Fin O Pedia Issue 33 Sep2 Sep8

7/27/2019 Fin O Pedia Issue 33 Sep2 Sep8

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Top Stories: International

Know Your Basics:

A SIMSREE Finance Forum Initiative | Issue 33

FIN-O-PEDIA

ets TalkFINANCE!!

SYDENHAM INSTITUTE OF MANAGEMENT STUDIES, RESEARCH &

ENTREPRENEURSHIP EDUCATION

2012

Know Your Basics:

Rupee Cost Averaging

Annuities


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Know Your Basics:

Rupee Cost Averaging

Rupee Cost Averaging is a technique to buy stocks. It is a methodology used mostly by smallinvestors in order to reduce their exposure to risk and also invest regularly. Here you invest a

particular amount of money in stocks at regular intervals and buy whatever the number of

stocks that can be bought in that amount. This is done for a considerable amount of time and

then if we calculate our investment in terms of the number of shares available it would be

better than investing the whole amount at once.

Consider an example of a company ABC Ltd. Let us say currently the share price of the

company is Rs.60 and you want to buy shares but are not sure whether to buy it right now or

wait for the prices to drop. So you can easily follow the following method.

Month Investment (Rs.) Share Price (Rs.) No. of Shares

1 600 60 10

2 600 50 12

3 600 45 13

4 600 70 8

Total 2400 43

So in all you can buy 43 shares of the company in 4 months. Lets say that you dont follow

this strategy and buy all shares worth Rs.2400 at the price of Rs.60 then you could havebought only 40 shares.

This is not a surest strategy to avoid risk but can be used safely if the markets are volatile and

can help in improving your portfolio.

Advantages

Investment in this case is on a regular basis. So this is very much beneficial rather than

buying all at once. Moreover the risk of the stock prices falling down and hence making a

loss is reduced to a significant extent. This can be done on a weekly or a fortnightly or amonthly basis. It can work effectively in both buying and selling. It will convert a monthly

savings scheme into a regular investment scheme.


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Annuities

Annuities are exactly the reverse of insurance. The insurance provides the family of the

insured with the stipulated amount after his/her death. However annuities pay the annuitants

until they are alive. So it can be called as a retirement instrument. It is a financial product

sold by financial institutions that is designed to accept and grow funds from an individual and

then pay out at regular intervals to the individual at a later point in time. Apart from being a

retirement vehicle they can also be used to pay for things like disability and long-term care,

and they can also serve as tax shelters for wealthy individuals whose incomes are too high to

allow them to save money in other retirement vehicles.

Advantages

Tax exemption is one of the benefits of annuities. It can be used as an instrument to save tax

by wealthy individuals Moreover there is generally no limit on the amount of money put in

the annuities.

Guaranteed Payout is also a good reason for investing. Annuitants that choose any type of life

payout option can rest assured that they will receive some sort of payment until they die, even

if they completely exhaust the value of the contract beforehand.

Typesof Annuities

There can be basically three types of annuities.

1. Fixed AnnuitiesAs its name implies, a fixed annuity is a type of contract that guarantees to return both

the investors principal plus a fixed rate of interest. Fixed annuities are among the

safest investments available. If an annuity carrier becomes bankrupt orinsolvent for

any reason, then reinsurance groups will step in and cover most or all of any investor

losses.

2. Indexed AnnuitiesThese contracts are similar to fixed annuities in that they offer a guarantee of principal

and a set term, but they do not pay a fixed rate. Indexed annuities, as the name

implies, will invest in one of the major stock market indices. The contract ownerreceives a share of the markets growth (if there is any), while avoiding any possible

downside risk. There are several different methods that companies use to credit their

contract holders with market gains. They are as follows

Annual ResetThe annuitant is credited with a return each year that the market

exceeds its previous years level. If it does not, then no gain is credited, but no loss is

taken either.

Point to PointMeasures the change in the index from the start of the contract to the

end of the term (which is usually five years). In a continuous bull market (rising
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market), point to point annuities will usually offer the highest returns.

3. Variable AnnuitiesVariable annuity investors have been subject to the same market risks as investors of

taxable stock and bond funds. These contracts consist of a bundled offering ofmutual

fund subaccounts that grow under a tax-deferred umbrella. Variable annuities are the

most complex type of annuity in the market today.
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Fin O Pedia Issue 33 Sep2 Sep8

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