. For Regular Income and Stability you should opt for income funds/MIPs For Short-Term Parking of Funds go for liquid funds, floating rate funds, short-term funds. For Growth and Tax Savings go for Equity-Linked Savings Schemes.

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Investment Objective Short-term Investment Capital Appreciation Regular Income Tax Saving

Investment horizon 1- 6 months Over 3 years Flexible 3 yrs lock-in

Ideal Instruments Liquid/Short-term plans Diversified Equity/ Balanced Funds Monthly Income Plans / Income Funds Equity-Linked Saving Schemes (ELSS)

C) Selecting the right Mutual fund Once you have a clear strategy in mind, you now have to choose which Mutual fund and scheme you want to invest in. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same Fund Manager. Some important factors to evaluate before choosing a particular Mutual Fund are:

The track record of performance over that last few years in relation to the appropriate yardstick and similar funds in the same category. How well the Mutual Fund is organized to provide efficient, prompt and personalized service. The degree of transparency as reflected in frequency and quality of their communications.

D) Evaluation of portfolio Evaluation of equity fund involve analysis of risk and return, volatility, expense ratio, fund managers style of investment, portfolio diversification, fund managers experience. Good equity fund should provide consistent returns over a period of time. Also expense ratio should be within the prescribed limits. These days fund house charge around 2.50% as management fees. Evaluation of bond funds involve it's assets allocation analysis, return's consistency, its rating profile, maturity profile, and its performance over a period of time. The bond fund with ideal mix of corporate debt and gilt fund should be selected. How to calculate the growth of your Mutual Fund investments ? Let's assume that Mr. Gupta has purchased Mutual Fund units worth Rs. 10,000 at an NAV of Rs. 10 per unit on February 1. The Entry Load on the Mutual Fund was 2%. On September 15, he sold all the units at an NAV of Rs 20. The exit load was 0.5%. His growth/ returns is calculated as under: 1. Calculation of Applicable NAV and No. of units purchased: (a) Amount of Investment = Rs. 10,000 (b) Market NAV = Rs. 10 (c) Entry Load = 2% = Rs. 0.20 (d) Applicable NAV (Purchase Price) = (b) + (c) = Rs. 10.20 (e) Actual Units Purchased = (a) / (d) = 980.392 units 55

2. Calculation of NAV at the time of Sale (a) NAV at the time of Sale = Rs 20 (b) Exit Load = 0.5% or Rs.0.10 (c) Applicable NAV = (a) (b) = Rs. 19.90 3. Returns/Growth on Mutual Funds (a) Applicable NAV at the time of Redemption = Rs. 19.90 (b) Applicable NAV at the time of Purchase = Rs. 10.20 (c) Growth/ Returns on Investment = {(a) (b)/(b) * 100} = 95.30 % TAX BENEFITS Twenty percent of the amount invested in specified mutual funds (called equity linked savings schemes or ELSS and loosely referred to as "tax savings schemes") is deductible from the tax payable by the investor in a particular year subject to a maximum of Rs2000 per investor. This benefit is available under section 88 of the I.T. Act.Investment of the entire proceeds obtained from the sale of capital assets for a period of three years or investment of only the profits for a period of 7 years, exempts the asset holder from paying capital gains tax. This benefit is available under section 54EA and 54EB of the I.T. Act, provided the capital asset has been sold prior to April 1, 2000 and the amount is invested before September 30, 2000.The mutual fund is completely exempt from paying taxes on dividends/interest/capital gains earned by it. While this is a benefit to the fund, it is the indirect benefit of unitholders as well. This benefit is available to the mutual fund under section 10 (23D) of the I.T. Act. A mutual fund has to pay a withholding tax of 10% on the dividends distributed by it under the revised provisions of the I.T. Act putting them on par with corporates. However, if a mutual fund has invested more than 50% of its assets into equity shares, then it is exempt from paying any tax on the dividend distributed by it, for a period of three years, by an overriding provision. This benefit is available under section 115R of the I.T. Act. The investor in a mutual fund is exempt from paying any tax on the dividend received by him from the mutual fund, irrespective of the type of the mutual fund. This benefit is available under section 10(33) of the I.T. Act.The units of mutual funds are treated as capital assets and the investor has to pay capital gains tax on the sale proceeds of mutual fund units sold by him. For investments held for less than one year the tax is equal to 30% of the capital gain. For investments held for more than one year, the tax is equal to 10% of the capital gains. The investor is entitled to indexation benefit while computing capital gains tax. Thus if a typical growth scheme of an income fund shows a rise of 12% in the NAV after one year and the investor sells it, he will pay a 10% tax on the selling price less cost price and indexation component. This reduces the incidence of tax considerably. This concession is available under section 48 of the I.T. Act. The following calculations show this in more detail: Purchase NAV = Rs 10 Sale NAV = Rs 11.2 Indexation component=8% Capital gains = 11.2 10(1.08) 56

= 11.2 10.8 = 0.4 Capital gains tax = 0.4*0.1 = 0.04. If an investor buys a fresh unit in the closing days of March and sells it in the first week of April of the following year, he is entitled to indexation benefit for two financial years which close in the two March ending periods. This is termed as double indexation and lowers the tax even further especially for income funds. In the above example, the calculation would be as follows: Capital gains = 11.2 10(1.08)(1.08) = 11.2 11.7 = -0.5 Thus there will be no capital gains tax. REGULATION OF MUTUAL FUNDS All Mutual Funds are registered with SEBI (Securities and exchange board of India)and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI. ASSOCIATION OF MUTUAL FUNDS OPERATION IN INDIA With the increase in mutual fund players in India, a need for mutual fund association in India was generated to function as a non-profit organisation. Association of Mutual Funds in India (AMFI) was incorporated on 22nd August, 1995.AMFI is an apex body of all Asset Management Companies (AMC) which has been registered with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its members. It functions under the supervision and guidelines of its Board of Directors.Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a professional and healthy market with ethical lines enhancing and maintaining standards. The Association of Mutual Funds of India works with 30 registered AMCs of the country. It has certain defined objectives which juxtaposes the guidelines of its Board of Directors. The objectives are as follows:

This mutual fund association of India maintains a high professional and ethical standards in all areas of operation of the industry.

It also recommends and promotes the top class business practices and code of conduct which is followed by members and related people engaged in the activities of mutual fund and asset management. The agencies who are by any means connected or involved in the field of capital markets and financial services also involved in this code of conduct of the association.

AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund industry.

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Association of Mutual Fund of India do represent the Government of India, the Reserve Bank of India and other related bodies on matters relating to the Mutual Fund Industry. It develops a team of well qualified and trained Agent distributors. It implements a programme of training and certification for all intermediaries and other engaged in the mutual fund industry. AMFI undertakes all India awareness programme for investors inorder to promote proper understanding of the concept and working of mutual funds. At last but not the least association of mutual fund of India also disseminate informations on Mutual Fund Industry and undertakes studies and research either directly or in association with other bodies.

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BROAD MUTUAL FUND TYPES

1. Equity Funds Equity funds are considered to be the more risky funds as compared to other fund types, but they also provide higher returns than other funds. It is advisable that an investor looking to invest in an equity fund should invest for long term i.e. for 3 years or more. There are different types of equity funds each falling into different risk bracket. In the order of decreasing risk level, there are following types of equity funds: a. Aggressive Growth Funds - In Aggressive Growth Funds, fund managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature. Because of these speculative investments Aggressive Growth Funds become more volatile and thus, are prone to higher risk than other equity funds. b. Growth Funds - Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that they invest in companies that are expected to outperform the market in the future. Without entirely adopting speculative strategies, Growth Funds invest in those companies that are expected to post above average earnings in the future. c. Speciality Funds - Speciality Funds have stated criteria for investments and their portfolio comprises of only those companies that meet their criteria. Criteria for some speciality funds could be to invest/not to invest in particular regions/companies. Speciality funds are concentrated and thus, are comparatively riskier than diversified funds.. There are following types of speciality funds: 59

i.

ii.

iii.

iv.

