ICICI Special Editioncontent.icicidirect.com/.../Special_Edition_2016.pdfICICIdirect Money Manager 5...

ICICIdirect Money Manager Special Edition

ForewordIf there ever was a great time to invest, it's when you are young. An early start to investing is the key to financial freedom and building wealth. You just need to build a few good financial habits and follow through your life. Managing personal finances is not difficult, it is all in our control to be disciplined and lead a healthy financial life. A small amount saved and invested today, while you are young, will help you accumulate a sizeable corpus by the time you retire. The right time to start investing is NOW. In this booklet, we tell you why investing early is important, what are the key investment options, how to invest, and in turn, reach your financial goals. In short, it is a handy guide on basics of savings and investing to help you get started with your investment journey.

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2ICICIdirect Money Manager Special Edition

Contents

Chapter 1 :

Chapter 2 : .....

Chapter 3 : Myths about Savings and Investing ………......…....................9

Chapter 4 : Understanding Major Asset Classes …..……........................15

Chapter 5 : Asset Allocation and Diversification …………......................20

Chapter 6 : Key Investment Products to Know ……………….................24

Chapter 7 : Insurance: Must Have Covers ………………........................44

Chapter 8 : Money Management Techniques .…………..........................47

Chapter 9 : You Need Different Approach to Investments than Your Parents ……………..................................................... . 53

Chapter 10 : Putting Your First Trade On ICICIdirect.com .……...... . . . . . . . 56

Understanding Your Salary ………............…………...............3

Why Saving and Investing Early Is So Important ...................7

Editorial Team : Abhishake Mathur, CFA, Sameer Chavan, CWM®, Yogita Khatri


Chapter - 1

Before you start your investment journey, it is important to

understand your earnings. There are two key reasons for this.

First, you need to know how much you earn in order to know how

much you can afford to spend, save and invest. Second, is to

understand the tax implications of each component of your

salary. Here is a quick guide.

This is a fixed component of your salary and forms the basis of

other components as the name suggests. Basic salary generally

comprises 35-50% of your total salary.

It is 100% taxable.

It is an allowance for salaried individuals who stay in rented

houses/apartments. You can claim HRA to lower your taxes. HRA

forms around 40-50 % of your basic salary, based on your

location - metro or non-metro.

You get tax exemption based on whichever of the

following is lower:

- 50% of your basic pay in case the location is Mumbai, Kolkata,

Chennai, Delhi or 40% of basic pay in case of other cities.

- Actual rent minus 10 % of basic

- HRA component specified on your salary slip

If you receive HRA and do not live on rent, your HRA shall be fully

taxable.

It is an allowance paid by the employer towards the cost of travel

from home to work and back.

Conveyance allowance up to Rs 1,600 per month is

exempted from tax.

Basic Salary

Taxation:

House Rent Allowance (HRA)

Taxation:

Conveyance Allowance

Taxation:

Leave Travel Allowance (LTA)

UNDERSTANDING YOUR SALARY


Chapter - 1

It is to cover the cost of travel while you are on leave. It includes

travel expenses of your immediate family members as well. LTA

can be availed on a trip within India. This does not apply for

foreign travel.

Only two journeys can be claimed in a block of 4 years.

You can claim deduction for LTA only up to the amount granted to

you by your employer. For claiming the LTA, you will have to

produce the original tickets / boarding pass to your employer.

It is a fixed allowance and part of your monthly salary. You do not

have to submit any medical bills to the employer to claim this

amount.

It is 100% taxable.

There is a difference between medical allowance and medical

reimbursement. For claiming the money under medical

reimbursement, you will have to submit medical bills to your

employer. Expenses such as consultation with a doctor,

medicines, medical tests etc. are eligible for this reimbursement.

There is no tax on medical reimbursement up to

Rs.15,000 in a year, provided all the proper bills are submitted to

the employer.

This is a retirement benefit that employers with over 20

employees have to provide. Both employer and employee each

contribute 12% of basic salary every month toward Employees'

Provident Fund (EPF). Employees can contribute over and above

the 12%; however, employer's contribution is fixed at 12%. You

earn interest also on these contributions. The current interest rate

is 8.8% (for 2015-16). The EPF, being an important component of

your salary, helps in building up a sufficient corpus for retirement.

EPF contributions up to Rs. 1.50 lakh are exempt from

Taxation:

Medical Allowance

Taxation:

Medical Reimbursement

Taxation:

Employee and Employer's Contribution to provident fund

Taxation:


Chapter - 1

tax under section 80C of the Income-tax Act.

It is a defined benefit plan, offered by employers to employees

upon retirement or completion of five years of continuous

service (5-year tenure is not applicable in the case of death or

disablement). Gratuity, unlike provident fund, is fully contributed

by the employer without any contribution from the employee.

The minimum benefit is approximately two weeks' last drawn

salary for each year of service with an upper limit of Rs. 10 lakh.

Gratuity benefit can be a sizable amount if the number of years

served is higher. Even if the amount is small, you may include this

in your pool of investments and make it grow.

Bonus/ Incentives are usually part of your variable pay. The

amount given depends on your performance and the company's

policies.

It is 100% taxable.

Professional tax is a tax levied by a state. It is deducted from your

gross salary every month – usually Rs. 200 per month. The

maximum amount of professional tax that can be levied by a state

is Rs 2,500 per year.

Income tax is levied by the central government and is deducted

based on your tax slab and the documents you may have

submitted proving your investments in tax-saving instruments.

To sum up, your salary basically includes three components:

Fixed allowances, retiral benefits, and reimbursements -- while

other components vary. To increase your net take-home pay, you

may also look to restructure your salary, if possible. For example,

benefits such as leave travel allowance (LTA) and medical

allowances not only increase in-hand salary, but also make the

overall pay more tax-efficient. On the other hand, increasing the

Gratuity:

Bonus/ Incentives

Taxation:

Professional Tax

Income tax


Chapter - 1

Source: The Economic Times

amount of your basic salary will help you build the larger

retirement corpus as your provident fund is deducted as a

percentage of your basic pay. Higher the basic pay, higher your

contributions towards PF and in turn, the larger corpus for

retirement. Likewise, you may try and adjust the components of

your salary to increase your in-hand pay and make it more tax-

efficient.


Chapter - 2

WHY SAVING AND INVESTING EARLY IS SO IMPORTANT

Is Savings a Sacrifice?

Why some sacrifices are important.

Does starting early really help?

Savings essentially means reducing your consumption today

and putting aside money for the future. So when we talk about

savings and investing, we are really looking at a better future. Yes

savings does mean some sacrifice…whether it is not buying a

new phone this month or a new dress or just letting go the urge to

eat out more than once in a week.

By the way, this is not an absolute sacrifice, because you are

saving for yourself and for your own future. In more complex

terms it is called 'delayed gratification' which is sacrificing today

to enjoy more tomorrow.

Nothing has demonstrated the benefits of delayed gratification

than the Stanford Marshmallow experiment.

or

something that the children really craved for.

The experiment reiterates that controlling oneself

today for a better future is really important for a balanced and

bright future.

So even if saving today may be hard today…it is very important.

You may have by now heard many times to start savings and

investing early. There is a mathematical reality behind this

adage…and that is the power of compounding.

This was a study

conducted on children who were offered a choice between one

small reward provided immediately or two small rewards if they

waited for a short period, approximately 15 minutes, The children

were left alone by the administrators of the study and then

returned subsequently. The reward was a marshmallow

In follow-up

studies, the researchers found that children who were able to

wait longer for the preferred rewards tended to have better life

outcomes and were better placed financially, behaviorally and

health wise.


Chapter - 2

The earlier you invest, the more you can benefit from compounding. Recall that chapter on interest rates in class Xth mathematics! Compounding means that you make money not only on the initial invested amount (or principal) but also on the returns that it earns. The earlier you invest and the longer you stay invested, the more will be the compounding effect. In fact, the earlier you start, the smaller amount will be required to invest and build sufficient corpus to reach a specific goal.

Let's understand this with an example of two investors - Suresh and Ramesh - both 25 years old. Suresh starts investing early at age 25, Rs 3,000 per month, till the age 60. Ramesh did not start investing until age 35 and then starts investing higher amount Rs. 5,000 per month to cover up the lost time. At the age 60, Suresh will accumulate Rs.1.65 crore at 12% p.a. return while Ramesh would be able to accumulate only Rs. 85.11 lakh, even though he invested higher amount of Rs. 15 lakh (5,000 x 12 months x 25 years) than Suresh who invested a total amount of Rs. 12.60 lakh (3,000 x 12 months x 35 years).

As you can see from the table above, the difference in accumulated corpus is significant - of around Rs. 80 lakh! Procrastination can be detrimental. As time is on your side, start investing NOW. The sooner you start, the greater your chances of meeting all your financial goals smoothly.

Investing Early Compared with Starting Later and Investing More

Particulars Suresh Ramesh

Current age 25 years 25 years

Investment start age 25 years 35 years

Retirement age 60 years 60 years

Investment amount Rs.3,000 p.m. for 35 years

(i.e. from 25 to 60 yrs)

Rs.5,000 p.m. for 25 years (i.e.

from 35 to 60 yrs)

Rate of return 12% p.a. 12% p.a.

