In financial terms, Investment is buying or creating an Asset in expectation of Capital Appreciation, Dividends (or Bonuses), Interest, Rent or any combination of these. This may or may not be backed by research or analysis. Most or all form of investments involve some form of risk, such as investment in equities, property, and even fixed interest securities which are subject, among other things, to inflation risk. A good investment strategy will diversify the portfolio according to the specified needs. For simple understanding, we divide investments in two broad parts.

Fixed Return Investments

When money is parked in an asset where the token / appreciation is receivable on a pre-identified Fixed basis, the asset class is called Fixed Return Invesment.

Variable Return Investments

When money is parked in an asset where the expected returns are uncertain and un-identified, the asset class is called Variable Return Invesment. Most common of all, there are many such asset classes discussed below..

Fixed Return Investments

These are the most talked and sought for options in India. It broadly comprises of Bank Fixed Deposits, Government Bonds, Debentures, Corporate FDs, Corporate Bonds etc. All these options bear a Fixed Rate of Interest / Returns and are mostly subject to Taxation / Captial Gains. Mutal Fund 'Fixed Maturity Plans' can also be added to the list but the returns there are indicative.
People often consider these investments to be Risk Free. However, even these investment carry risks, broadly four catagories:

  • Interest Rate Risk:
    Once bought, these options have an inverse relation with the prevailing rate of interests in the market. If the interest rates increase from the current level, the prices of fixed income securities decrease, and vice-versa.
    Take an example. Consider a 10 year government bond which has a face value of 1000 a coupon rate of 8% i.e. one receives an interest payment of 80. If the lending rate has been increased to 10%, the new bonds with the same face value of 1000 and tenure of 10 years provide a coupon rate of 10%. This makes the existing bonds at 8% coupon rate less attractive and it will be traded below its face value in the market.
  • Credit / Default Risk:
    It is the risk of not getting the promised money as per the agreed schedule, either there is a delay or the money does not come back to at all. One can assess this risk through a process called credit rating done by specialized rating agencies like CRISIL etc.
  • Liquidity Risk:
    This is the risk of not being able to liquidate the instrument in Cash in case required earlier.
  • Inflation Risk:
    The reduced buying capacity of your investment due to increase in Inflation. You have Rs. 100 today. You invest it for 1 year at 8% interest. After 365 days, you receive Rs. 108, but inflation was 8.5% in the same period. Thus you wont be able to buy even the same thing which you might have bought last year with Rs. 100.
  • We strongly recommend to consider these risks before investing.

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    Variable Return Investments

    Almost all other Investment options like Real Estate, Commodities, Shares, Mutual Funds etc. comes under this catagory. Keeping the retail participation in key thought, we shall elaborate more about Mutual Funds today!

    MUTUAL FUNDS (Basics)

    A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund.
    Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is Diversification.
    Mutual Funds are broadly classified in three catagories:

  • Equity Oriented Mutual Funds
  • Debt Oriented Mutual Funds
  • Hybrid Mutual Funds (Equity + Debt)
  • Advantages

  • No Knowledge:
    No expertise in Equities, Debt, Finance and Economics? Mutual Funds are for you!! A highly experienced and skillful FUND MANAGER is there to have it on your part.
  • No Time:
    No time to Buy, Sell, Diversify, Churn Portfolio? Mutual Funds are for you!! A full time FUND MANAGER is there to do it on your part.
  • Limited Resources:
    Cant manage Big Money to benefit from Economies of Scale? Mutual Funds are for you!! Thousands of investors with common objectives provide Large Sum to play with Economies of Scale, finally shared by all.
  • How to Invest

  • Lump-Sum Investment
  • Systematic Investment (SIP)

  • Lump-Sum Investment

    Investment done with a Specific Amount without any plan for regular further investments is called Lump-sum Investing. By doing such investment, you are alloted your share of 'Units' based on the prevailing 'NAV'. Lump-sum Investment should be done either with a little research on the current market scenario, or should be done with a longer term horizon. The investor bears a little higher risk as in case of a downfall in markets, his entire invested money can fall too..

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    Systematic Investment Plan (SIP)

    SIP works on the principle of Disciplined Regular Investments. It is like your recurring deposit where you put in a small amount every month. It allows you to invest by making smaller periodic investments (weekly, monthly or quarterly) instead of a heavy one-time investment. Thus, you can invest without altering your other financial liabilities. It is imperative to understand the concept of Rupee Cost Averaging and the power of Compounding to better appreciate the working of SIPs.

    Ruppee Cost Averaging - Falling Markets

    Month Amount (Rs.) Unit Price(Rs.) No. of Units
    1 10000 10 1000.00
    2 10000 8 1250.00
    3 10000 6 1666.67
    4 10000 4 2500.00
    TOTAL 40000   6416.67
    Analysing the data above, the Simple average Unit Price of Purchase will be {(10+8+6+4) / 4} = Rs. 7 per unit. However, the actual average unit price of purchase will be ( Rs. 40000 / 6416.67) = Rs. 6.23 per unit.
    Interpreting the same, you ended up buying at a lower price by systematic investment, thus increasing your potential to Grow when Markets Rise..