Sector Funds: Equity funds that invest in a particular sector/industry of the market are known as Sector Funds. The exposure of these funds is limited to a particular sector (say Information Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer Goods) which is why they are more risky than equity funds that invest in multiple sectors. Foreign Securities Funds: Foreign Securities Equity Funds have the option to invest in one or more foreign companies. Foreign securities funds achieve international diversification and hence they are less risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate risk and country risk. Mid-Cap or Small-Cap Funds: Funds that invest in companies having lower market capitalization than large capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500 crores but more than Rs. 500 crores) and Small-Cap companies have market capitalization of less than Rs. 500 crores. Market Capitalization of a company can be calculated by multiplying the market price of the company's share by the total number of its outstanding shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently, investment gets risky. Option Income Funds*: While not yet available in India, Option Income Funds write options on a large fraction of their portfolio. Proper use of options can help to reduce volatility, which is otherwise considered as a risky instrument. These funds invest in big, high dividend yielding companies, and then sell options against their stock positions, which generate stable income for investors.

d. Diversified Equity Funds - Except for a small portion of investment in liquid money market, diversified equity funds invest mainly in equities without any concentration on a particular sector(s). These funds are well diversified and reduce sector-specific or company-specific risk. However, like all other funds diversified equity funds too are exposed to equity market risk. One prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times. ELSS investors are eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time of filing the income tax return. ELSS usually has a lock-in period and in case of any redemption by the investor before the expiry of the lock-in period makes him liable to pay income tax on such income(s) for which he may have received any tax exemption(s) in the past. e. Equity Index Funds - Equity Index Funds have the objective to match the performance of a specific stock market index. The portfolio of these funds comprises of the same companies that form the index and is constituted in the same proportion as the index. Equity index funds that follow broad indices (like S&P CNX Nifty, Sensex) are less risky than equity index funds that follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are less diversified and therefore, are more risky. f. Value Funds - Value Funds invest in those companies that have sound fundamentals and whose share prices are currently under-valued. The portfolio of these funds comprises of shares that are trading at a low Price to Earning Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value (Fundamental Value) Ratio. Value Funds 60

may select companies from diversified sectors and are exposed to lower risk level as compared to growth funds or speciality funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar etc.) which make them volatile in the short-term. Therefore, it is advisable to invest in Value funds with a long-term time horizon as risk in the long term, to a large extent, is reduced. g. Equity Income or Dividend Yield Funds - The objective of Equity Income or Dividend Yield Equity Funds is to generate high recurring income and steady capital appreciation for investors by investing in those companies which issue high dividends (such as Power or Utility companies whose share prices fluctuate comparatively lesser than other companies' share prices). Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared to other equity funds. 2. Debt / Income Funds Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors. In order to ensure regular income to investors, debt (or income) funds distribute large fraction of their surplus to investors. Although debt securities are generally less risky than equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment. To minimize the risk of default, debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". Debt funds that target high returns are more risky. Based on different investment objectives, there can be following types of debt funds: a. Diversified Debt Funds - Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors which further reduces risk for an individual investor. b. Focused Debt Funds* - Unlike diversified debt funds, focused debt funds are narrow focus funds that are confined to investments in selective debt securities, issued by companies of a specific sector or industry or origin. Some examples of focused debt funds are sector, specialized and offshore debt funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds. Because of their narrow orientation, focused debt funds are more risky as compared to diversified debt funds. Although not yet available in India, these funds are conceivable and may be offered to investors very soon. c. High Yield Debt funds - As we now understand that risk of default is present in all debt funds, and therefore, debt funds generally try to minimize the risk of default by investing in securities issued by only those borrowers who are considered to be of "investment grade". But, High Yield Debt Funds adopt a different strategy and prefer securities issued by those issuers who are considered to be of "below investment grade". The motive behind adopting this sort of risky strategy is to earn higher interest returns from these issuers. These funds are more volatile and bear higher default risk, although they may earn at times higher returns for investors. d. Assured Return Funds - Although it is not necessary that a fund will meet its objectives or provide assured returns to investors, but there can be funds that come with a lock-in period and offer assurance of annual returns to investors during the lock-in period. Any 61

shortfall in returns is suffered by the sponsors or the Asset Management Companies (AMCs). These funds are generally debt funds and provide investors with a low-risk investment opportunity. However, the security of investments depends upon the net worth of the guarantor (whose name is specified in advance on the offer document). To safeguard the interests of investors, SEBI permits only those funds to offer assured return schemes whose sponsors have adequate net-worth to guarantee returns in the future. In the past, UTI had offered assured return schemes (i.e. Monthly Income Plans of UTI) that assured specified returns to investors in the future. UTI was not able to fulfill its promises and faced large shortfalls in returns. Eventually, government had to intervene and took over UTI's payment obligations on itself. Currently, no AMC in India offers assured return schemes to investors, though possible. e. Fixed Term Plan Series - Fixed Term Plan Series usually are closed-end schemes having short term maturity period (of less than one year) that offer a series of plans and issue units to investors at regular intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series usually invest in debt / income schemes and target short-term investors. The objective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period. 3. Gilt Funds Also known as Government Securities in India, Gilt Funds invest in government papers (named dated securities) having medium to long term maturity period. Issued by the Government of India, these investments have little credit risk (risk of default) and provide safety of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of debt securities are inversely related and any change in the interest rates results in a change in the NAV of debt/gilt funds in an opposite direction. 4. Money Market / Liquid Funds Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest investment option when compared with other mutual fund types. However, even money market / liquid funds are exposed to the interest rate risk. The typical investment options for liquid funds include Treasury Bills (issued by governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by banks). 5. Hybrid Funds As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio. There are following types of hybrid funds in India: a. Balanced Funds - The portfolio of balanced funds include assets like debt securities, convertible securities, and equity and preference shares held in a relatively equal proportion. The objectives of balanced funds are to reward investors with a regular income, moderate capital appreciation and at the same time minimizing the risk of capital erosion. Balanced funds are appropriate for conservative investors having a long term investment horizon. b. Growth-and-Income Funds - Funds that combine features of growth funds and income funds are known as Growth-and-Income Funds. These funds invest in companies having 62

potential for capital appreciation and those known for issuing high dividends. The level of risks involved in these funds is lower than growth funds and higher than income funds. c. Asset Allocation Funds - Mutual funds may invest in financial assets like equity, debt, money market or non-financial (physical) assets like real estate, commodities etc.. Asset allocation funds adopt a variable asset allocation strategy that allows fund managers to switch over from one asset class to another at any time depending upon their outlook for specific markets. In other words, fund managers may switch over to equity if they expect equity market to provide good returns and switch over to debt if they expect debt market to provide better returns. It should be noted that switching over from one asset class to another is a decision taken by the fund manager on the basis of his own judgment and understanding of specific markets, and therefore, the success of these funds depends upon the skill of a fund manager in anticipating market trends. 6. Commodity Funds Those funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds. A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. "Precious Metals Fund" and Gold Funds (that invest in gold, gold futures or shares of gold mines) are common examples of commodity funds. 7. Real Estate Funds Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies, are known as Specialized Real Estate Funds. The objective of these funds may be to generate regular income for investors or capital appreciation. 8. Exchange Traded Funds (ETF) Exchange Traded Funds provide investors with combined benefits of a closed-end and an openend mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. The biggest advantage offered by these funds is that they offer diversification, flexibility of holding a single share (tradable at index linked prices) at the same time. Recently introduced in India, these funds are quite popular abroad. Simply put, an ETF is a basket of securities that is traded on the stock exchange, akin to a stock. So, unlike conventional mutual funds, ETFs are listed on a recognized stock exchange. Their units can be bought and sold directly on the exchange, through a stockbroker during the trading hours. ETFs can be either close-ended or open-ended. Open-ended ETFs can issue fresh units to investors even post the new fund offer stage, although this tends to happen selectively on account of the substantial lot sizes involved. In case of ETFs, since the buying and selling is largely done over the stock exchange, there is minimal interaction between investors and the fund house. Besides, ETFs can be either actively or passively managed. In an actively-managed ETF, the objective is to outperform the benchmark index. To that end, they have no obligation to invest in stocks from any benchmark index. On the contrary, a passively-managed ETF attempts to replicate the performance of a designated benchmark index. Hence it invests in the same stocks, which comprise its benchmark index and in the same weightage. For example, Nifty BeES is a 63

passively managed ETF with the S&P CNX Nifty being its designated benchmark index. In the Indian context, passively managed ETFs are more prominent. 9. Fund of Funds Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes, just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non financial assets. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. However, the expenses of Fund of Funds are quite high on account of compounding expenses of investments into different mutual fund schemes. Major Mutual Fund Companies in India ABN AMRO Mutual Fund Birla Sun Life Mutual Fund Bank of Baroda Mutual Fund (BOB Mutual Fund) HDFC Mutual Fund HSBC Mutual Fund ING Vysya Mutual Fund Prudential ICICI Mutual Fund Sahara Mutual Fund State Bank of India Mutual Fund Tata Mutual Fund Kotak Mahindra Mutual Fund Unit Trust of India Mutual Fund Reliance Mutual Fund Standard Chartered Mutual Fund Franklin Templeton India Mutual Fund Morgan Stanley Mutual Fund India Escorts Mutual Fund Alliance Capital Mutual Fund Benchmark Mutual Fund Canbank Mutual Fund Chola Mutual Fund LIC Mutual Fund GIC Mutual Fund etc.