Accumulated Corpus at Retirement Rs.1.65 crore Rs.85.11 lakh

Total amount invested Rs. 3,000 per month x12 months x 35 years = Rs.12.60 lakh

Rs. 5,000 per month x12 months x 25 years =Rs.15 lakh


Chapter - 3

MYTHS ABOUT SAVINGS AND INVESTING

Investing is generally not on the minds of youngsters especially

when they are in their 20s and just at the start of their careers.

They are more focused on immediate things like buying a new

Smartphone, new laptop or any latest gadget. Instant

gratification generally takes over investing at this stage.

Recently, ICICIdirect.com did a study to find out what prevents

youngsters from starting their investment journey and taking that

first step. The reasons are many, reveals our study. Whether it is

not having enough time and money, thinking investing is too

complex…youngsters are quick to give up before they even start.

While staying away from market and investing may feel sensible

to many given its volatile nature, it however, on the other hand,

could harm our long-term financial health if we shun the

investments and equities completely.

Let's clear up some of the most common barriers and

misconceptions that hold youngsters back from investing.

Being young is the perfect reason to start investing, not to put it

off. The younger you are the more you can benefit from the

power of compounding (as we saw in the Suresh vs. Ramesh

case above). The earlier you start investing, the bigger corpus

you can create to reach your financial goals. Starting early helps

you to accumulate more than someone who starts later, saves for

longer, and puts in more money.

The smartest investors such as Warren Buffet started their

investments way back in their early years. They had plenty of

time ahead of them to ride market cycles, and thus eventually had

the money to spend on the big goals of life like children's

education, retirement, etc.

“I'm too young to start investing”


Chapter - 3

Remember, when young, time is your best ally. So do make the

most of it!

Many young individuals feel that it is not worth investing till they

have a larger sum available. Remember, you do not need a large

amount to get started with investing. All that really matters is

taking that first step, say for example, opening a systematic

investment plan (SIP) for just Rs. 500. An SIP is nothing but a

planned investment program, which takes a small sum of money

from you at regular intervals and invests it in a mutual fund.

Do not underestimate how a small amount of money can grow

over time. Even small amounts invested over a period of time

sums up to a sizeable corpus (see the table below).

“I don't have enough money to invest”

Small is powerful

Investment contribution per

month

Investment value after 1 year

At return 8% p.a. At return 10% p.a. At return 12% p.a.

Rs. 500 Rs. 6,225

Rs. 6,283 Rs. 6,341

Rs. 1,000 Rs. 12,450

Rs. 12,565 Rs. 12,683

Rs. 2,000 Rs. 24,900 Rs. 25,131 Rs. 25,365

Rs. 3,000 Rs. 37,350 Rs. 37,697 Rs. 38,047

Rs. 5,000 Rs. 62,250 Rs. 62,828 Rs. 63,413

Even Rs. 500 a month is good amount to start with. The important

thing is to just start, and then make it a habit. Always remember to

pay yourself first. Putting away a small percentage of your

paycheck say 10-15%, instead of a set amount, will keep your

investments in line with your every pay-raise. Still, if you feel, you

are left with no money after meeting your monthly expenses, do

try and recognize some of the non-discretionary expenses such

as buying a latest gadget etc, which can be delayed or curbed

upon, so that you can save and invest. This can go a long way in

helping you secure your future.


Chapter - 3

“I don't have enough time”

“The stock market means short-term trading. It is a kind of gambling.”

“I haven't really known people who made money”

This is another reason why youngsters do not get started with

investing. They believe, if invested, they would have to

continuously track their stocks and investments as it was needed

to get the real gains. It is critical to understand that stock market is

not just about trading – buying and selling stocks frequently –

which requires daily monitoring. Investments in equity should be

made with a longer term perspective. This way, one need not

worry about every little dip in price or every little news item.

Onecan focus on the bigger picture then and not on the time -

consuming process of rigorous monitoring.

Focusing on simple and easy-to-understand investments also

reduces the time required to track investments. You need not

own complex instruments. Invest in simple products, such as

mutual funds, to get started with.

The stock market is often associated with short-term trading -

buying & selling, and with gambling. To understand why

investing in stocks is inherently different from trading or

gambling, we need to understand what it means to buy a stock.

When you buy a stock, you own a share of the company. If the

company is profitable and issues dividend, you benefit

financially. Gambling, on the other hand, is a zero-sum game, i.e.

gain for one is a loss for the other. Whereas, in the stock market, if

ten investors hold the shares of the same company and prices go

up, all of them will gain. Further, in gambling, there is no value

creation – it's the same money to be won or lost. A goodcompany

creates value for all the shareholders and the economy in

general. And investing into a good company can create wealth

for us.

This reasoning causes many individuals to stay away from the


Chapter - 3

market. It is not that people do not have a fair amount of

knowledge on stock market and its volatile nature, it's about the

stories that they generally get to hear or read about people who

have made losses. For example, during our study, one individual

said, “My cousin followed the tips given by his relative and lost

Rs. 1 lakh.”

Fear of losing money is understandable. But remember, not

investing your money doesn't give it an option to grow, which is

critical for meeting your financial goals.

Several studies in the field of behavioral finance have shown that

we do not accept losses well. We are so afraid of losing money

that we tend to be in the grip of inaction. Unfortunately, inaction in

investing is not a choice.

Say for example, Karan, 25, manages to save Rs. 10,000 a month.

Due to fear of losing money, he lets his funds remain in a savings

account for the next 30 years, earning just 4% p.a. He will end up

having Rs. 69,40,494 only. Consider the rate of inflation (say 6%

p.a.), he would actually end up losing money in a savings account

(negative 2% returns).

On the other hand, if Karan invests the same amount Rs. 10,000 in

equities every month, he could end up having Rs. 10,16,33,175!

This is at a return of 16.63% p.a. - Sensex has delivered

compounded annual growth rate (CAGR) of 16.63% in the past 30

years, despite losing big sometimes.

There is no doubt that equity investing comes with its fair share of

risk. There will always be aspects of investing that one cannot

have control over, for instance, market volatility, but that also

provides an opportunity to make money and reach our financial

goals. The best way to invest in equities for investors who are

new to markets is through professionally-managed mutual

funds. Investing directly in stocks can be an overwhelming


Chapter - 3

experience, but not everyone has the time or expertise to

research so many individual stocks available. Mutual funds offer

a good alternative here, as you let the fund manager do much of

the work for you. Further, they offer diversification, liquidity,

convenience, and a large variety to choose from to help you

reach your goals.

Our study shows that investing in real estate seems attractive to

youngsters because of apparent low risk associated, high returns

and a proud feeling of owning a house. Moreover, there was

astrong word of mouth around it. Many had seen their friends

and relatives making profits in real estate. For instance, during

one of our study interactions, a person said, “In my office, most

discuss about buying a property in Gurgaon.”

No doubt real estate is a good investment option, but we need to

understand that returns on real estate are not same across

regions and are not guaranteed. It's just the sheer quantum of

investment involved, the investment being leveraged, and a

feeling of pride that make real estate investments look more

attractive. At the same time, having an owned house always

takes a priority over other investments for a young investor.

What we found, however, is that most young investors were

unaware of the margin money required to buy a house. When

asked, how they will fund, most of them said that they will take a

loan.

It is important to remember that one needs to have at least 20% of

the value of the property as a part of self funding. And one needs

to plan to have this in place through investments.

Say for example, Rohit needs to buy a flat worth Rs. 1 crore in

next 10 years and needs to shell out at least 20% margin, i.e. Rs.

20 lakh. If he invests Rs. 10,000 every month for a period of 10

“Real estate is the most promising and stable investment”


Chapter - 3

years, in a bank deposit that gives 8% p.a. interest rate, he will be

able to make up Rs. 18,29,460 only. Whereas if he invests the

same amount via systematic investment plan (SIP) in equity

mutual funds, at 12% p.a expected returns., he will end up having

more, i.e. Rs. 23,00,386.

Investing may look complex to many beginners because of

information overload and the number of options available.

Sometimes that itself dissuades us to take the first step. But many

times it is also due to inertia ─ just like what we experience when

we adopt an exercise schedule or a diet program. It is important

to get over that initial inertia. It's really the first step that matters.

Getting started is not difficult at all. The first step could be, say,

opening a Systematic Investment Plan (SIP) for just Rs. 500. The

key is to remain disciplined and have patience – these two crucial

qualities will take you safely through your investment journey.

“Investing is too complicated”

Watch Mr. Anup Bagchi, MD and CEO, ICICI Securities Ltd. explains why

taking the first step of investing now is important.

https://www.youtube.com/watch?v=PBFaoQmCPBI

Scan the following QR-code via any QR-code app to watch this video on your smartphone or tablet.


Chapter - 4

UNDERSTANDING MAJOR ASSET CLASSES

An asset class is simply a grouping of similar types of investments. Each asset class has different characteristics in terms of risk level and return potential. There are six broad asset classes: They behave rather differently and distinctly and therefore holding a right mix can balance the risk.

Equity, also known as shares or stocks, are an ownership interest in a company. At some point every company needs to raise money for its functioning. For this, companies can either borrow it from somebody or raise it by selling a part of the company (by issuing shares). When you buy shares of a company, you become part-owner of its business and also own a share in the future of that business. So, for example, when you buy shares of XYZ Company, you buy a proportion of XYZ and also receive a share of profits when it does well. The better the business it does, the more your stake in a company will be worth.

