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Introduction to Investing

Why should I invest?
Logically speaking, one should invest to protect oneself from the ill effects of rising inflation by utilizing the growth attained from the act. In order to give you a decent chunk of surplus, the rate of return on investments should be greater than the rate of inflation. No matter where your money is invested, be it stocks, bonds, mutual funds or certificates of deposit (CD), the idea is to create wealth for retirement, marriage, college fees, vacations, better standard of living or to just pass on the money as a legacy. Also, it is priceless to watch your investment returns grow at a faster rate than your salary.

But when is the right time to invest?
By investing into the market right away you give your investments more time to grow. Here comes the concept of compounding interest that inflates your income by accumulating your earnings and dividends. Compounding refers to growth via reinvestment of returns earned on your savings as you earn income not only on the original investment but also on the reinvestment of dividend/interest accumulated over the years. Taking the volatility of the markets into account, research and experience indicates that all investors, should invest early, invest regularly and have a disciplined approach towards investing.

Do I need a fortune to invest?
The beauty of investing in the financial markets is that it suits everyone's pockets from the obscenely rich to the man next door. There is no fixed amount that investors need to invest so as to generate adequate returns from their savings. The amount that you invest will eventually depend on factors such as your risk profile, time horizon and amount of savings.

What should I invest in?
There is a plethora of investing options such as:
Equities (Shares/Stocks)
Mutual funds
Fixed deposits and many more.

Investment Avenues

There are a number of investment options available in the advanced financial markets; the idea is to pick the right investment tool based on the risk profile, circumstances and holding capacity. Market volatility has the potential to give you a high rate of return. But if you are risk averse and simply desire some additional source of income, then the fixed income securities should be given a thought. However, it should be noted that risk is directly proportional to return; higher the risk, higher the return.

The following sections will give you a bird's view of various tools of investments:

Equities Investment in the shares of companies is investing in equities. It is rightly said that the shareholders are the owners of the company. Stocks/Shares can be bought/sold from the exchanges (secondary market) or via IPOs - Initial Public Offerings (primary market). Stocks are the best long-term investment options wherein the market volatility and the resultant risk of losses, if given enough time, is mitigated by the general upward momentum of the economy.

There are two branches of revenue generation from this form of investment.

Periodic payments made to the shareholders out of the company's profits are termed as dividends.

The price of a stock appreciates commensurate to the growth posted by the company resulting in capital appreciation.

BondsIt is a fixed income debt instrument issued for a period of more than one year with the purpose of raising capital. The central or state government, corporations and similar institutions sell bonds. A bond is generally a promise to repay the principal along with fixed rate of interest on a specified date, called as the maturity date. The average rate of return on bonds and securities in India has been around 10 - 12 % p.a.

Certificate of Deposits These are short-to-medium-term interest bearing debt instruments, such as fixed deposits and recurring deposits, offered by banks. They are low-risk, low-return instruments. Furthermore there is usually an early withdrawal penalty associated with them. Average rate of return is usually between 4-12 %, depending on which instrument you park your funds in.

Mutual Fund These are open and close ended funds operated by an investment company which raises money from the public and invests it in a group of assets, in accordance with a stated set of objectives. Its a substitute for those who are unable to invest in equities or debt because of resource, time or knowledge constraints. Benefits include diversification and professional money management. The average rate of return as a combination of all mutual funds put together is not fixed but is generally more than what earned in fixed deposits. In the recent past, MFs have given a return of 18 - 30%.

Cash Equivalents: These are highly liquid and safe instruments which can be easily converted into cash. Treasury bills and money market funds are examples of cash equivalents.

Others: There are also other saving and investment vehicles such as gold, real estate, commodities, art and crafts, antiques, foreign currency. However, holding assets in foreign currency are considered as more of a hedging tool (risk management) rather than an investment.

An Overview of the Stock Market

How does the stock market work?
To learn how to earn money on the stock market, one has to understand how it works. A person desirous of buying/selling shares in the market has to first place his order with a broker. When the buy order of the shares is communicated to the broker he routes the order through his system to the exchange. The order stays in queue on the exchange system and gets executed when it reaches the buy price that has been specified. The shares purchased will be sent to the purchaser by the broker either in physical or demat format.

