Spiraling Curve of Inflation

Everyone these days is talking about inflation. Its impact, ways to reduce it, etc. Ever wondered what actually this word means and how it impacts you as an individual and the society / country in general. Let me try to explain it in simple words its impact on individual and the country.

High inflation means things getting costlier. You must have experienced that during the periods of high inflation the cost of edible items, commodities, transport, etc go up. As a result you end up paying more for the items of daily consumption causing your budget to go for a toss. This is the direct impact of inflation on an individual, isn't it :)

Now let’s broaden this scenario and see its bigger picture on the country. As sen above as a result of higher costs you start purchasing less. Since the same situation of higher costs is being faced by others in the society, slowly they also start purchasing less. With less purchasing by the society companies making these products start feeling the heat. Due to low demand (read consumption) they tend to decrease their output (production). This decrease in production by companies impacts the purchase of the raw material which they used to procure from the market. Hence we see that the increasing cost, causes the overall decrease in consumption and lesser production. Lower production means the companies need lesser number of people in their factories, plants, marketing teams, etc. So inflation indirectly leads to increased unemployment.

Also due to reduced purchasing by society, cash flow decreases in market, causing liquidity crunch. Banks are forced to increase the interest rates, causing borrowing to become costlier. Due to increased interest rates companies prefer not to borrow or even if they borrow they end paying more interest increasing their cost of production. This leads to lower margin and lesser profit for the companies. Companies then find themselves in a catch 22 situation. If they resort to cost cutting measures like lower salary, lesser appraisals this would lead to decreased purchasing power of people further increasing the liquidity crunch in the market. On the other hand if they increase the price of products, this would make people to buy less, further decreasing the consumption of their products.

There are many more indirect impacts of inflation, like depreciating currency, low GDP, etc. I would not go into all of these impacts here in this article. But as you would see most people only think that inflation is impacting them directly by burning a hole in their pockets, but its impact is not only on individuals but on the contrary it impacts the whole economic system of the country. In a nutshell the inflation should always be moderate and under control. 

Tax Slabs for AY 2013-14 (FY 2012-13)

Income tax slab (in Rs.)	Tax
0 to 2,00,000	No tax
2,00,001 to 5,00,000	10%
5,00,001 to 10,00,000	20%
Above 10,00,000	30%
India Income tax slabs 2012-2013 for Female tax payers
Income tax slab (in Rs.)	Tax
0 to 2,00,000	No tax
2,00,001 to 5,00,000	10%
5,00,001 to 10,00,000	20%
Above 10,00,000	30%
India Income tax slabs 2012-2013 for Senior citizens (Aged 60 years but less than 80 years)
Income tax slab (in Rs.)	Tax
0 to 2,50,000	No tax
2,50,001 to 5,00,000	10%
5,00,001 to 10,00,000	20%
Above 10,00,000	30%
India Income tax slabs 2012-2013 for very senior citizens (Aged 80 and above)
Income tax slab (in Rs.)	Tax
0 to 5,00,000	No tax
5,00,001 to 10,00,000	20%
Above 10,00,000	30%

NEFT & RTGS

While doing online money transfer you must have heard the terms NFT and RTGS. Ever wondered what exactly these terms are and what’s the difference between them. If No then perhaps you should spend a few minutes to read below and hopefully your basic queries would be answered.

NEFT and RTGS are the two different means of transferring money between banks in India. Important thing to note here is that this is only for domestic transfers.

RTGS stands for Real Time Gross Settlement, it is a fund transfer mechanism which allows the money transfer between two banks on a ‘real time’ and on ‘gross’ basis. I will explain these terms a bit later.

NEFT stands for National Electronic Funds Transfer which is an online system for transferring funds between financial institutions. This is not done in real time but is done at predetermined fixed times.

The main difference between the 2 modes of transfer are listed below :

• The basic and most important difference between RTGS and NEFT is in their definitions itself. RTGS is based on gross settlement in real time while NEFT is based on bulk settlement at a predetermined time in future. In RTGS settlement is done in real time meaning immediately after processing of the remitting bank, while in NEFT the transfer is done in batches at specific times of the day. So NEFT is not based on individual transactions but rather is a bulk transaction between one bank to the other at a defined time of the day while RTGS is done based on individual transactions and in real time.  