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INVESTMENT IN BOND Bonds are a core element of any financial plan to invest and grow wealth .When you buy bonds, you're lending the bond issuer money in return for a fixed rate of return. Bonds are therefore known as fixed-income investments, and you are a creditor of the company. Stocks, on the other hand, go up and down in value depending on the stock market, and you are an owner of the company. Bonds are another word for loans taken out by large organizations, such as corporations, cities, and the U.S. Government. Since these entities are so large, they need to borrow the money from more than one person or bank. Bonds can be described simply as longterm debt instruments representing the issuers contractual obligation, or IOU. The buyer of a newly issued coupon bond is lending money to the issuer who, in turn, agrees to pay interest on this loan and repay the principal at a stated maturity date. When you buy a bond, you become a lender. The bond issuer is the borrower. The bond issuer might be a company, a city, a state, or a federal government agency. They may borrow for short periods to manage cash flow or cover operating costs, for example. They may also borrow money for longer-term goals such as to build new facilities or pay for new technologies. Cities or states may need to build bridges or provide other community services. One common way to borrow money is to issue a bond series and sell units of the series to the public.Therefore, bonds are a piece of a really big loan. The borrowing organization promises to pay the bond back, and pays interest during the term of the bond. Since large organizations don't like to actually say they are borrowing money, they say they are selling bonds...presumably because it sounds better.Like loans, bonds return interest payments to the bond holder. In the old days, when people actually held paper bonds, they would redeem the interest payments by clipping coupons. Today, most bonds are held by the financial planning institution, and interest is automatically accrued for the life of the bond.Bonds are usually resold before they mature, or reach the end of the loan period. This is how bonds rise and fall in value. Since bonds return a fixed interest payment, they tend to look more attractive when the economy and stocks market decline. When the stock market is doing well, investors are less interested in purchasing bonds, and their value drops. Like stocks, bonds can be packaged into a bond mutual fund. This is a good way for an individual investor to let an experienced mutual fund manager pick the best selection of corporate bonds. A bond fund can also reduce risk through diversification. This way, if one corporation defaults on its bonds, then only a small part of the investment is lost.Bonds can be issued by corporations, states, cities, and the federal government. The interest on bonds is usually paid quarterly, but is sometimes paid at the date the bond matures, when the borrower pays you back the principal you lent them. Bonds issued by the federal government are extremely safe. Corporate bonds and municipal bonds (munis), issued by states and cities, can be safe or high-risk. Just because a bond is issued by a city or state doesn't guarantee their safety. Bonds are rated for safety by bond-rating companies like A.M. Best (www.ambest.com), Moody's (www.moodys.com), and Standard and Poor's (www.standardandpoors.com). These rating companies give each bond a grade between A (low risk) and C (high risk). The grade indicates the likelihood that the bond issuer will pay the interest and principal as promised. Since you lock-in your interest rate when you buy bonds, one of the risks of owning bonds is that you could be stuck with a lower interest rate while interest rates in the market are rising. Bonds have a place in every portfolio. The danger is in being too conservative by having too much of your money invested in conservative bonds and not enough in more aggressive stocks or mutual funds. In a nutshell a bond is a debt security, similar to an I.O.U. When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency or other entity known as the issuer. In return for the loan, the issuer promises to pay you a specified rate of interest 65

during the life of the bond and to repay the face value of the bond (the principal) when it matures, or comes due. REASON FOR CHOOSING BOND It's an investing axiom that stocks return more than bonds. In the past, this has generally been true for time periods of at least 10 years or more. However, this doesn't mean you shouldn't invest in bonds. Bonds are appropriate any time you cannot tolerate the short-term volatility of the stock market. Take two situations where this may be true: 1) Retirement - The easiest example to think of is an individual living off a fixed income. A retiree simply cannot afford to lose his/her principal as income for it is required to pay the bills. 2) Shorter time horizons - Say a young executive is planning to go back for an MBA in three years. It's true that the stock market provides the opportunity for higher growth, which is why his/her retirement fund is mostly in stocks, but the executive cannot afford to take the chance of losing the money going towards his/her education. Because money is needed for a specific purpose in the relatively near future, fixed-income securities are likely the best investment. These two examples are clear cut, and they don't represent all investors. Most personal financial advisors advocate maintaining a diversified portfolio and changing the weightings of asset classes throughout your life. For example, in your 20s and 30s a majority of wealth should be in equities. In your 40s and 50s the percentages shift out of stocks into bonds until retirement, when a majority of your investments should be in the form of fixed income. CHARACTERSTICS Bonds have a number of characteristics of which you need to be aware. All of these factors play a role in determining the value of a bond and the extent to which it fits in your portfolio.
Face Value/Par Value

The face value (also known as the par value or principal) is the amount of money a holder will get back once a bond matures. A newly issued bond usually sells at the par value. Corporate bonds normally have a par value of $1,000, but this amount can be much greater for government bonds. What confuses many people is that the par value is not the price of the bond. A bond's price fluctuates throughout its life in response to a number of variables (more on this later). When a bond trades at a price above the face value, it is said to be selling at a premium. When a bond sells below face value, it is said to be selling at a discount.

Coupon (The Interest Rate)

The coupon is the amount the bondholder will receive as interest payments. It's called a "coupon" because sometimes there are physical coupons on the bond that you tear off and redeem for interest. However, this was more common in the past. Nowadays, records are more likely to be kept electronically. As previously mentioned, most bonds pay interest every six months, but it's possible for them to pay monthly, quarterly or annually. The coupon is expressed as a percentage of the par value. If a bond pays a coupon of 10% and its par value is $1,000, then it'll pay $100 of interest a year. A rate that stays as a fixed 66

percentage of the par value like this is a fixed-rate bond. Another possibility is an adjustable interest payment, known as a floating-rate bond. In this case the interest rate is tied to market rates through an index, such as the rate on Treasury bills. You might think investors will pay more for a high coupon than for a low coupon. All things being equal, a lower coupon means that the price of the bond will fluctuate more.

Maturity The maturity date is the date in the future on which the investor's principal will be repaid. Maturities can range from as little as one day to as long as 30 years (though terms of 100 years have been issued). A bond that matures in one year is much more predictable and thus less risky than a bond that matures in 20 years. Therefore, in general, the longer the time to maturity, the higher the interest rate. Also, all things being equal, a longer term bond will fluctuate more than a shorter term bond.

Issuer The issuer of a bond is a crucial factor to consider, as the issuer's stability is your main assurance of getting paid back. For example, the U.S. government is far more secure than any corporation. Its default risk (the chance of the debt not being paid back) is extremely small - so small that U.S. government securities are known as risk-free assets. The reason behind this is that a government will always be able to bring in future revenue through taxation. A company, on the other hand, must continue to make profits, which is far from guaranteed. This added risk means corporate bonds must offer a higher yield in order to entice investors this is the risk/return tradeoff in action. The bond rating system helps investors determine a company's credit risk. Think of a bond rating as the report card for a company's credit rating. Blue-chip firms, which are safer investments, have a high rating, while risky companies have a low rating. The chart below illustrates the different bond rating scales from the major rating agencies in the U.S.: Moody's, Standard and Poor's and Fitch Ratings. Bond Rating Moody's Aaa Aa A Baa Ba, B Caa/Ca/C C Grade Investment Investment Investment Investment Junk Junk Junk Risk Highest Quality High Quality Strong Medium Grade Speculative Highly Speculative In Default

S&P/ Fitch AAA AA A BBB BB, B CCC/CC/C D

Notice that if the company falls below a certain credit rating, its grade changes from investment 67

quality to junk status. Junk bonds are aptly named: they are the debt of companies in some sort of financial difficulty. Because they are so risky, they have to offer much higher yields than any other debt. This brings up an important point: not all bonds are inherently safer than stocks. Certain types of bonds can be just as risky, if not riskier, than stocks. Types of Bonds In general, there are three main types of bonds:

Municipal bonds Corporate bonds Government bonds

Municipal Bonds These are issued by state and local governments or their agencies to pay for public improvements, reducing debt, or other public purposes. If you buy bonds issued by your home state, you will not have to pay state income tax or federal income tax (or city tax, if you have one). If you buy bonds issued by another state, you will not have to pay federal tax, but you will pay tax to your own state (and city if applicable). Corporate Bonds These are issued by corporations that want to raise money for their business ventures, ranging from balancing their cash flow to buying new equipment, building new facilities, or spending on new research.Interest earned from corporate bonds is taxable, so they tend to pay higher rates than government or municipal bonds, which have some tax benefits. Corporate bonds are often considered appropriate investments for the bond portion of your retirement plan investments, because you get the higher interest and still aren't taxed until the earnings are withdrawn. A municipal or government bond will pay you less interest and already offers a tax benefit, so they offer less incentive to include them in your retirement portfolio. Government Bonds Government bonds are those issued by the federal government or one of its agencies. From a credit perspective, these are the safest of all investments because they're backed by the "full faith and credit" of the U.S. government; so unless the U.S. goes bankrupt, you're guaranteed to get your money back. Treasuries Treasury bills, notes, and bonds are collectively called "Treasuries."