Indian Stock Market Overview The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are the two primary exchanges in India. In addition, there are 22 Regional Stock Exchanges. However, the BSE and NSE have established themselves as the two leading exchanges and account for about 80 per cent of the equity volume traded in India. Most key stocks are traded on both the exchanges and hence the investor could buy them on either exchange. Both exchanges have a different settlement cycle, which allows investors to shift their positions on the bourses. The BSE Sensex is the older and more widely followed index. The scrips traded on the BSE have been classified into 'A', 'B1', 'B2', 'C', 'F' and 'Z' groups. The 'A' group shares represent those, which are in the carry forward system (Badla). The 'F' group represents the debt market (fixed income securities) segment. The 'Z' group scrips comprise of blacklisted companies. The 'C' group covers the odd lot securities in 'A', 'B1' & 'B2' groups and Rights renunciations. The key regulator governing Stock Exchanges, Brokers, Depositories, Depository participants, Mutual Funds, FIIs and other participants in Indian secondary and primary market is the Securities and Exchange Board of India (SEBI) Ltd.

Rolling Settlement Cycle In a rolling settlement, each trading day is considered as a trading period and trades executed during the day are settled based on the net obligations for the day. At NSE and BSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd working day. To arrive at the settlement date all intervening holidays, which include bank holidays, NSE/BSE holidays, Saturdays and Sundays are excluded. Typically trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on.

Types of Orders There are various types of orders, which can be placed on the exchanges:

Limit Order It refers to a buy or sell order with a limit price. Suppose, you check the quote of ABC Ltd. at Rs. 251 (Ask). You place a buy order for ABC with a limit price of Rs 250. This puts a cap on your purchase price. In this case as the current price is greater than your limit price, order will remain pending and will be executed as soon as the price falls to Rs. 250 or below. In case the actual price of ABC on the exchange was Rs 248, your order will be executed at the best price offered on the exchange, say Rs 249. Thus you may get an execution below your limit price but in no case will exceed the limit buy price. Similarly for a limit sell order in no case the execution price will be below the limit sell price.

Market Order Generally a market order is used by investors, who expect the price of a share to move sharply and are yet keen on buying and selling the share regardless of price. Suppose, the last quote of ABC is Rs 251 and you place a market buy order. The execution will be at the best offer price on the exchange, which could be above Rs 251 or below Rs 251. The risk is that the execution price could be substantially different from the last quote you saw.

Stop Loss Order A stop loss order allows the trading member to place an order which gets activated only when the last traded price (LTP) of the share is reached or crosses a threshold price called as the trigger price. The trigger price will be as it is on the price mark that you want it to be. For example, you have a sold on a position in ABC Ltd booked at Rs. 345. Later in case the market goes against you, you would not like to buy the scrip for more than Rs.353. Then you would put a SL Buy order with a Limit Price of Rs.353. You may choose to give a trigger price of Rs.351.50 in which case the order will get triggered into the market when the last traded price hits Rs.351.50 or above. The execution will then be immediate and will be at the best price between 351.50 and 353.

Circuit Filters and Trading Bands In order to check the volatility of shares, SEBI has come with a set of rules to determine the fixed price bands for different securities within which they can move in a day. As per SEBI, all securities traded at or above Rs.10/- and below Rs.20/- have a daily price band of ±25%. All securities traded below Rs. 10/- have a daily price band of ±50%. Price band for all securities traded at or above Rs. 20/- have a daily price band of ±8%. The price bands have been relaxed to ±8% for select 100 scrips after a cooling period of thirty minutes.



How should I invest in equities?
It is generally seen that many investors go about investing in a highly irrational manner. They buy a scrip impulsively upon receiving tips from their associates, news or a rumor about a stock. Acting on such baseless information is like living in a fool's paradise.

Our recommendation is to follow a three part approach to investing in equities.

1. Don’t get excited when you are tipped on any stock. In such cases, your next move should be to obtain first hand unbiased information from credible sources.