• RTGS is the fastest money transfer system through the banking system as it is done in real time.

• Another major difference between the RTGS and NEFT is the amount which could be transferred. RTGS is a mechanism to transfer an amount of over  ` 2 lakhs ie the minimum amount to be remitted through RTGS is ` 2 lakhs. There is no upper limit for RTGS transactions. While  NEFT is used mainly to transfer funds below ` 2 lakhs, however, there is no maximum limit for transfers through NEFT.

So though NEFT and RTGS both are meant to perform the same function which is to transfer money. However the amount and the quickness differentiates them. Also the banks charges certain fees on both type of transactions. For international transfers each bank may have a different mode or vendor for transactions.

Tips For Secure E-Commerce

With each passing day online shopping is becoming more popular in India. It's mainly due to the convenience of buying and increasing reliability of the portals selling the products. However one just needs to make sure about the safety when doing transactions on the Internet. Here are some tips for making secure Internet transactions.

How to check whether the web site is safe :
 

Encryption – Make sure one shop's only at secure web sites that use encryption. If the web site uses encryption technology to transfer information from your computer to the merchant’s computer, that means the information is scrambled so computer hackers can’t easily steal it. 

Secure URL – Look for the “s” following “http" in a web address, indicating it’s safe. However unfortunately most of the sites divert you to https URL only on the final step when you are about to make the payment. 

Lock display – The Padlock display is at the bottom of the browser screen (on the browser’s status bar). If that lock is open, one should stay away from it, as it’s probably not a secure site.

Unbroken key – An unbroken key also designates a secure site.

Unknown / Strange web address – If a URL has a string of numbers at the beginning or has strange names, be suspicious because this isn't an address one would see for a genuine/reputed company.

Tips for Safe Online Shopping

Don’t shop at shared networks – Don’t do online transactions when you’re using public or shared networks (like cyber cafe). It's best to buy online at home. The computers in shared networks may have Trojans / viruses/ keyloggers which may store your passwords.

Use the card wisely – While paying with credit / debit card, be cautious to ensure that the site where you are putting in the details is safe and secure. If you still have reservations about giving out your credit card number online, then use third-party escrow services such as PayPal.

Don’t share personal information – Usually legitimate web sites won’t ask one to give out personal information such as his birth date, account details or the address. By giving out the personal information, you can give criminals enough data to apply for new credit cards in your name.

Keep accurate records – Always keep accurate, detailed records of any online transactions. This way one will have the evidence of his purchase if problems occur.

Use updated anti-virus programs – Be sure your computer is secured with updated anti-virus, anti-spyware, and firewall software.

Why Investing in Gold Is Wise

During the past few years, GOLD has proved to be the most consistent and best investment option. All other investments avenues like equity, MF, SIP’s, PPF, FD, etc have not been able to match the shine of GOLD. The return on GOLD investment during past 4 years has been around 25%. Due to the high return and introduction of easy investment methods, people have been flocking to invest in Gold. Most common ways to invest in Gold are listed below:

Jewellery

Most Indians still prefer the age old method of buying GOLD in the form of jewellery. Apart from being the most easy form of buying Gold, this also gives a huge satisfaction to the female members of the family. Women love to possess more and more jewellery (is there any husband who would dare to differ on this J). But the investment in Jewellery, in my view, is not the best option. Firstly there are making charges(around 10-20%) when you buy gold jewellery which is completely lost while selling the jewellery. Also at the time of selling the gold jewellery there are deductions on account of purity, degradation like wear and tear, damage etc. So one never gets the full value of his Gold while selling. Again ensuring safety of jewellery at home is itself a task.

Gold Coins/Bars

These days almost all banks and Gold merchants sell gold coins which are 99.99% pure and are certified by Standard Agencies like Hallmark. Hence the problem of searching pure gold is almost a thing of the past. Apart these coins are available in very small denominations like 2 gm, 5 gm, 10gm, 25gm, etc. So anyone with even a low budget could invest in Gold coins. Though these coins to not have the making charges, but then while selling them these are purchased at a discounted price. So though unlike jewellery there is no loss of making charges which but then one still do not get 100% value of his Gold at the time of selling.