Treasury bills (T-bills): These are short-term securities that mature in a year or less. You buy them at a discount price and at the end of the term, you're repaid the full price. The difference is what constitutes your earnings. These earnings are exempt from local and state income taxes, but must be reported on your federal tax return. Treasury notes: These are issued for the intermediate term, such as 2 years up to 10 years. Expect to earn a little higher interest rate than what you could get from a T-bill. Interest is paid every six months. Earnings are exempt from local and state income taxes 68

but must be reported on your federal tax return. You can sell your Treasury note before it matures, if you wish. Treasury bonds: These are issued for the long-term, generally from 10 years to 30 years. Expect to earn a higher interest rate than what you could get from a T-note. Interest is paid every six months. Earnings are exempt from local and state income taxes but must be reported on your federal tax return. You can sell your Treasury bond before it matures, if you wish.

Savings Bonds Savings bonds are government bonds designed especially for individual investors. As such, they can generally only be redeemed by their original owner, except in limited circumstances. Savings bonds include:

I Bonds: These are savings bonds that help protect against inflation. They pay a fixed interest rate combined with a variable interest rate that's updated twice a year based on the current inflation rate. EE Bonds: Series EE savings bonds issued on or after May 1, 2005 earn a fixed rate of interest. They increase in value every month instead of every six months. Interest is compounded semiannually. If you cash them in before owning them for 5 years, you will be penalized the last three months of interest. Interest earned on Series EE bonds is exempt from state and local income taxes. You can defer federal income tax until you redeem the bonds, which will stop earning interest after 30 years. Since interest isn't taxed until you redeem a bond, your savings grow faster. EE bonds can also assist you with tax planning, as you have the flexibility to redeem the bonds on your own terms. HH bonds. HH bonds also earn a fixed rate of interest. Unlike EE Bonds, HH Bonds pay interest every 6 months until maturity or redemption, whichever comes first. The U.S. Treasury discontinued the HH series of bonds in 2004, but will continue to honor outstanding HH bonds still held by investors.

Zero coupon bonds This is a type of bond that makes no coupon payments but instead is issued at a considerable discount to par value. For example, let's say a zero-coupon bond with a $1,000 par value and 10 years to maturity is trading at $600; you'd be paying $600 today for a bond that will be worth $1,000 in 10 years. EARNINGS The amount that you earn will be based on the bond's face value, coupon rate and yield.The face value, or par value, of a bond is the value of the bond at maturity, the date when the loan is paid off. A common face value is $1,000 per bond. It's important to keep in mind that the actual market price of a bond may be higher or lower than the bond's face value. A bond's market price can fluctuate over time, depending on a variety of factors including investor demand, interest rate movement, the bond's maturity date and the creditworthiness of the issuer.A bond's coupon rate refers to the interest that will be paid based on the face value of the bond. A bond with a face value of $1000 and a 7% coupon will pay $70 a year in interest. Interest may be divided into quarterly, semiannual or annual payments, depending on the issuer and the individual bond.If you purchase a bond at face value, your coupon rate and actual earned yield will be the same. However, bonds are often sold at higher or lower prices than their face values. As a result, your actual yield can be different from the bond's coupon rate. Buying a bond at a discount, or less 69

than its face value, results in a higher yield than the stated coupon rate. In contrast, buying a bond at a premium, or more than its face value, results in a lower yield than the stated coupon rate. SAFETY COVER When you buy bonds, you're taking a risk that borrowers with poor credit ratings may not repay their loans on time, or even at all. Two major services, Moody's and Standard & Poor's, rate the creditworthiness of bonds. Ratings are based primarily on the credit history and current status of the issuer.The ratings use a letter system. They go by letters, like at school. The ones with only As in their rating are of high quality. The ones with a B in the rating are of medium quality (except for Moody's B rating, which is below medium quality). Bonds with a C are either low quality or extremely low quality. Bonds are commonly labeled either "investment grade" or "junk" quality (often called "high yield" instead). The less creditworthy the borrower, the higher your risk is of not being repaid what you lend. For that reason, higher risk bonds usually provide a higher interest rate. You can avoid the issue of creditworthiness entirely by investing in bonds issued by federal government agencies. Repayment of these loans is guaranteed by the Full Faith and Credit of the U.S. Government. WHAT DO BOND RATING MEAN? 1. Moody's Bond Ratings Aaa Best quality, with the smallest degree of investment risk.

Aa High quality by all standards; together with the Aaa group they comprise what are generally known as high-grade bonds. A Possess many favorable investment attributes; considered upper-medium-grade bonds.

Baa Medium-grade bonds (neither highly protected nor poorly secured). Bonds rated Baa and above are considered investment grade. Ba Have speculative elements; futures are not as well-assured. Bonds rated Ba and below are generally considered speculative. B Caa Generally lack characteristics of a desirable investment. Bonds of poor standing.

C Lowest rated class of bonds, with extremely poor prospects of ever attaining any real investment standing. 2. Standard & Poor's Bond Ratings AAA 'AAA' is the highest rating assigned by Standard & Poor's. The bond issuer's capacity to meet its financial commitment is extremely strong. 70

AA A bond rated 'AA' differs from the highest-rated obligations only to a small degree. The bond issuer's capacity to meet its financial commitment on the bond is very strong. A A bond rated 'A' is somewhat more affected negatively by changes in world and economic conditions than bonds in higher-rated categories. However, the bond issuer's capacity to meet its financial commitment on the bond is still strong. BBB A bond rated 'BBB' show signs of adequate financial protection. However, unfavorable economic conditions or changing circumstances are more likely to weaken the bond issuer's ability to meet its financial commitment 'BB', 'B', 'CCC', 'CC', and 'C' Bonds with these ratings are regarded as having significant risk, even though they may have some positive qualities. 'BB' indicates the least degree of risk and 'C' the highest. D A bond rated 'D' is in payment default.

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READINGS OF THE BOND TABLE

Column 1: Issuer - This is the company, state (or province) or country that is issuing the bond. Column 2: Coupon - The coupon refers to the fixed interest rate that the issuer pays to the lender. Column 3: Maturity Date - This is the date on which the borrower will repay the investors their principal. Typically, only the last two digits of the year are quoted: 25 means 2025, 04 is 2004, etc. Column 4: Bid Price - This is the price someone is willing to pay for the bond. It is quoted in relation to 100, no matter what the par value is. Think of the bid price as a percentage: a bond with a bid of 93 is trading at 93% of its par value. Column 5: Yield - The yield indicates annual return until the bond matures. Usually, this is the yield to maturity, not current yield. If the bond is callable it will have a "c--" where the "--" is the year the bond can be called. For example, c10 means the bond can be called as early as 2010.

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INSURANCE BASICS OF INSURANCE Insurance is a form of risk management primarily used to hedge against the risk of contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium .Insurance provides financial protection against a loss arising out of happening of an uncertain event. A person can avail this protection by paying premium to an insurance company. Insurance works on the principle of risk sharing. A great advantage of insurance is that it spreads the risk of few people over a large group of people that promises to honour the claim in case such los is actually incurred by the insured is termed as insurer. In order to get insurance, the insured is required to pay the insurance company (ie the insurer) a certain amount termed as premium on a periodical exposed to same types risk of similar type. Insurance is a basic form of risk management which provides protection against possible loss to life or physical assets .A person who seeks protection against such loss is termed as insured and the company basis (say monthly, quarterly ,annually or even one time). Insurance provides compensation to a person for an anticipated loss of life, business or an asset. Insurance is broadly classified into 2 parts covering different types of risk: 1. LONG TERM(life insurance) 2. GENERAL INSURANCE(non life insurance) Life insurance is one of the only tool where you create asset at the start (life cover) as compared to any other options where your savings build up over a time period. Life insurance is a contract between the policy owner and the insurer where the insurer agrees to pay a sum of money upon occurrence of the policy owners death. In return the policy owner (or policy payer) agrees to pay a stipulated amount called a premium at regular interval. As with most insurance policies life insurance is a contract between the insurance company and the policy owner (policy holder) whereby a benefit is paid to the designated beneficiary (or beneficiaries) if an insured event occurs which is covered by the policy. To be a life policy the insured event must be based upon life (or lives) of the people named in the policy. Insured events that may be covered include: Death Accidental death Life policies are legal contracts and the terms of the contract describe the limitation of the insured events. Life based contract tend to fall into 2 major categories: I. II. PROTECTION POLICIES: Designed to provide a benefit in the event of specified event, typically a lump sum payment. INVESTMENT POLICIES: Where the main objective is to facilitate the growth of capital by regular or single premiums.