Relatively few people have a clear understanding of the important role that equity markets play in our economy. Equity markets channel investors' money to their most productive uses. They allow the corporates to obtain the capital they require from individual savers like you and me and make it easier for these individuals to achieve their financial goals and accumulate wealth in the long run.

The increase in price of the stock.

Periodic payments made out of the company's profits.

Sum up the two - capital appreciation and dividend - and you get the total return on your equity investments.

Equity, as an asset class, is inherently more volatile than other asset classes. But, it also has the higher return potential. If you

Equity, Debt, Cash, Gold, Real Estate and Alternative Assets.

Equity

There are two ways you can profit from your equity investments.

1. Capital appreciation:

2. Dividends:


Chapter - 4

look at the historical returns, it is evident that equities have outperformed all other major asset classes over the long run, providing around 15% CAGR (compounded annual growth rate).

Apart from strong long-term returns, equities also provide better inflation-adjusted returns (also known as real returns). In order to meet your goals and create wealth over the long run, your investments must deliver higher returns than the rate of inflation. Else, inflation will eat into your returns and may not help you build sufficient corpus for meeting your goals. Liquidity is also high for equity when compared to other asset classes.

Further, equities are tax-efficient investments. Like inflation, taxes also reduce your net rate of return. As long-term capital gains (> 1 year) from equities are tax-free, they provide better tax-adjusted / net returns. Dividends are also tax-free in the hands of investors (taxations are as per current tax laws).

Equity plays an important role to help diversify your investment portfolio and in turn provide better risk-reward trade-off. If you are a disciplined investor with good amount of risk capacity and a long term vision, equity is the best asset class to be in.

Debt, also known as fixed-income, is an asset class wherein an investor gives a loan to a corporate or government borrower. In return, the borrower promises to repay principal along with the specified interest until a predetermined maturity date.

Typically, debt as an asset class, offers predictable and stable returns, brings in certainty of cash flows, and is relatively safer. However, inflation-adjusted returns (real returns) are generally low from debt investments. It is important to understand that the return on debt products is directly dependent on the interest rates, inflation and macro economic situation of a country.

Debt products are basically suited for meeting shot-to-medium-term financial goals as they provide stability which is needed for meeting these goals.

In short, debt as an asset class provides capital preservation,

Debt


Chapter - 4

whereas equity as an asset class offers capital appreciation. Equity as an asset class represents a growth-oriented asset and Debt as an asset class represents an income-oriented asset.

Cash as an asset class, is predictable with low-risk and low-return profile. It includes your savings account, liquid fund, short-term fixed deposits and money market investments. The biggest advantage of this asset class is that it provides easy access to money when you suddenly need it. However, it's not free from risks. It generally produces negative real rate of return during periods of high inflation. For example, if your savings account gives you 4% interest and inflation is 6%, you end up earning negative 2% returns. Though it is important to keep certain funds in cash asset class for emergency purpose, one should not overdo it. Cash and its equivalents are for parking funds for a short period of time and earning a nominal return. After keeping aside certain sum of money for emergency purpose, rest must be invested for meeting medium-to-long-term financial goals.

Gold as an asset class plays a significant role in one's investment portfolio. It not only provides hedge against inflation, but also has low correlation with other asset classes such as equity and debt. This makes gold suitable for portfolio diversification. Adding a gold component to your portfolio can help reduce the overall volatility in a portfolio. Options to invest in gold are manifold - direct as well as indirect. Direct options include jewellery, coins, bars & biscuits. Indirect options are Gold exchange traded funds (ETFs), Gold fund of funds (FoFs), e- Gold, Gold mining stocks, Gold futures, Gold deposit schemes, Gold monetization scheme and gold bonds. Keep in mind, investing in gold can be highly risky as the commodities market is highly volatile and work on the basis of market demand. Investment in this asset class should be small percentage only may be 5-10 per cent for diversification purpose.

Cash

Gold


Chapter - 4

Real estateReal estate is one of the earliest forms of investments. It has attracted several investors for centuries. Real estate as an asset class, not only has economical benefits in terms of regular cash flow (rental income) and upside potential (capital appreciation), but also has emotional and expressive benefits. Although, it's a good investment option, it is important to note that it is not free from risks.

As investment in this asset class is usually large, it can destabilize your portfolio. Liquidity is another risk. A panic sell can drastically bring down the returns. And this can get amplified if the markets are down. Though in India we haven't seen any crash in real estate markets, many developed countries have seen it, e.g. Japan and US. It is extremely difficult to know why or when a country can go through phases of bubble and burst. Overleveraging is also the risk. Investing in property by taking a mortgage loan can amplify the returns, but can also do the same if the markets go down. Investing in real estate requires more time and effort. It's a lengthy process that involves identifying a good location with growth potential, looking for a particular property, carrying our due diligence, paper work, etc.

The good part of real estate investing is that you can lower your total tax outgo as there are tax benefits available for both principal and interest repayment, which in turn brings down the cost of the home loan.

Real estate investments give better returns in the long run (5-7 years), thus ideally suitable for your long term goals like retirement. For short-term investments, it is purely speculative and one needs to be careful. For your immediate and short term goals, you need to look through investments in financial products.

You can either invest directly (physical real estate: Residential and commercial properties) or indirectly in real estate. Indirect investing involves investing in stocks of real estate companies, real estate funds, private equity funds, and real estate investment


Chapter - 4

trusts (REIT). Most Indians prefer investing directly in real estate, as it is not only considered to be a matter of pride and social status, but also has a high growth rate.

Alternative Assets is another type of asset class that's fast becoming popular in India. Art, antiques, collectibles etc. are representative investments under this asset class. Alternative assets also comprise of option which compliment broad asset classes such as structured products, portfolio management services (PMS), etc.

Alternative Assets

Here's the quick snapshot of major asset classes andtheir key characteristics.


Chapter - 5

ASSET ALLOCATION AND DIVERSIFICATION

It is important to have a right mix of asset classes in a portfolio to achieve financial goals. This is done through a process called Asset Allocation.

Asset allocation is the process of dividing your investment portfolio among various types of asset classes such as equity, debt, cash, gold, real estate, etc. There are two main reasons why asset allocation is important. First, the mix of various asset classes that you hold determines the overall performance of your investment portfolio. One study, for example, suggests that 91.5 per cent of variation in returns of a portfolio is attributable to its mix of asset classes.

Second, by having a mix of assets in your portfolio, which behave differently, you can maximize the chances of achieving favorable risk-adjusted returns in the long-term. Market conditions can cause one asset class to do well and another to have average or poor returns. By investing in more than one asset class, you can help offset losses in one asset category with better returns in another.

Many people confuse asset allocation with diversification. Diversification means having a wide variety of investments within a portfolio, but that doesn't necessarily have to involve different asset classes. Whereas asset allocation is the process of building a portfolio of different asset classes with varying levels of correlation.

For an investor like you, the asset allocation strategy is dependent on your investment objectives and risk appetite. If your primary objective is long term growth of your investments, there needs to be more allocation to growth oriented but riskier assets like Equity. If the primary objective is stability and income, then the allocation needs to be higher in Debt. Your risk profile also plays an important role in determining the asset class.

Let us look at typical risk profile based Asset Allocation Profile Based Asset Allocation Strategies:


Chapter - 5

Strategies.

• A Conservative Asset Allocation has a larger portion in Debt and therefore is less volatile but at the same time gives a lower return

• Investment horizon: This allocation is suitable for tenure of 2-5 years

• The historical performance (2004-2014):

• Average Annual Return: 11.53%

• Best Year Return: 27.48%

• Worst Year Return:-9.06%

a. Conservative Asset Allocation:

b. Moderate Asset Allocation

• A Moderate Asset Allocation has a larger portion in Equity as compared to a Conservative Allocation. This provides growth to the portfolio

• Investment horizon: This allocation is suitable for tenure of at least 5 years and above




• Worst Year Return: -18.16%


Chapter - 5

c. Aggressive Asset Allocation

• An Aggressive Asset Allocation has a larger portion in Equity. This is a portfolio that targets growth and Equity Allocations can be as much as 80%

• Investment horizon: This allocation is suitable for tenure of at least 5-7 years. The allocation best performs over long period of time i.e. 7-10 years




• Worst Year Return: -27.27%

Do compare your existing asset allocation to understand how your investments can behave


Chapter - 5

Your asset allocation strategy is the most important decision that you need to take while planning for your life goals. Once you have set your asset allocation strategy, you need to regularly check it for two reasons: First, to make sure that your portfolio is in line with your original asset-mix; and second, to see if that mix is still appropriate for meeting your goals. This process is called re-balancing.

Some events to re-balance your asset allocation could include: One, a major change in personal circumstances, such as marriage or a birth of a child. Two, you are close to reaching a certain goal (such as your retirement). Three, the proportion of an asset class rises or falls considerably and thereby changes your original allocation plan for that class by more than, say, 5 per cent. Suppose, for example, your original asset allocation plan calls for 55 per cent in equities but then the market falls and now equities represent only 50 per cent of your total portfolio value. You may view this as a good time to buy, and in so doing, bring your portfolio back up to 55 per cent in equities.

