UNIT - 1

Personal Financial Basics

Personal finance is the process of planning and managing personal financial activities such as
income generation, spending, saving, investing, and protection. The process of managing one’s
personal finances can be summarized in a budget or financial plan. This guide will analyze the most
common and important aspects of individual financial management.
Areas of Personal Finance
In this guide, we are going to focus on breaking down the most important areas of personal finance
and explore each of them in more detail so you have a comprehensive understanding of the topic.
As shown below, the main areas of personal finance are income, spending, saving, investing, and
protection. Each of these areas will be examined in more detail below. 

1. Income
Income refers to a source of cash inflow that an individual receives and then uses to support
themselves and their family. It is the starting point for our financial planning process.
Common sources of income are:
 Salaries
 Bonuses
 Hourly wages
 Pensions
 Dividends
These sources of income all generate cash that an individual can use to either spend, save, or
invest. In this sense, income can be thought of as the first step in our personal finance roadmap.
2. Spending
Spending includes all types of expenses an individual incurs related to buying goods and services
or anything that is consumable (i.e., not an investment). All spending falls into two

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categories: cash (paid for with cash on hand) and credit (paid for by borrowing money). The
majority of most people’s income is allocated to spending.
Common sources of spending are:
 Rent
 Mortgage payments
 Taxes
 Food
 Entertainment
 Travel
 Credit card payments
The expenses listed above all reduce the amount of cash an individual has available for saving and
investing. If expenses are greater than income, the individual has a deficit. Managing expenses is
just as important as generating income, and typically people have more control over their
discretionary expenses than their income. Good spending habits are critical for good personal
finance management.
3. Saving
Saving refers to excess cash that is retained for future investing or spending. If there is a surplus
between what a person earns as income and what they spend, the difference can be directed
towards savings or investments. Managing savings is a critical area of personal finance.
Common forms of savings include:
 Physical cash
 Savings bank account
 Checking bank account
 Money market securities
 Most people keep at least some savings to manage their cash flow and the short-term difference
between their income and expenses. Having too much savings, however, can actually be viewed as
a bad thing since it earns little to no return compared to investments.
4. Investing
Investing relates to the purchase of assets that are expected to generate a rate of return, with the
hope that over time the individual will receive back more money than they originally invested.
Investing carries risk, and not all assets actually end up producing a positive rate of return. This is
where we see the relationship between risk and return.
Common forms of investing include:
 Stocks
 Bonds
 Mutual funds
 Real estate
 Private companies
 Commodities
 Art
Investing is the most complicated area of personal finance and is one of the areas where people get

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the most professional advice. There are vast differences in risk and reward between different
investments, and most people seek help with this area of their financial plan.
5. Protection
Personal protection refers to a wide range of products that can be used to guard against an
unforeseen and adverse event.
Common protection products include:
 Life insurance
 Health insurance
 Estate planning
This is another area of personal finance where people typically seek professional advice and which
can become quite complicated. There is a whole series of analysis that needs to be done to properly
assess an individual’s insurance and estate planning needs.
The Personal Finance Planning Process
Good financial management comes down to having a solid plan and sticking to it. All of the above
areas of personal finance can be wrapped into a budget or a formal financial plan.
These plans are commonly prepared by personal bankers and investment advisors who work with
their clients to understand their needs and goals and develop an appropriate course of action.
Generally speaking, the main components of the financial planning process are:
 Assessment
 Goals
 Plan development
 Execution
 Monitoring and reassessment

Replacement and Time Value of Money

The time value of money is generally a principle within a financial theory which states that the
people if given a preference, would like to receive the money as sooner as possible. It lays the
foundation for many of the theories which mainly determines the discount rate that one should
expect during the future cash flows.
Time Value of Money says that the worth of a unit of money is going to be changed in future. Put
simply, the value of one rupee today will be decreased in future. The whole concept is about the
present value and future value of money. There are two methods used for ascertaining the worth of
money at different points of time, namely, compounding and discounting. Compounding method is
used to know the future value of present money. Conversely, discounting is a way to compute the
present value of future money.

This principle does not calculate the market value of that asset, instead, it calculates the intrinsic
value. Intrinsic value is nothing but the total value that is required to own the asset for the entirety
of its lifetime. For better understanding, let’s consider an example. Every business to operate
requires machinery for its operations.
The machinery is the necessity for every business and thus whenever the machine or in business
terms, assets reaches its life, it needs to replace. Now, the machine that we used to replace the
current one reaches its life, also requires to be replaced at the end of that asset’s life. And so the
process goes on and on till the business is being run.

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This replacement of machines results into the outflow of the cash and thus the whole amount can
be added to get a depreciation amount. This is called the depreciation value. There are many
methods to calculate this depreciation of any machinery. These methods include the write-down
value method, the straight-line method, etc.

Compounding Discounting

The method used to determine the future The method used to determine the present
Meaning value of present investment is known as value of future cash flows is known as
Compounding. Discounting.

If we invest some money today, what will What should be the amount we need to invest
Concept
be the amount we get at a future date. today, to get a specific amount in future.

Use of Compound interest rate. Discount rate

Known Present Value Future Value

Future Value Factor or Compounding

Factor Present Value Factor or Discounting Factor
Factor

Formula FV = PV (1 + r)^n PV = FV / (1 + r)^n

Assumptions
While talking about the time value of money principle, there are many assumptions that you need
to make so that the depreciation can be demonstrated in a simple manner. Some of these
assumptions include:
 Each machinery that will be replaced will have the same cost
 The productivity of all the assets remains the same during its lifetime
 The asset and its replacement have the same total lifetime
 There will be no residual value of the asset at the end of its lifetime
 The asset that is used for replacement will have the same productivity
 The assets that are used does not require any repairs or maintenance during its lifetime
 No taxation is involved in the transaction
 The payment done for the asset which is replaced will be upfront

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  The replacement of the asset will be immediately done

Present Value and Future Value

While compounding value for the depreciation of the assets, you need to keep in mind two
important values: present value and future value. Future value is the value of the asset after a
certain time period. While the present value is the value of the asset that we calculate after
deducting the residual value.
FV = PV(1 + r)n
where FV= future value,PV = present value, r = rate of interest, n = equal number of periods.
PV = FV / (1 + r)n

Compounding
For understanding the concept of compounding, first of all, you need to know about the term future
value. The money you invest today, will grow and earn interest on it, after a certain period, which
will automatically change its value in future. So the worth of the investment in future is known as
its Future Value. Compounding refers to the process of earning interest on both the principal
amount, as well as accrued interest by reinvesting the entire amount to generate more interest.
Compounding is the method used in finding out the future value of the present investment. The
future value can be computed by applying the compound interest formula which is as under:

Where n = number of years

R = Rate of return on investment.

Discounting
Discounting is the process of converting the future amount into its Present Value. Now you may
wonder what is the present value? The current value of the given future value is known as Present
Value. The discounting technique helps to ascertain the present value of future cash flows by
applying a discount rate. The following formula is used to know the present value of a future sum:

Where 1,2,3,…..n represents future years

FV = Cash flows generated in different years,
R = Discount Rate

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Financial Aspects of Career Planning
A B

Job Work that you do mainly to earn money

Career Is a commitment to work in a field that you find interesting and fulfilling

A measure of quality of life based on the amounts and kinds of goods and
Standard of living
services a person can buy

Developments that mark changes in a particular area-indicate that some

Trends people are making career decisions that allow them to spend more time
with their families or to enjoy their hobbies and interests

Potential earning
The amount of money you may earn over time.
power

Aptitudes Are the natural abilities that people possess

Interest inventories Are tests that help you identify the activities you enjoy the most.

Demographic trends Are ways in which groups of people change over time?

Those that provide services for a fee, will offer some of the greatest
Service industries
employment potential in coming years

Is a position in which a person receives training by working with people

Internship
who are experienced in a particular field

Cooperative Programs allow students to enhance classroom learning with part-time

education work related to their majors and interests

Networking Is a way of making and using contacts to get job information and advice

A meeting with someone who works in your area of interest who can
Informational
provide you with practical information about the career or company
interview
you’re considering

one page document that summarizes a person’s skills, education,

Resume
experience, and achievements

Sent with the resume to provide information about your qualifications

Cover letter
and why you are interested in the job. Also, to help you get an interview.

Cafeteria-style Programs that allow workers to choose the benefits that best meet their
employee benefits personal needs.

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Pension plan A retirement plan that is funded at least in part by an employer

An experienced employee who serves as a teacher and counselor for a

Mentor
less experienced person.

Need for Career Planning:

Career Planning is necessary due to the following reasons:
1. To attract competent persons and to retain them in the organization.
2. To provide suitable promotional opportunities.
3. To enable the employees to develop and take them ready to meet the future challenges.
4. To increase the utilization of managerial reserves within an organization.
5. To correct employee placement.
6. To reduce employee dissatisfaction and turnover.
7. To improve motivation and morale.

Process of Career Planning:

The following are the steps in Career Planning:
1. Analysis of individual skills, knowledge, abilities, aptitudes etc.
2. Analysis of career opportunities both within and outside the organization.
3. Analysis of career demands on the incumbent in terms of skills, knowledge, abilities,
aptitude etc., and in terms of qualifications, experience and training received etc.
4. Relating specific jobs to different career opportunities.
5. Establishing realistic goals both short-term and long-term.
6. Formulating career strategy covering areas of change and adjustment.
7. Preparing and implementing action plan including acquiring resources for achieving goals.
Pre-requisites for the success of career planning.
1. Strong commitment of the top management in career planning, succession planning and
development.
2. Organization should develop, expand and diversify its activities at a phased manner.
3. Organization should frame clear corporate goals.
4. Organization should have self-motivated, committed and hard working employees.
5. Organization’s goal in selection should be selecting the most suitable man and place him in
the right job.
6. Organization should take care of the proper age composition in manpower planning and in
selection.
7. Organization should take steps to minimize career stress.
8. Organization should have fair promotion policy.
9. Organization should publicize widely the career planning and development programmes.

Advantages of Career Planning:

For Individuals:

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 1. The process of career planning helps the individual to have the knowledge of various career
opportunities, his priorities etc.
2. This knowledge helps him select the career that is suitable to his life styles, preferences,
family environment, scope for self-development etc.
3. It helps the organization identify internal employees who can be promoted.
4. Internal promotions, upgradation and transfers motivate the employees, boost up their
morale and also result in increased job satisfaction.
5. Increased job satisfaction enhances employee commitment and creates a sense of
belongingness and loyalty to the organization.