2. The next step is to do a little bit of number crunching. Check out the growth rate of the stock's earnings, as shown in a percentage and analyze its graphs. Learn more about the P/E ratio (price-to-earnings ratio), earning per share (EPS), market capitalization to sales ratio, projected earning growth for the next quarter and some historical data, which will tell what the company has done in the past. Get the current status of the stock movement such as real-time quote, average trades per day, total number of shares outstanding, dividend, high and low for the day and for the last 52 weeks. This information should give you an indication of the nature of the company’s performance and stock movement.

3. Also getting acquainted with the following terms will take you a long way in equity investing:

High (High): The highest price for the stock in the trading day.
Low (Low)> : The lowest price for the stock in the trading day.
Close (Close) >: The price of the stock at the time the stock market closes for the day.
Chg (Change)> : The difference between two successive days' closing price of the stock.
Yld (Yield)> : The dividend divided by the price of the stock.

When you enter an order to buy or sell a stock, you will essentially see the "Bid" and "Ask" for a stock and some numbers. What does this mean?

The ‘Bid’ is the buyer’s price. Bid is the rate/price at which there is a ready buyer for the stock, which you intend to sell.

The ‘Ask’ (or offer) is what you need to know when you're buying a stock i.e. this is the rate/ price at which there is seller ready to sell his stock.




Introduction to Derivatives
Derivative is a product/contract which does not have any value on its own i.e. it derives its value from some underlying asset.

What are Forward contracts?
A forward contract is one to one bi-partite contract, to be performed in the future, at the terms decided today. Forward contracts offer tremendous flexibility to the parties to design the contract in terms of the price, quantity, quality (in case of commodities), delivery time and place. However forward contracts suffer from poor liquidity and default risk.

What are Future contracts?
Future contracts are organized contracts, which are traded on the exchanges and are very liquid in nature. In the futures market a clearing corporation provides the settlement guarantee.

What are Index Futures?
Index futures are the future contracts for which the underlying asset is the cash market index. For example: BSE may launch a future contract on "BSE Sensitive Index".

Frequently used terms in Index Futures market

Contract Size
The value of the contract at a specific level of the Index.
It is Index level * Multiplier.

It is a pre-determined value, used to arrive at the contract size. It is the price per index point.

Tick Size
It is the minimum price difference between two quotes of similar nature.

Expiry Day
The last day on which the contract is available for trading.

Open interest
Total outstanding long or short positions in the market at any specific point in time.

Number of contracts traded during a specific period of time.

Long position
Outstanding/unsettled purchase position at any point of time.

Short position
Outstanding/ unsettled sales position at any point of time.

Open position
Outstanding/unsettled long or short position at any point of time.

Cash settlement
Open position at the expiry of the contract is settled in cash. These contracts are designated as cash settled contracts. Index Futures fall in this category.

Operators in the derivatives market

People who want to reduce the risk component of their portfolio.

People who intentionally take the risk from hedgers in pursuit of profit.

People who operate in the different exchanges simultaneously and benefit from the difference in the price of the same stock in different exchanges.

Hedge terminology

Long hedge
When you hedge by going long(buying) in the futures market.

Short hedge
When you hedge by going short(selling) in the futures market.

Cross hedge
When a futures contract is not available on an asset, you hedge your position in the cash market on this asset by going long or short on the futures for another asset whose prices are closely associated with that of your underlying asset.

Hedge Contract Month
Maturity month of the contract through which hedge is accomplished.

Hedge Ratio
Number of future contracts required to hedge the position.

Some specific uses of Index Futures

Portfolio Restructuring
An act of increasing or decreasing the equity exposure of a portfolio, quickly, with the help of Index Futures.

Index Funds
These are the funds which imitate/replicate an index with the objective to generate a return equivalent to that of the Index. This is called Passive Investment Strategy.

Speculators in the Futures market

Speculation is all about taking position in the futures market without actually having the underlying asset. Speculators operate in the market with a motive to make money.

They take:
Naked positions - Position in any future contract.
Spread positions - Opposite positions in two future contracts. This is a conservative speculative strategy.

Speculators bring liquidity to the system, provide insurance to the hedgers and facilitate the price discovery in the market.

Arbitrageurs in Futures market
Arbitrageurs facilitate the alignment of prices among different markets through operating in them simultaneously.

What are the advantages of the derivatives market when compared to the cash market?