    Ruppee Cost Averaging - Rising Markets

    Month Amount (Rs.) Unit Price(Rs.) No. of Units
    1 10000 10 1000.00
    2 10000 12 833.33
    3 10000 14 714.28
    4 10000 16 625.00
    TOTAL 40000   3172.61
    Analysing the data above, the Simple average Unit Price of Purchase will be {(10+12+14+16) / 4} = Rs. 13 per unit. However, the actual average unit price of purchase will be ( Rs. 40000 / 3172.61) = Rs. 12.60 per unit.
    Interpreting the same, you ended up buying at a lower price by systematic investment, thus increasing your potential to Grow when Markets Rise..
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    Lump-Sum + SIP = STP

    Syestematic Transfer Plan is an mix of the two techniques of investing in mutual funds. When you have a bulk amount of investment, and still you want to advantage from Rupee Cost Averaging as discussed above, you can go throug STP Mode. Here, generally the lump-sum investment is parked in a liquid / debt fund and therefrom, an amount is transfered automatically on periodic intervals (daily, weekly, monthly etc) to an equity fund. Thus, lowering the risk of lump-sum, enjoying the benefit of SIP and yet not taking the headache of regular bank transaction.

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    Life Insurance

    'Simplify the Complicacies' is what we deal in. So let's understand some basic Jargons of Life Insurance

    Term Insurance

    Also called "Pure Insurance", Term Insurance provides a "High Life Insurance Coverage" for a "Specified Tenor" in a "Very Low Premium".

    Term Insurance usually doesn't pay any Maturity. It is the Simplest form of Insurance with only 3 things, Sum Insured, Annual Premium and Policy Tenor.

    There are also some Term Insurance which Returns all the Premiums paid on Maturity. However, they charge a higher Premium as compared.

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    Traditional Insurances

    These are the simplest and oldest form of Life Insurances. The premium you pay are invested in non-equity instruments like bonds and Long Term Deposits. Thus, they carry lower risk and volatility.

    They generally declare yearly dividends also called 'Bonuses' which are mostly floating. Most of these are loanable, however bear high pre-surrender charges.

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    Unit Linked Insurances

    ULIP is a product that unlike a Term insurance policy gives investors the benefits of both insurance and investment under a single integrated plan. A part of the premium paid is utilized to provide insurance cover while the remaining portion is invested in various equity and debt schemes. Just the way it is for mutual funds, ULIP's also allot units & each unit has a Net Asset Value (NAV) that is declared on a daily basis

    Generally Nothing is Guaranteed Except the Death Cover. They are Subject to Market Risks and bear various charges.

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    Section 80C and 10(10D)

    Section 80C entitles the assesse to claim Deduction for certain Investments and Expenditure up-to Rs 1.5lacs per year. Life Insurance acquires a major space of 80C in India. For 80C deduction, the Insured Sum should at-least be 10 times of the annual premium paid.

    Section 10(10D) exempts income received from a Life Insurance Policy from Tax. Exceptions are: Pension/Annuity plans, Employer Sponsored group life insurance, policy which violates the conditions of section 80C.

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    Utmost Good Faith

    Life Insurance is a Contract between the Insurer and Insured. The basis of each contract is Utmost Good Faith. Thus both, insurer & insured shouldn't hide anything material for the insurance contract.

    The Insured should not hide any medical ailment, lifestyle habits, heredity issues and Financial eligibility to ensure Claim Settlement. A declaration may invite extra premiums or proposal rejection, but will ensure 100% honor of contract.

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    Policy Charges

    An Insurance Company deploys many physical & human resources to manage it's clients. All those expenses are distributed proportionately amongst their clients.

    They include Policy Administration Charge, Fund Management Charge, Policy Servicing Charges, Surrender Charges, Mortality Charges and Upfront Charges. Customer should study the charges before taking a policy

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    Portfolio Restructuring

    In India, a big chunk of life insurance is bought in obligation, lack of knowledge or for tax saving. However, it mostly leads to dis-satisfaction.

    A customer should take time to hire a professional to Assemble, Analyze and Restructure their existing policies to suit their needs. Restructuring may require Pre-Close, Switch, Premium Holidays, Additional Purchase and lot. But it leaves you with a light head and clear understanding of where you are!!

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    Health Insurance

    'Simplify the Complicacies' is what we deal in. So let's understand some basic Jargons of Health Insurance

    Family Floater Policy

    A plan where the Entire Family is Covered in a Single Policy and people covered SHARE the total health insurance available to them is called a Family Floater. Thus, the overall claim limit of both, an Individual & the entire family is the same.

    Family may contain Self, Spouse, Children and in Some Cases Parents and Other Relatives too. Here, the premiums are generally charged as per the age of the eldest insured.

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    Group Insurance

    When instead of an Individual or a Family, the entire Organization or a Formal Group forms a contract with an insurer, it is called a Group Insurance. It comprises of Group Health and Group Personal Accidental Insurance. It has many advantages over Individual insurance.