Money Management Strategy

1. Successful Money Management
A. Money management
The day-to-day financial activities necessary to manage current personal economic resources while
working toward long-term financial security.
B. Opportunity Cost and Money Management
1. Spending money on current living expenses reduces the amount you can use
for saving and investing for long-term financial security.
2. Saving and investing for the future reduce the amount you can spend now.
3. Buying on credit results in payments later and reduces the amount of future
income available for spending.
4. Using savings for purchases results in lost interest earnings and an inability
to use savings for other purposes.
5. Comparison shopping can save you money and improve the quality of your
purchases but uses up something of value you cannot replace: your time.
C. Components of Money Management
1. Personal Financial Records and Documents
2. Personal Financial Statements
3. A Budget or Spending Plan

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A System for Personal Financial Records
Personal Financial Statements
A. The Personal Balance Sheet: Where are You Now?
Items of Value – Amounts Owed = Net Worth

B. Evaluating Your Financial Positiion

If you are a traditional college student, don’t be surprised if your net worth is negative.
C. The Cash Flow Statement: Where Did Your Money Go?
Total Cash Received during the time period – Cash Outflow during the time period = Cash Surplus
or Deficit

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Planning Your Tax Strategy
The first thing an Indian taxpayer must know about is Section 80C. Among the various exemptions
that the Income Tax Act offers to Indian taxpayers, Section 80C is one of the most popularly known
exemption. This particular section alone exempts tax up to an outer limit of Rs1.50 lakh per
financial year on a series of contributions.
Broadly, there are two types of contributions that are eligible for exemption under Section 80C.
First, there are specific investments such as Public Provident Fund (PPF), long-term deposits,
National Savings Certificate (NSC), and equity-linked savings scheme (ELSS), where you can invest
for long-term growth and get tax benefits.
Second, there are also select payments such as premium on life insurance, tuition fees for your
children, and principal repayment of home loan that are eligible for exemption under Section 80C.
This exemption is applicable to each financial year and the total eligible contribution is directly
deducted from the taxable income.
Let us look at some key investments and payments that are eligible for Section 80C exemption and
some of their unique features.

EPF and PPF contributions

Employee contributions to the Employee Provident Fund (EPF) are mandated to be at 12% of the
basic salary plus dearness allowance (DA) and the employer matches this contribution. However,
only the employee’s contribution is eligible for Section 80C benefits. On the other hand, Public
Provident Fund (PPF) rates are fixed by the Finance Ministry and they are instruments of high
safety. PPF has a minimum lock-in period of 5 years and loans can be taken against PPF after this
lock-in period is completed. Withdrawals are permitted from the seventh year onwards and the
interest on PPF and the final redemption is entirely exempt from tax.
ELSS contribution
These specific tax-saving equity funds (with a 3-year lock-in period) have become quite popular
over the last few years. Unlike PPF and bank FDs, where the returns are regulated, ELSS funds are a
market-linked product. Dividends on ELSS are tax-free in the hands of the investor but are subject
to Dividend Distribution Tax (DDT) at 10%. Effective April 2018, any LTCG earned on ELSS funds

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above Rs1 lakh is subject to tax at 10% without the benefit of indexation. ELSS remains a good
instrument for combining tax-saving and wealth creation.
Long-term bank fixed deposits
These are like normal bank FDs but are subject to a mandatory lock-in of 5 years. The rates of
interest are also at par with the bank FD rates. Only the contribution to these long-term FDs qualify
for exemption under Section 80C. It needs to be noted that any interest that is received on such FDs
will be treated as taxable income and taxed at your peak rate.
National Savings Certificates (NSC)
The NSC requires very minimal documentation and can be purchased at your neighbourhood post
office. The interest rates on NSC are also announced by the government from time to time. NSC
contributions are subject to a minimum lock-in period of 5 years. The interest is not paid out each
year but is accrued and paid out on redemption. However, even though you do not receive the
interest, you need to show the accrued interest each year in your tax returns and pay tax on the
same.
Life insurance and ULIP premiums
Life insurance contributions are eligible irrespective of whether it is a term policy, an endowment
policy, a money-back policy, or a ULIP. Any death benefit received or proceeds received on
maturity, including bonuses, are fully exempt from tax in the hands of the recipient. In the case of
ULIPs, the tax exemption is calculated differently. Section 80C exemption on ULIPs is available on
the lower of the two (10% of the sum assured or actual premium paid). Even if ULIP has an equity
component, there is no LTCG tax on redemption.
Tuition fees and home loan principal
With the rising costs of education, the Income Tax Act has extended the benefits of Section 80C to
tuition fees paid for two children. This exemption is only available to annual tuition fees and not to
any donation, capitation fees, or building fund.

On the other hand, while home loan interest is exempt under Section 24 of the Income Tax Act, the
principal component is exempt under Section 80C. Interestingly, in the year of completion of your
property, the stamp duty and registration charges can also be claimed as part of home loan
principal under Section 80C.
National Pension Scheme (NPS)
Contributions made by an employee towards the National Pension Scheme (NPS) is allowed as a
deduction under Section 80CCD, an adjunct of Section 80C. The advantage of the NPS contribution
is that even if you have exhausted your limit of Rs1.50 lakh under Section 80C, the NPS
contribution entitles you to an additional exemption of Rs50,000, thus taking your total exemption
limit to Rs2 lakh. This extra benefit is not only for NPS but also for contributions made to APY
schemes.
When selecting your Section 80C investments and contributions, you need to focus on the returns,
risk, wealth creation potential, levels of tax benefits, and liquidity so that you make the best of both
tax-saving and wealth creation.

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 UNIT – 2
Savings Plans and Payment Accounts
Types of Saving Schemes in India
National Savings Certificate (NSC)
The National Savings Certificate is a scheme offered by the Government of India for fixed income
investment that can be opened with any post office. It involves a savings bond that proves to be
tax-efficient for the investor. It is best suited mainly for small to mid-income investors with a low
risk appetite. This is similar to other fixed income investments like PPF (Public Provident Fund)
and Post Office Fixed Deposits.
However, being a safe and low-risk investment also implies that it does not ensure high returns,
especially when the capital market is volatile. You can purchase an NSC in your name or hold a joint
account with another adult or buy it for a minor. However, the government makes this scheme
available only to individuals of Indian nationality. Therefore, HUFs (Hindu Undivided Families) and
NRIs (Non-Resident Indians) are not eligible to invest in NSCs.
Salient features and benefits of NSC Savings Scheme:
 They are of two types based on their maturity periods of 5 years and 10 years.
 NSCs do not have any maximum limits of purchase. However, investments of only up to INR
1.5 lakhs attracts tax benefits under Section 80C of the Income Tax Act, 1961.
 The current rate of interest on NSCs is 6.8% per annum applicable from 01.04.2020. This
interest rate is added to the investment and then compounded annually and serves as a
stable source of regular income.
 You can start with an investment as small as INR 100 and increase the amount as per your
convenience.
 Acceptable as collateral by banks and financial institutions as well as security for secured
loans.
 Acts as financial security and support for the nominee on the unforeseen demise of the
investor.
 The entire maturity value is payable to the investor when the investment completes its
maturity tenure. However, since TDS on NSC pay-outs are applicable, NSC is not completely
tax-free.
 Investors are not eligible for premature withdrawal unless under exceptional
circumstances like sudden death of the investor or legal order from the court.
National Savings Scheme (NSS)
National Savings Scheme (NSS), backed by the Government of India, offers the entire sum assured
after the completion of its maturity tenure. The applicable rate of interest is compounded annually.
It also gives you the flexibility to extend the term as per your investment objectives. It is also tax
deductible under Section 80 C of the Income Tax Act, 1961.
Salient features and benefits of NSS Savings Scheme:
 Offers fixed assured returns after it completes the maturity term. However, they are not
market-linked like some other government schemes.
 The rates on small saving schemes are revised and updated every quarter every quarter.
This implies that you will be eligible for higher interest rates.

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  NSS schemes like PPF, Sukanya Samriddhi Yojana, NSC etc., attract tax exemptions of up to
INR 1.5 lakhs under Section 80C of Income Tax Act, 1961. Besides, interest on Sukanya
Samriddhi Yojana and PPF and Sukanya Samriddhi Yojana is also tax-free.
 Investors are not eligible for premature withdrawal unless under exceptional
circumstances like sudden death of the investor.
Public Provident Fund (PPF)
This scheme was introduced by the National Savings Institute, under the Finance Ministry of India,
in 1968. It is an effective savings instrument, specifically for tax savings.
Salient features and benefits of PPF Savings Scheme:
 Attracts an interest rate of 7.1% per year applicable from 01.04.2020, which is then
compounded annually.
 Applicable on a minimum annual investment of INR 500 and a maximum of INR 1,50,000.
 Payable in lump sum or through a maximum of 12 deposits in one financial year.
 Maturity period varies from a minimum tenure of 15 years and can be extended up to a
maximum of 5 more years, as per the discretion of the investor.
 Offers further flexibility as it can be moved from one post office or bank to another.
 Not applicable on joint accounts.
 Investors are eligible for tax deductions under Sec. 80C of the IT Act, 1961. Besides,
accumulated interest is completely tax-free.
 The accumulated savings is accepted by banks and financial institutions as security and
collateral during loan application from the third financial year.
Post Office Savings Scheme
Being one of the most secure and reliable saving schemes, it is the most suitable for investors who
have a low-risk appetite. Besides assuring investors of high returns, the process is streamlined,
quick and hassle-free. It is accompanied by the inherent features of high-end investment and
saving schemes in India.
The following are the products of Post Office Savings Scheme:
 Post Office Savings Account
 5 Years Post Office Recurring Deposit Account
 Post Office Time Deposit Account
 Post Office Monthly Income Account Scheme
 Senior Citizens Saving Scheme
 15 Years Public Provident Fund Account
 National Savings Certificates (NSC)- 5 Years NSC (VIII Issue) and 10 Years NSC (IX Issue)
 Kisan Vikas Patra (KVP)
 Sukanya Samriddhi Account
Senior Citizens Savings Scheme (SCSS)
Senior Citizens Savings Scheme was especially planned keeping in mind the unique needs of senior
citizens in India, that is, individuals of at least 60 years of age. However, individuals between 55
years and 60 years who have retired or have opted for Voluntary Retirement Scheme (VRS) are
also eligible to apply for Senior Citizens Savings Scheme, but only when the savings scheme
account has been issued within one month of the receipt of their retirement benefits.

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Salient features and benefits of Senior Citizens’ Savings Scheme:
 The rate of interest for Senior Citizens Savings Scheme is 7.4% quarterly applicable from
01.04.2020, payable on any one of these days in a financial year – 31st March 30th June,
30th Sept and 31st. December.
 The tenure of the saving schemes is 5 years.
 Investors are eligible for making a maximum of one deposit into the saving schemes and in
multiples of INR 1,000.
 The maximum amount cannot be more than INR 15 lakhs.
 The account is transferrable from one bank or post office to another.
 The savings scheme account can be closed before the completion of its full tenure, provided
the investor pays 1.5% of the deposit amount in the first year and 1.0% of the amount in
the second year.
 The tenure can be further extended to a maximum of 3 years after the minimum maturity
term of 5 years, as per the discretion of the investor. If the investor wants to withdraw the
amount after the completion of 1 year of this extended term, the savings scheme account
can be closed prematurely without any deductions.
 The accumulated interest attracts TDS, deducted at source, if the interest exceeds INR
10,000 annually.
 The accounts of this savings scheme enable investors to avail tax deductions under Section
80C of Income Tax Act, 1961.
Kisan Vikas Patra (KVP)
Kisan Vikas Patra (KVP), launched in the year 1988, is one of the most preferred saving schemes
from the Indian Postal Department. Post its initial phenomenal success, this savings scheme was
discontinued in 2011 as a result of it being misused. It was re-introduced in 2014 after
experiencing high demand.
Salient features and benefits of KVP Savings Scheme:
 What attracts the applicant to this savings scheme is that the principal amount doubles in
124 months at an interest rate of 6.9%.
 This is available only in the multiples of INR 1,000, INR 5,000, INR 10,000 and INR 50,000,
INR 1,000 being the minimum purchase value. It does not have a maximum limit.
 It can be encashed prematurely after 2½ years from the issuance date.
 The account of this savings scheme can be transferred from one bank or post office to
another, and from one individual to another.
Sukanya Samriddhi Yojana (SSY)
Introduced by the Indian Ministry of Finance, the Sukanya Samriddhi Yojana (SSY) savings scheme
was launched by the honourable Prime Minister of India, Mr. Narendra Modi, to financially secure
the future of the girl child and support her future ambitions. Salient features and benefits of SSY
Savings Scheme:
 Attracts an annual rate of interest of 7.6% applicable from 01.04.2020 on the principal
amount, one of the highest in a savings scheme of its kind.
 The account for this savings scheme can be opened at any post office or authorised bank in
India.
 Deposits can be made in denominations of INR 100. However, the initial deposit applicable
ranges from a minimum of INR 1,000 to a maximum of INR 1,50,000 per year.