In effect, re-balancing at regular intervals helps ensure that you invest into asset classes which are available at a greater value and at the same time book profits from asset types which have given better returns over a period. It is advisable to review your asset allocation at a regular frequency, say a quarter and at least once a year.


Chapter - 6

KEY INVESTMENT PRODUCTS TO KNOW

Under the broad asset classes discussed above, there are several investment products/avenues available. The following pages describe key investment products in detail.

Bank fixed deposits (FDs) are a popular investment choice in India - forming a major chunk - almost 50% of the total financial assets held by Indian households. Traditional FDs have always been popular due to their safety of capital and fixed interest rate. Through FDs preserve capital and provide stable, regular income, there are some downturns. First, FDs are not tax-efficient. The entire interest income is taxed at marginal rate, thus providing poor post-tax returns. For example, if you invest say Rs 10,000 in an FD at 9% interest rate and you fall under say 30% tax bracket, the post-tax return would just be 6%. Further, inflation-adjusted return or real rate of return is also poor in case of Fds. Considering the effect of taxes and inflation, FDs are a low-yielding instrument in the long run.

For your short-term goals, FDs can be preferred as preserving the capital is your utmost priority for these goals. FDs are available for a very short term (7 days) as well as for long term (10 years). Bank FDs up to Rs. 1 lakh (both principal and interest amount) are backed by Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of Reserve Bank of India (RBI). This way, you may split your FDs of above Rs. 1 lakh each with different banks in order to get better protection.

Another alternative to traditional FDs is corporate/company Fds. These are normal fixed deposits offered by companies. When companies require funds to expand business, they can raise funds through deposits. The interest rates offered are generally higher than interest rates offered on traditional FDs. Higher the interest rates offered, higher are the risks involved.

As far as company fixed deposits are concerned there are companies offering 250 (2.5%) to 300 basis points more than a

Bank and Corporate Fixed Deposits (Fds)


Chapter - 6

traditional fixed deposit of similar tenure, but an investor may be exposed to greater risk. Hence it is essential that you be aware of the risks of the company in which you park your deposits. It will be wise on your part to assess the credit rating of the FD offered by corporates (opt for higher credit rating such as AA and AAA). It is generally observed that a company with higher credit rating offers lower interest rate compared to a lower-rated company, but it may vary if the two companies belong to different sectors.

The interest that you earn on corporate FDs is added to total income and is taxed according to your tax-slab. The same applies to traditional FDs as well. Tax deducted at source (TDS) is levied on corporate FDs if the interest income exceeds 5,000 in one financial year. In case of traditional FDs, there is no TDS up to 10,000 interest income per financial year.

PPF is a long-term retirement planning product to those who may not be covered under Employees' Provident Fund (EPF). PPF is a 15-year deposit account that can be opened with a designated bank or a post office. Premature closure is not allowed before 15 years. Maturity period is 15 years but the same can be extended within one year of maturity for further 5 years and so on. You can open account with Rs. 100, but has to deposit minimum of Rs. 500 in a financial year and maximum Rs. 1,50,000. Deposits can be made in lump-sum or in 12 installments. Joint account cannot be opened. You can hold only one PPF account in your own name. Regular deposits have to be made for a period of 15 years; penalties apply for skipping the deposit. Interest is calculated on the lowest balance in the account on the 5th of the month, currently at 8.10% per annum and credited to the account on 31st March. Interest is cumulated and not paid out. One withdrawal in a financial year is permissible from 7th financial year from the year of opening the account. Maximum withdrawal can be 50% of balance at the end of immediate preceding year of withdrawal. Loan facility is available from 3rd financial year. Nomination facility is available at the time of opening and also after opening of account. Account can be transferred from one post office to another.

Public Provident Fund (PPF)


Chapter - 6

Amount deposited in the PPF account is eligible for deduction up to Rs.1,50,000 per year under Section 80C of the Income Tax Act. Interest is completely tax free. Unlike other instruments eligible for tax deduction under Section 80C, PPF enjoys an exempt-exempt-exempt (EEE) status, where withdrawals are also not taxed.

EPF is a statutory, interest-guaranteed, defined contribution retirement plan, available to all salaried individuals. The employee and the employer each contribute 12% of the basic salary. Employees can contribute over and above the 12%; however, employer's contribution is fixed at 12%.

From the employer's contribution of 12%, 8.33% is diverted to the EPS (Employee Pension Scheme) and the balance 3.67% goes into an EPF account. It is important to note that if your basic salary is above Rs. 15,000 a month (the limit was Rs. 6,500 before Sept. 1 2014), your employer can contribute only 8.33% of 15,000 (i.e. Rs. 1,250) to your EPS and the balance to your EPF account. Employers also contribute an additional 0.5% of the basic pay (capped at a maximum of Rs. 15,000) towards assurance benefit under Employees' Deposit Linked Insurance (EDLI) scheme.

The EPF, being an important component of your salary, helps in building up a sufficient corpus for retirement. A fixed rate of interest and tax-free status (EEE regime) makes EPF an attractive proposition. The EPF contributions, if left to grow for long term, can help reap good amount at retirement. For instance, a 25-year old salaried employee with a basic salary of Rs. 15,000, if contributes 12%, along with a matching contribution from his employer, can accumulate Rs. 3.11 crore at the age of 60. This is at an average 8.50% interest rate and at 10% incremental contribution every year (in line with the average salary hike). The EPF, if utilized properly, can come in handy to fulfill some of your post-retirement needs, if not all.

A few employees treat EPF as an additional surplus to fulfill certain discretionary needs. However, pre-mature withdrawals

Employees' Provident Fund (EPF)


Chapter - 6

from EPF should be avoided until in case of an urgent situation. EPF does allow partial withdrawals subject to few conditions and situations, which could be a better option than opting for costlier loans such as personal loan.

EPF: Partial withdrawals

PurposeEligibility

Maximum

withdrawable amount

For the marriage of:

Self, son, daughter, brother

and sister

For the education of :

Self, son and daughter

Should complete at least 7

years of service. 3 times in

the entire service.

50% of employee share

at the time of tendering

the application.

For the medical treatment of

Self & family (spouse, son,

daughter, dependent father

and mother)

No minimum service

required.

6 times of basic salary +

dearness allowance

(DA), Or full of employee share

(whichever is less).

For the construction/

purchase of dwelling unit

(house/ flat)

Should complete 5 years of service.

Only once in service.

36 times of basic salary + DA.

Repayment of housing loan Should complete 10 years of service. Only once in service.

36 times of basic salary

+ DA.

For the purchase of site/ plot Should complete 5 years of

service.

Only once in service.


+ DA.

Addition/alteration of house Should complete 5 years

after construction. Only

once in service.


+ DA.

Repair of house Should complete 10 years

after construction. Only once in service.


+ DA.

Some employees also tend to withdraw money from EPF when changing jobs and spend it away on discretionary items. It would


Chapter - 6

be prudent to transfer the balance to a new account to ensure suitable capital appreciation for the corpus. Multiple accounts can now be managed smoothly through a single portal by getting a Unique Account Number (UAN).

To put it in a nutshell, EPF is a good investment tool for retirement planning. However, one should not rely on the EPF alone. That is because EPF being a debt instrument does not offer growth benefits provided by equity instruments and its returns may not beat inflation in the long run. Ideally, a good retirement plan should have a mix of growth as well as income-producing assets.

Launched in 2004 by the Pension Fund Regulatory & Development Authority (PFRDA), NPS is a defined-contribution product, where your contributions grow and accumulate over the years. It was first introduced for new government employees, but from 2009 it got extended to all citizens including the unorganized sector, on voluntary basis.

Any citizen, whether resident or non-resident, who is in the age bracket of 18-60 years, can subscribe to NPS. The subscriber gets allotted a unique Permanent Retirement Account Number (PRAN), which remains same throughout the life and can be accessed from anywhere.

NPS has two accounts: Tier-I and Tier II. The Tier-I account is a mandatory, non-withdrawable account, meant for retirement savings. The contributions to Tier-I account only are eligible for tax deduction.

The Tier-II account is a withdrawable account, simply like a voluntary savings facility. It can be opened only when there is an active Tier-I account in your name. You can withdraw any number of times from Tier-II account, provided you maintain the minimum balance of Rs. 2,000 at the end of financial year.

The minimum contribution for Tier-I account is Rs. 500 while for Tier-II account it is Rs. 250. There is no upper cap on the amount of contribution for both the accounts - you can invest any amount.

National Pension System (NPS)


Chapter - 6

NPS is a long-term retirement and pension product; your savings get accumulated till the age of 60. It discourages early withdrawals, which is crucial for building the retirement corpus.

Your contributions under NPS get invested across three asset classes: E: Equity, C: Corporate bonds or fixed-income securities other than government securities, and G: Government securities. You are free to decide your asset allocation among E, C and G (known as Active Choice). However, the exposure to equity asset class cannot exceed 50%.

Further, you can invest in your choice of fund, the fund manager as well as select a suitable investment strategy. NPS makes a good choice on cost-front as well. The fund management charge is currently fixed at 0.01%, making NPS one of the cheapest investment products available. There is no cap on the maximum amount as well that you can invest into NPS.