  • Higher liquidity
  • Availability of risk management products attracts more investors to the cash market
  • Arbitrage between cash and futures markets fetches additional business to cash market
  • Improvement in delivery based business
  • Lesser volatility
  • Improved price discovery


What are Options?

Options are instruments whereby the right is given by the option seller to the option buyer to buy or sell a specific asset at a specific price on or before a specific date.

A call option gives the holder the right to buy an underlying asset at a certain date for a certain price. The seller is under an obligation to fulfill the contract and is paid a certain price which is called "the call option premium or call option price".

A put option, on the other hand gives the holder the right to sell an underlying asset at a certain date for a certain price. The buyer is under an obligation to fulfill the contract and is paid a certain price, which is called "the put option premium or put option price".

The price at which the underlying asset would be bought in the future at a particular date is the "Strike Price" or the "Exercise Price". The date on the options contract is called the "Exercise date", "Expiration Date" or the "Date of Maturity".

There are two kinds of options based on the date. The first is the European Option(CE) which can be exercised only on the maturity date. The second is the American Option(CA) which can be exercised before or on the maturity date.

Cash settled optionsare those where, on exercise the buyer is paid the difference between stock price and exercise price (call) or between exercise price and stock price (put).

Delivery settled options are those where the buyer takes delivery of undertaking (calls) or offers delivery of the undertaking (puts).

Who are the Market players in options?

The objective of these kind of traders is to reduce the risk. They are not in the derivatives market to make profits. They are in it to safeguard their existing positions. Apart from equity markets, hedging is common in the foreign exchange markets, where fluctuations in the exchange rate have to be taken care of in the foreign currency transactions or in the commodities market, where spiraling oil prices have to be tamed using the security in derivative instruments.

They are traders with a view and objective of making profits. They are willing to take risks and they bet upon whether the markets would go up or come down.

Riskless profit making is the prime goal of Arbitrageurs. Buying in one market and selling in another or buying two products in the same market are common. They could be making money even without putting there own money in and such opportunities often come up in the market but last for very short timeframes. This is because as soon as such a situation arises arbitrageurs take advantage and demand-supply forces drive the markets back to normal.

Options Pricing

Prices of options commonly depend upon six factors. Unlike futures which derive their prices primarily from prices of the undertaking, option prices are far more complex.

Spot prices: In case of a call option the payoff for the buyer is maximum therefore greater the Spot Price greater the payoff and it is favorable for the buyer. It is the other way round for the seller, more the Spot Price higher are the chances of his going into a loss.

In case of a put Option, the payoff for the buyer is maximum therefore, more the Spot Price more are the chances of going into a loss. It is the reverse for Put Writing.

Strike price: A higher strike price would reduce the profits for the holder of the call option.

Time to expiration: More the time to Expiration more favorable is the option. This can only exist in case of American option as in case of European Options the Options Contract matures only on the Date of Maturity.

Volatility: More the volatility, higher is the probability of the option generating higher returns to the buyer. The downside in both the cases of call and put is fixed but the gains can be unlimited. If the price falls heavily in case of a call buyer then the maximum that he loses is the premium paid and nothing more than that. More so he/ she can buy the same shares form the spot market at a lower price. Similar is the case of the put option buyer.

Risk free rate of interest: In reality the risk and the stock market is inversely related. But theoretically speaking, when all other variables are fixed and interest rate increases this leads to a double effect:

  • Increase in expected growth rate of stock prices
  • Discounting factor increases making the price fall

In case of the put option both these factors increase and lead to a decline in the put value. A higher expected growth leads to a higher price taking the buyer to the position of loss in the payoff chart. The discounting factor increases and the future value becomes lesser.

In case of a call option these effects work in the opposite ion. The first effect is positive as at a higher value in the future the call option would be exercised and would give a profit. The second affect is negative as is that of discounting. The first effect is far more dominant than the second one, and the overall effect is favorable on the call option.

Dividends: When dividends are announced then the stock prices on ex-dividend are reduced. This is favorable for the put option and unfavorable for the call option.



What are the advantages of investing in mutual funds?

Professional Management and Informed Decision Making
The biggest advantage that mutual funds offer is greater expertise on the markets, be it the stock market or debt market. SRE, with its well organized and structured pool of talent, tracks the economy, companies and stock market happenings on a day-to-day basis, and investment decisions are made on the basis of this research. It would be far more difficult for a retail investor to undertake research of the same magnitude. They have better access to information than individual investors.

