Why should you invest?

Why should you invest?
You will not have to work!
You probably have heard the phrase “Let your money work for you!”. Just incase you do not understand what exactly this means, let us explain. The whole idea of investing is that you create or buy an “asset”.
What is an asset?
An “asset” is something that generates money. Just to give you an example, if you buy a flat for 4 lakh and then rent it out for Rs.3000 a month then you have created an asset. An “asset” that generates Rs.3000 a month.
However, this is just one type of asset. Assets are of many kinds. If you have a “copyright” or patent in your name, for which you get paid a certain amount when anybody uses it, then that too is called an asset. If you own a small pay phone from which you make just Rs.20 each day, then that too is called an asset!

The above given explanation is very crude, but that is the basics of investing. You want to invest the money you make in assets. Assets that generate money. The idea is that once you invest your money in enough assets, you can stop working. All your assets will make money for you. You can then use this money to enjoy life. Or you can use this money to invest in more assets that generate more money! So all this gives us the phrase, “Let your money work for you!” This is the main aim of investing. However, there are many other smaller aims of investing and we have explained them to you next...

Investing for TAX SAVING!

Investing for TAX SAVING!
The major reason why a large number of young people invest is to save tax! In fact, thank God for tax. If tax did not exist, the youth would never even think about investing!

Incase you do not know how this whole “tax saving” and investing thing works, let us explain that first.

You see the Govt. wants us to invest in certain things. Some of the things that the Govt. wants us to invest in are for our own good. The other things are for the good of the nation. So to encourage people to invest their money in the “these things” the Govt. says that, “If you invest your money in these things, you do not have to pay ‘income tax’ for earning that money!”

Incase you are confused, I will just give you are very basic and crude explanation on how income tax is calculated and paid. You see, “income tax” is all about your “income” i.e. the money you earn! You have to basically pay a portion of what you earn to the Govt.

Suppose you do a job and you earn Rs.20,000 every month you will have to pay a part or a “percentage” of that money to the Govt. What is the percentage that you have to pay? That depends on the “tax bracket” you fall in.

What is a tax bracket? You see, the Govt. feels that rich people can afford to give more money towards the development of the country and poor people cannot give much. Also the really poor people cannot give anything at all since they are struggling financially. So the Govt. has decided whether you are “very poor” or “poor” or “rich” or “very rich” depending on how much income you make. If you fall in the “very rich” category than you have to pay a big percentage of your money towards the county. If you fall in the “very poor” category you do not have to pay anything to the country.

This is basically what tax brackets are. The Govt. has decided what percentage of your income you must pay as “income tax” depending on how much you make or which “tax bracket” you fall in.

Now there is a legal way of paying less tax than what you are supposed to pay. And this way is though “investments”. If you invest part of your income into Govt. bonds, infrastructure bonds, life insurance etc. then your income will reduce and you will have to pay less to the Govt though income tax!

However, this is not true for any type of investment. It is true only for certain types of investments as stated by the Govt. Also, if you invest your money in these tax saving things, it does not just “go away”! You actually create an asset. An asset that produces money for your self. So, instead of loosing the earning power of the money by giving it to the Govt. though income tax, you could use the money to create an asset and also save tax in the process.

Again, incase you lost the original point in all the explanation, invest your money to save tax!

What we have told you above, are just the very basics of saving tax. There is a lot more to learn!

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 up to a maximum of Rs 1 lakh so as to enjoy the tax deduction u/s 80C / 80CCC;

(c) Investment up to 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 up to 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(Equity Linked Saving Scheme) and repayment of the housing loan. Thus, all together one can pick and choose from all these investment options as 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!

How to choose the Best Investment!
Now let us try to analyze which investment is good for which category of taxpayer. It is a well-known fact that the taxpayers can be classified into different categories depending upon the tax bracket in which they are assessed. For example, the first category of taxpayers would be persons having income in excess of Rs 1 lakh but up to Rs 1,50,000. All those taxpayers 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 taxpayers who are having annual income exceeding Rs 1,50,000 per annum and going up to Rs 2,50,000 per annum. All those taxpayers 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 taxpayers who come within the income bracket of more than Rs 2,50,000 where the maximum marginal rate of income tax is 30%. This category of individual taxpayers 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 taxpayers 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 2,50,000 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.