Till date, the contributions to NPS were to be taxed at the time of withdrawal... what is called as EET (Exempt from tax at Contribution, Exempt on Income but Taxed at Withdrawal). Now, as per the latest tax rules, 40% of your accumulation at the time of withdrawals will be tax exempt once the Budget proposal comes into force. Out of the remaining 60%, 40% of the corpus has to be mandatorily converted into annuity. Annuities are taxable as per your income slab as and when you receive the same. Remaining 20%, you can annuitize or withdraw as lump sum. If you withdraw as lump sum, the same will be added to your income and taxed as per your income slab. If you withdraw as annuity, then the annuities are taxable as per your income slab as and when you receive.

You can invest and claim tax deduction of up to ` lakh for the NPS. This would result in a tax-saving of ̀ 61,800 for someone in the highest tax bracket of 30.9%. You can invest into NPS online with ICICIdirect.com.

Direct equity is often associated with trading (buying and shares frequently) by youngsters. However, there is a difference

Direct Equity


Chapter - 6

between trading and investing. A lot of individuals often use the terms 'trading' and 'investing' interchangeably. Understanding the difference between these two is critical as they need different mind sets among other things. Confusing one for the other can lead to mistakes, which in turn, erode confidence and interest in the stock market. It is therefore important to be informed and understand the difference between two.

Trading and investing, both involve deployment of capital in pursuit of profits. What separates them, however, is the time frame. Trading has a finite life. It has a predefined exit criterion. A trader exits when his target is met or 'compulsorily' exits to minimize losses quickly ('stop loss'). Investing, on the other hand, is more open ended and long term in nature. An investor buys a stock with no set timeline of when to exit. He lets his investments grow, mature, and create wealth for him in the long run.

It is very important that you keep your trading and investments separate. One cannot be a substitute for the other. Mixing up the two could really prove costly for your portfolio.

Trading is not everyone's cup of tea, while investing is strongly recommended for everyone. Keep in mind, markets do not always have unidirectional upward move. It can take a dip too. So don't panic in such times of market volatility. Be patient and disciplined in your investments. There is no substitute for quality; invest in good quality stocks that will give you good returns on a regular basis. Patience and discipline are keys to investing. Invest regularly, don't let your emotions sway with the market, and remain invested for the long term. Doing so, you are sure to reap the benefits of your investments.

Mutual funds are an investment vehicle that pool money from individuals like you and me, and invests it in a variety of securities ─ shares, bonds, and others. Those securities are professionally managed on behalf of the individual investors and each individual holds a proportional share of the portfolio.

Mutual Funds


Chapter - 6

The most important benefit of investing through a mutual fund is that you get access to professional management. The fund managers have real time access to crucial market information; they are able to manage your investments better than you can - unless you have time to spend on researching the individual investment options you decide to invest in.

The second important advantage of mutual funds is the in-built diversification they offer, by investing in a broad range of securities. This limits the investment risk by reducing the effect of a possible decline in the value of any one security. You can participate in a diversified portfolio for as little as Rs 5,000, or less.

Further, they offer liquidity, for instance, you can easily redeem an open-ended scheme. Being well regulated, they offer transparency. You also have a large variety of schemes categories and sub-categories—to choose from.

Last, but not the least, mutual funds also offer you to invest in options where you individually can't. For instance, they can easily trade in the government securities and bond markets where the minimum investment criterion is into crores.

So, to put it in a nutshell, wherever you want to invest - Stocks or bonds, government securities or commercial paper, gold or real estate, mutual funds can do it with greater professionalism and with less risk to your investment. As mutual funds come into variety, they are there for almost every financial goal.

An emergency situation can arise at any point of time. For times like these, it is important to build a contingency fund. It is nothing but savings parked in liquid options, to be used during emergencies. The size of the fund depends on your expenses, stability of income, etc. It can be at least 6 months of your basic living expenses.

Most people would consider parking money in savings accounts due to their liquid nature; however, this is not a prudent option. Liquid funds give better returns than savings accounts. One

Mutual funds for almost every financial goal

Saving for emergencies:


Chapter - 6

should invest in liquid funds - short-term mutual fund schemes - from where money can be withdrawn anytime without any exit load. While most banks offer 4 per cent interest on savings accounts, liquid funds have given around 8 per cent returns in the last one year.

From playschools to post graduation, education costs are rising exponentially. Hence, it is important that one plans in advance, to safeguard children's future.

Assuming that your child's education and marriage goals are 15 -20 years away, you can invest aggressively in equity funds. You can choose a mix of equity diversified funds and index funds. Another option is a well-performing balanced fund. Mid-cap funds can be considered too.

It is important to shift funds from equity to debt funds as you near your goal (at least three-five years before).

For your children's marriage goals, you can start buying gold for in the form of gold Exchange Traded Fund (ETF) units. Each unit represents approximately 1 gram of physical gold. Gold ETFs are listed on the National Stock Exchange (NSE) and can be traded just like stocks using the trading platform.

Factors such as increasing life spans, rising inflation, preference for nuclear families, absence of pension systems, etc. necessitate early investing for retirement.

Now is the best time to start investing for retirement. Now that the time is on your side and your retirement is some 25-30 years away, you can invest aggressively in equity mutual funds. In the long run, equity tends to outperform all other asset classes.

If you want to lower your taxable income and also build long-term wealth, you can invest in equity-linked saving schemes (ELSSs). ELSS funds are diversified equity funds except for the lock-in period of three years from the time of investment and the tax deduction under Section 80C up to Rs. 1.50 lakh.

Being the equity-linked instruments, they have given highest

Children's education and marriage goals:

Saving for retirement:

Tax planning:


Chapter - 6

returns, with 5-year category average returns being around 12%. The best way to invest in ELSS is to take the SIP route and invest throughout the year.

Near term goals could be buying a car or make the down payment for a house in a year or two. For near term goals it is better to stay in debt options. Debt mutual funds offer a better option here. Debt funds invest majorly in fixed-income instruments, which provide better capital and return stability in the short term.

As mutual funds have objectives, you too have your financial goals. Make sure these match. For example, if your goal is planning for retirement, liquid funds will not serve the purpose, as their objective is easy liquidity and not long-term growth. It is best to go with equity diversified funds for your long term goals such as retirement.

Look at the fund's past performance, preferably over different time periods – like 3 years, 5 years, and so on. Also check out the fund's performance against its benchmark index and its peers. A fund that has consistently underperformed its benchmark index and also its peers is not worth considering. If it is a new scheme, check out the past performance of the fund house's existing schemes. But you must remember that past performance is not a guarantee of future performance.

Expense ratio is the annual fee that all funds charge for managing your money. It is deducted from your investments every year. A higher expense ratio can lower your returns. Expense ratio is important especially in case of debt funds, as in the long run, returns from debt funds are generally lower compared to equity funds, and a higher expense ratio can drag down their returns by ~50-100 basis points (bps).

The fund size, reflected by its assets under management (AUM), is another important factor you should look at. The fund's size should neither be too small nor too big. If it's

Saving for near term goals:

How to select a mutual fund

Make sure the fund's objective matches yours:

Fund's performance:

Weigh the impact of expense ratio:

Size matters:


Chapter - 6

too big, the fund manager might face difficulties finding better opportunities to deploy funds and hence it may affect returns. The size of the fund should be evaluated on the basis of its category. For instance, in case of sector funds and gilt funds, AUM of ~100 crore may be considered as enough. For other categories, 200 crore may be considered as minimum.

Fund manager is an important driver of the fund performance. It is important to look at his experience in managing the fund and his total experience in the fund management industry - the higher, the better. You should also look at his consistency in delivering the returns over various market cycles, and choose the one with longer performance history.

All funds carry certain level of risk. Even debt funds, which invest in government securities, e.g. gilt funds, because their performance is very sensitive to interest rate changes. In fact, funds even in the same category can have varied levels of risk and some funds may provide equal returns even with lesser risk. Therefore, it is important to consider both - risk and returns - before investing - to gauge fund's risk-adjusted performance.

It indicates excess return generated by a fund over the return of its benchmark index. It represents the value that a fund manager adds to or subtracts from a fund's return. For example, if Nifty has delivered returns of 10% p.a. and the fund 'A' has delivered 16% p.a., then the fund's alpha would be 6% p.a.

It finds out fund's volatility against market indices (Sensex/Nifty). In other words, it measures how sensitive a fund is to the market. For example, if a fund's beta is 1.5, and Sensex moves up by 10%, then fund's return will move up by 15%. On the other hand, if Sensex goes down by 10%, the fund return would take a hit of 15%.

Track fund manager's record:

Factor in level of risk:

Here are some ratios that can come handy to you while analyzing equity fund's risk profile:

Alpha:

Beta:


Chapter - 6

Standard Deviation (SD):

Sharpe ratio:

Duration:

Standard deviation gives the overall volatility or variation from average returns. Unlike Beta, it evaluates the fund's overall risk. The higher the standard deviation, the more volatile the fund is, and hence the more risky as its returns will deviate sharply from its average return.

The Beta and Standard Deviation are measures of risk. However, returns also need to be seen, as risk alone cannot define the performance of a fund. Sharpe Ratio is therefore an overall measure of risk and return. This ratio combines both risk and returns to evaluate the fund and is an important measure.

It gives the relative return of a fund (to a benchmark) per standard deviation (or risk). In other words, it quantifies how a fund performs relative to the risk it takes. It is calculated as: Fund return - risk free rate / standard deviation.