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  The maturity term is 21 years from the issuance date and the account holder has to pay into
the account for a total term of 14 years.
 This savings scheme account can be transferred from one bank or post office to another
bank or post office anywhere within India.
Atal Pension Yojana
Named after the respected former Prime Minister of India, Shri Atal Bihari Vajpayee, this savings
scheme is designed to cater to the welfare of the weaker sections of the society. It is also applicable
to individuals, especially those working in the unorganised sectors, who require the financial
support from a government-sponsored welfare program. This serves as a robust pension plan for
their post-retirement years. Applicants pay a very low premium and enjoy the fruits of a robust
and reliable pension plan.
Salient features of the Atal Pension Yojana Savings Scheme:
 A robust retirement plan that acts as a steady source of income for the weaker sections of
the society and people working in the unorganised sector, which does not offer a pension
option.
 Indian citizens between the age groups of 18 years and 40 years are eligible to apply.
 Involves a very low premium amount, but it has to be paid for a minimum duration of 20
years. However, the higher the premium amount, the higher will be the payable pension
amount.
 It is mandatory for the applicant to hold an active savings bank account.
 The applicant cannot be a policyholder of any other statutory saving schemes.
Employees Provident Fund (EPF)
The Employees Provident Fund (EPF), introduced by the Employees’ Provident Fund Organisation
(EPFO), involves the working Indian population to make a compulsory financial contribution into a
Provident Fund (PF) account. This enables them to plan their retirement fund in advance.
Alternately, it also offers them the benefit of financial security during unforeseen emergencies as
well as planned financial objectives. EPF is one of the most popular and much-favoured
government-sponsored savings scheme of a vast majority of the Indian population working in the
organised sector.
Salient features and benefits of EPF Savings Scheme:
 In this savings scheme, the employer and employee contribute 12% of the employee’s
monthly salary into this provident fund account every month.
 The annual rate of interest on the funds accumulated in the EPF account throughout the
year is decided by the government and usually ranges between 8% and 12%.
 The interest is credited to the employee’s account on 1st April of every financial year.
 The EPFO office generates annual reports through the concerned employer that the
employee is employed with, to enable him/her to clear the bearings on the amount
accumulated in the EPF account.
National Pension System (NPS)
The National Pension System is a savings scheme that focuses on serving as reliable and secure
source of monthly income after retirement. To avail this benefit, employees have to make a small
premium payment towards NPS while they are gainfully employed. The lump sum, accumulated
throughout the tenure of the scheme, is broken down through an annuity plan, and paid to the
applicant every month post-retirement.

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Salient features and benefits of NPS Savings Scheme: _ Acts as a secure source of monthly
income for retired employees of state and central government organisations, employees of MNCs,
and Indian citizens employed in the unorganised sectors.
 For employees of the central or state government organisations, the applicable deduction
from the individual’s monthly income is 10% and an equal contribution from the
government.
 For employees of MNCs or those from the unorganised sectors, NPS is similar to any other
long-term saving schemes that benefits applicants after the completion of the pre-
determined tenure, as per the terms of the scheme.
Voluntary Provident Fund (VPF)
As suggested by the name of this savings scheme, employed Indian citizens can opt for out of their
individual willingness.
Salient features and benefits of VPF Savings Scheme:
 The applicant willingly contributes up to 100% of their basic salary and dearness
allowance towards their respective Employee Provident Fund (EPF), as opposed to the
usual 12%.
 As per the financial year 2013 – 14, applicants were eligible for an interest rate of 8.75% on
the accumulated funds.
 Any activity in an applicant’s VPF will have a direct impact on his/her EPF account too, and
vice versa.
Deposit Scheme for Retiring Government Employees
This savings scheme, targeted at the retiring employees of the public sector, is particularly well-
known for its hassle-free application and documentation procedure.
Salient features and benefits of this savings scheme:
 The necessary documents required during the application process to be eligible for this
saving schemes are locally payable cheque, DD, etc., along with a certificate from the
employer.
 The interest accrued is payable from the date of deposit to 30th June or 31st December of
the same year, and subsequently followed by half-yearly payments on 30th June or 31st
December.
 Withdrawals cannot be made by applicants during the first year of the opening of the
account. However, the applicant will be eligible for withdrawals after the completion of one
year.
Pradhan Mantri Jan Dhan Yojana
This savings scheme has been launched by the Government of India in 2014, especially for those
Indian citizens who do not have a bank account in India. This offers cost-effective solutions related
to accessing financial services like banking, remittance, insurance, pension, etc.
Salient features and benefits of Pradhan Mantri Jan Dhan Yojana Savings Scheme:
 Account holders are eligible for an accidental insurance cover of INR 1 lakh and a life cover
of INR 30,000, payable on the death of the beneficiary.
 Account holders are eligible for an overdraft facility of up to INR 5,000, applicable to not
more than one account per household.
 This savings scheme is tailor-made for Indian citizens below the poverty line, empowering
them to make the most of this saving schemes through reinvestments.

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  Maintaining a minimum balance in the account is not mandatory.
 Account holders can avail interest on their deposits.
 Account holders can avail seamless access to insurance policies and pension.
 Beneficiaries of government schemes are eligible for Direct Benefit Transfer.
 Mobile banking facility further makes this saving schemes user-friendly.
Advantages of Saving Schemes in India
Let’s look at some of the primary benefits of savings schemes in India:
Robust savings schemes
The public and private sector banking schemes from the Government of India offer a robust and
secure savings instrument for individuals with varied financial objectives.
Hassle-free services
These saving schemes are customised to offer streamlined and seamless application and
maintenance.
Extensive range of savings schemes
The government offers a wide range of saving schemes to cater to the varied needs and financial
goals of Indians citizens across different sections of the society. For instance, Sukanya Samriddhi
Yojana focuses on the financial support for the girl child, while Pradhan Matri Jan Dhan Yojana is
especially designed for citizens below the poverty line.
Long-term financial strategies
The saving schemes are safe investment instruments that enable applicants to meet long-term
financial goals like child’s higher education, child’s marriage, retirement plan, etc.
Payment method types
Credit Cards
As a global payment solution, credit cards are the most common way for customers to pay online.
Merchants can reach out to an international market with credit cards, by integrating a payment
gateway into their business. Credit card users are mostly from the North America and Europe, with
Asia Pacific following suit.
Mobile Payments
A popular payment method in countries with low credit card and banking penetration, mobile
payments offer a quick solution for customers to purchase on e-commerce websites. Mobile
payments are also commonly used on donation portals, browser games, and social media networks
such as dating sites, where customer can pay with SMS.
Bank Transfers
Customers enrolled in an internet banking facility can do a bank transfer to pay for online
purchases. A bank transfer assures customers that their funds are safely used, since each
transaction needs to be authenticated and approved first by the customer’s internet banking
credentials before a purchase happens.
e-wallets
An ewallet stores a customer’s personal data and funds, which are then used to purchase from
online stores. Signing up for an ewallet is fast and easy, with customers required just to submit
their information once for purchases. Additionally, ewallets can also function in combination with
mobile wallets through the use of smart technology such as NFC (near field communication)

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devices. By tapping on an NFC terminal, mobile phones can instantly transfer funds stored in the
phone.
Prepaid Cards
An alternative payment method, commonly used by minors or customers with no bank accounts.
Prepaid cards come in different stored values for customers to choose from. Online gaming
companies usually make use of prepaid cards as their prefered payment method, with virtual
currency stored in prepaid cards for a player to use for in-game transactions. Some examples of
prepaid cards are Mint, Ticketsurf, Paysafecard, and Telco Card. It appears that age rather than
income is the trait that affects the adoption of prepaid cards, according to Troy Land’s research.
Direct Deposit
Direct deposits are when customers instruct their banks to pull funds out of their accounts to
complete online payments. Customers usually inform their banks on when funds should be pulled
out of their accounts, by setting a schedule through them. A direct deposit is a common payment
method for subscription-type services such as online classes or purchases made with high prices.
Cash
Fiat, or physical cash, is a payment method often used for physical goods and cash-on-delivery
transactions. Paying with cash does come with several risks, such as no guarantee of an actual sale
during a delivery, and theft.

Introduction to Consumer Credit

Following are the features of Consumer credit:
1. Consumer credit is a method of financing semi-durables and durables.
2. It assists consumers to acquire assets.
3. Consumers get possession of the assets immediately when a fraction of the price is paid.
4. The balance payment is payable in installments over an agreed span of time.
5. The duration of the finance normally ranges between three months to five years,
6. It is an agreement between parties to the contract.
7. When there are only two parties to the contract, it is called a Bipartite Agreement (the
customer and the dealer cum financier) and where there are three parties, such agreements
are called Tripartite Agreements (the customer, the dealer and the financier.)
8. The structure of financing may by way of hire-purchase, conditional sale or credit sale. In
the case of both hire purchase and conditional sale, ownership of the asset is transferred
only on completion of all the terms of agreement. But in the case of credit sale ownership is
transferred immediately on payment of first installment.
9. Generally advances are made on the security of the asset itself and
10. It involves down payment normally ranging from 20 to 25% of the asset price.

Forms/Types of Consumer Credit:

1. Revolving Credit:
It is an ongoing credit arrangement. It is similar to overdraft facility. Here a credit limit will be
sanctioned to the customer and the customer can avail credit to the extent of credit limit
sanctioned by the financier. Credit Card facility is an excellent example of revolving credit.
2. Cash Loan:

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In this form, the buyer consumer gets loan amount from bank or non- banking financial institutions
for purchasing the required goods from seller. Banker acts as lender. Lender and seller are
different. Lender does not have the responsibilities of a seller
3. Secured Credit:
In this form, the financier advances money on the security of appropriate collateral. The collateral
may be in the form of personal or real assets. If the customer makes default in payments, the
financier has the right to appropriate the collateral. This kind of consumer credit is called secured
consumer credit.
4. Unsecured Credit:
When financier advances fund without any security, such advances are called unsecured consumer
credit. This type of credit is granted only to reputed customers.
5. Fixed Credit:
In this form of financing, finance is made available to the customer as term loan for a fixed period
of time i.e., for a period of one to five years. Monthly installment loan, hire purchase etc. are the
examples.