Investment Flexibility
Mutual fund houses offer various categories of schemes (equity, debt, hybrid etc) with a good number of options such as growth, regular income and so on. You can pick and choose as per your risk appetite, return expectations and overall investment objective.

Portfolio diversity
With a comparatively small capital investment in a mutual fund scheme, you can gain exposure to a large variety of instruments. In fact, some instruments which form part of a mutual fund’s portfolio, especially in the debt segment, are totally out of the reach of a retail investor due to high threshold investment limits.

Transparency and Safety
No mutual fund guarantees returns but they are transparent in their operations, since they are subject to stringent disclosure norms. SEBI regulates all mutual funds operating in India, setting uniform standards for all funds. In addition, thanks to its three tier structure – clear cut demarcation between sponsors, trustees , conflict of interests can be promptly checked. Lastly, the Association of Mutual Funds in India works towards promoting the interests of mutual funds and unit holders. It also launches Investor Awareness Programs aimed at educating investors about investing in mutual funds.

Tax Benefits
Generally, income earned by any mutual fund registered with SEBI is exempted from tax. However, income distributed to unit holders by a closed end or debt fund is liable to a dividend distribution tax. Capital gains tax is also applicable, depending on the type of scheme and the period of holding.

What are the tax benefits and implications of investing in mutual funds?

The dividend distributed by both debt funds and equity funds is tax-free in your hands. In case of equity funds, no dividend distribution tax is payable by the mutual fund. However, in the case of debt funds, the mutual fund has to pay a Dividend Distribution Tax (DDT) of 14.025 per cent (12.5 per cent tax + 2 per cent education cess + 10 per cent surcharge) on the amount of dividend distributed to individuals.

In the case of short term capital gains (profits that accrue from the sale of units within one year from the date of purchase) earned on the sale of equity mutual funds, tax is applicable at the rate of 11.22 per cent, if your net taxable income is above 10 lakh per annum or 10.2 per cent if your net taxable income is below Rs 10 lakh per annum. Short term capital gains on debt mutual funds attract tax at the personal income tax rate applicable to you.

Long term capital gains (profits that accrue from the sale of units after one year from the date of purchase) earned on the sale of equity mutual funds are tax free in your hands. In case of debt funds, long term capital gains computed without indexation (indexation involves increasing the cost of your investment to account for inflation based on the cost inflation index table published by the government), the tax payable on long term capital gains from debt funds is 22.44 per cent if your income is above Rs 10 lakh per annum or 20.4 per cent if your income is below Rs 10 lakh per annum. You can choose to calculate your long term capital gains with or without indexation, depending on which one results in lower tax payable.

What are the expenses related to mutual funds?

The Asset Management Company charges an annual fee, or expense ratio that covers administrative expenses, advertising expenses, custodian fees, etc.

A fund's expense ratio is typically linked to the size of the funds under management and not to the returns earned. Normally, the costs of running a fund increase at a slower rate than the growth in the fund size - so, the more assets in the fund, the lower should be its expense ratio. SEBI has prescribed limits for the maximum expense that can be charged to the scheme.

What are the different types of mutual funds?

Mutual funds based on structure

Open-ended schemes
These schemes do not have a defined or fixed maturity period. The investors can buy or sell units on any business day at NAV based prices from the fund house. Due to this flexibility offered to unit holders, the overall capital of open-ended schemes can fluctuate on a daily basis.

Close-ended schemes
These schemes have a stipulated maturity period and the fund remains open for subscription only during a specified period, at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter, they can buy or sell the units of the scheme on the stock exchange where the units are listed. To provide an exit route to the investors, a few close-ended funds give an option of selling back the units to the fund house through periodic (usually monthly or quarterly) repurchase at NAV related prices. SEBI regulations stipulate that at least one of the two exit routes is provided to the investor i.e., either repurchase facility or listing on stock exchanges.

Load and No Load Funds
Some mutual funds charge entry or exit loads (fees) when an investor buys or sells units. These are called "Load funds"?. The load is based on the NAV and is calculated as a certain percentage of the NAV. The load is applied to cover expenses incurred on the scheme’s marketing, distribution, advertisements, etc. Because of these charges, your purchase price is higher and your sale price is lower than the prevailing NAV of the scheme.