GOLD ETF

Gold ETF is purchasing Gold in Demat Format. This in my view has the biggest advantage that one does not get the delivery of the physical Gold, hence no problem of securing your purchased Gold. Also Gold could be purchased in small units. One could hold his gold in demat account till he desires. There is only a small maintenance and brokerage charges on the Demat account, so this in my view is the easiest and cheapest form of purchasing Gold. Also one could sold his gold anytime at the market price of that particular moment. So there are no deductions and one gets almost the full value for his money while selling it.

Gold Funds/Bonds

These days there are a number of Gold Funds or MF’s where one can invest. These bonds invest the money only in the bullion market and are managed by Professional Experts. So if one do not have time or expertise to deal directly with the fluctuations of the gold market he could still invest via these bonds. However most of these bonds have entry and/or exit fees and have a certain lock in period. So this form of investment is mostly a long period investment. Another advantage is that these funds gives the ease to invest via SIP’s. So one could invest in Gold in  small amounts over a long period of time.

Home Loan

Till a few years ago, people used to buy homes when they retired or were about to retire. The purchase used to be funded by PF or gratuity money received on their retirement. However time have changed considerably, nowadays after getting a job, buying a house becomes the first and foremost priority. This has been made possible by the keenness of the banks to disburse Home Loans. Banks are ready to give the Home Loan customers a Red carpet welcome. They float all sorts of offers, promotional packages, etc to lure new borrowers. However before one opts for a home loan from a particular bank, he needs to do a good homework. Some main points to consider are as below :

• Type of Interest

One is always confused whether to go for fixed rate of interest or floating one. The fixed rate is always higher (by about 1.5-2%) than the prevailing floating rate of interest. Also the fixed rate is not exactly fixed for the tenure of the loan. It is fixed only for a few years. After that it normally converts into floating rate of interest. If the existing rate of RBI is in upward trend, then you should go for fixed rate, as this protects you form fluctuations of change in ROI. However if the RBI rates are already on the higher end and are expected to go down, then the wise decision would be to go for floating ROI.

•  Credibility of the Bank/Financial Institute

While going for a Home Loan do not only think about the rate of interest, but also look into the credibility of the bank/financial institute. There may be banks which are offering lower rate of interest than the existing market rates, but check the credibility of these banks. They may be notorious for not lowering the ROI quickly after a rate cut by RBI. Also these banks may be charging additional fees for processing, inspection of property, etc. Normally these charges are not told initially, and you come to know about them only after applying the loan.

• Insure your property

Make sure to ensure your property against natural calamities, like earthquake, floods, etc. This is very important to protect you against unforeseen events. In the event of any calamity though the property is lost but then you do not have to repay the loan, as it is insured. This insurance amount is normally quite small and people in their ignorance do not go for the insurance of the home loan.

• Switch the Loan

If  in spite of all your research, you get stuck in a bad loan, where either the bank is not reducing the rates as quickly as they should, or there are other issues with the service of the bank, then do not hesitate in switching the loan to another bank. These days RBI has abolished the pre payment penalties which banks used to charge while closing the loans due to pre payment. So switching the loan to another bank which is offering lower rate of interest is now a good option. However do consider other charges/fees while switching loans. These charges should not be so high as to nullify the advantages of switch over.

•  Paperwork

Before applying for a loan, make sure that you get your paperwork in place. Before issuing the loan, bank asks for huge number of papers. This is mandatory as banks have to ensure that they know everything about you before giving you a high value loan. So ensure that all your papers are ready, else there may be a delay in approval of your loan. Also in case if your loan gets rejected due to lack of papers, then you would lose the processing fees that you may have had paid.

Using Credit Cards Wisely

Is anyone born with knowledge of how to use credit cards ? Definitely not. Still, it’s important to learn the rules of the credit card game – preferably before one starts playing.  I am writing a few DO’s and Don’ts for credit card users. These are definitely not all but some useful tips which could help one to maximize the output from the credit card and at same time preventing him from accumulating debts.