No higher deduction is available for investment in tax saving instruments for senior citizens or for women taxpayers. However, the senior citizens can invest in medical insurance up to Rs 15,000. Sometimes, a question also arises whether the investment in other bonds and investible instruments would entitle the taxpayer to section 80C. For example, your investment in post office monthly deposit account or your investment in senior citizens saving scheme as well as your investment in RBI (reserve Bank of India) bond will not bring home for you any tax saving in terms of section 80C.

In conclusion, please do remember that you have a long time ahead waiting for you up to 31st March, 2008 to make your investment in tax saving instruments but surely it makes better sense to invest now, relax and save tax right now. You can also opt for making the investment not at one go but in installments. Yes, if you have some small money available right now you may better invest now the money in tax saving instrument and as and when you have balance money available at your disposal then make investment at a later date but surely before 31st March, 2008.

Investing in Mutual Funds!

Investing in Mutual Funds!
What are Mutual Funds?
Mutual funds are one of the most convenient way to invest! Mutual funds allow you to invest your money like an expert without being an expert!

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciation realized by the scheme are shared by its unit holders in proportion to the number of units owned by them (pro rata). Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy
A mutual fund is the ideal investment vehicle for today’s complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc.

Basically, mutual funds are a way for you to outsource the whole “investing” headache to people who are experts at investing. Simply put, you give the money you want to invest to people who are experts at investing. They will invest your money and make it grow & for this service they charge you a small fee!

Why invest in mutual funds?
Good investing generally requires a good knowledge about the market, economics, world politics and a lot of experience etc. Most people who want to invest their money, do not have the time to follow and learn all these things. For them “Mutual Funds” are the best option. You do not have to worry about anything when investing in Mutual Funds. You just have take out the money for investing. The Mutual Fund managers are people who will do all the work for you and make your money grow!

The actual process of investing in mutual funds is also quite easy. You do not have to do anything except for write a cheque and give it to the mutual fund company. You do not have the hassles of using a “broker” or a “demat” account or anything.

Besides this, there are certain mutual funds that will “really” help you in your financial planning. There are certain mutual funds that are designed to help you invest and accumulate money for your “big buys”! All in all, we highly recommend that you use mutual funds for investing, as you are probably a new investor.
Mutual funds have some risk associated with them. But the risk is not very high. It is generally considered to be a moderately safe investment. However, mutual funds can produce pretty good returns!

One of the best things about mutual funds is that they are “liquid”! What is liquid? To understand what “liquid” means, let us try to understand what non-liquid investments are.

There are some investments that take some time period to “mature”. This means that once you invest the money in the investment, you cannot withdraw it until the time period is up. Once the time period is up, then only will you be able to withdraw the money you invested and the returns produced. These investments are non-liquid. If on the other hand, you can withdraw the money invested and the returns at any point of time, then the investment is considered to be a liquid investment.
Generally, it is good to try and put your money in liquid investments. This is because in case there is a sudden need for money like an operation, an accident etc. you should not have to borrow money. You should have the money available.
Mutual funds are very liquid investments. The process of re-claiming your money in most mutual funds will take a maximum time of 2-3 days.

How to invest in mutual funds?
There are many different kinds of mutual funds. Instead of trying to figure out what is good for you what is bad for you etc, you should get yourself a good mutual fund agent! You just call one of these agents up and tell them you invest in mutual funds. They will help you out with everything that you need to know. You just have to tell them what kind of “financial aims” you have and they will come up with a whole plan for you to reach your “financial aims”!


Issuing a Mutual Fund Offer!
A draft offer document is to be prepared at the time of launching the fund. Typically, it pre specifies the investment objectives of the fund, the risk associated, the costs involved in the process and the broad rules for entry into and exit from the fund and other areas of operation. In India, as in most countries, these sponsors need approval from a regulator, SEBI (Securities exchange Board of India) in our case. SEBI looks at track records of the sponsor and its financial strength in granting approval to the fund for commencing operations.

A sponsor then hires an asset management company to invest the funds according to the investment objective. It also hires another entity to be the custodian of the assets of the fund and perhaps a third one to handle registry work for the unit holders (subscribers) of the fund.
In the Indian context, the sponsors promote the Asset Management Company also, in which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the Asset Management Company (AMC). E.g. Birla Global Finance is the sponsor of the Birla Sun Life Asset Management Company Ltd., which has floated different mutual funds schemes and also acts as an asset manager for the funds collected under the schemes.