PARTIES TO CONTRACT There is a difference between the insured and the policy owner (policy holder) although the owner and the insured are often the same persons eg if joe buys a policy on his own life ,he is 73

both the owner and the insured. The policy owner is the guarantee and he/she will be the person who will pay for the policy. The insured is a participant in the contract but not necessarily a party to it. ROLES OF LIFE INSURANCE : Risk and uncertainties are part of Lifes great adventureaccident, illness, theft, natural disaster; they are all built into the working of the universe, waiting to happen. Its role can be summarized as: 1. LIFE INSURANCE AS INVESTMENT: Insurance is an attractive option for investment. While most people recognize the risk hedging and tax saving potential of insurance, Many are not aware of its advantages as an investment option as well. Insurance products yield more compared to regular investment options, and this is besides the added incentives (read bonuses) offered by insures. You cannot compare an insurance product with other investment schemes for the simple reason that it offers financial protection from risks, something that is missing in non insurance products. Infact the premium you pay for insurance policy is an investment against risk. Thus before comparing with other scheme you must accept that a part of the total amount goes towards providing for the risk cover, while the rest is used for savings. In life insurance, unlike non life products you get maturity benefits on survival at the end of the term. In other words if you take a life insurance policy for 20years and survive the term the amount invested as premium in the policy will come back to you with added returns. In the unfortunate event of death with in the tenure of the deceased will receive the sum assured. Now lets compare insurance as an investment option. If you invest Rs 10,000 in PPF your money grows to Rs 10,950 @ 9.5% interest over a yes. But in this case, the access to your funds will be limited. One can withdraw 50% of the initial deposit only after 4 years. The same amount of Rs 10,000 can give upto approximately Rs 5,00,00 to Rs 12,00,000(depending upon the plan, medical conditions of the life insured) and this amount can immediately can become available to the policy holder on death. Thus insurance is a unique investment avenue that delivers sound returns in addition to protection. 2. LIFE INSURANCE AS RISK COVER: First and foremost insurance is about risk cover a protection; financial protection, to be more precise to help outlasts lifes unprecedented losses. Designed to safeguard against losses suffered on account of any unforeseen event, An insurance provides you with that unique sense of security that no other form of investment provides. By buying life insurance you buy peace of mind and are prepared to face any financial demand that would hit the family in case of untimely demise. To provide such protection insurance firms collect contribution from many people who face the same risk. A lose claim is paid out of the total premium collected by the insurance companys who act as trustees of the monies. Insurance also provides a safeguard in the case you have a wide range of products of accidents or a drop in income after retirement. An accident or disability can be devastating and an insurance policy can lend timely support to the family in such time. It also comes as a great help when you retire, in case no untoward happens during the term of the policy. With the entry of 74

private sector players in insurance, you have a wide range of products and services to choose from .Further many of these can be further customized to fit individual specific needs. Considering the amount you have to pay now it is worth buying some extra sleep. 3. LIFE INSURANCE AS TAX PLANNING: Insurance serves as an excellent tax saving mechanism too. The government of India has offered tax incentives to life insurance products in order to facilitate the flow of funds into the productive assets. Under SEC 88 of the INCOME TAX ACT,1961 an individual is entitled to a rebate of 20% on the annual premium payable on his/her life or life of his/her children or adult children. The rebate is deductible fro tax payable by the individual or a Hindu undivided family. This rebate can be availed upto a maximum of Rs 60,000.By paying Rs 60,000 a year , you can buy anything upwards of Rs 10,00,000 in sum assured(depending upon the policy) .This means that you get a Rs 12,000 tax benefit. The rebate is deductible from the tax payable by an individual/Hindu undivided family. TYPES OF INSURANCE What you should know about various types of insurance policies before getting insurance insured. All policies are not the same. Some give coverage for your life time and other cover you a specific numbers of years. Here is a snapshot of the policies and what they offer. 1. TERM INSURANCE: Term insurance covers you for a term of one or more years. It pays a death benefit only if the policy holder dies during the insurance is in force. Term insurance generally offers the cheapest form of life insurance. You can renew most term insurance policies for one or more terms even if your health condition has changed. However each time you renew the policy term premiums may climb higher, just like a rent agreement every time you renew the lease. This policy is particularly useful to cover any outstanding debt in the form of mortagage, home ;loan etc. Eg ; if you have taken a loan of Rs 10,00,000 you will have an option of taking an insurance to protect the loan in case of passing away before the debt is repaid. 2. WHOLE LIFE INSURANCE: Whole life insurance covers you for as long as you live if yours premiums are paid. You generally pay the same premium amount throughout your lifetime. Some whole life policies let you pay premiums for a shorter period such as 15,20,25 years. Premiums for these policies are higher since the premium payments are made during a shorter period. There are options in the market to have a return of premium option in a whole life policy. That means after a certain age of paying premiums the life insurance company will pay back the life assured but the coverage will continue. 3. MONEY BACK INSURANCE : The money back insurance plan not only covers yours life ,it also assures you the return of a certain percent of the sum assured as cash payment at regular interval. It is a savings plan with the added advantage of life cover and regular cash inflow. This plan is ideal for planning special moments ; like a wedding, your childs education or purchase of an asset. 75

4. ENDOWMENT ASSURANCE : It is a level premium plan with a saving feature. At maturity, a lumpsum is paid out equal to the sum assured (plus dividends in a par policy). If death occurs during the term of the policy then the total amount of insurance and any dividend(par policy) are paid out. There are number of products in the market that offer flexibility in choosing the term of the policy namely .You can choose the term 5 30 years. There are products in the market that offer non participating (no profits) version, the premiums for which are cheaper. 5. UNIVERSAL LIFE INSURANCE : This is a flexible life policy and is also market sensitive. You decide on the several investment options on how your net premium are tobe invested. While the money invested has the potential for significant growth, such funds are subject to market risks including the loss of the principal. 6. UNIT LINKED PRODUCT : Market linked plans or unit linked plan are similar to traditional insurance policies with the exception that your premium amount is invested by the insurance company in the stock market. Market linked insurance policies mimic mutual funds and investment in a basket of securities allowing you to choose between the investment options predominantly in equity, debt or a minimum of both(called balanced funds).The major advantage of market linked product is that they leave the asset allocation decision in the hands of investors themselves. You are in control of how you want to distribute your money among the broad class of instruments and when you want to do it or pull out. RIDERS Riders are additional add-on benefits that you could opt to include in your policy over and above what the policy may provide. However these additions come at an extra premium charge depending of the rider you opt for. These riders cannot be bought separately and independently. The extra premium, nature and characteristics of the riders are based on the base policy that is offered. Some riders available in the market are : ACCIDENT DEATH BENEFIT : Provides an additional amount in case death occurs as a result of an accident. TERM RIDER: It allows the payment of an additional amount should death of the insured happens. WAIVER OF PREMIUM : In case of total and permanent disability of life insured due to accident or any other means ,this rider allows premium on base policy or riders to be waived. CRITICAL ILLNESS : It allows payment of an additional amount on the diagnosis of some critical illness.