    Benefits: Lower Premiums, High Customization, No pre-policy health checkups required, Higher age of Entry, Addition Deletion in between, Smoother Claims Settlement.

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    Waiting Periods / Exclusions

    Before buying a Health Insurance Policy, one must closely notice these.

    Waiting Periods: Many illnesses are out of scope of the policy for initial 30days, 1/ 2/ 4 years. These mostly comprises of treatments of pre-existing illnesses, cataract, piles, hernia, stone, joint replacement, cyst, sinus and few other surgeries.

    Exclusions: There is a set of common & permanent exclusions like War, breach of law, substance abuse, dental treatment, HIV etc.

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    Cashless / Reimbursement

    Cashless: All Insurance Co's have associations with many hospitals, a list of which is provided along with the Policy. If an insured is advised to take a treatment (within the scope of the policy) in these hospitals, they can be treated without paying cash to the hospital. The hospital raises the bill to insurance comp. which approves the allowable amount and pays directly to the hospital.

    Reimbursement: Treatments taken in non-network hospitals have to be initially paid by the client. Thereafter, insured may raise all bills, prescriptions, receipts, investigations along with claim for the settlement directly to his bank account.

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    Third Party Administrator (TPA)

    TPA is an organization that processes claims and performs other administrative services in accordance with a service contract with the Insurance Company. More specifically, a TPA is neither the insurer (provider) nor the insured (employees or plan participants), but handles the administration of the plan including processing, adjudication, and negotiation of claims, record-keeping, and maintenance of the plan. These are intermediaries between the Customer, Hospital and Insurer.

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    As per the terms & conditions of the insurance policy, a customer may require to bear a certain percentage of a claim. This Sharing of claims between the Insured and Insurer is called Co-Pay.

    In India, Co-pay is generally associated with Client's Age, Specific Illnesses or Hospital Agreement.

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    Day Care Treatments

    A Health Insurance policy mostly requires 24 hours continuous hospitalization for a claim. However their are certain conditions where a patient is eligible for a claim despite getting discharged within 24 hours of admission.

    Those treatments taken in-patient in a hospital where due to technological advancement, the treatment can be done within 24 hours are day-care treatments like Cataract, chemotherapy, Cyst Surgeries, Sinus Surgeries and many more..

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    Mutual Funds

    'Simplify the Complicacies' is what we deal in. So let's understand some basic Jargons of Mutual Funds

    Basic Concept

    A mutual fund is a type of professionally managed investment fund that pools money from many investors to purchase securities. Managed by Professional Fund Managers, they aim to achieve common goals of investors by investing within the Regulations Specified.

    They invest in Equities, Debt, Money Market Instruments, Bonds, Specified Commodities & many more.

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    Units / NAV's

    Units: Just as shares represent the extent of equity ownership in a company, units represent your extent of ownership in a mutual fund. Higher the Units, Higher your shareholding in a Mutual Fund and vice-versa.

    Net Assets Value (NAV): A fund's NAV equals the current market value of a fund's holdings minus the fund's liabilities (sometimes referred to as "net assets"). It is computed by dividing net assets by the number of fund shares outstanding. Thus, it's simply the monetary representation of the per unit valuation of the overall fund securities.

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    Types of Mutual Funds

    Open Ended Funds: Funds with Open Entry and Exit for New and Existing Investors.
    Close Ended Funds: These are offered for purchase only once, at the time of their launch. They can further be traded in Stock Exchanges.
    Exchange Traded Funds: ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. ETFs bear low costs, tax efficiency, and stock-like features.

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    Systematic Investment Plan

    SIP is an investment vehicle offered by mutual funds to investors, allowing them to invest using small periodically amounts instead of lump sums. The frequency of investment is usually weekly, monthly or quarterly. They are the most popular tools of Investment in Mutual Funds, and allows the investor to Average their purchase cost by periodic investments. They are the best source of Long Term Wealth Creation

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    Systematic Transfer Plan

    STP is a variant of SIP. It is essentially transferring investment from one asset/ asset type into another asset/ asset type. The transfer happens gradually over a period. Thus, it is Investing ==> from the Invested Fund ==> to Another Fund ==> at periodic intervals.

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    Taxation in MF's

    Mutual Funds are subject to Capital Gain Taxes. These gains can be short term or long term. They may be from Equity Oriented Fund or Debt Oriented Fund.

    Short Term Captial Gains Tax: 15% for Equity funds sold within 12 months of purchase, and "As per Income Tax Slab" for Debt Funds sold within 36 months of purchase.

    Long Term Capital Gains Tax: 0% for Equity Funds sold after 12 months of purchase, and "10% without Indexation" or "20% with Indexation" for Debt Funds sold after 36 months of purchase.

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    Debt Funds

    Debt fund has core holdings are fixed income investments with investing objectives as preservation of capital and generation of income. A debt fund may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt. They are sensitive to Interest rates of the inherited securities. Longer the Fund's Average Maturity, Higher the volatility. They are good investment options when the interest rates are prone to fall from their ever high.

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