Classification of Mutual Fund!
Mutual fund schemes may be classified on the basis of its structure and its investment objective:
By Structure:

Open-ended Funds
An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.

Closed-ended Funds
A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. 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 exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.

Interval Funds
Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices.

By Investment Objective:

Growth Funds
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a majority of their corpus in equities. It has been proven that returns from stocks, have outperformed most other kind of investments held over the long term. Growth schemes are ideal for investors having a long-term outlook seeking growth over a period of time.

Income Funds
The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income.


Balanced Funds
The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth.

Money Market Funds
The aim of money market funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for Corporate and individual investors as a means to park their surplus funds for short periods.

Load Funds
A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history.

No-Load Funds
A No-Load Fund is one that does not charge a commission for entry or exit. That is, no commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work.

Other Schemes:
Tax Saving Schemes
These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for investment in specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 80 of the Income Tax Act, 1961.

Special Schemes
Industry Specific Schemes
Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like InfoTech, FMCG, Pharmaceuticals etc.


Index Schemes
Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50.

Sectoral Schemes
Sectoral Funds are those, which invest exclusively in a specified industry or a group of industries or various segments such as 'A' Group shares or initial public offerings

Benefits of Mutual Fund investment
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.

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.

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.

Return Potential
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.

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.

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.

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.

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.

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.

Choice of Schemes
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

Well Regulated
All Mutual Funds are registered with SEBI 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.


Who are the issuer of Mutual Funds in India!

Unit Trust of India was the first mutual fund which began operations in 1964. Other issuers of Mutual funds are Public sector banks like SBI, Canara Bank, Bank of India, Institutions like IDBI, ICICI, GIC, LIC, Foreign Institutions like Alliance, Morgan Stanley, Templeton and Private financial companies like Kothari Pioneer, DSP Merrill Lynch, Sundaram, Kotak Mahindra, Cholamandalam etc.

Are there any risks involved in investing in Mutual Funds?
Mutual Funds do not provide assured returns. Their returns are linked to their performance. They invest in shares, debentures and deposits. All these investments involve an element of risk. The unit value may vary depending upon the performance of the company and companies may default in payment of interest/principal on their debentures/ bonds/ deposits. Besides this, the government may come up with new regulation, which may affect a particular industry or class of industries. All these factors influence the performance of Mutual Funds.

How is the worth of an investment in a mutual fund measured? What is NAV?
The current value of your investment can be known from the Net Asset Value or the NAV. The NAV, in effect, measures the value of the net assets (gross assets less liabilities) per unit.
Mathematically, the NAV is given by:
{(Market Value of the Scheme's Investments) + Other Assets (including accrued interest) + Unamortised Issue Expenses (only in case of schemes launched on a load basis) - All Liabilities except unit capital and reserves)} Divided by the number of units outstanding at the end of the day.

How often is the NAV declared?
The NAV of a scheme has to be declared at least once a week. However many Mutual Fund declare NAV for their schemes on a daily basis. As per SEBI Regulations, the NAV of a scheme shall be calculated and published at least in two daily newspapers at intervals not exceeding one week. However, NAV of a close-ended scheme targeted to a specific segment or any monthly income scheme (which are not mandatory required to be listed on a stock exchange) may be published at monthly or quarterly intervals.

What is Entry/Exit Load?
A Load is a charge, which the AMC may collect on entry and/or exit from a fund. A load is levied to cover the up-front cost incurred by the AMC for selling the fund. It also covers one time processing costs. Some funds do not charge any entry or exit load. These funds are referred to as 'No Load Fund'. Funds usually charge an entry load ranging between 1.00% and 2.00%. Exit loads vary between 0.25% and 2.00%

What is Sale/Purchase Price?
Sales/Purchase price is the price paid to purchase a unit of the fund. If the fund has no entry load, then the sales price is the same as the NAV. If the fund levies an entry load, then the sales price would be higher than the NAV to the extent of the entry load levied.

What is Redemption Price?
Redemption price is the price received on selling units of open-ended scheme. If the fund does not levy an exit load, the redemption price will be same as the NAV. The redemption price will be lower than the NAV in case the fund levies an exit load.