Let's understand this with an example: An equity fund 'A' has given return of 16% p.a. and has a standard deviation of 34%, assuming 6% is the risk-free rate; the Sharpe ratio would be 0.29. That is, 16 - 6/34 = 0.29.

The higher the Sharpe ratio, the better the fund has performed in proportion to the risk taken by it. All these ratios are important to consider before selecting an equity fund to gauge its risk-adjusted performance.

Mutual funds in the debt markets are prone to interest rate risks. Duration defines the sensitivity of a bond/debt portfolio to changes in the interest rates. The higher the duration more is the interest rate risk. The capital value of a debt fund can reduce if interest rates increase, similarly the capital value can increase with decrease in interest rates. It is best to match the duration of a debt fund to your investment horizon.

To put it in a nutshell, before investing in mutual funds, do have a clear idea of your goals, time horizon and risk tolerance, so that you can choose your funds wisely. Next, make sure fund's investment objectives match with your goals. Finally, don't fall for fund's recent performance - look for consistency in returns - along with various factors discussed above.


Chapter - 6

Types of mutual funds and their expected return, risk level and indicative investment horizon

Mutual Fund

type

Brief/ Set of assets they invest in Expected

return

Risk Indicative

investment

horizon

Equity:

Large-cap

Invest predominantly in large -cap

stocks

High High

More than 5

years

Equity:

Diversified

Invest in stocks across market

capitalization and sectors

High High

More than 5

years

Equity: Small

and mid-caps

Invest predominantly in small and

mid cap stocks

High High More than 5

years

Equity: ELSS

(tax planning)

Diversified equity funds that have a

3 year lock-in period and provide

income tax exemption under

section 80 C upto Rs.1.50 lakh


years

Equity: Index

funds

Invest into companies in the same

proportion as that index (Sensex of

Nifty)


years

Balanced

funds

Invest at least 65% of the corpus

into equity and the remainder into

debt securities

Moderate Moderate 5 years

Liquid funds Invest into short-term corporate

debt papers, certificate of deposit

(CDs) and money market

instruments, with a maturity of up

to 91 days

Low Very low Less than 90

days

Income

funds – short

Invest into short-term debt papers

whose maturities are up to 3 years

Moderate Low 1 to 3 years

Income funds

– long term

Funds that invest in long-term debt

papers whose maturities range

between few months and can go

even beyond 25 years

Moderate Moderate 3 to 5 years

Gilt funds Invest in government securities

whose maturities range between

few months and can go even

Moderate Moderate 5 to 10 to 20

years

Fixed

maturity

plans (FMPs)

Invest in debt papers whose

maturity or ithtenure coincides w

Moderate Moderate 30 days to 5 years

beyond 20 years

that of the scheme


Chapter - 6

Monthly

income plans

(MIPs)

Hybrid funds that invest a small

portion (up to 30%) in equity


Gold ETFs Invest in physical gold and are

traded on an exchange.


and rest into debt

Mutual funds are a great investment option for all types of investors for their all financial needs and goals. They offer diversification, professional management, convenience, liquidity, and a large variety of options, at a relatively low cost. All these features make them a powerful tool for wealth creation in the long run. If you haven't already started investing in mutual funds, start now. You can start investing as low as Rs. 500 a month through a systematic investment plan (SIP). Investing in mutual funds through SIP is the best investment strategy to achieve your long term goals.

Watch Mr. Vineet Arora, Head - Product & Distribution, ICICI Securities explains the basics of mutual funds and how investing can help you work towards reaching your financial goals...

https://www.youtube.com/watch?v=H44VOmrL3w8

Scan the following QR-code via any QR-code app to watch this video on your smartphone or tablet.


Chapter - 6

Post Office / Small Savings Schemes

Scheme

Interest

payable, Rates,

Periodicity etc.

Minimum

Amount for

opening of

account

and

maximum

balance

that can be

retained Key features including tax rebate

Post Office Savings Account

4% per annum on individual/ joint accounts.

Minimum Rs. 20 for opening.

· Account can be opened by cash only.

· Minimum balance to be maintained in a non-cheque facility account is Rs. 50.

· Cheque facility available if an account is opened with Rs. 500 and for this purpose minimum balance of Rs. 500 in an account is to be maintained.

· Cheque facility can be taken in an existing account also.

· Interest earned is Tax Free up to Rs. 10,000 per year from financial year 2012-13.

· Nomination facility is available at the time of opening and also after opening of account.

· Account can be transferred from one post office to another.

· One account can be opened in one post office

· Account can be opened in the name of minor and a minor of 10 years and above age can open and operate the account.

· Joint account can be opened by two or three adults.

· At least one transaction of deposit or withdrawal in three financial years is necessary to keep the account active.

· Single account can be converted into Joint and Vice Versa.

Minor after attaining majority has to apply for conversion of the account in his name.

Deposits and withdrawals can be done through any electronic mode in CBS Post offices.


Chapter - 6

*Inter Post office transactions can be done between CBS post offices

* ATM/Debit Cards can be issued to Savings Account holders (having prescribed minimum balance on the day of issue of card) of CBS Post offices.

5-Year Post Office Recurring Deposit Accountt

From 1.4.2016, interest rates is as follows:7.4% per annum (quarterly compounded) On maturityRs. 10 account fetches Rs.726.97. Can be continued for another 5 years on year to year basis.

Minimum Rs. 10 per month or any amount in multiples of Rs. 5. No maximum limit.

· Account can be opened by cash/cheque and in case of cheque the date of deposit shall be date of presentation of cheque.



· Any number of accounts can be opened in any post office.


· Joint account can be opened by two adults.

· Subsequent deposit can be made up to 15th day of next month if account is opened up to 15th of a calendar month and up to last working day of next month if account is opened between 16th day and last working day of a calendar month.

· If subsequent deposit is not made up to the prescribed day, a default fee is charged for each default, default fee @ 5 paisa for every 5 rupee shall be charged. After 4 regular defaults, the account becomes discontinued and can be revived in two months but if the same is not revived within this period, no further deposit can be made.

*If in any RD account, there is monthly default(s) the depositor has to first pay the defaulted monthly deposit with default fee and then pay the current month deposit. This will be applicable for both CBS and non CBS Post offices.

· There is rebate on advance deposit of at least 6 installments.


Minor after attaining majority has to apply for conversion of the account in his name.


Chapter - 6

· One withdrawal upto 50% of the balance allowed after one year.

Full maturity value allowed on R.D. Accounts restricted to that of INR. 50/- denomination in case of death of depositor subject to fulfilment of certain conditions.

In case of deposits made in RD accounts by Cheque, date of credit of Cheque into Government accounts shall be treated as date of deposit.

Post Office Time Deposit (TD) Account

Interest payable annually but calculated quarterly. From 1.4.2016, interest rates are as follows:

Period Rate 1yr.A/c 7.1% 2yr.A/c 7.2% 3yr.A/c 7.4% 5yr.A/c 7.9%

Minimum Rs. 200 and in multiple thereof. No maximum limit.

· Account may be opened by individual.

· Account can be opened by cash/cheque and in case of cheque the date of realization of cheque in Govt. account shall be date of opening of account.



· Any number of accounts can be opened in any post office.


· Joint account can be opened by two adults.


· Minor after attaining majority has to apply for conversion of the account in his name.

· *In CBS Post offices, when any TD account is matured, the same TD account will be automatically renewed for the period for which the account was initially opened e.g 2 Years TD account will be automatically renewed for 2 Years. Interest rate applicable on the day of maturity will be applied.

· The investment under 5 Years TD qualifies for the benefit of Section 80C of the Income Tax Act, 1961 from 1.4.2007.

Post Office Monthly Income Account Scheme

From 1.4.2016, interest rates are as follows:7.80% per annum payable monthly.

In multiples of Rs. 1500 Maximum investment limit is

· Account may be opened by individual.

· Account can be opened by cash/cheque and in case of cheque the date of realization of cheque in Govt. account shall be date of opening of account.

· Nomination facility is available at the time of


Chapter - 6

Rs. 4.5 lakhs in single account and Rs. 9 lakhs in joint account. An individual can invest maximum INR 4.5 lakh in MIS (including his share in joint accounts)For calculation of share of an individual in joint account, each joint holder have equal share in each joint account.

opening and also after opening of account.


· Any number of accounts can be opened in any post office subject to maximum investment limit by adding balance in all accounts.


· Joint account can be opened by two or three adults.

· All joint account holders have equal share in each joint account.


· Minor after attaining majority has to apply for conversion of the account in his name.

· Maturity period is 5 years from 1.12.2011.

· Interest can be drawn through auto credit into savings account standing at same post office, through PDCs or ECS./In case of MIS accounts standing at CBS Post offices, monthly interest can be credited into savings account standing at any CBS Post offices.

· Can be prematurely en-cashed after one year but before 3 years at the discount of 2% of the deposit and after 3 years at the discount of 1% of the deposit. (Discount means deduction from the deposit.)

· A bonus of 5% on principal amount is admissible on maturity in respect of MIS accounts opened on or after 8.12.07 and up to 30.11.2011. No bonus is payable on the deposits made on or after 1.12.2011.