Cumulative or growth schemes, dividend reinvestment schemes and dividend payout schemes
Mutual funds usually give investors a choice of three ways in which they can receive their profits from a scheme. These are called the dividend payout option, the growth option and the dividend reinvestment option.

Dividend payout option
In the dividend payout option, the profits of the scheme are distributed to the investors in proportion to the number of units that they hold. This option is suitable for investors who would like to receive a regular income and for those who would like to use their profits elsewhere.

Growth option
In the growth option, the profits are not distributed and accordingly, the value of each unit keeps appreciating as the profits increase. This option is suitable for investors who do not have any immediate need for cash and would prefer to reap better wealth in the long run.

Dividend reinvestment option
Lastly, the dividend reinvestment option is similar to the growth option, in that the profits are not distributed. However, here the value of the units is not left to simply appreciate. Instead, each investor’s profits are converted into more units of the same scheme at the NAV of the scheme as on the day of conversion. This option is for those investors who have a medium risk profile and would prefer to see their capital base grow rather than allow their appreciation to be eroded by any fall in the value of the scheme’s portfolio.

Mutual funds based on the Portfolio Allocation



What is a Commodity?
The term commodity includes all kinds of goods. The Forward Contracts (Regulation) Act defines goods as 'every kind of movable property other than actionable claims, money and securities'. Futures trading is organized in goods or commodities that are permitted by the Central Government. The National commodity exchanges have been recognized by the Central Government for organizing trading in all permissible commodities which include precious (gold and silver) and non-ferrous metals; cereals and pulses; raw jute and jute goods; sugar, gur, potatoes, coffee, rubber and spices, etc

What are commodity futures?
Commodity Futures are contracts to buy specific quantity of a particular commodity at a future date. It is similar to the Index futures and Stock futures but the underlying asset happens to be commodities instead of Stocks and Indices.

How do Commodity prices move?
The following factors have an impact on the commodity prices:
  • Demand & Supply
  • Natural Factors such as climatic conditions and natural calamities.
  • Government Policies like EXIM Policies like tariff rates and minimum support prices.
  • Annual production, consumption and carry-over quantity of stocks.
  • Economic policies and conditions
  • Interest Rates

What are the major commodity exchanges?
• Multi-Commodity Exchange of India Ltd, Mumbai (MCX).
• National Commodity and Derivatives Exchange of India, Mumbai (NCDEX).
• National Multi Commodity Exchange, Ahemdabad (NMCE).

What are the commodity derivatives market timings?
Monday to Friday: 10 am to 11.30 pm (Agri-commodities up to 5 p.m. only)
Saturday: 10 am to 2 pm

Is delivery of commodities available? Is it compulsory?
Yes, but its not compulsory, buyers and sellers intending to take/give delivery should express their intention to the exchange. The exchange will match delivery randomly and assign it accordingly.



What is Life Insurance?
Life Insurance is a contract between you and a life insurance company, which provides your beneficiary with a pre-determined amount in case of your death during the contract term.
Buying insurance is extremely useful if you are the principal earning member of the family. In case of your unfortunate premature demise, your family can remain financially secure because of the life insurance policy that you have purchased.
The primary purpose of life insurance is therefore protection of the family in the event of death. Today, insurance is also seen as a tool to plan effectively for your future years, your retirement, and for your children's future needs. Today, the market offers insurance plans that not just cover your life but at the same time increase your wealth as well.

Do I need life insurance?
If you have financial responsibilities towards your dependants, then you certainly need
insurance. Financial commitments come in the form of loans, children's education, medical expenses.
Imagine what would happen if you were to lose your life suddenly or become disabled and could not earn. Being insured in a situation like this is a necessity. When you insure your life, in effect what you are doing is insuring your earning capacity. This way your dependants will continue to live without financial hardships even after your demise.
Most insurance plans available today come with a savings element built into it. These policies help you plan not only for your family’s protection after death but also for your own financially secure future, which would enable you to have a comfortable retirement.