What are the other costs involved in Mutual Fund Investing?
In addition to entry and exit charges, a mutual fund also charges asset management fees and certain other expenses. These charges compensate the fund for the expenses it incurs in managing assets, processing transactions and paying brokerages. For instance, every redemption request involves not only administrative processing costs but also other costs associated with raising money to pay off the outgoing investor. Regulations stipulate that the difference between the repurchase and the resale price cannot exceed 7 % of sale price, and that recurring expenses cannot exceed 2.5 % of average weekly net assets. The recurring expenses limit is even lower for schemes with a size exceeding Rs. 100 crores in net assets.
Is there any minimum lock-in-period for units?
There is no lock-in period in the case of open-ended funds. However in the case of tax saving funds a minimum lock-in period is applicable. The lock-in period for different tax saving schemes is 3 yrs

What are the factors that influence the performance of Mutual Funds?
The performances of Mutual funds are influenced by the performance of the stock market as well as the economy as a whole. Equity Funds are influenced to a large extent by the stock market. The stock market in turn is influenced by the performance of the companies as well as the economy as a whole. The performance of the sector funds depends to a large extent on the companies within that sector. Bond-funds are influenced by interest rates and credit quality. As interest rates rise, bond prices fall, and vice versa. Similarly, bond funds with higher credit ratings are less influenced by changes in the economy.

As a new investor how do I Select a Particular Scheme?
Choice of any scheme would depend to a large extent on the investor preferences. For an investor willing to undertake risks, equity funds would be the most suitable as they offer the maximum returns. Debt funds are suited for those investors who prefer regular income and safety. Gilt funds are best suited for the medium to long-term investors who are averse to risk. Balanced funds are ideal for medium- to long-term investors willing to take moderate risks. Liquid funds are ideal for Corporates, institutional investors and business houses who invest their funds for very short periods.
An important aspect while selecting a particular scheme is the duration of the investment. Depending on your time horizon you can select a particular scheme. Besides all this, factors like objective of the fund and returns given by the funds on different schemes should also be taken into account while selecting a particular scheme.

What are the various ways in which fund performance can be measured?
NAV serves as the basic material for evaluating the performance of a fund. Some of the methods used are explained below:

Relative-To-Benchmark method :
Under this method, a comparison is made between the returns given by a market index and the fund over a given period of time. If the returns generated by the fund (as measured by changes in NAV over that given period of time) are greater than those generated by the benchmark, then the fund is said to have outperformed the market portfolio.

Risk-Return method:
The Relative-to-Benchmark measure is very simplistic, as it does not incorporate any measure of risk in its calculation. An investor would naturally be interested in finding out the return generated for the risk undertaken, as, in a bid to generate super-normal returns, the fund may go overboard on the risk parameter. Therefore, risk-adjusted measures of return are needed to evaluate the performance of funds. There are several such measures prominent among which are the Sharpe ratio, the Treynor ratio, and Alpha:

Sharpe ratio:
This measure uses standard deviation as a measure to evaluate a fund's risk-adjusted returns. The higher a fund's Sharpe ratio, the better it is. Thus, a fund's returns would be regarded good if the fund returns a high level of Sharpe ratio. Mathematically, it is arrived at by deducting the risk-free returns from the returns generated by the fund and dividing the residual figure by the standard deviation of the fund's returns. One thing that has to be kept in mind while using this measure is that the ratio is not an absolute figure. Its real utility lies in inter-scheme comparison.

Treynor's ratio:
Treynor's ratio also has the same attributes as Sharpe's with the difference that the residual figure in this case is divided by beta rather than the standard deviation, thus reflecting only the systematic risk. Beta of the fund is a volatility measure that quantifies the sensitivity of the fund's return to the benchmark index's returns, i.e., given the movements of the benchmark how much the fund will move. It does not represent unsystematic risk under the assumption that the fund manager can easily wipe out the unsystematic risk by diversifying across a large number of stocks.