Interest rates on small savings schemes have recently seen a cut, in the range of 60 and 130 basis points (bps), across schemes. The rates on these schemes have now become market-linked and will be reset every quarter. This will bring down the returns. Lower interest rates are correlated to lower inflation expectations. Therefore part of the decrease in interest income will be absorbed by lower than expected expenses. However, it is


Chapter - 6

likely that as we grow as a stronger economy, interest rates will soften further. It is therefore important to invest in growth-oriented equity investments for long-term goals.

The Rajiv Gandhi Equity Savings Scheme (RGESS) was launched in 2013 with the stated objective of introducing people to equity investments. This scheme gives tax benefits to new investors who invest up to Rs. 50,000 and whose annual income is below Rs. 12 lakh. The new investors get 50% deduction of the amount invested during the year, upto a maximum investment of Rs.50,000 per financial year, from his/her taxable income for that year, for three consecutive assessment years, beginning with the financial year in which the investment under the scheme was made for the first time. RGESS tax benefits are over and above the present tax benefits under the Income Tax Act. You can invest at any time during the financial year to avail the tax benefit. Dividend payments are tax free.

As per the definition of 'New Retail Investor', it includes any individual who has opened a demat account before the RGESS notification (i.e. December 2013) but has not made any transactions in the equity segment or the derivative segment before the date he designates his existing demat account for the purpose of availing the benefit under RGESS or the first day of the initial year (the financial year in which the investor makes investment in eligible securities for availing deduction under RGESS for the first time), whichever is later.

You need to have a demat account to be eligible for investment under this scheme. You can invest in any of the eligible stocks or mutual funds in lump sum or in installments. Though any amount can be invested, the tax benefits will be available only up to Rs 50,000.

• Equity shares, which are part of "BSE-100" or “CNX-100", on the day of purchase.

• Equity shares of public sector enterprises which are

Rajiv Gandhi Equity Savings Scheme (RGESS)

Eligible instruments under RGESS:


Chapter - 6

categorized as Maharatna, Navratna or Miniratna by the Central Government.

• Units of Exchange Traded Funds (ETFs) or Mutual Fund (MF) schemes which have securities eligible under RGESS as underlying.

• Follow on Public Offers (FPOs) of eligible securities.

• New Fund Offers (NFOs) of eligible ETFs and mutual funds.

• Initial Public Offers (IPOs) of public sector undertakings (PSUs) wherein the government shareholding is at least 51 per cent and whose annual turnover is not less than Rs. 4000 crore in the preceding three years

The capital market regulator, Securities and Exchange Board of India (SEBI), is looking to replace RGESS and come up with a new scheme which would be much more flexible and attractive from taxation viewpoint.


Chapter - 7

INSURANCE: MUST HAVE COVERS

Term planBeing young and single, you might think it's too early to think about buying life insurance at this stage. You may not have dependants. But you need to be prepared if something happens to you. You don't want your family - including your parents - to have to pay any debts you leave behind, e.g. credit card bills, loan on your first home, etc.

It can be worth buying life insurance while you are young because premiums are relatively low and you are likely in good health.

The core objective of life insurance is to financially protect your dependents in case of an unfortunate event. Keeping this in mind, pure term plan is an ideal form of insurance.

Term plan, as the name indicates, is for a specific term, and offers the greatest amount of coverage at the lowest premium. This is because the insurer does not provide anything if you outlive the policy term, i.e. there is no maturity value.

You can select the length of the term for which you want the coverage, right from 5 years up to 30 years. Some companies also offer 40-year term plans.

These plans, being the basic form of insurance, are the most affordable cover. It gives a very high cover at a low price. A 25 year-old man can buy 1 crore worth of coverage for as little as 10,000 per year for a policy period of 30 years.

Life insurance is meant to provide with the enough money to your dependants to replace your income in case you die. Ideally, your life cover must take care of the following things: a) Family expenses till lifetime; b) Liabilities outstanding and c) Family and children goals.

This worksheet will help you determine how much coverage you will need:

If you are unable to cover all the above three, then cover can be


Chapter - 7

taken at least for some of them, based on the below order of priority: a) Unsecured liabilities; b) Family expenses till lifetime; c) Secured liabilities; d) Children goals; and e) Family goals.

There is a myth associated with health insurance that goes this way: If you are young and looking healthy you don't require health insurance. This is far from the truth. There has been a rising prevalence of lifestyle disorders among young professionals in the age group of 23-35 years. According to a recent survey conducted by one of the insurance companies found that close to 25% of the company's health claims came from this particular age-group. Moreover, it was found that most young professionals depend solely on employer-provided mediclaim and do not have a personal health cover.

Relying only on group health insurance cover of your employer is not advisable.

Remember, medical expenses can quickly wipe out savings and investments and thus jeopardize our family's financial well-being. So, don't let health insurance take a backseat, procure it today and maintain it regularly to lead a hassle-free life.

It is always better to enroll in a health insurance cover as early as possible. Health insurance premium tends to increase with age — more the age, higher the premium.

A basic plan, which reimburses hospitalisation expenses, should be your first health insurance policy. A 25-year old individual can buy Rs. 5 lakh worth of coverage for an annual premium of just about Rs. 4,000 (premium mentioned is indicative in nature).

- Individual / HUF - Rs. 25,000 tax deduction

- Mediclaim towards health of parents who are not senior citizen - Rs. 25,000 tax deduction

- Mediclaim towards health of parents who are senior citizen - Rs. 30,000 tax deduction

Health / medical insurance

You also get tax benefits on your medical insurance under section 80D as follows:


Chapter - 7

- Preventive Health Check-up - Rs. 5,000 tax deduction

- Medical Expenditure incurred on oneself or his / her parents. This clause is applicable only for very senior citizens (80 years or above). Provided, there is no medical insurance in force for such persons - Rs. 30,000 tax deduction.

This is another type of insurance plan youngsters must opt for. A personal accident cover takes care of the expenses if one gets permanently or temporarily disabled following an accident.

An individual can get a personal accident cover of Rs. 25 lakh for an annual premium of just about Rs.3,000 (premium mentioned is indicative in nature).

Lifestyle diseases are on the rise among youngsters. Critical illness can burn a big hole in one's pocket. Expenses can be ongoing for such illnesses. It is therefore important to buy critical illness cover and safeguard oneself. This policy provides for a lump sum benefit if the policyholder contracts certain specified diseases such as cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, paralytic strokes, etc.

A 30-year old individual can get a critical illness cover of Rs. 10,00,000 for an annual premium of just about Rs.3,000 (premium mentioned is indicative in nature).

Personal accident cover

Critical illness cover


Chapter - 8

MONEY MANAGEMENT TECHNIQUES

Budgeting

3 simple steps to make a Budget

Step 1 - Income Estimation

Step 2 - Expenditures Estimation

Step 3 - Surplus / Deficit Estimation

Target savings

Budgeting is the first step to secure your future. It puts checks on your income and expenses and helps you prevent overspending at various levels. It brings in the much needed discipline in managing your finances. It is important to stick to Budget so that you have decent investable surplus for meeting your goals.

Making a budget is simple. You just need to spend little time and effort. You need to list down your income sources and expenses. Income sources could be your salary, rent that you receive, interest that you receive from your investments, etc. The expenses side would depend on the type of lifestyle that your family needs. Creating a budget would help you plan and balance between the income and expenses. The excess of income over the expenses is the savings and investable surplus to fulfill your goals in life.

It could be your Salary, Business / Profession, Capital Gains, House Property Income and Income from Other Sources

It includes both Fixed Expenditures such as Utilities, Rental / Mortgage Payments, Taxes, Transportation & Conveyance, etc. and Variable Expenditures such as Vacation, Recreation, Entertainment, Gifts, etc.

Income minus Expenses. Surplus: When Income exceeds expenses. Deficit: When expenses exceed income

Once you get to know your investable surplus through Budgeting, it is important to know how to utilize this surplus for meeting particular goals i.e. how much amount you need to target to save and invest for meeting a specific goal.


Chapter - 8

Target savings is all about determining how much you should put aside each period to meet all your goals –short and long term goals.

Let's take an example of a short-term goal. You want to buy a car one year down the line and have not made any specific investment towards this goal. Assuming an increase in the cost of the car to be 10%, the future value of Rs. 1,00,000 for this goal will be Rs. 1,50,000 after 1 year. So you have to start investing Rs. 5,000 per month for 1 year in an investment avenue which gives you 15% returns. This may help you stick to your plan and make your dream of buying a car into a reality.

Let's take another example of a long term goal, say child's education. Suppose you expect to incur an expense of Rs. 8,00,000 (in today's value) 7 years down the line for your child's education and you have not made any specific investment towards this goal. So, assuming an increase in the cost of education expenses to be 10%, the future value of Rs. 8,00,000 for this goal will be Rs. 15,00,000 after 7 years. So you have to start investing Rs. 5,000 per month for 7 years in an investment avenue which gives you 15% returns. This may help you stick to your plan of saving enough for your children's education.

Investing without a defined plan and a disciplined approach often ends up off the track. When you invest based on your goals and with an appropriate plan, it provides you with more clarity and confidence into your financial journey.

Remember, reaching your financial goals is the core purpose of making an investment. It is therefore important to focus on your goals and invest accordingly. Investing towards a specific goal is more precise and detailed way of investing. It goes beyond the performance of a portfolio and focuses more on matching your financial resources with your financial goals and liabilities. There is a 50% greater probability of reaching your goals with a goal-based investing compared to traditional product-centric approach, says an international study.