Do’s

• Ensure that you purchase things you need and not the one’s you ‘want’. There is a difference between need and want and that has to be honored. Often wants are way beyond our budget and credit card is used to buy those wants, which are way beyond the budget.

• Make sure you pay the credit card dues on time. I used to forget the due date and as a result on several occasions have paid late fees. Then I started setting reminders in my mobile/emails or any other convenient tool. This helped me to get rid of the problem of forgetting the due date.

• Stay within 40-50% of the limit on your credit card. A large part of your credit score considers the amount of debt you have. Keeping your balances low helps you maintain a good credit score. Not only that, lower balances are easier to manage than those that are higher.

• Negotiate a lower interest rate with your credit card company. Your interest rate determines how much you pay for carrying a balance on your credit card. Evaluate the interest rate on your credit card periodically to be sure you are getting the best deal possible.

Don't

• Credit card should not be used to make everyday purchases like food, clothing, and gas. Using your credit card as a substitute for cash is a habit that can quickly lead to debt. For ordinary purchases, use the cash in your wallet or debit card instead.

• Do not get into the habit of making only the minimum payments. Making only the minimum payment each month increases the debt. Also most of the card companies charge interest on the remaining amount and new purchase from day 1. So if you do not pay the full amount, you may lose the advantage of grace period on your new purchases.

• Do not close out a credit card without knowing how your credit will be impacted. Avoid closing cards that still have a balance or those that make up a significant amount of your credit history. This may impact your credit score.

Choosing the Right Credit Card

Whether you walk in a super store, or checking your email, you would surely be flooded with offers for new cards. It's easy to apply for a credit card simply because the offer looks good, but have you really stopped to think about whether that's the right card for you. You can save hundreds, and maybe even thousands, of rupees by shopping around for a credit card.

Before applying for a credit card, find answers to a few important questions. The answers to most of these questions can be found in the disclosure included with the credit card application, which I agree is itself a task to read through.

What Type of card is it?

There are many different types of credit cards to choose from: Regular credit cards, rewards credit cards, loyalty cards, petro cards, to name a few. Understand what kind of card you’re applying for and whether you really need it before filling out the application.

How are you going to use the credit card?

If you are the one who pays the full balance timely then you could go for a card which may have interest charged at the end of grace period.  If you intend to use your card for balance transfers ? You should then look for a card with a low interest rate on balance transfers. If you plan to carry a balance from one month to the next, then a credit card with a low interest rate is ideal. If you shop mostly from a specific store then you could go for a loyalty card specific to that store. This helps you to accumulate the loyalty points which could be redeemed later.

How long is the grace period?

The grace period is the amount of time you get to pay your balance in full before a finance charge is added. The period is usually expressed in days from the billing date, example :  “28 days from the billing date”. Longer grace periods are better because they give you more time to pay your bill without incurring a cost for the convenience of using credit. However If you already have a balance on the credit card, new purchases may not have a grace period.

What are the fees?

You should enquire about the fees and the circumstances under which the fees are applied. The most common types of fees include: annual fee, late fee, and over-the-limit fee. There may also be additional fees for paying your account over the phone on the due date, requesting additional copies of your statement, or for having your check returned. Most people don’t check these and later pay money for using these features. Its better to check for them before applying for the card.

How is the finance charge calculated?

The credit card company’s method of calculating the finance charge has an impact on the amount of the charge. Some methods consider only the current month’s balance while others consider the current and previous months’ balances. New purchases may or may not be included in the calculation. This needs to be checked before you apply for the card. This is especially important for those who tend to over spend and then pay in installments.

What is the credit limit?

The credit limit influences your purchasing power. If you are the one who tend to overspend, then start with a low credit limit. This helps you in keeping a tab on your spending which in turn helps in preventing default and a hit on your credit score.

What are the rewards?

Some credit cards offer rewards for using your credit card. Make sure you fully understand the reward structure and the amount of purchases you have to make to receive the reward. Also please check for the validity period of the reward points. This is important so that you could use the reward points before they lapse.