Alpha:
Basically, alpha is the difference between the return that would be warranted by its beta (expected return) and the return that is actually generated by the fund. If a fund returns more than what is anticipated by beta, it has a positive and favourable alpha, and if it returns less than the amount predicted by beta, the fund has a negative alpha. Mathematically, Alpha = fund return - [Risk free rate + Beta of fund (Benchmark return - Risk free return)]

How relevant is the Past Performance of a Fund Scheme?
Fund prospectuses will clearly tell you that "past performance is no indicator of the future", but, on the other hand, many analysts will tell you that sustained performance over a reasonably long period of time is a good criteria. There is truth in both points of view. While past performance reflects the success of the fund manager, the broad investment strategy and related factors, it serves as no guarantee that the strategy will work equally well in the future. A change in the external environment could necessitate a change in investment strategy too. Again, past successes could imply that the probability of future successes is respectably high. So it's one of those issues where you'll have to rely partly on information and partly on intuition. Do fund managers commit themselves to any particular investment philosophy and style? Normally fund managers do define the approach they intend to adopt to realise the investment objective of the scheme. In fact, if you want to know what your fund manager's philosophy is, go through the fund offer documents and other communication - that should give you a clear idea of what the fund manager proposes to do with your money.

What is Cost Averaging?
Cost averaging is an investment strategy in which equal amounts of money are invested in a scheme at regular intervals. So, you can buy a lower number of units when the NAV is high and a higher number of units when the NAV is low. What it does, in effect, is eliminate the need to keep a continuous track of the market. Regular investment over a period of time evens out the short term fluctuations associated with the market's volatility, so you don't suffer.

Insurance.. Why take LIFE insurance?

Insurance.. Why take LIFE insurance?
Life Insurance is bought by almost everyone. And most people buy it for one core reason – to save tax! But this should not be the only reason to buy insurance! Here we have explained some of the reasons why life insurance is a VERY important part of personal money management!

Passing away early
One is never sure about life. We often come across people claiming that nothing is going to happen to them; that they are too young to pass away. But do they really know what the future holds for them? Just read newspaper headlines about the recent Tsunami, the earthquake, bomb blasts etc. that took place and such calamities to understand how the future can be unpredictable.
Individuals need to insure themselves to secure the future of those who are dependant on them; especially if they happen to be to only earners in thire family. You wouldn’t want your family to go through hardships or rely on others/relatives, etc. This, in fact, is the MAIN reason why one should buy an insurance policy!

Living too long
Advances in the field of medicine have grown by leaps and bounds over the past few decades. Due to this, life expectancies have gone up. This causes another problem for individuals. It is generally observed that individuals who tend to live way beyond their earning years like say, till the age of 85 or 90, usually face a problem coming to terms with increasing costs of living. Also take into account the increase in medical expenses!
Insurance, if bought at the right time for the right amount provides the required money in such times. Individuals could opt for a pension plan offered by insurance companies, which suits their needs in terms of income, retirement age and expenses post-retirement. Such plans provide an "annuity", which means that individuals keep getting a fixed sum every month/year after they have retired.

Painful existence
Maybe an individual has planned well during his earning years to secure himself financially. He has created assets in such a way that he has a comfortable monthly income to support his family expenditure.
But what if an individual were to have a health problem afflicting him or his spouse? What if the treatment were to cost him a sum beyond his financial capacity? Here again, life insurance can help you out in two ways. One, by way of a "medical rider" that provides for money in case of any medical emergencies! These riders are taken along with the life insurance plan and help cover the medical expenses.
And secondly by allowing the individual to surrender the insurance policy. Of course this should be done only in case of an urgent need like a serious health problem. Surrendering the policy will help in the generation of a lump sum amount that can be used for covering the high cost of medical expenses.

Tax benefits
Life insurance has always been bought more for tax benefits than to insure human life. But the role of life insurance in an individual’s "tax planning" cannot, in any way, be undermined.
Individuals can now invest upto Rs.100,000 in insurance premium to avail of a deduction from taxable income.
Now that the extreme need for Life Insurance is understood, you must get your self some life insurance. If you do not do it for your self or if you do not even want to do it to save tax, do it for your family! If you have people who depend financially on you, you MUST MUST MUST get life insurance!
There are many different Life Insurance Companies and many different life insurance plans. It is best to get your self a life insurance agent instead of deciding which plan to go in for yourself!

National Savings Certificate (NSC)

National Savings Certificate (NSC)
NSC is an assured return scheme and provides for tax saving too! Returns are at 8% for a duration of only 6 years, which is relatively smaller compared to other small saving schemes. Here, investors are required to make a single deposit and the interest is returned along with the principal amount on maturity.
However, NSC is not at all liquid, as premature withdrawals can be done under specific circumstances only, such as death of the holder, forfeit by the pledgee or under court's order.
NSC investors enjoy tax saving benefits. Thus, NSC is an ideal investment for those investors who are looking at tax benefits on a longer-term basis and are not too bothered about liquidity.