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Unit Linked Insurance Plan (ULIP) Plan Overview ULIP is an abbreviation for Unit link insurance plan .A ULIP is a insurance policy which provides a combination of risk cover and investment. The dynamics of the capital market have a direct bearing on the performance of the Ulip. In unit linked policy the investment risk is generally borne by the investor.Unit Linked Insurance Plan (ULIPs) are insurance policies that combine risk coverage with investing in the stock/debt markets. In effect, they are designed to behave as normal insurance policies plus mutual funds.An investor contribution to ULIPs gets invested in specific types of portfolios that he/she chooses. The policy typically pays back based on market returns on investments at the end of the insured period. Therefore, it forms an interesting savings instrument that can get good risk cover.Unit Linked Insurance Plans (ULIP) are the fastest growing category in the financial products market of our country. It is a hybrid of Insurance and Mutual funds in which the customer decides the premium he/she is willing to pay as well as the sum assured. In the case of conventional plans the client decides the sum assured and the premium is fixed depending on the age. The minimum sum assured one now has to take (post June 2006) is five times the annual premium and the maximum risk cover can be a multiple of more than 100, depending on the company, scheme and the age of the applicant. You can also opt for accidental and critical illness riders in most of the plans. To decide the quantum of insurance required, you should get a human life value analysis done, which will determine your insurance needs depending on a number of factors like age, income, outstanding loans and other liabilities like number of dependents etc. This analysis can be done by any financial planner or a life insurance advisor. It is advisable to take a higher multiple of sum assured; not less than 20 times the annual premium. If you are 30 years of age, it is possible to pay a premium of Rs.2000 per month and get a risk cover of Rs.21.60 lakhs. This multiple goes down with age but still there are plans in the market, like a ULIP by TATA AIG offers a risk cover of up to 60 times the annual premium up to an entry age of 60. Taking a lower multiple of risk cover is not desired since we have to be clear that the primary purpose of a ULIP is to take insurance and not just investment, for which there are mutual funds. How does a ULIP work? To understand how a ULIP works, let us assume an annual premium of Rs. 25,000. The life insurer will first deduct an up front charge which varies from 5% to 7% in the first year. IRDA has not decided so far to cap the allowable up front charges, which are strictly controlled in the mutual fund market. Let us assume a charge of 20%, which is very common in the industry. So out of 25,000 rupees, 5000 are deducted up front and they will take care of the cost of issuance of policy, agents commission etc. This charge is higher in the first year and goes down subsequently. Balance Rs. 20,000 is then used to allot you some units at the current price which is exactly like a mutual fund. The price of the units can go up and down depending on the market price of the securities it has purchased which can vary from 100% debt to 100% equity in various combinations offered by different insurers and schemes. These units are then used to deduct the cost of risk cover given to you and the cost of fund and policy management. Every investment made by you in the form of premium or Top-up (money you can pay in addition to the premium), adds to your balance of units and any charge towards risk cover or policy administration etc. reduces your number of units. The balance units multiplied by the current NAV (Net Asset Value) is your fund value for any given day, which changes almost every day.

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So to sum up:

ULIP is a hybrid plan, provides the qualities of both insurance and mutual funds Gives you the flexibility to chose your premium as well as risk cover Gives you the flexibility to stop premium payments if so desired or needed

ULIPs vs Mutual Funds Mutual Funds Minimum investment Determined by the Investment amounts are investor and can be amounts determined by the fund modified as well house No upper limits, Upper limits for expenses expenses chargeable to Expenses determined by the investors have been set insurance company by the regulator Portfolio Quarterly disclosures Not mandatory disclosure are mandatory Modifying Generally permitted Entry/exit loads have to asset for free or at a be borne by the allocation nominal cost investor Section 80C Section 80C benefits benefits are are available only on Tax benefits available on all investments in taxULIP investments saving funds ULIPs

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The important differences between traditional plans and ULIP : S.NO ULIP 1 The premiums in excess of risk cover, is invested as desired by the policy holder. 2 The investment return may vary depending on the market movements and the investment risk is borne by the policy holder. 3 4 5 TRADITIONAL PLANS All the premiums go into a common fund and are invested at the insurers direction. There are 2 categories of benefits guaranteed and non guaranteed. For guaranteed benefits, the insurer bears the investment risk. However non guaranteed benefit such as bonuses depend on the performance of insurer. Surrenders are allowed but at a loss. Loss may be provided. For participating policies, bonuses are payable. The premium amount used for insurance coverage, other charges and investment are bundled up and not known.

6 7

Withdrawals are allowed. Loss if any, depends on NAV ;loans are not allowed. There are no bonuses, except royalty bonuses in some cases. The amount of premium used for insurance coverage,other charges and the purchase of units are unbounded and transparent . Benefits are variable. Benefits are pre determined. Loss is likely. Gains depending on Loss is unlikely. Gains are also unlikely market movements. except through bonuses.

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FIXED DEPOSIT FDs are one of the oldest and most common methods of investing. Incase you do not know how it works, you have to give the financial institution a certain sum of money for a certain fixed period of time. After that time period is over you will get the original amount with some interest that you have earned for the time period you invested your money. FDs are not very liquid investments. If you invest your money in FDs, you will not be able to withdraw it until the FD matures. Generally, if you need to remove your money before the maturity of the investment, you will be able to do so but you will loose the interest that you were supposed to earn. There are some FDs that allow you to claim your interest every month or every 6 months etc. There are many different schemes with many different offers! Besides this, if a particular interest rate is decided at the time of investing and the interest rate goes up while your money is invested, you will not be able to enjoy the higher interest rate. However, now-a-days the banks and the financial market is becoming very competitive. You need to check up on the different types of FD schemes available before making any FD investments. There are FDs offered by nonfinancial institutions like companies etc. also. These are generally FDs that will give good rate of returns. They are called Company FDs. However, the risk involved is also moderately high. However, the companies try to get themselves an AAA rating according to the specifications of the RBI. If a company has an AAA rating, then it can be considered to be a safe investment. Company Fixed Deposits forms are available through various broking agencies or directly with the companies. Minimum investment in a Company Fixed deposit varies from company to company. Normally, the minimum investment is Rs.5,000. For individual investors, there is no upper limit. In case of recurring deposits, the minimum amount is normally Rs.100 per month. Duration of the Company FD scheme: Company Fixed Deposits have varying duration; they may vary from a minimum of 6 months to 5 years or even more.

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PROVIDENT FUND Provident fund scheme is a retirement benefit scheme .Under this scheme, a stipulated sum is deducted from the salary of the employee as his contribution towards the fund. The employer also, generally, contributes simultaneously the same amount out of his pocket to the fund. The employees and employers contribution are invested in gilt edged securities. Interest earned theron is also credited to the provident fund account of employees. Thus credit balance in a provident fund account of an employee consists of employees contribution, interest on employees contribution, employers contribution and interest on employers contribution. The accumulated sum is paid to the employee at the time of his retirement/resignation. In the case of death of an employee, accumulated balance is paid to his legal heirs. Since the scheme encourages personal savings at micro level and generates funds for investment at the macro level, the government provides tax incentives under Sec 88.Thus it is a social security measure to provide for the old age of the employee. Provident fund is calculated as a percentage of your salary (Basic pay and dearness allowance if any).The present rate is 12% and the same will be cut from your salary and a matching contribution will be paid from employer pension fund. It is deducted from your salary if you are government employee. According to the new pension policy it is not deducted for employees in service after 1.1.2007. To sum up: Benefit is payable in lumpsum. 12% contribution from both employer and employee. 8.33% of employers contribution to EPS95 Tax benefit to approved fund. Accumulated value with interest is returned on leaving the service.

Provident fund is thus defined as a benefit scheme where benefits are paid in lumpsum or on exit. It is mandatory for all organization employing more than 19 employees. Employer and employee both conyribute 12% of the wage bill to the fund. The accumulated amount with interest is returned to employee on the retirement. After the introduction of EPS-95 part of the contribution to provident fund is diverted to state pension scheme, which provides salary linked benefits on superannuation. PUBLIC PROVIDENT FUND Public provident fund is established by the Central Government for the benefit of general public to mobilize public savings. The ppf is a government run fund where the entire contribution is voluntarily made by the individual himself. Interest is credited every year but payable at the time of maturity. PPF is among the most popular small saving schemes. Currently, this scheme offers a return of 8 per cent and has a maturity period of 15 years. It provides regular savings by ensuring that contributions (which can vary from Rs.500 to Rs.70,000 per year) are made every year. For efficient "tax saving" there is nothing better than PPF!But for those who are looking for liquidity, PPF is NOT a good option. Withdrawals are allowed only after five years from the end of the financial year in which the first deposit is made.PPF does not provide any regular income and only provides for accumulation of interest over a 15-year period, and the lump-sum amount (principal + interest) is payable on maturity. The lump-sum amount that you receive on maturity (at the end of 15 years) is completely tax-free!! One can deposit up-to Rs 70,000 per 81

year in the PPF account and this money will also not be taxed and be removed from your taxable income. If you are relatively young and have time on your side, then PPF is for you. PPF account can be opened with a minimum deposit of Rs.100 at any branch of the State Bank of India (SBI) or branches of it's associated banks like the State Bank of Mysore or Hyderabad. The account can also be opened at the branches of a few nationalized banks, like the Bank of India, Central Bank of India and Bank of Baroda, and at any head post office or general post office. After opening an account you get a pass book, which will be used as a record for all your deposits, interest accruals, withdrawals and loans. National Savings Certificate (NSC) The National saving scheme popularly referred to by its acronym NSC. NSC is a post office saving scheme backed by the government, it is one of the safest investment option. That is National Savings Certificates (NSC) are certificates issued by Department of post, Government of India and are available at all post office counters in the country. It is a long term safe savings option for the investor. The scheme combines growth in money with reductions in tax liability as per the provisions of the Income Tax Act, 1961. The duration of a NSC scheme is 6 year. NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000 for a maturity period of 6 years. There is no prescribed upper limit on investment. Individuals, singly or jointly or on behalf of minors and trust can purchase a NSC by applying to the Post Office through a representative or an agent. One person can be nominated for certificates of denomination of Rs. 100- and more than one person can be nominated for higher denominations. The certificates are easily transferable from one person to another through the post office. There is a nominal fee for registering the transfer. They can also be transferred from one post office to another. One can take a loan against the NSC by pledging it to the RBI or a scheduled bank or a co-operative society, a corporation or a government company, a housing finance company approved by the National Housing Bank etc with the permission of the concerned post master. Though premature encashment is not possible under normal course, under sub-rule (1) of rule 16 it is possible after the expiry of three years from the date of purchase of certificate. Tax benefits are available on amounts invested in NSC under section 88, and exemption can be claimed under section 80L for interest accrued on the NSC. Interest accrued for any year can be treated as fresh investment in Certificate of Rs 1000.NSC for that year and tax benefits can be claimed under section 88. eg a Rs1000 denomination certificate will increase to Rs. 1601 on completion of 6 years. Interest rates for the NSC Year 1 year 2 year 3 year 4 year 5 year 6 year Rate of Interest Rs 81.60 Rs 88.30 Rs 95.50 Rs103.30 Rs 111.70 Rs 120.80