Advantages of Consumer Finance:

1. Compulsory Savings:
Consumer credit promotes compulsory savings habit among the people. To make periodical
installments knowingly or unknowingly, people cut short their other expenditures and save. These
savings ultimately fetch them ownership of an asset in course of time. Thus consumer credit adds
to the savings habit of people.
2. Convenience:
Considering the nature and type of customers, consumer credit facility offers schemes to the
convenience and satisfaction of the customers. Walk in and drive out, pay as you earn, everything
at the door step, one time processing etc. are examples.
3. Emergencies:
Consumer credit facility is available to meet personal requirements like family requirements,
festival requirements, emergencies etc. The credit facility is not strictly restricted to purchasing of
consumer durables alone. In ordinary course of life people come across number of urgent financial
requirements, for which consumer credit offers a better solution.
4. Assists to Meet Targets:
In all business activities, there will be targets to be achieved by the executives. Most people
abstain/ postpone purchasing for want of sufficient fund. When the dealer themselves arrange for
fund people get attracted and purchase take place in large quantity. Thus it assists to meet sales
targets and profit targets.
5. Assists to Make Dreams to Reality:
A car, a TV, a washing machine, a computer, a laptop, a mobile phone, etc. is undoubtedly a dream
of an average human being. But people may not purchase because of fund problem. In those cases
consumer credit facilitates an opportunity to possess and own those dreams on convenient terms.
6. Enhances Living Standard:
Consumer credit enhances living standard of the people by providing latest articles and amenities
at reasonable and affordable terms.

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7. Accelerates Industrial Investments:
Demand for consumer durables enhances further investment in the consumer durables industry.
Thus provides more and more employment opportunities in the country.
8. Promotes Economic Development:
Demand for consumer durables, further investments in consumer durables industry, increased
living standard of people, improved employment opportunities and income etc. improves economic
development of the country.
9. Economies of Large Scale Production:
Increased demand leads to large scale production. Large scale operations lead to the economies of
large scale operation. This in turn leads to lower prices.
10. National Importance:
Consumer credit is of national importance in India. Unless there is such a convenient mode of
financing, total demand for consumer durables will be far lesser. Poor demand lead to lower
production, which in turn lead to poor employment opportunity and lower income level. All these
finally land the economy in trouble.

Disadvantages of Consumer Finance:

1. Promotes Blind Buying:
Facility to purchase at somebody else’s money tempts people to buy and buy goods blindly. This
may land these people to debt trap within a short while.
2. Leads to Insolvency:
Blind buying of goods make these people insolvent/bankrupt within a shorter span of time. This
ultimately spoils their life in the long run.
3. Consumer Credit is Costlier:
Along with the convenience that it offers it charge the customer for all these conveniences offered.
Thus it becomes costlier when compared to other forms of finance.
4. Artificial Boom:
The economic development posed by the impact of consumer credit is not real but artificial.
Economy will take years to stabilize the artificial boom claimed by the proponents of consumer
credit.
5. Bad Debts Risk:
By whatever name called credit is always risky so is the case with consumer credit as well. Defaults
are a major threat to consumer credit. Once there is a default, repossession and other legal
formalities are difficult.
6. Causes Economic Instability:
Artificial boom and depression leads to economic instability and causes chaos in the economic
progress. It will be difficult for the real ordinary business man to identify real progress and
artificial progress.

Choosing a Source of Credit: The Cost of Credit Alternatives

Individual Credit Rating:
Always the financier should assess the repaying capacity of the customer before advancing money.
To assess the credibility and repayment capacity of a customer several methods are made use of.

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Those methods which are used to assess the credit worthiness and repaying capacity of a customer
are called consumer credit scoring methods or credit rating methods.
These methods provide standards for accepting or rejecting a customer and assess the credit
worthiness of a customer. Some of the commonly used methods are Dunham Greenberg Formula,
Specific Fixed Formula and Machinery Risk Formula. In India, the largest credit rating agency for
individual consumer finance is Credit Bureau of Information India Ltd. (CBIL)
A. Dunham Greenberg Formula:
This method is based the customer’s i) Employment Record, ii) income level, iii) Financial Position,
iv) Type of Security Offered and v) Past Payment Record. It gives more importance to the
customer’s income level and past records. Under this method points are allotted to the various
aspects/parameters of the customer. It is ranked out of a total of 100. An applicant scoring more
than 70 points is considered as one with good credit standing.
The points allotted to various aspects are:

Parameters Credit Score

Applicnts employment record 20
Appicant’s income 25
Applicants finance 10
Type of security offered 20
Past payment method 25
Total 100
B. Specific Fixed Formula:
This method is another credit rating formula. It give emphasis to i) Age, ii) Gender, iii) Stability of
Residence, iv) Occupation, v) Type of Industry, vi) Stability of Employment and vii) Assets of the
Customer in assessing the credit worthiness of a customer. Specific scores are allotted to each of
these parameters. The borrowers getting a score more than 3.5, is ranked as ‘excellent borrower’
and those getting more than 2.5 but less than 3.5 is ranked as ‘marginal borrower’.
The method of scoring is as follows:

Parameters Credit Score

Age 0.1-0.5
Gender 04
Stability of residence 0.042-0.42
Occupation 0.16-0.55
Industry 0.21
Stability of employment 0.059-0.59
Assets 0.20 – 0.45
C. Machinery Risk Formula:
This method is based upon the amount of down payment, monthly income and length of service.
Basically this method is based upon the present financial position and future income earning

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capacity of the customer. Generally this method is used in government Departments to advance
loans to its employees. The loan amount to be sanctioned is calculated using the following formula.
Loan amount = Down payment + (0.124 x monthly income) + (6.45 x length of service in months)
Cost Aspects of Consumer Finance:
Like any other mode of finance, consumer finance also has certain costs. Normally financiers
charge interest for the capital, service charges for the services rendered and other charges. The
financiers used to charge the customer for all the services rendered to the customer. Generally
service charges will be collected as percentage of borrowings. Interest will be disclosed either on
flat rate of interest or yearly declining balances rate, net interest rate, etc.
The effective rates of interest for consumer finance are higher than other modes of finance. This is
because consumer finance is provided based on the integrity and credibility of the customer alone.
As the banker is undertaking higher risk, a higher rate of interest is charged as a premium for the
extra risk undertaken.
Interest comprises of risk free rate of interest for the capital and a premium for default in future
payment of premium. In India there is no ceiling as to the maximum rate of interest. Financiers
charge different rate of interest as per the policies and practices of their organization. On an
average, in India, the effective rate of interest on consumer finance ranges from 20 percent to 30
percent.
Other charges include documentation fees, processing fees, management fees, examination fees,
service charges, brokerage, collection costs etc. Moreover financiers used to take deposits/
guarantee as a precaution against possible default in payment of installments. Interest, service
charges, other charges, security deposit, guarantee etc. makes consumer finance costlier. However
because of the practical convenience and feasibility of schemes attracts more and more people to
consumer credit schemes.
Consumer Credit Portfolio Management:
Consumer credit portfolio refers to the combination of various consumer credits granted by an
organization. Consumer credits may be classified according to the tenure of repayment, amount of
credit, type of customers, mode of credit, type of security offered, etc. The degree of risk and return
varies in each case. The total of all consumer credit granted by an organization to various parties
under various forms upon different terms and securities is called its consumer credit portfolio.
Like any other business, consumer financing is also a business set up to make profit. Thus profit
maximization is its objective. The ultimate aim of portfolio management is to maximize profit. The
portfolio must be perfect, balanced and well managed. The evaluation of the existing consumer
credit portfolio, for its credibility, forms of credit, the amount of credit, the risk involved, and to
make suggestions wherever necessary, so as to achieve the organizational objective can be termed
as consumer credit portfolio management.
It shall not give much stress to any particular type of credit alone. It shall keep a balanced portfolio
comprising of all types of credits. The tenure of the credits is to be closely watched. A prudential
trade off shall be kept between secured and unsecured credits. Both have their own merits and
demerits.
Secured credits are sure to get back but have lower rate return. Unsecured ones are risky but have
higher return. The total credit to a single customer is to be checked frequently, as undue credit to
one may land the customer in difficulty and thereby the financier as well. For assessing the
credibility of the advances scientific tools may be used to analyze the credit worthiness of the
customer.

Consumer Purchasing Strategies

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Marketing is concerned with the introduction and promotion of products and services to the
potential customers. It plays a prominent part in an organization as everything from sales to
success depends on it. Through marketing, a business can get a chance to be discovered and
recognized by a large group of people and influence them to opt for its products and services.
However, what actually drives consumers to choose a particular product over others is a question
which is often overlooked by marketers.
1. Engage with your Audience Online and Offline
In this digital world, everyone is hyper-connected and consume content on multiple platforms and
devices. Companies can start a conversation on various social media platforms and engage their
audience in it. However, consumers have now become more skeptical of businesses and more
cautious with their spending on a particular product or service. So, it is important to engage
customers in conversations where they perceive your message and intentions as sincere. Also,
businesses should inspire them to advocate their product and service on their behalf by engaging
them offline.
2. Understand the Needs of your Potential Customers
To influence consumers’ decisions about purchasing a product or service, companies need to
understand their requirements and identify how to deliver a marketing message that appeals to
them. Many businesses believe that they can use social media to influence or change the way
customers think. But they can only win over people by creating mobile-friendly content that fits
their needs and preferences. If they are not sure what consumers are looking for, then they should
directly ask them through various social media platforms or emails.
3. Apply the Golden Rule
Being attractive has its perks, and it can increase a business’ likability and its trustworthiness.
Striking website design has the power to influence customers and compel them to buy products
and services of a particular company. Out of some of the most fantastic design techniques that are
used to make a website look captivating, one is the Golden Ration. It is a design concept that is
concerned with proportions in areas, such as art, design, and architecture. It can be used to work
out the most visually appealing font size, proportions, margins, column widths, and line heights.
4. Use the Foot-in-the-Door Technique
This concept is used to increase compliance rates and influence consumers to make a purchase
decision. In simple words, it is a tactic that aims at getting a person to a bigger request by making
them agree to a modest request first. Businesses use these techniques to influence consumers
behavior by asking them for something small in the first place. If they comply with their first small
request, then they will be more likely to feel obliged to act consistently to the next and more
significant request. So, by using this compliance tactic, companies can make the customers opt for
their products and services.
5. Be Available 24/7 for your Customers
If companies want to influence consumer behavior, then they need to focus on making emotional
connections with them through positive customer experiences. And that’s possible when they are
available for their consumers twenty-four hours a day, and seven days a week to resolve their
queries. A study found that 42% of customers who complain on social media platforms expect a
response within 60 minutes. Further, 57% expect the response time at night and on weekends.
So, these were a few strategies that businesses can use to influence consumer behavior and make
them choose their product or service over others. Since we are living in the digital world, more
focus should be made on online marketing strategies than offline because people are good at tuning
out brand-related content on social media platforms, like Facebook, Twitter, and LinkedIn.