 Credit Card Basics

Before you start shopping around for a credit card, think about how you will use it and set some guidelines for yourself. Here are five key points to remember:

1. A credit card doesn’t increase the money you have available, it simply gives you the ease of paying a bit later. So all your credit card spending should fit within your regular budget.

2. Using a credit card to get cash or for other cash-like transactions, such as a wire transfer or money order, is generally not a good idea. It costs you interest from the date of the transaction. If possible, do not use your credit card for cash withdrawal. Instead use your debit card.

3. If you pay your credit card balance in full every month and you don’t use the card for cash transactions, you will never have to pay interest. If you don’t pay in full, the interest charges you pay will incur on every new transaction from day 1. You won’t get any grace period for the new transactions. This would increase the cost of everything you buy with the card.

4. If your credit card balance grows from month to month, that’s a sign that you are overspending and could be on the road to serious debt problems. Stop using your card until you get your debts under control.

5. Applying for a new credit card because you have reached your credit limit on your other cards is not a good solution to managing your debt. Instead, look seriously at how you can reduce spending.

Most credit cards, whether they are standard, gold or platinum, have the same basic function: they offer a convenient way to pay for goods and services. The main differences are in three areas: interest rates, fees, and rewards and benefits. Looking carefully at those details will help you find the right credit card for you. I will write about these aspects in the coming articles… stay tuned.

Mutual Funds                                                      As the name suggests Mutual Fund is a fund collected by pooling money by a group of people termed as investors. The fund is collected with a predetermined objective of investment. All Mutual Funds have a Fund Manager who is responsible for investing the pooled money into specific areas, like equity or bonds. When an investor puts money in a mutual fund, he buys units of that MF and thus becomes the shareholder or unit holder of the said MF. Mutual fund is one of the best available investment options as compared to other methods, as they are cost efficient and easy to invest. By investing in MF, individual gets the benefit of stock markets without actually worrying about the day to day movement of the stocks and the market.
Stocks & Bonds When one buys stocks of a public company he gets the shares equivalent to his investment and  he becomes the share holder / partner in that company.
Bonds are basically the means of lending money to Government or a company, and in return one receives interest on the invested money. Bonds are issued for a pre determined period of time and are most common lending investment used in the market.
Regulatory Authority To protect the interest of the investors, Government has formulated SEBI which formulates and regulates the policies related to functioning of Mutual Funds. MF's either promoted by public or private entities including the ones promoted by Foreign entities are governed by SEBI regulations.
	Types of Schemes
	1. Open – Ended :
	An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. One can conveniently buy and sell units at Net Asset Value ("NAV") related prices.
	2. Close - Ended :
	Closed ended funds have  a pre-specified maturity period. One can invest directly in the scheme at the time of the initial issue. There are two exit options available to an investor after the initial offer period closes. Investors can transact (buy or sell) the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchanges could vary from the net asset value (NAV) of the scheme on account of demand and supply situation.  Alternatively some close-ended schemes provide an additional option of selling the units directly to the Mutual Fund through periodic repurchase at the schemes NAV. SEBI Regulations ensure that at least one of the two exit routes is provided to the investor.

Types of investment by MF’s :

1. Equity fund:

In this category the corpus is invested mainly in stocks/equities. The investment break up may vary depending upon the specific  scheme and the outlook of the fund manager. Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.

2. Debt funds:

In this category the corpus is invested mainly in bonds of Government, private companies, banks and financial institutions. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors.

3. Balanced funds

As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities.  These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.

Advantages of Investing Mutual Funds:

1. Professional Management – The biggest advantage according to me is that this gives the small investor the option to invest his money professionally. The fund managers are qualified who invest wisely with a specific focus. Individuals who are mostly small investors do not have the time or the expertise to track the market and handle the volatility. A mutual fund is considered to be relatively less expensive way to make and monitor their investments.

2. Diversification – The investors money is invested in a diverse range of stocks and bonds. This covers the risk which arises out of investment in a single sector The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others.

3. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want.