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COMPARING NSC WITH PPF NSC versus PPF: Post- tax returns PPF NSC Coupon rate (pa) 8.00% 8.00% Interest frequency Compounded annually Compounded half-yearly Effective rate (pa) 8.00% 8.16% Interest receipt On maturity On maturity Tax benefit on investment Deduction under Section 80C Deduction under Section 80C Tax benefit on interest earned Exempt under Section 10 Nil Tax rates Nil 10% 20% 30% Post-tax returns* 8.00% 8.00% 8.00% 8.00%

8.16% 7.33% 6.50% 5.66%

(*Education cess charged at 2.00% has been considered while computing post-tax returns.)

NSC scorecard Risk Returns Liquidity Other tax benefits Pluses

No risk Averagegood Medium Average

The interest that accrues is eligible for a deduction of up to Rs 12,000 from your taxable income. In other words, the interest that accrues (and is not received) is exempt from income tax up to Rs 12,000. The interest that accrues is automatically reinvested and is eligible for rebate of upto 30 per cent, thereby reducing the requirement limit for investment next year. You can pledge NSCs with banks and other lending institutions to get a loan of 75 per cent of the value of the certificates. This is particularly useful for contractors and other people who regularly need loans against security. The lock-in period is for six years only.

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Minuses

The post-tax returns are lower than that offered by the Public Provident Fund (PPF) and infrastructure bonds. Premature withdrawals are not allowed. Interest income is subject to a maximum exemption of Rs 12,000; interest income in excess of Rs 12,000 is taxable.

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GOLD AS AN INVESTMENT Investment in gold has always played a significant role in religion, rituals and human sentiments, making it an indispensable investment option. Gold with its traditionally negative correlation with other assets classes such as stocks, fixed income securities, and commodities, has made it a popular investment for portfolio diversification. n individual can invest in gold through various routes. The most conventional route is to possess it in physical form. However, this kind of investment is not only risky but also requires high carrying cost. The other option is to invest in gold bonds or certificates issued by various central and commercial banks. These bonds generally carry interest rates and a lock- in period varying from three years to seven years. On maturity, depositors can take the delivery of gold or amount equivalent depending on their option. In the recent past, launch of Gold ETF( Exchange traded fund) has been a welcome development. World gold options are the latest option for investing in gold. These are mutual funds, specializing in investing in the shares of gold companies. It would be misleading to equate investment in gold bullion as the appreciation potential of the gold mining company share depends on market expectations of the future price of gold, the costs of mining it, the likelihood of additional gold discoveries and several other factors. Most gold mining equities tend to be more volatile than the gold itself. Gold mining stocks have earnings and resources to leverage the price of gold. Hence as the price of gold rises, profit of gold mining stocks rises more in percentage terms. As supply side of gold is not increasing, existing gold mining companies are likely to witness a significant increase in profitability and value in the next couple of years. Hence as long as demand for gold rises world gold funds are likely to be the most remunerative option for investors. DERIVATIVES A derivative is a financial instrument that derives or gets it value from some real good or stock. It is in its most basic form simply a contract between two parties to exchange value based on the action of a real good or service. Typically, the seller receives money in exchange for an agreement to purchase or sell some good or service at some specified future date.The largest appeal of derivatives is that they offer some degree of leverage. Leverage is a financial term that refers to the multiplication that happens when a small amount of money is used to control an item of much larger value. A mortagage is the most common form of leverage. For a small amount of money and taking on the obligation of a mortgage, a person gains control of a property of much larger value than the small amount of money that has exchanged hands.

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FINDINGS

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ANALYSIS OF THE QUESTIONNAIRE RESPONSES For judging the investors perception about different investment avenues , I have taken a sample of 100 investors. The analysis was done using the responses obtained. (1) Monthly income (in Rs) : Below 15,000 30,000 45,000
Monthly income(in Rs)
9% 12% 37% Below 15,000 15,000- 30,000 30,000- 60,000 Above 60,000 42%

15,000 - 30,000 above 45,000

INTERPRETATION: Survey results shows that people having income below Rs 30,000 are taking the mutual fund route for investing their money .That is they dont want inflation to eat up their money in a savings bank account.Thus they take balanced approach to investment i.e upper middle class segment of our society is diversifying their investment .Diversification is a nuclear weapon in the investors arsenal to fight against risk: in simple terms it means spreading your investment across different securities stocks, bonds, real estate, money market instruments, real estate, fixed deposit etc) and different sectors ( auto, textile, IT) .Upper middle class is investing in various types of instruments which are hard to predict.These days demand for SIP is on the rise particularly among middle class investors for the simple reason SIP is very similar to regular saving scheme like a recurring deposit i.e. it is a method of investing a fixed sum regularly in a mutual fund .Thus investing savings that too without much savings is like a dream come true.

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(2) Savings that go in investment :

Savings that goes in investment

9% 10% < 10% 17% 64% 10%- 20% 20%- 30% > 30%

INTERPRETATION: Investment means putting your money to work to earn more money. Investment planning is a holistic approach to meeting your lifes goalsi.e. investment planning is a key to successful investing. It is a scientific process, which if done in a right spirit can help you achieve your financial goals like buying a new house, enjoying comfortable retirement, paying for education of children etc. You do not have to be wealthy to be an investor. Investing even a small amount can produce considerable rewards over the long term .especially if you do it regularly.But you need to decide about how much you want to invest and where.. on analysis it was found that 64% respondents have invested 10% of their savings in different investment avenue.

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(3)

Preference for investment avenues :

Investment Avenues
50 45 40 35 30 25 20 15 10 5 0 equity bonds fixed mutual deposits funds Avenues real estate others like ppf, nsc, gold, lic

INTERPRETATION : On analysis it was found that mutual funds have graduated into a flexible and innovative investment avenue for investors. The reason why mutual funds appeal to investors across the spectrum is because as an investment avenue they offer a lot more variety and flexibility than stocks, NSC, PPF and bonds . Eg: For a low risk investor debt funds and MIPs are the most sought after fund. High risk investors prefer investing in equity and balanced funds. Now if you have money that you want to invest for a single day there are liquid funds . Another way is to start investing piecemeal with as little as Rs 500 p. m through SIP.Today Mutual funds have finally come into their own as an independent investment avenue Mutual funds IPOs attract as much investor attention as stock. Next on the list comes the small savings segments - small saving continues to be a popular investment avenue.PPF is an ideal tool while planning for long term objectives as it scores high in terms of tax benefit i.e. interest earned is exempt under section 10 of the Income Tax act . Assured return life insurance schemes have now become a thing of the past. Ulip have been a rage of late. Ulip work like a mutual fund with a life cover thrown in. Finally comes the real estate sector Rising income levels of a growing middle class along with increase in nuclear families, low interest rates , modern attitude to home ownership and a change in attitude amongst the young working population from that of save and buy to buy and repay have all combined to boost housing demand.

Percentage

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(4) Analyzing the different risk levels :

12% 12%

Risk levels
24%

Conserv e ativ Some what conserv e ativ moderate some what aggressiv e Aggressive

13% 39%

INTERPRETATION : Risk and return go hand in hand. Higher the risk, higher is the possibility of earning a good return. Theoretically even safe investments such as (such as bank deposits) are not without some element of risk .Conservative investor is not very open to market but they are smart enough to take a conservative amount of risk. Conservative people are very stringent about their investing decision. They invest most of their fund in debt funds. For them cash & capital investment is most important and prioritized. They invest most of their fund in debt fund and dont even think about entering into high end equity market. Conservative investors take only limited risk by concentrating on secure fixed income instruments. Moderate investors take moderate risk by investing in mutual funds, bonds, select bluechip equity shares etc. Aggressive investors are the masters of the field. They play aggressively in the market as they take higher risk so they are entitled to higher returns. Aggressive investors take major risk on investments in order to have high(above-average) returns like speculative or unpredictable equity shares.