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Marketing strategies and tactics are normally based on explicit and implicit beliefs about
consumer behavior. Decisions based on explicit assumptions and sound theory and research are
more likely to be successful than the decisions based solely on implicit intuition.
Knowledge of consumer behavior can be an important competitive advantage while formulating
marketing strategies. It can greatly reduce the odds of bad decisions and market failures.
Uses of principles of consumer behavior in the areas of marketing
The principles of consumer behavior are useful in many areas of marketing, some of which are
listed below:
Analyzing Market Opportunity
Consumer behavior helps in identifying the unfulfilled needs and wants of consumers. This
requires scanning the trends and conditions operating in the market area, customer’s lifestyles,
income levels and growing influences.
Selecting Target Market
The scanning and evaluating of market opportunities helps in identifying different consumer
segments with different and exceptional wants and needs. Identifying these groups, learning how
to make buying decisions enables the marketer to design products or services as per the
requirements.
Example: Consumer studies show that many existing and potential shampoo users did not want to
buy shampoo packs priced at Rs 60 or more. They would rather prefer a low price packet/sachet
containing sufficient quantity for one or two washes. This resulted in companies introducing
shampoo sachets at a minimal price which has provided unbelievable returns and the trick paid off
wonderfully well.
Marketing-Mix Decisions
Once the unfulfilled needs and wants are identified, the marketer has to determine the precise mix
of four P’s, i.e., Product, Price, Place, and Promotion.
Product
A marketer needs to design products or services that would satisfy the unsatisfied needs or wants
of consumers. Decisions taken for the product are related to size, shape, and features. The marketer
also has to decide about packaging, important aspects of service, warranties, conditions, and
accessories.
Example: Nestle first introduced Maggi noodles in masala and capsicum flavors. Subsequently,
keeping consumer preferences in other regions in mind, the company introduced Garlic, Sambar,
Atta Maggi, Soupy noodles, and other flavours.
Price
The second important component of marketing mix is price. Marketers must decide what price to
be charged for a product or service, to stay competitive in a tough market. These decisions
influence the flow of returns to the company.
Place
The next decision is related to the distribution channel, i.e., where and how to offer the products
and services at the final stage. The following decisions are taken regarding the distribution mix −
 Are the products to be sold through all the retail outlets or only through the selected ones?
 Should the marketer use only the existing outlets that sell the competing brands? Or,
should they indulge in new elite outlets selling only the marketer’s brands?

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  Is the location of the retail outlets important from the customers’ point of view?
 Should the company think of direct marketing and selling?
Promotion
Promotion deals with building a relationship with the consumers through the channels of
marketing communication. Some of the popular promotion techniques include advertising,
personal selling, sales promotion, publicity, and direct marketing and selling.
The marketer has to decide which method would be most suitable to effectively reach the
consumers. Should it be advertising alone or should it be combined with sales promotion
techniques? The company has to know its target consumers, their location, their taste and
preferences, which media do they have access to, lifestyles, etc.

Consumer Legal Protection

The Consumer Protection Act, 1986 (CPA) is an Act that provides for effective protection of
interests of consumers and as such makes provision for the establishment of consumer councils
and other authorities that help in settlement of consumer disputes and matters connected
therewith.
The CPA seeks to protect the interests of individual consumers by prescribing specific remedies to
make good the loss or damage caused to consumers as a result of unfair trade practices.

Scope
Broadly speaking, the CPA seeks to protect the following basic rights of consumers:
 Right against the marketing of goods and services which are hazardous to life and property;
 Right to be informed about the quality, quantity, potency, purity, standard and price of
goods or services;
 Right to choice, wherever possible through access, to a variety of goods and services at
competitive prices;
 Right to be heard and to be assured that consumers’ interests will receive due
consideration at appropriate forums;
 Right to seek redressal against unfair trade practices or restrictive trade practices or
unscrupulous exploitation of consumers;
 Right to consumer education; and
 Right to clean and healthy environment.
Consumer:
Section 2(d) of the CPA defines “consumer” as a person who:
“(a) Buys any goods for a consideration which has been paid or promised or partly paid and partly
promised, or under any system of deferred payment and includes any user of such goods other
than the person who buys such goods for a consideration paid or promised or partly paid or partly
promised, or under any system of deferred payment, when such use is made with the approval of
such person, but does not include a person who obtains such goods for resale or for any
commercial purpose;
or
(b) Hires or avails of any services for consideration which has been paid or promised or partly paid
and partly promised, or under any system of deferred payment and includes any beneficiary of
such services other than the person who hires or avails of the services for a consideration paid or
promised, or partly paid and partly promised, or under any system of deferred payment, when

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such services are availed of with the approval of the first mentioned person but does not include a
person who avails of such services for any commercial purpose. It may, however, be noted that
“commercial purpose” does not include use by a person of goods bought and services exclusively
for the purposes of earning his livelihood by means of self-employment.”
From the above definition, it can be observed that:
 The goods or services must have been purchased or hired or availed of for a consideration which has
been paid in full or in part or under a system of deferred payment, i.e., in respect of hire-purchase
transactions;
 The goods purchased should not be meant for resale or for a commercial purpose. Goods purchased
by a dealer in the ordinary course of his business and those which are in the course of his business to
supply would be deemed to be for re-sale;
 In addition to the purchaser(s) of goods, or hirer(s) or user(s) of services, any beneficiary of such
services, a user of goods/services with the approval of the purchaser or hirer or user would also be
deemed to be a “consumer” under the Act.
Consumer Protection Council
The interests of consumers are sought to be protected and promoted under the Act inter alia by
establishment of Consumer Protection Councils at the District, State and National levels.
Redressal Machinery under the Act
The Act provides for a three-tier quasi-judicial redressal mechanism at the District, State and
National levels for redressal of consumer disputes and grievances, namely:
National Consumer Disputes Redressal Commission (commonly known as National Commission)
It has jurisdiction to entertain complaints where the value of goods/services complained against
and the compensation, if any claimed, exceeds Rs10,000,000 (Indian Rupees 10 Million).
State Consumer Disputes Redressal Commission (commonly known as State Commission)
It has jurisdiction to entertain complaints where the value of goods/services complained against
and the compensation, if any claimed, exceeds Rs 2,000,000 (Indian Rupees 2 Million) but less than
Rs 10,000,000 (Indian Rupees 10 Million).
District Consumer Disputes Redressal Forum (commonly known as District Forum)
It has jurisdiction to entertain complaints where the value of goods/services complained against
and the compensation, if any claimed, is less than Rs 2,000,000 (Indian Rupees Two Million).
Till the 1970s there was unchecked consumer mistreatment happening in India. Black marketing,
monopolistic practices, adulteration of food were all commonplace. However, the consumer
movement brought about a change in the scenario. The government too provided consumers legal
protection through various laws and setting up of consumer court.
To protect consumer on legal terms, Court of Law i.e. Consumer Court has laid down certain acts to
protect the consumers on legal grounds. This Legal Protection keeps intact the right of the
consumer which when acted will provide them justice against any dissatisfaction created by the
sellers/business/manufacturer.
This legal Indian framework by Consumer Court also consists of large number of regulations that
are maintained strictly for the protection of consumers. Some of these regulations are followed as
stated below:

Laws to Protect Consumers

The Consumer Protection Act, 1986 (COPRA)
 In this, it protects the right of the consumer and makes user aware of their rights.

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  They have developed or formed three-tier system wherein there is District Forums, State
Commission, and National Commission thus to protect the right of the consumer.
Indian Contract Act, 1972
 They lay down the conditions in which the parties promise each other of the services to be
provided and agree on certain terms. The contract is made that is binding on each other.
 They protect the interest that the contract is not breached and in case if breached the
remuneration to be provided.
The Sales of Good Act, 1930
 To ensure the consumer rights in case the goods offered to the consumer is not up to the
standard which was promised and the false claim was made.
The Essential Commodities Act, 1955
 To keep track of the commodities which are essential and monitor their production and
supply. Also keep a track of any hoarders, black marketers,
The Agricultural Produce (Grading and Marking ) Act, 1937
 To implement the grading standard and hence monitoring the same whether standard
checks are been done to issue the grading. In this, AGMARK is the standard introduced for
agricultural goods.
The Prevention of Food Adulteration Act, 1954
 This act makes sure the purity of the food items and the health of the consumers which
could be affected by the adulterated items.
The Standards of Weights and Measures Act, 1976
 The Standards of Weights and Measures Act protects the right against the goods which is
underweight or under measured.
The Trade Marks Act, 1999
 This act protects users from false marks which could mislead the consumer and hence
cheat them in the ground of quality of the product.
The Competition Act, 2002
 The Competition Act replaced from the Monopolies and the Restrictive Trade Practices Act
following to take action against the firms which use such practice which in turn affect the
competition in the market.
The Bureau of Indian Standards Act, 1986
 The Bureau of Indian Standards Act ensures about the quality of the product to be used by
the consumer and have introduced BIS Mark to certify the quality of the product and have
set up grievance cell which can take complaints regarding the quality of the product.

Consumer Court
Consumer Courts are special courts set up by the Indian Judiciary to settle consumer grievances
and entertain consumer problems. A special consumer court is set up to ensure that justice is done
quickly and efficiently, without undue hardship to the complainant. Also to handle the sheer
number of cases, the consumer courts help lessen the burden on the judiciary system.
Another major advantage that the consumer court offers is that the whole process is fairly simple.
One does not even need to hire a lawyer or any legal professional for the hearing if he thinks it is
not required. Self-representation is possible in a consumer court. Right from submitting a
complaint to the process of hearing all procedures are kept simple and uncomplicated.

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Applicability of the Law of Limitation
The District Forum, the State Commission and/or the National Commission shall not admit a
complaint unless it is filed within two years from the date on which the cause of action has arisen.
However, where the complainant satisfies the Forum/Commission, as the case may be, that he has
sufficient cause for not filing the complaint within two years, such a complaint may be entertained
by such Forum/ Commission after recording the reasons for condoning the delay.
Remedies under the CPA
Depending on the facts and circumstances, the redressal forums may issue orders for one or more
of the following relief(s):
 Removal of defects from the goods;
 Replacement of the goods;
 Refund of the price paid;
 Award of compensation for the loss or injury suffered;
 Withdrawal of the hazardous goods from being offered for sale; or
 Award for adequate costs to parties.
 Removal of defects or deficiencies in the services

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 UNIT - 3
Investing Your Financial Resources: Investing Fundamentals
The word “investment” can be defined in many ways according to different theories and
principles. It is a term that can be used in a number of contexts. However, the different meanings of
“investment” are more alike than dissimilar. Generally, investment is the application of money for
earning more money. Investment also means savings or savings made through delayed
consumption. According to economics, investment is the utilization of resources in order to
increase income or production output in the future.
An amount deposited into a bank or machinery that is purchased in anticipation of earning income
in the long run is both examples of investments. Although there is a general broad definition to the
term investment, it carries slightly different meanings to different industrial sectors.
According to economists, investment refers to any physical or tangible asset, for example, a
building or machinery and equipment. On the other hand, finance professionals define an
investment as money utilized for buying financial assets, for example stocks, bonds, bullion, real
properties, and precious items.
According to finance, the practice of investment refers to the buying of a financial product or any
valued item with anticipation that positive returns will be received in the future. The most
important feature of financial investments is that they carry high market liquidity. The method
used for evaluating the value of a financial investment is known as valuation. According to business
theories, investment is that activity in which a manufacturer buys a physical asset, for example,
stock or production equipment, in expectation that this will help the business to prosper in the
long run.
Types of Investment in Security Analysis and Portfolio Management
Types of investments
Investments may be classified as financial investments or economic investments.In Finance
investment is putting money into something with the expectation of gain that upon thorough
analysis has a high degree of security for the principal amount, as well as security of return, within
an expected period of time. In contrast putting money into something with an expectation of gain
without thorough analysis, without security of principal, and without security of return is
speculation or gambling. Investment is related to saving or deferring consumption. Investment is
involved in many areas of the economy, such as business management and finance whether for
households, firms, or governments.
Economic investments are undertaken with an expectation of increasing the current economy’s
capital stock that consists of goods and services. Capital stock is used in the production of other
goods and services desired by the society. Investment in this sense implies the expectation of
formation of new and productive capital in the form of new constructions, plant and machinery,
inventories, and so on. Such investments generate physical assets and also industrial activity.
These activities are undertaken by corporate entities that participate in the capital market.
Financial investments and economic investments are, however, related and dependent. The money
invested in financial investments is ultimately converted into physical assets. Thus, all investments
result in the acquisition of some asset, either financial or physical. In this sense, markets are also
closely related to each other. Hence, the perfect financial market should reflect the progress
pattern of the real market since, in reality, financial markets exist only as a support to the real
market.