Who Is an Insurance Broker?
An insurance broker is someone who acts as a go-between for businesses and insurance
companies. They typically have access to dozens of carriers, and can quickly find several policies for you to consider. A good insurance broker knows the industry, and can begin searching for additional insurance plans for you to consider. They know the procedures and processes of the various companies that offer coverage, and can cut through the red tape and interpret the jargon found in most contracts.

Is there any other benefit of buying insurance other than the risk cover?
There are several benefits of buying insurance. Other than the risk cover, the most important benefit you receive is Income Tax Relief under Section 80C of the Income Tax Act, which means premiums paid by you reduce your tax liability. Besides it helps you build up compulsory savings. Also, through a valid assignment the beneficiaries of the policy are protected from claims of creditors. One could also surrender his/her policy in case of emergencies. For a policy taken under the MWP Act 1874, (Married Women's Property Act), a trust is created for wife and children as beneficiaries.

Are there any advantages of buying insurance at an early age?
Yes. The premium that you pay on your insurance policy is mainly dependant on two things—your age and the tenure of the policy. The younger you are the lower is your insurance premium amount. At a younger age, you would also be physically sound and may not be suffering from illnesses which would entitle you to a lower premium on the policy. Therefore it is advisable to buy insurance at an early age to reduce the cost of insurance.

Is insurance better than other savings plan?
Other savings plans like Bank Fixed Deposits, National Savings Certificate, Public Provident Fund have short maturity tenures, compared to life insurance policies. (Eg.: NSC for 6 years, PPF for 15 years & life insurance can be up to 100 years). Therefore other saving plans have limited impact on financial planning prospects. Whereas, a Life Insurance Policy pays the sum assured even if the policyholder dies before the end of the payment term. Hence, this provides greater security to the person and his/her family.

What is Term Insurance?
Term Insurance, also known as pure life cover, is the cheapest and the simplest form of insurance. Under this insurance policy, against payment of regular premium, the insurer agrees to pay your beneficiaries the sum assured in event of your premature death. However, if you survive till the end of the policy term, nothing is payable to you. This policy has no savings component and the premiums you pay are purely a cost you have to pay to buy you life cover.

This is suitable for you if you are looking for a low cost life cover without any saving benefits attached or you are at that stage in life where insurance cover is vital but you cannot afford high a premium payment due to low income.

What is the difference between traditional life insurance and unit-linked life insurance?
The main difference is in the flexibility in the choice of investments. In the case of unit-linked life insurance, the insurance company would usually offer a choice of different funds (say, with a differential mix of bond and equity investments) in which the policyholder can opt to invest his/her contributions. The policyholder can decide into which funds his/her contributions need to be invested in and in what proportion. Therefore, the returns under the policy are dependent on the investment choice made by the policyholder. The policyholder can also opt to invest top-up contributions over and above the regular contributions at any time and to switch his/her investment pattern at any time during the term of the policy.

In the case of traditional life insurance, the policyholder is usually offered a guaranteed sum assured. In addition, non-guaranteed bonuses in the form of a share in the profits of the fund may also be offered depending on whether the policy is a participating policy or not. The premium amounts are usually fixed at the outset and the same quantum of premium needs to be paid throughout the term of the policy.

What is the difference between “term��? and “whole life��? insurance?
Term plans are the purest and cheapest form of insurance where benefits are payable only on the death of the policy holder within the term.
Whole life plans are a special type of term assurance wherein the term of the policy is whole life. So it follows that benefits under the policy are payable only on death of the policy holder.

Can my policy ever be cancelled due to health or other reasons?
Once a life insurance policy is issued, it cannot be cancelled by the insurance company during the policy period for any reason including changes in health, provided the required premium payments are made and the information on the application was not misleading or inaccurate.

Do all life insurance policies require a medical test?
Life insurance companies underwrite risk on the basis of the health status of the person. The amount of evidence of health required by the insurer depends upon the amount of risk involved i.e. the sum insured under the contract. In the case of a low sum insured of the life to be insured or at young age, the company might ask only for the statement of health in the form of a health questionnaire from the customer and not a medical examination. In other cases a full medical examination may be required.

Does the insurance company disclose the investments made in each fund?
The insurance company usually provides investment information at periodic intervals through news bulletins and other means.