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(5) Investment with the help of an financial advisor :

Expert advice
44% 56% Yes no

INTERPRETATION : According to the survey it has been found that investors want their money to be in proper hands that is why they consider professional management to be the most important thing while investing their hard earned money. People enlist the help of financial planner because of the complexity of knowing how to perform the following:] Providing direction and meaning to financial decisions. Allowing the person to understand how each financial decision affects the other areas of finance.
Allowing the person to adapt more easily to life changes in order to feel more secure.

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(6) Source of information :

60% 50% 40% 30% 20% 10% 0% Source of inform ation Magazine & new spape r Internet Friends & re latives Staff

INTERPRETATION : There are many factors which influence the investment decision of the investors. It may be current news (political, technological, financial etc ) , magazines, friends etc. In the study it proved that many people trust only the people working in that investment advisory company for the investment decisions. Friends, relatives i.e. personal source is the next major factor. It is to be noted that experienced person trust himself thereafter he/she invests. Magazines and current news also matters and bad news can make a person change his/her decision.

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(7) Rating the services of the financial advisors :

Rating s
3%1% 18% 22% Excellent Good Fair Poor 56% Verypoor

INTERPRETATION : The service of the service provider is the factor which makes a person from shifting from one investment advisor to another. The hard task is to retain an investor with the company over a period of time. Business lost for once is lost forever . The word of mouth communication plays important role in attracting most investors. There were many who remained unsatisfied with the services of their brokers. The facilities must be attractive . The investors dont want to keep any tensions in their mind apart from investments. Still the majority was of those who are partially satisfied. There is always room for improvement. The services can be improved and many others can be made to work with the organization.

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(8) Appropriate time for consulting the financial planner :

Consultation
13% 23% Ev time ery 27% Once in a month Once in a year Can't say 37%

INTERPRETATION : The experience in the market is the factor which influences the investment .Major part of the sample was having vast experience thus they prefer consulting their advisor once in a year i.e. the smart investors decides in advance for how much time he would be keeping his money in the market and when he should leave squaring up. There are many who are somewhat conservative and are inexperienced i.e they entered the market after noticing the rise in the market. That is they are the ones who consult their advisor every time they invest.

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SUGGESTIONS
India has one of the biggest savings rates in the world , but these are invested in such instruments that do not really built long term wealth. Investments by households have been mostly limited to fixed deposits with banks, risk-free government backed securities. A majority of Indian households do not know how to approach the modern financial markets- this brings fore the importance of a financial planning thus a need for a financial planner. Individuals make a wide array of financial decisions through their lifetime. Examples of such decisions include providing for childrens higher education, saving for retirement , managing credits wisely, budgeting, tax and estate planning, insurance etc. Each of these is prompted by the emergence of a need. To help consumers make informed decisions, financial education is very important. thus there is a need of Financial literacy. Financial literacy is the process by which investors improve their understanding of the financial markets, products, concepts and risks. It goes beyond the provision of financial information and advice. It is the ability to know , monitor , and effectively use financial resources to enhance the well-being and economic security of oneself, ones family and ones business. Asset management companies(AMC) should conduct more and more mass awareness campaigns on systematic investment planning, power of rupee compounding , need to insure financial goals etc .AMCs should also lower the minimum investment bar to as minimum as possible thus making it affordable to smallest of the small investor to participate in financial markets. Easy access to simple products will be key factors in improving investors financial learning. Going ahead ,low risk mutual funds products can be made available like any other FMCG product over the counter, packaged and delivered instantly. This will improve the acceptance and access to the industry and will open the gates for masses to improve and experiment with their wealth-building endeavor.

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CONCLUSIONS & LIMITATIONS

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CONCLUSIONS
Our parents and the generation before them used to generally deploy all their savings in bank fixed deposits, national savings certificates , post office deposits , RBI bonds and so on. These fixed return generating instruments used to meet perfectly well their capital protection and growth objectives. Unfortunately, in todays globalize world, the above referred fixed coupon instruments yield on an average around only 8% and being taxable end up providing a net return of around 5.5% percent . This in a scenario where average inflation is around 7-8%, results in a negative net income and depletion of corpus in true sense of the term. Thus arises the current desperate need for financial literacy and financial planning among mass investors. In order to protect capital , today investors need to necessarily deploy atleast a part of savings in risk financial instruments. To understand and appreciate these instruments prior to such deployment, we need financial literacy and correct advice. In this context the role of the intermediary, financial planner or advisor gains significant importance. It is expected from them that correct knowledge would be imparted and appropriate product would be sold. Unfortunately the financial landscape is littered with tales of mis-selling. To protect themselves from such mishaps, an investor should look for an unbiased and trustworthy intermediary. He should ideally look for not a product seller but a financial planner who would be more like a doctor and not a pharmaceutical salesman. The basic questions an investor should ask an intermediary should include the following: 1) What is the commission he would getting out of the sale? 2) What are the competing products in the same space and how the product suggested is superior. 3) Are there any some other domain which may lead to fulfillment of similar financial objectives at a lower cost ? ( Unit linked insurance plans vs mutual funds , for instance.) 4) Does the intermediary sell all the competing products or only few specific products? 5) Who will provide the after sales service. That is, will the intermediary remain engaged even after selling the product.? 6) Would the intermediary facilitate timely renewals ( if appropriate) on a regular basis? The principle of caveat emptor that is buyer bewares also applies to a financial service buyer and abundant caution should be exercised while selecting the intermediary through whom the product or service is being acquired.

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Earlier people used to decide how to invest their savings based on what every one else is doing. But its painfully clear that no one else can make the right decision for ones investment strategy which brings fore the importance of financial plan. Today investment planning is no more an alien concept for the Indian populace. The people are better aware of the art of managing their hard earned money. Today as we see economy booming another boom to investor is a lot of information, awareness, new opportunities and innovative tools of investment. An individual investor knows about and looks beyond traditional avenues of investing like bank FD, post office saving or long term insurance and is more courageous to take more risk for higher returns.

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LIMITATIONS
1) Time constraints: Time is the most important thing in every bodys life which flows like a running water in the sea. There was limited time for conducting the study. 2) Sample size: The study was done for only 100 people, so the actual figures can be different, more geographical sample may show greater difference in perceptions. 3) Since the project was undertaken at the student level, the analysis, results and findings could not be cent percent accurate, although full and sincere efforts have been made to reach the accurate results. 4) Unnatural circumstances: Public is little hesitant in disclosing their financial dealings. On being questioned/ observed people tend to act artificially- this psychology must have led to hide and reveal certain false facts. They wont talk about investment made by them so far the business level is concerned they are far still comfortable to share information.

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BIBLIOGRAPHY
LITERATURE KOTHARI, C.R., RESEARCH METHODOLOGY. New Age International Publishers. PANDIAN, PUNITHAVARTHY, Security analysis & portfolio management. Vikas publications. CHANDRA, PARSANNA, Financial management Principles and practice WEALTH COMPASS: The investors monthly magazine from Way2wealth.

WEBSITES www.way2wealth.com www.mutualfundindia.com www.amfi.com www.bajajcapital.com www.moneycontrol.com www.valueresearchonline.com www.easymf.com

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QUESTIONNAIRE Financial planning and its relevance in Indian families. (1) Respondents name (2) Age (in years): Under 25 50 75 (3) Occupation: (a) Business (c) Others (4) Monthly income (in Rs) Below 15,000 30,000 60,000 25 - 50 above 75 (b) Service.

15,000 - 30,000 above 60,000

(5) How much percentage of your income goes in investment? <10% 10% - 20% 20% - 30% > 30% (6)Where do you prefer to invest your savings? Equity Mutual fund Bonds Real estate Fixed deposit any other please specify. (7) What are your financial goals? (a) Reducing income tax (b) Protection from inflation. (c) Insurance cover. (d) Liquidity. (e) Investing for a long term goal like retirement, childs education. (8) Choose one of the following risk levels. (a) Conservative (b) Some what conservative (c) Moderate (d) Some what aggressive. (e) Aggressive. (9) Have you ever taken an expert advice while investing your savings in different avenues? (a) Yes (b) no (10) How do you came to know about that investment guide ? Through magazines, newspapers, journals. Internet Through friends, relatives already taking guidance. People working in that investment advisory company/institution etc. (11) What is your overall rating in respect of that investment guide? Excellent Good Fair Poor Very poor 101

(12) How often do you consult your investment advisor ? (a) Every time you invest (b) once in a month (c) Once in a year. (d) cant say. (13) Are you satisfied with the services of your current investment guide ? If not,What specific services you would like them to introduce for you? Please suggest.................................................. .

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