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Nature of investment
The features of economic and financial investments can be summarized as return, risk, safety, and
liquidity.
1. Return
 All investments are characterized by the expectation of a return. In fact, investments are
made with the primary objective of deriving a return.
 The return may be received in the form of yield plus capital appreciation.
 The difference between the sale price and the purchase price is capital appreciation.
 The dividend or interest received from the investment is theyield.
 The return from an investment depends upon the nature of the investment, the maturity
period and a host of other factors.
Return = Capital Gain + Yield (interest, dividend etc.)
2. Risk
Risk refers to the loss of principal amount of an investment. It is one of the major characteristics of
an investment.
The risk depends on the following factors:
 The investment maturity period is longer; in this case, investor will take larger risk.
 Government or Semi Government bodies are issuing securities which have less risk.
 In the case of the debt instrument or fixed deposit, the risk of above investment is less due
to their secured and fixed interest payable on them. For instance, debentures.
 In the case of ownership instrument like equity or preference shares, the risk is more due
to their unsecured nature and variability of their return and ownership character.
 The risk of degree of variability of returns is more in the case of ownership capital compare
to debt capital.
 The tax provisions would influence the return of risk.
3. Safety:
Safety refers to the protection of investor principal amount and expected rate of return.
Safety is also one of the essential and crucial elements of investment. Investor prefers safety about
his capital. Capital is the certainty of return without loss of money or it will take time to retain it. If
investor prefers less risk securities, he chooses Government bonds. In the case, investor prefers
high rate of return investor will choose private Securities and Safety of these securities is low.
4. Liquidity:
Liquidity refers to an investment ready to convert into cash position. In other words, it is available
immediately in cash form. Liquidity means that investment is easily realizable, saleable or
marketable. When the liquidity is high, then the return may be low. For example, UTI units. An
investor generally prefers liquidity for his investments, safety of funds through a minimum risk
and maximization of return from an investment.

Objectives of investment
Four main investment objectives cover how you accomplish most financial goals. These
investment objectives are important because certain products and strategies work for one
objective, but may produce poor results for another objective. It is quite likely you will use several

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of these investment objectives simultaneously to accomplish different objectives without any
conflict. Let’s examine these objectives.
Primary Objectives
Capital Appreciation
Capital appreciation is concerned with long-term growth. This strategy is most familiar in
retirement plans where investments work for many years inside a qualified plan. However,
investing for capital appreciation is not limited to qualified retirement accounts. If this is your
objective, you are planning to hold the stocks for many years. You are content to let them grow
within your portfolio, reinvesting dividends to purchase more shares. A typical strategy employs
making regular purchases. You are not very concerned with day-to-day fluctuations, but keep a
close eye on the fundamentals of the company for changes that could affect long-term growth.
Current Income
If your objective is current income, you are most likely interested in stocks that pay a consistent
and high dividend. You may also include some top-quality real estate investment trusts (REITs)
and highly-rated bonds. All of these products produce current income on a regular basis. Many
people who pursue a strategy of current income are retired and use the income for living expenses.
Other people take advantage of a lump sum of capital to create an income stream that never
touches the principal, yet provides cash for certain current needs (college, for example).
Capital Preservation
Capital preservation is a strategy you often associate with elderly people who want to make sure
they don’t outlive their money. Retired on nearly retired people often use this strategy to hold on
the detention has. For this investor, safety is extremely important – even to the extent of giving up
return for security. The logic for this safety is clear. If they lose their money through foolish
investment and are retired, it is unlike they will get a chance to replace it. Investors who use capital
preservation tend to invest in bank CDs, U.S. Treasury issues and savings accounts.
Speculation
The speculator is not a true investor, but a trader who enjoys jumping into and out of stocks as if
they were bad shoes. Speculators or traders are interested in quick profits and used advanced
trading techniques like shorting stocks, trading on the margin, options and other special
equipment. They have no love for the companies they trade and, in fact may not know much about
them at all other than the stock is volatile and ripe for a quick profit. Speculators keep their eyes
open for a quick profit situation and hope to trade in and out without much thought about the
underlying companies. Many people try speculating in the stock market with the misguided goal of
getting rich. It doesn’t work that way. If you want to try your hand, make sure you are using money
you can afford to lose. It’s easy to get addicted, so make sure you understand the real possibilities
of losing your investment.
Secondary Objectives
The secondary objectives are tax minimization and Marketability or liquidity.
Tax Minimization:
An investor may pursue certain investments in order to adopt tax minimization as part of his or her
investment strategy. A highly-paid executive, for example, may want to seek investments with
favorable tax treatment in order to lessen his or her overall income tax burden. Making
contributions to an IRA or other tax-sheltered retirement plan can be an effective tax minimization
strategy.
Marketability/Liquidity:

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Many of the investments we have discussed are reasonably illiquid, which means they cannot be
immediately sold and easily converted into cash. Achieving a degree of liquidity, however, requires
the sacrifice of a certain level of income or potential for capital gains.
Common stock is often considered the most liquid of investments, since it can usually be sold
within a day or two of the decision to sell. Bonds can also be fairly marketable, but some bonds are
highly illiquid, or non-tradable, possessing a fixed term. Similarly, money market instruments may
only be redeemable at the precise date at which the fixed term ends. If an investor seeks liquidity,
money market assets and non-tradable bonds aren’t likely to be held in his or her portfolio.

Investing in Stocks
Despite its popularity and presence in the news, the stock market is just one of many potential
places to invest your money. Investing in stock is often risky, which draws attention to the huge
gains and losses of some investors. If you manage the risks, you can take advantage of the stock
market to secure your financial position and earn money.
Investment Gains
One of the primary benefits of investing in the stock market is the chance to grow your money.
Over time, the stock market tends to rise in value, though the prices of individual stocks rise and
fall daily. Investments in stable companies that are able to grow tend to make profits for investors.
Likewise, investing in many different stocks will help build your wealth by leveraging growth in
different sectors of the economy, resulting in a profit even if some of your individual stocks lose
value.
Dividend Income
Some stocks provide income in the form of a dividend. While not all stocks offer dividends, those
that do deliver annual payments to investors. These payments arrive even if the stock has lost
value and represent income on top of any profits that come from eventually selling the stock.
Dividend income can help fund a retirement or pay for even more investing as you grow your
investment portfolio over time.
Diversification
For investors who put money into different types of investment products, a stock market
investment has the benefit of providing diversification. Stock market investments change value
independently of other types of investments, such as bonds and real estate. Holding stock can help
you weather losses to other investment products. Stock also adds risk to a portfolio, as well as the
potential for large, rapid gains, helping investors avoid risk-averse or overly conservative
investment strategies.
Ownership
Buying shares of stock means taking on an ownership stake in the company you purchase stock in.
This means that investing in the stock market also brings benefits that are part of being one of a
business’s owners. Shareholders vote on corporate board members and certain business decisions.
They also receive annual reports to learn more about the company. Owning stock in the company
you work for can be a way to express loyalty and tie your personal finances to the success of the
business as a whole.
Higher Liquidity:
In the Indian stock market, two exchanges, the Bombay Stock Exchange (BSE) and National Stock
Exchange (NSE) play important roles. Most companies trade their shares on either or both of these
exchanges. This provides higher liquidity to investors because average daily volumes are high.

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Therefore, if an investor wants to buy or sell any product on the stock exchanges, this liquidity
makes it easy.
Versatility:
The stock market offers different financial instruments, such as shares, bonds, mutual funds, and
derivatives. This provides investors a wide choice of products in which to invest their monies. In
addition to providing investment choices, this flexibility is beneficial in mitigating the risks
inherent to stock investing by enabling diversification of investment portfolios.
Higher Returns in Shorter Periods of Time:
Compared to other investment products like bonds and fixed deposits, stock investing provide
investors an excellent possibility of making greater returns in comparatively shorter time periods.
Adhering to the stock market basics, such as planning the trade, using stop-loss and take-profit
triggers, doing the research and due diligence, and being patient can significantly mitigate the risks
inherent to stock investing and maximize the returns on share market investments.
Acquire Ownership and Right to Vote:
Even if an investor acquires a single share in a company, he acquires a portion of ownership in the
company. This ownership, in turn, provides investors the right to vote and offer his contribution in
the strategic movement of the business. Although this may seem like an exaggeration, it is true and
there are several instances when shareholders have prevented company management from making
unreasonable decisions that are detrimental to their interests.
Regulatory Environment and Framework:
The Indian stock market is regulated by the Stock Exchange Board of India (SEBI). The SEBI has the
responsibility of regulating the stock exchanges, its development, and protecting the rights of the
investors. This means when investors invest in financial products on the stock market, their
interests are well-protected by a regulatory framework. This significantly helps in reducing risks
due to fraudulent activities of companies.
Convenience:
Technical development has influenced every aspect of modern living. The stock exchanges are also
using various technical advancements to provide greater convenience to the investors. The trades
are all executed on an electronic platform to ensure the best investment opportunities to investors
in an open environment. In addition, broking service providers offer online share trading facilities
that make investing convenient, because investors can place their orders through a computer from
the comfort of their homes or offices. The demat account makes it easier for investors to hold all
the products within their investment portfolio electronically in a single location, which makes it
easier to track and monitor the performance.
Although stock investing has several benefits, investors must also be cautious while making their
decisions. Understanding the stock market basics and doing their research before investing is
advisable to mitigate risks and maximize returns.

Investing in Bonds
There are two reasons for it:
(a) Government bonds are issued by the central government in India,
(b) These bonds are regulated and managed by Reserve Bank of India (RBI).
What makes government bonds risk free is the security of the principal amount, and the certainty
of the promised return. A person who wants to invest for long term, but wants to keep it risk-free,
Government bonds are the best option.