5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis.

Disadvantages of Investing Mutual Funds:

1. Professional Management- Some funds do not perform too well, as their management is not dynamic enough to explore the available opportunity in the market. So many  investors debate over whether so-called professionals are any better than investor himself managing his portfolio.

2. Costs – At times there are heavy deductions for entry and exit loads. The mutual fund industries are thus charging extra cost under layers of jargon. However SEBI is now working on means to reduce these extra charges and to make them consistent across the sector.

3. Dilution – As the funds have small holdings across different companies and sectors, high returns from a few investments often don't make much difference on the overall return. Also when money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.

4. Taxes – The return on Mutual Fund investment is taxable and often the actual return is much less than projected by MF managers due to TDS.

Public Provident Fund (PPF)

I have seen that today when people talk of investment, they just talk about ULIP, equity, mutual fund, etc. These days anyone hardly talks about traditional saving plan like PPF, Fixed Deposit, endowment plans, etc. However if one looks closely, traditional plans are still the best bets and often would give the best return over a long period of time. Here I would discuss the features, advantages and disadvantages of the PPF.

Features

• The PPF account could be opened in a Post office or a Nationalized Bank.
• The tenure of the PPF account is 15 years, and could be increased by 5 years on completion of 15 years.
• Investment up to INR. 1,00,000 per annum qualifies for IT Rebate under section 80 C of IT Act.
• The rate of interest is declared every year by Central government. Current rate of interest is 8.8%, compounded yearly.
• Minimum deposit is Rs 500 and Maximum Rs 1 Lakh in a financial year.
• One deposit of Minimum Rs 500 in a year is mandatory.
• If the payment is not made in any year, the account is made discontinued.
• A discontinued account can be activated by payment of Rs 500 and a penalty of Rs 50 per each defaulted year.
• Account can be opened by an individual or by minors through their guardians.
• Even GPF and EDF account holders can open PPF account.
• Loan facility available from 3rd financial year up to 5th financial year. The rate of interest charged on loan taken by the subscriber of a PPF account on or after 01.12.2011 shall be 2% p.a. However, the rate of interest of 1% p.a. shall continue to be charged on the loans already taken or taken up to 30.11.2011.
• The facility of first withdrawal in the 7th year of the account subject to a limit of 50% of the amount at credit preceding three year balance. Thereafter one Withdrawal in every year is permissible. Free from court attachment.
• Interest earned on PPF is totally tax free.
• Nomination facility is available

Advantages of PPF

• Interest is totally tax free.
• Flexibility of investment : If you do not have funds during a particular year, you could continue the account with a minimum deposit of Rs 500.
• Very high returns due to compounding and tax free returns.
• Investment is exempted under section 80C.

Disadvantages 0f PPF

•  Interest rate keeps changing. Its changes every year and is decided by Central Government.
• Long lock in period. Some people think 15 years is a long period to invest.
• Since money is stuck for a minimum of 15 years, so there is a lack of liquidity.

Types of Insurance Plans

Insurance is securing your life or an asset against any unforeseen mishap. The insured pays a premium to the insuring body, who in event of any mishap financially compensates the insured. The insurance of life of an individual is classified under Life Insurance. While the insurance of non life entities, like vehicle, business, asset, etc is covered under General Insurance.

The Life Insurance plans are of 2 types, ones which are called traditional in which the returns are fixed or guaranteed and the other in which the returns are not guaranteed but depends upon the nature of investment, mostly in equities.


Types of Conventional Plans

Term Assurance : This type of insurance provides life coverage and could be redeemed only in case of death of the insured. This is for a fixed period normally 5,10,15,20,25 and 30 years. In this policy the premiums are normally very low and the sum assured is comparatively very high. However in the event of insured person surviving the tenure of the policy, the insured person does not get any money. This is a major disadvantage but the biggest advantage is that the sum assured is very high against a small premium. These policies are gaining lot of popularity in India.

Endowment Assurance : In endowment policies the insured pays a fixed premium for a period 15,20,25 or 30 years. The insurance company pays a fixed return plus bonuses to the nominee in the event of the death of the insured. If the insured survives the tenure of the policy, then also he is paid the guaranteed return plus the bonuses. This is a major advantage of this type of policy, that is, the insured gets some return in the event of no claim.