How do I invest in National Savings Schemes?
NSC application forms are available at all post-offices.


What is the minimum investment and range of investment in NSC?
NSCs are issued in denominations of Rs.100, Rs.500, Rs.1,000, Rs.5,000 and Rs.10,000. There is no upper limit on investment in NSCs.


Kisan Vikas Patra (KVP)
Want to double your investments in less than nine years? KVP is for you! But there's a catch. The scheme, which offers to double your money in "eight years and seven months", offers NO Tax benefits!
One can exit the scheme any time after 2.5 years from the investment date, though investors will have to bear the loss of interest for the invested time period.
Though KVP is not meant for regular income, it is a safe avenue of investment for those without pressing tax concerns. Liquidity is also reasonably higher here.

How do I invest in Kisan Vikas Patra?
You can buy KVP by filling up the appropriate application form available at post offices across the country.

What is the minimum investment and range of investment in KVP?
The minimum investment in KVP is Rs.100. Certificates are available in denominations of Rs.100, Rs.500, Rs.1,000, Rs.5,000, Rs.10,000 and Rs.50,000. The denomination of Rs.50,000 is sold through head post offices only. There is no limit on holding of these certificates. Any number of certificates can be purchased. A KVP is sold at face value; the maturity value is printed on the Certificate.

Public Provident Fund (PPF) Investing!

Public Provident Fund (PPF) Investing!
The Public Provident Fund (PPF) is by far the most popular tax saving investment as far as provisions of Section 80C are concerned. This section allows a deduction of up to Rs one lakh on approved investments every year.
Unlike other options, selecting this route cannot use the entire limit of Rs one lakh, as the maximum permissible limit of investing in PPF in a financial year is only Rs 70,000.
To get the benefit of this investment, the investor will have to open a PPF account with the specified nationalized banks or post offices. Once the account is opened, this will be operational for a period of 15 years. When this period is over, the account can be extended by a period of five years at one go and in blocks of five years thereafter.
An investor can make up to 12 deposits in the account during a year. The minimum amount of deposit is Rs 500 while the maximum amount is also capped at Rs 70,000 during a year. Depending on the convenience of the person, the deposits can be made as and when the funds are available.
A person can also open an account in the name of children. But as far as operation of the account is concerned, the amount of investment in the account of a person and the child should not exceed the maximum amount of Rs 70,000.
It is pertinent to note that in case the amount exceeds this figure, then at the time of discovery the additional investment will be returned to the investor and no interest will be paid from the date of investment.
The interest rate payable on this investment is 8 per cent and this is compounded each year as the amount invested along with the interest earned is considered for further calculation of interest. While the interest figure is calculated on an annual basis, the monthly figures of the amount present in the account are considered for the calculation.

It means that a person who makes his PPF deposit early in the financial year will earn more interest than those who wait till March for making tax saving investments.

There is facility for taking loan as well as withdrawal from the PPF account before the completion of 15 years. The loan facility is available from the start of the fourth year and this will be available to the extent of 25 per cent of the amount standing in the account at the end of the third year. The loan has to be repaid within a period of 36 months.

The withdrawal facility is available for the investor from the start of the eighth year and will be the amount that is 50 per cent of the amount standing in the account at the end of the fourth year or 50 per cent of the amount standing in the account at the end of the seventh year.

Both these routes provide an element of liquidity in the entire investment so that the funds are not locked in for the entire duration of 15 years of the scheme.

Previously, PPF fetched a tax-free interest of 12 per cent. But in the last eight years, the interest has come down sharply.
A PPF account should be used to create wealth over a longer time frame, using the power of compounding. This is the real benefit that will arise to a person who is maintaining and running a PPF account for a long time period.
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 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.
How to invest in PPF?
A 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 nationalised 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.
However, be warned: you can have only one PPF account in your name. If at any point it is detected that you have two accounts, the second account that you have opened will be closed, and you will be refunded only the principal, not the interest. Again, two adults cannot open a joint account. The account will have to be opened in only one person’s name. Of course, the person who opens an account is free to appoint nominees.