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Government Bonds
What are bonds and T-bills? These are Securities (G-secs) issued by the government of India to
borrow money from investors. Who are investors?
 Big Investors: Banks, insurance companies, mutual funds, trusts, corporates etc. These are
called big because their size of investment (in G-Secs) are large compared to small
investors. Know more about mutual funds.
 Small Investors: HNI’s, NRIs, HUF members, individuals etc. In this group of people,
‘individual investors’ are the ones where we common men are placed. Read more about
Peter Lynch a big HNI investor.
Government borrows money from these investors by offering them G-secs through “auctions“.
How the auction is done? Through “competitive bidding” process. We will read more about it below.
In good old days, G-sec market was dominated by big players like banks, insurance companies,
mutual funds etc. Small investors stood away from investing directly in bonds. Why? 
 First because of the difficult process of investing in bonds. A common man just did not
knew how to buy government bonds. The ease with which they can buy stocks, mutual
funds etc, Government bonds purchase was not as simple. Read more about how to buy
stock online.
 Secondly, because the big players used to deal in much larger volumes, individuals
just could not compete with them in the “auction” process. Know if small investors shall
invest in debt funds.
Government Bonds – Process of Purchase
Before Nov’2017, Government Securities (G-Secs) like bonds and T-bills were virtually non-
accessible for common men (small investors). But then RBI started the “Non-competitive Bidding
Facility“. This made G-secs more accessible for common men.
Lets understand more about competitive and non-competitive bidding process:
 Competitive bidding: Example: Government issues a bond of Face Value of Rs.1,000,
offering an interest @8.0% p.a. In the competitive bidding process (auction), “investors”
will quote a price higher than the face value (Rs.1,000). Suppose based on all bids, RBI
accepts a cut-off price as Rs.1,060. In this case everyone who has quoted Rs.1,060 or more
will get their quoted lot of the bond. [Note: In this case, their yield will be lower than 8.0%.
How much lower? 7.54% (=8.0% / 1,060 * 1000)].
 Non-competitive bidding: RBI’s “non-competitive bidding facility” for retail investors like
me and you. Small investors just need to access the mobile and web app of NSE.
mall investors like me and you can buy government bonds in India using a mobile app or a web
based app of National Stock Exchange (NSE). This app is called “NSE goBID“. Either of these two
apps can be used to buy the following:
 Long-dated government bonds: holding time: 5 to 40 year.
 Treasury bills (T-bills): holding time less than 1 year.
Before one can go ahead and buy the government bonds using NSE goBID, the “process of
registration” must be completed. But do not worry, everything is online. 
About NSE goBID APP
To get a better perspective of how/why a common man can invest in bonds, let’s understand why
rich and wealthy like bonds.

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Why wealthy prefer bonds?
The way high net worth investors think investment is slightly different than majority. They invest
money in a backdrop of a condition where they have excess of it (money). How does it make a
difference?
As they have money in excess, they can afford to buy bonds and not need it easily for next 10-15
years. This money can stay invested for prolonged period of time, and yield low returns (like 8%
p.a.). Wealthy people do not mind it. They invest money mostly for wealth protection.
In the process of wealth protection, if their investment can yield even 8% p.a. odd returns, it is like
icing on the cake. Moreover, the returns of the government bonds are almost guaranteed. How?
Because they are backed by the Indian government. 
Whereas when we (common men) invest money for time horizons like 10-15 years, we think
about growth. For such prolonged horizons we will instead invest in equity. Why? Because our
objective is wealth creation. Read more about where to invest money for high returns.
So what does this tell us about bonds? It is only for rich and wealthy, right? But there are
conditions where bonds may become good investment option for common men as well. Let’s see
how…
When bonds are useful for common men…
Generally speaking, when common men invest money, they do it for wealth creation. Hence, they
often invest with a long term perspective (5+ years). Equity based investment options can give
much higher returns than bonds.
In India, a government bond will yield returns between 7-8% per annum even in long term. But a
good equity based plan can easily give 14% p.a. in a time horizon of 5+ years. Read more about
types of mutual funds and their potential returns.
Types of Government Bonds in India
The multiple variants of Government bonds are discussed below:
Fixed-rate bonds
Government bonds of this nature come with a fixed rate of interest which remains constant
throughout the tenure of investment irrespective of fluctuating market rates.
The coupon on a Government Bond is mentioned in nomenclature. For instance, 7% GOI 2021
means the following

Rate of interest on face value 7%

Issuer Government of India
Maturity year 2021
Floating Rate Bonds (FRBs)
As the name suggests, FRBs are subject to periodic changes in rate of returns. The change in rates is
undertaken at intervals which are declared beforehand during the issuance of such bonds. For
instance, an FRB could have a pre-announced interval of 6 months; which means interest rates on
it would be re-set every six months throughout the tenure.
There is another variant to FRBs, wherein the rate of interest rate is bifurcated into two
components: a base rate and a fixed spread. This spread is decided through auction and remains
constant throughout the maturity tenure.
Sovereign Gold Bonds (SGBs)

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The Central Government issues sovereign Gold Bonds, wherein entities can invest in gold for an
extended period through such bonds, without the burden of investing in physical gold. The interest
earned on such bonds is exempted from tax.
Prices of such bonds are linked with gold’s prices. The nominal value of SGBs is reached by
calculating the simple average of closing prices of 99.99% purity gold, three days preceding such
bonds’ issuance. SGBs are also denominated in terms of one gram of gold.
As per RBI regulations, there are individual ceilings concerning SGB possession for different
entities. Individuals and Hindu Undivided Families can only hold up to 4 kg of Sovereign Gold
Bonds in a financial year. Trusts and other relevant entities can hold up to 20 kg if SGBs during a
similar time frame. Interest at 2.50% is disbursed periodically on such SGBs and has a fixed
maturity period of 8 years unless stated otherwise. Also, no tax is levied on interest earnings
through such SGBs.
Investors seeking liquidity from such bonds shall need to wait for the first five years to redeem it.
However, redemption shall only take effect on the date of subsequent interest disbursal.
Assuming that Mr A invested in an SGB on 1st April 2014, and interest disbursals are set on 1st
May 2014 and every six months from thereon. In case he decides to withdraw it on 1st June 2019,
he shall need to wait till 1st November 2019(interest disbursal date) to receive the redemption
amount.
Inflation-Indexed Bonds
It is a unique financial instrument, wherein the principal, as well as the interest earned on such
bond, is accorded with inflation. Mainly issued for retail investors, these bonds are indexed as per
the Consumer Price Index (CPI) or Wholesale Price Index (WPI). Such IIBs ensure real returns
accrued with such investments remain constant, thereby allowing investors to safeguard their
portfolio against inflation rates.
Another variant of such inflation-adjusted securities is Capital Indexed Bond. However, unlike IIBs,
only the capital or principal proportion of balance is accorded with an inflation index.
7.75% GOI Savings Bond
This G-Sec was introduced as a replacement to the 8% Savings Bond in 2018. As noted from its
nomenclature, the interest rate of such bonds is set at 7.75%. As per RBI regulations, these bonds
can only be held by:
 An individual or individuals who are/are not NRI(s) in any capacity
 A minor with a legal guardian representative
 A Hindu Undivided Family
Interest earnings from such bonds are taxable under the Income Tax Act 1961 as per the investors’
applicable income tax slab. The minimum amount at which these bonds are issued is Rs. 1000 and
in multiples of Rs. 1000 thereof.
Bonds with Call or Put Option
The distinguishing feature of this type of bonds is the issuer enjoys the right to buy-back such
bonds (call option) or the investor can exercise its right to sell (put option) them to such issuer.
This transaction shall only take place on a date of interest disbursal.
Participating entities, i.e. the government and investor can only exercise their rights after the lapse
of 5 years from its issuance date. This type of bonds might come with either:
 Call option only
 Put option only

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  Both
In any case, the government can buy back its bonds at face value. Similarly, investors can sell such
bonds to the issuer at face value. This ensures the preservation of the corpus invested in case of
any downturn of the stock market.
Zero-Coupon Bonds
As the name suggests, Zero-Coupon Bonds do not earn any interest. Earnings from Zero-Coupon
Bonds arise from the difference in issuance price (at a discount) and redemption value (at par).
This type of bonds are not issued through auction but rather created from existing securities.
Advantages of Investing in Government Bonds
Sovereign Guarantee 
Government Bonds enjoy a premium status with respect to the stability of funds and promise of
assured returns. As G-Secs are a form of a formal declaration of Government’s debt obligation, it
implies the issuing governmental body’s liability to repay as per the stipulated terms.
Inflation-adjusted 
Balances held in Inflation-Indexed Bonds are adjusted against increasing average price level. Other
than that, the principal amount invested in Capital Indexed Bonds is also adjusted against inflation.
This feature provides an edge to investors as they are less susceptible to be financially undermined
as investing in such funds increase the real value of the deposited funds.
Regular source of income
As per RBI regulations, interest earnings accrued on Government Bonds are supposed to be
disbursed every six months to such debt holders. It provides investors with an opportunity to earn
regular income by investing their idle funds.
Disadvantages of Investing in Government Bonds
Low Income
Other than 7.75% GOI Savings Bond, interest earnings on other types of bonds are relatively lower.
Loss of relevancy
As Government Bonds are long-term investment options with maturity tenure ranging from 5 – 40
years, it can lose relevancy over time. It means such bonds value loses relevance in the face of
inflation, barring IIBs and Capital Indexed Bonds.

Investing in Mutual Funds

Mutual funds are investment vehicles that pool money from many different investors to increase
their buying power and diversify their holdings. This allows investors to add a substantial number
of securities to their portfolio for a much lower price than purchasing each security individually.
Benefits of Mutual Funds
Risk reduction
As mutual funds are managed professionally it reduces the risk factor. Also, they are invested in a
huge number of companies. Thus, the risk factor is reduced more.
Diversification
There are a large number of investors that has savings with them. Thus, these small savings are
brought together and a mutual fund is created. So, this can be used to buy the share of many
different companies. Also, because of this diversification, the investment ensures capital
appreciation and regular return.

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Tax advantage
There are many schemes in a mutual fund that provide a tax advantage under the new income tax
act. So, the liability of paying the tax of an investor is also reduced. This can be possible only when
he/she invests in mutual funds.
Investor protection
Mutual funds are monitored and regulated by the SEBI. Thus, it provides better protection to its
investors. Also, this makes sure that there is no legal obligation for the investors.
Disadvantages of Mutual Funds
Although mutual funds can be beneficial in many ways, they are not for everyone.
1. No Control over Portfolio. If you invest in a fund, you give up all control of your portfolio
to the mutual fund money managers who run it.
2. Capital Gains. Anytime you sell stock, you’re taxed on your gains. However, in a mutual
fund, you’re taxed when the fund distributes gains it made from selling individual holdings
even if you haven’t sold your shares. If the fund has high turnover, or sells holdings often,
capital gains distributions could be an annual event.
3. Fees and Expenses. Some mutual funds may assess a sales charge on all purchases, also
known as a “load” this is what it costs to get into the fund. Plus, all mutual funds charge annual
expenses, which are conveniently expressed as an annual expense ratio this is basically the cost
of doing business. The expense ratio is expressed as a percentage, and is what you pay annually
as a portion of your account value. The average for managed funds is around 1.5%.
Alternatively, index funds charge much lower expenses (0.25% on average) because they are
not actively managed. Since the expense ratio will eat directly into gains on an annual basis,
closely compare expense ratios for different funds you’re considering.
4. Over-diversification. Although there are many benefits of diversification, there are pitfalls
of being over-diversified. Think of it like a sliding scale: The more securities you hold, the less
likely you are to feel their individual returns on your overall portfolio. What this means is that
though risk will be reduced, so too will the potential for gains. This may be an understood
trade-off with diversification, but too much diversification can negate the reason you want
market exposure in the first place.
5. Cash Drag. Mutual funds need to maintain assets in cash to satisfy investor redemptions
and to maintain liquidity for purchases. However, investors still pay to have funds sitting in
cash because annual expenses are assessed on all fund assets, regardless of whether they’re
invested or not. According to a study by William O’Reilly, CFA and Michael Preisano, CFA,
maintaining this liquidity costs investors 0.83% of their portfolio value on an annual basis.