Whole Life Assurance : In this the insurance company collects premium from the insured for his whole life or retirement and pays the claim to the nominee/family of the insured only after his death. So this type of plan does not give any return to the insured, but is used to only provide financial stability to the nominee after the death of the insured.

Annuity/Pension Assurance : In this the insured makes a single lump sum payment or through installments spread through a number of years. The insurer in return pays a specific sum periodically from a specific date onward, called as deferment date. This payment can be monthly, quarterly, half yearly or annually either for the whole life or for a fixed number of years. Annuities / Pension funds are different from from all other forms of life insurance as an annuity policy / fund does not provide any life insurance cover but merely offers a guaranteed income either for life or a certain period. This policy is normally opted by individuals who have extra money to invest for maintaining a specific life style after their retirement.

Money Back : As the name suggests this policy provides pay back in between during the tenure of the policy. This is opted by people who may need periodical payments. These policies are issued for a specific period and the sum assured is paid in installments throughout the tenure of the policy. In the event of the death of the insured within the tenure of the policy, the sum assured along with the accrued bonuses is paid to the nominee.

Investment or Insurance

A few years ago when I had just started my career, a financial adviser approached me to help me invest Rs 1 lakh  (or rather Rs 0.1 million that sounds better, isn’t it) to save the taxes. At that time I hardly knew anything about investments, savings or insurance. So I followed him like an obedient school boy. He sold me a ULIP, a few LIC policies and a mutual fund. Obviously not all at the same time but within a gap of few months. I felt relieved, to think that I am sufficiently insured and have invested wisely in good policies.

I kept on paying my premiums for the next couple of years. One day, on advise of my friend I decided to check the value of my invested money. That was the first time, I explored the details of my ‘wise’ investments and the realisation was startling. I came to know that my investments were not that wise as they seemed to be. What I found was that I had neither put my money in a category which could be called investment nor it could be called an insurance. I had simply put my money in hybrid policies which were supposedly offering me both investment and insurance, but neither was fulfilling the purpose it should have been.

My ULIP which was sold to me by showing a hypothetical proposal of 7-10% return along with an insurance was actually not giving any return to me. Apart the insured amount was not sufficient to serve any purpose in case of any contingency. For instance, I was paying a premium of Rs 20k annually as ULIP premium. In 3 years I had paid Rs 60k as premium. As per the hypothetical tables, my money should have been increased by 7-10%. So my portfolio should have had something around 65k, but in reality it was showing to be less than 60k. On enquiry I found that most of the money paid as premium had been deducted to cover my insurance and other charges. So though I was paying Rs 20k as premium, in reality only 60% of that was being invested. Similarly the sum insured was 5 times the premium, which comes to be Rs 1 lakh, which again was not sufficient to be of any help in times of contingency.

Similarly my other LIC policies were also linked to equity market and had been showing lot of volatility in terms of returns. So they were also neither investment nor a proper insurance. The only good thing which I had done was an investment in mutual fund. This was a pure investment. Though this money was also invested in equity market, like the other policies, but it was not a hybrid. It was pure investment with no insurance coverage.

Over here, I am not criticising the equity linked LIC policies, or the ULIP. They have their own merits/demerits and depending upon individuals requirement he/she may invest in it. My suggestion is only for those friends who are starting their career and are not sure what and where to invest. I would suggest you should analyse your requirements and decide whether you need investment or insurance. If you need investment then go for policies which talk only about increasing your money, don’t try to get insured while thinking of growing your money. Simply put, if you need to be insured, then go for a conventional plan which only insures you. Do remember that the purpose of insurance is long term coverage against any mishaps. So insurance should always be long term, with low premiums and high amount as sum insured. Investments could be short or long term, safe or risky investments, depending upon individual’s appetite. I am not talking about various options available under both investment and insurance. I will write about them in my forthcoming articles. Keep an eye over this page for further articles and of course do write what you like or dislike about this article…..