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…..