Goal-based investing


Chapter - 8

Our goals differ in terms of importance, time horizon and the level of risk we are comfortable taking relative to each goal. For example, we would want to take less risk with the funds designated for critical goals that are short-term in nature, while would be ok to accept more risk for discretionary goals, which are long-term in nature.

Creating a separate portfolio or a bucket for each goal provides a much clearer picture of how well we are succeeding. This approach also greatly reduces the influence of emotions that often play a role in our financial decisions and goals.

Taxes can eat away quite a sum from our returns. It is therefore important to look at the tax-efficiency of returns before investing. Tax efficiency is a measure of how much of an investment's return is left over after taxes are paid. A basic understanding of investment income and taxes can go a long way in helping you build a tax-efficient portfolio.

Any investment that you make has three stages: 1. Contribution stage (when you invest), 2. Earnings stage (when you earn interest or returns), and 3. Withdrawal stage (when you take out lump sum or regular payouts such as annuities).

At each of these three stages, an investment has its own tax implications -- it can either be Taxed (T) or Exempted (E) from the taxes.

There are basically 5 tax regimes / models that apply to investments. These are EEE, EET, ETE, TEE and TTE. Let's understand these in detail.

Under this regime, taxes are not levied at any stage. That is, you can avail tax deductions at the time of investment / contribution, earnings are tax exempted, and even the maturity proceeds at withdrawal are also tax exempted.

EEE tax regime is generally applicable for long-term products such as PPF, EPF, etc.

Tax savings

1. EEE: Exempt – Exempt – Exempt


Chapter - 8

While an investment product with no tax at any stage would likely be the preferred choice for investors, it should not be the only criterion for product selection.

Here, you get the tax deduction at the time of investment, earnings are also tax exempted, but the withdrawals at the time of maturity are taxed.

Since the withdrawals are taxed here, your net returns are generally lower in this tax regime, especially if you fall under higher tax brackets of 20% or 30%. Say for example, you fall in the 30% tax bracket and the rate of return on your investment is 10%, taxes will eat away 30% of that return and you make only 7% post-tax return on your investment.

Most of the pension plans fall under EET category.

Under this model, you pay tax only on the earnings. Contributions and withdrawals are tax-exempted.

Investment avenues that currently fall under ETE tax regime are: - 5-year tax-saving fixed deposits, National Saving Certificates (NSCs) (However, you can claim tax benefits under section 80C for accrued interest every year), Senior Citizen Savings Scheme (SCSS), etc.

Here, at the time of investment, there are no tax deductions available, but the earnings and withdrawal can be tax-free. Investment avenues that currently fall under TEE tax regime are: Stocks, Equity mutual funds (except ELSS), Tax-free bonds, etc.

Under this model, there is no tax deduction offered at the time of investment, earnings are also fully taxable, but the withdrawals are tax-exempted.

Investment avenues that currently fall under TTE tax regime are: Fixed deposits (FDs) – except tax-saving FDs, Recurring deposits (RDs), Post office monthly income scheme (POMIS), Non-

2. EET: Exempt – Exempt – Tax

3. ETE: Exempt – Tax – Exempt

4. TEE: Tax – Exempt – Exempt

5. TTE: Tax – Tax – Exempt


Chapter - 8

convertible debentures (NCDs) / Bonds, Debt mutual funds, etc.

Tax implications are an important aspect to look at before selecting an investment product. However, that should not be the only decisive factor for selection. It is also important to look at other factors such as liquidity, safety, returns, risk, etc. Basically, you should choose products based on your goals, risk profile and investment time horizon.

Indians are traditionally conservative borrowers. However, this has changed in the last two decades, thanks to the boom in the economy and the growing consumerism. Finance has become a basic part of our lives, especially for youngsters. From credit cards to auto loans to home loans, our access to debt has been increasing of late. This “Buy now, pay later” approach is fine if we pay off our debt on time. But if we don't, it can put a strain on our finances.

Managing debt carefully

Safe debt guidelines

Here's the worksheet to help you get a rough idea whether you're following safe debt guidelines:


Chapter - 8

Are your following safe debt guidelines?

A: Your annual debt payments Amount

Home loan _______

Car loan _______

Credit cards _______

Personal loans / Money taken from private moneylenders _______

Consumer durable loan _______

Any other form of loan or liabilities you might have taken _______

Total debt _______

B: Your total annual income

Your business/ Professional income/Salary _______

Bonus/incentives receivable _______

Dividend or interest income receivable _______

Rental income _______

Any other form of income _______

Total income _______

Debt-to-income ratio = Total debt/ Total income*100 _______

`

`

`

`

`

`

`

`

`

`

`

`

`

Your debt-to-income ratio:

40% or less:

40%-45%:

50% or more:

A healthy debt load to carry for most people.

Not bad, but start trimming now before you get into trap

You need to take immediate action. A professional advisor may help.


Chapter - 9

YOU NEED DIFFERENT APPROACH TO INVESTMENTS THAN YOUR PARENTS / GRANDPARENTS

Each generation has its own set of financial needs and priorities.

Though the basic priorities remain more or less similar across

generations – owning a home, funding child's education and

planning for retirement - today's young generation or Gen-Y has

diverse set of needs than older generations. They have bigger

aspirations and financial pressures are also bigger. There is a

bigger challenge between consumption today and investments

for tomorrow.

Older generations perhaps had simpler and limited needs.

Returns, even on fixed-income investments were higher, in the

range of 12-15 per cent, so there was no need to take additional

risks. Employers took the responsibility to plan for retirement by

giving pension and medical benefits. Effectively a little bit of

planning by oneself was good enough to make achieve the

critical life goals. Today, factors such as increasing cost of living,

increasing life spans, preference for nuclear families, absence of

pension systems, etc. call for greater and early planning for the

future.

There has been a gradual shift from Defined Benefit (DB) pension

system to a Defined Contribution (DC) pension system across the

world. Under a DB system, the specific pension is guaranteed to

an employee upon retirement. While in a DC system, the

employer and the employee make a particular contribution, but

the benefit depends on the growth of the underlying

investments. The transition from DB to DC pension system

suggests that the responsibility to build sufficient corpus for

retirement and other goals falls primarily upon us.

Conservative investment strategies of your parents and

grandparents wouldn't prove fruitful, especially for long-term

goals such as children's education and retirement. Conservative

investments hardly beat the inflation. To add to it, the returns


Chapter - 9

generated from debt instruments are taxable and hence, the net

return generated is much lower than the growth assets such as

equity. Today's youngsters also have greater risk capacity with

better income levels and mostly both husband and wife are

working. So, overall, today's changing environment needs

different investment approach than previous generations.

However, we see that majority of youngsters holding a big chunk

of their funds in savings account / cash. They need to look at

equity and invest through SIPs. They need to wake up and don't

repeat financial habits of their parents / grandparents. They need

to move from conservative investments to growth-oriented

investments.

Say for example, you invest Rs. 5 lakh today into an FD for 10

years to fund your child's graduation after 10 years. You expect

the cost of graduation to be Rs. 5 lakh (in today's value). With the

cost of education growing at a rapid pace, the cost can grow up to

Rs.12.97 lakh after 10 years (assuming an inflation rate of 10%

p.a.). However, the FD can grow to Rs.11.84 lakh after 10 years

(assuming an interest rate of 9% p.a.). But after tax, the FD will

fetch only Rs.9.72 lakh (assuming a tax of 30.9%) as against the

future cost of graduation of Rs.12.97 lakh.

Thus, for long-term goals, it is always advisable to invest into

growth assets such as equity mutual funds, which will protect

you not only against inflation, but also taxes. In fact, the amount

required to invest also comes down due to these benefits. In the

above example, the lump sum investment required in an FD was

Rs. 5 lakh, but if you invest in equity mutual funds, it will be just

Rs.4.18 lakh to accumulate the future value of Rs.12.97 lakh

(assuming a return of 12% p.a.). And to accumulate the future

value of Rs.12.97 lakh (post tax), the lumpsum investment

required in an FD would be Rs.6.98 lakh as against Rs. 4.18 lakh in

equity instruments.

It is our own responsibility to plan and secure future with greater

amount of discipline, diligence and patience. Investing randomly,


Chapter - 9

without a defined investment plan would hardly provide any

fruitful result. Young individuals sometimes get carried away with

short-term returns in the market and start investing arbitrarily

based on suggestions from friends, relatives or even media.

Such investments without keeping goals in mind and

withdrawing money midway can result in below-average

performance or even loss-making transactions. We need to have

a goal and set time horizon in mind, preferably long term, to

invest in markets.

Achieving goals requires a methodical and disciplined approach.

It requires thorough planning to balance retirement planning

with funding children's education, among other goals. Financial

planning helps to prioritize goals and provides optimal solutions

and strategies to meet goals within a planned time line. While

most of us understand the importance of planning for a financial

future, the action and implementation still falls short for many.

The services of a professional financial planner can help you truly

channelize your investments to your life goals.


Chapter - 10

PUTTING YOUR FIRST TRADE ON ICICIDIRECT.COM

ICICIdirect Self-Help Videos… to get you started with your investment journey

Knowing ICICIdirect

My First Trade in Equity

My First Mutual Fund Order

My First Margin Trade

My First Futures Trade

My First Options Trade

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