Investing in Real Estate

There are hundreds of people around who can share their property investment ideas with
us. Almost everyone, at some stage in their life, has experienced a property dealing. 
Bottom of Form
We’ve seen our parents, elder siblings etc buy a property. It has enriched our knowledge. Even
listening about property dealing from friends also adds to our knowledge base. But nothing is more
valuable than self indulgence.
Which are those deeper insights about property investment which experienced buyers use as their
guide? How a beginner can invest in real estate in India as a pro?

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This is what we are going to discuss in this article. But before that, lets’ refresh some basics about
the property market in India.
Rich and wealthy invest in real estate directly. They own multiple residential or commercial
properties. Steady and decent capital appreciation of their real estate property is common.
But the part which makes property investment so dear is its capability of generating stable short
term income. The short term income is generated in form of “monthly rents“. 
The rate at which the rental income grows, generally beats inflation in long term. This is specially
true for Metro, Tier1, and Tier 2 Cities. As the monthly yield of property grows, this also pushes the
overall property price up. 
What is shown in the above infographic? Real estate investment generates assured returns. The
returns are in form of rent and capital appreciation.
The rental yield (fixed income) grows with time. Generally this growth keeps pace with the
inflation. Capital appreciation will happen due to demand growth. India being a growing and young
population, demand for property keeps rising.
This dual effect (of assured rent and value growth) makes the real estate sector generate
unparalleled returns, unlike any other asset.
Property investment is one of the best inflation hedge. This is the reason why big investors like
Robert Kiyosaki and Donald Trump has special liking for it.

Tread With Caution

Why? Because, except for few Indian cities, real estate market has not really matured in India? Why
I say so? Because we still see random development of properties in majority cities in India. 
A good real estate property must be developed, sold, and maintained as per a master plan
incorporating all facilities.
Unless property has a master plan, its long term value appreciation is doubtful. In most cases, value
of such properties depreciates with time.
The problem is, most of the properties are by either unplanned or are developed by below-par
developers. This makes real estate investing in India slightly risky.
for a beginner, it is essential to know what to look at in a property. Investing in real estate cannot
be done just on basis of aesthetics. Proportional weightage must be given to at least 14
parameters listed below:

Price

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  Affordability: If one’s affordability is Rs.35 Lakhs, and the property on offer is costing
Rs.40 Lakhs, it is clearly not affordable. This is one reason why affordability calculation in
step #1 is essential before making a commitment.
Vicinity
 Location: Property investment must be done in a location which is known to the investor.
Investing in an unknown city/town shall be avoided. Location of property within the city is
also important. A property which has schools, markets, hospitals nearby is preferable.
 Transportation: Approach road is important. If there is a broad and paved road
connecting the property, it’s a big thumbs up. Public transport connectivity like metro, bus
depot, auto rickshaw stand, Ola/Uber connectivity also adds to the value.
 Negatives: Special attention must be given to the drawbacks of the property. Typical ones
can be like busy roads, too close to railway station or airport, traffic noise, remote location,
old society etc. These factors cause hardships & also lowers the quality of life of the
residents.
Specification
 Type of House: If the preference is a row house, multi-storeyed apartment will not work
and vice versa. Before venturing out for property search, type of house must be finalised.
 New or Used: Second hand homes can be great value for money. They have an advantage of
ready possession and established locality. They may also have pre-built facilities like
internet, heaters, wood work, modular kitchens etc. But a new property also comes with its
own advantages.
 Number of bedroom: For a small family, even a studio apartment is enough. For others,
requirement may range from 1/2BHK to higher size flats. I personally like evaluating
property first on basis of their size (in SQFT), and then on the number of bedrooms it can
offer.
 Open Floor: There are some properties which has slots & pockets for wardrobes, cabinets,
fridge etc. Such homes offer better ‘open floor space management’ after the furnitures are
put in place. Generally speaking, a house must be able to accommodate your special
furnitures (like over , bicycle, pram etc).
 Parking: If you own a car, two wheeler etc the property must offer an adequate parking
facility.
Other Features
 Communication: If the property has facilities already laid for services like cable TV and
broadband etc, it can save few bucks. Generally speaking, look for mobile & internet
connectivity in the area. There are some areas which has inherently poor mobile network
connectivity.
 Extension: Over a period of time, owners like to extend their living space. Properties which
has provisions for extension may prove handy in times to come.
 Gardening: For some, building a hanging garden in their balcony is a big plus. If you are
looking for a row house, check if the open space provides the possibility of gardening.
Property with such provisions becomes desirable.
 Present Condition: Check the ‘built condition’ of the property. If it is a new property, no
problem. But in a second hand house, rework or repairs may be required. Being aware of
this extra cost before taking the possession is advisable.

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  Condition on Outside: Apartment may be good from inside, but the outside building is
equally good? Make sure to check the property from outside. Scan the painting, cracks,
seepage, loose wirings, encroachments, quality of parking etc.
 Security: These days the societies are plagued with random thefts and pilferages. Make
sure to check if the property has a dedicated security protection.

Other Investment Alternatives

Stock Investment
Stock investment is one of the most preferred investment options due to the high return potential.
As the stock investments carry a little higher risk and hence are also capable of generating high
returns.
You can expect an annual return of 15% – 18%, if you know the art of investing in the right stocks
at the right time. I would recommend you to start with a small investment in stock with an intent to
learn before making big investments.
Best Investment Options for a Salaried Person
1. Public Provident Fund (PPF)
Apart from your regular pension contribution, an investment in PPF account can save lots of tax as
all the deposits made are deductible under section 80C.
Further, all the accumulated principal and interest are exempted from tax at the time of
withdrawal.
2. National Pension System (NPS)
NPS scheme is portable across jobs and locations. The added benefit is the returns from equity and
debt investments.
All your contributions up to Rs. 1.5 Lac to Tier I capital are exempted under section 80C. Plus you
can claim an additional up to Rs. 50,000 of tax benefits.
So here you can save Rs. 2 Lacs of tax.
3. Equity Linked Savings Scheme (ELSS)
You get a higher return of 15% to 18% while investing in ELSS. Investment in ELSS funds have a
lesser lock-in period of 3 years and any earning over Rs. 1 Lac are taxable.
4. Tax Savings Fixed Deposit
If you want to have a safe investment option without investing in equities then pick tax saving fixed
deposit of any bank or post office.
The interest rates vary from bank to bank and are in the range of 6% to 8.5%.
5. Unit Linked Insurance Plans (ULIPs)
Investments in ULIPs gives you wealth creation option along with life cover. Premium paid are
eligible for deduction under section 80C. Plus the returns on maturity are exempt under section
10(10D).
The returns vary depending on the combination of equity, debt or hybrid funds.
Best Investment Plan with High Returns
6. Direct Equity Investment

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All the equity investments carry higher risks and hence are also capable of generating very high
returns. Opt for equity investment option if you are comfortable losing as much as 50% of the
capital.
The last 1-year return of NSE is 12.40% and in the last 2 year generated a 26.5% returns. Likewise,
shares of blue-chip companies have delivered huge returns in the near past.
7. Mutual Funds
Mutual funds are the safest and the most convenient way of investing in the markets when you do
not have the time and expertise.
The equity mutual funds have generated consistently higher returns. With funds like L&T India
Value, Mirae Asset India and ICICI Prudential Blue Chip delivering 3 years return in the range of
14% to 18%.
The investment in mutual funds can be a lump sum or monthly SIP for an amount as low as Rs. 500.
8. Commercial Real Estate
Commercial real estate provides rental income and capital appreciation. The higher appreciation is
due to demand for office space and growth of corporate environment.
But the location, building quality, market space rent and the demand-supply plays a major factor in
deciding returns.
A good investment in office and shop spaces not only fetches higher returns but also helps in the
diversification of investment assets.
9. Initial Public Offer (IPO)
The best part of investing in IPO is that the money gets blocked only for 7 to 15 days. Prudent
investment in a good company coming out with IPO can fetch returns as high as 20-25% over a
period of time.
Best Investment Plan for 1 Year
10. Fixed Deposit
FDs are the safest and secure investment options provided by banks and post offices which earn
higher interest rates than a savings account.
Any excess amount which you are not going to use for a certain period of time can be safely put
into a fixed deposit.
11. Recurring Deposit
Like fixed deposit, RD to earns a higher interest rate than a savings account.
RD let you invest any amount which can be as small as Rs. 5 per month and is the best option for
promoting the habit of savings.
12. Liquid Mutual Fund
The option carries the least amount of risk and is for persons who have idle money for short period
of time.
The mutual fund invests your money in the highly liquid short term instruments like the bank’s CD,
T-bills and commercial papers generally with a maturity period of less than 91 days.
13. Ultra Short Term Debt MF Plans
Unlike, liquid MF the money is invested in bonds and other instruments with maturity more than
91 days and less than 1 year.
Ultra ST debt MF does carry interest rate risk, are not so liquid and hence gives you higher returns.

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Best Investment Plan for 3 Years
14. Savings Account with Sweep in Facility
The sweep in option lets you enjoy flexibility in managing your savings and also enjoy higher
returns from a fixed deposit.
Here, any excess money lying in your savings account, above a particular threshold level gets
automatically converted into a fixed deposit and vice versa.
15. Short Term Debt MF
Is a good option for generating stable returns with modest risk.
The funds are locked for up to 3 years and there is a 1% penalty for premature redemption. Still
you can expect returns a bit higher than the fixed deposit in a range of 8-10%.
16. Equity Linked Savings Scheme (ELSS)
There are numerous benefits when you invest in ELSS like tax savings, higher returns (15% to
18%), option to invest monthly (SIP) and can be started with as low as investing Rs. 500.
17. Fixed Deposit
Returns on a 3-year FDs vary from bank to bank, usually in a range of 6.5% to 8%. Also there are no
associated tax benefits in this investment option.
8. Recurring Deposit (RD)
The returns generated are almost the same as a fixed deposit for a 3 year period.

The Housing Decision: Factors and Finances

Main factors that affect the housing market
 Economic growth. Demand for housing is dependent upon income. With higher economic
growth and rising incomes, people will be able to spend more on houses; this will increase
demand and push up prices. In fact, demand for housing is often noted to be income elastic
(luxury good); rising incomes leading to a bigger % of income being spent on houses. Similarly,
in a recession, falling incomes will mean people can’t afford to buy and those who lose their job
may fall behind on their mortgage payments and end up with their home repossessed.
 Unemployment. Related to economic growth is unemployment. When unemployment is
rising, fewer people will be able to afford a house. But, even the fear of unemployment may
discourage people from entering the property market.
 Interest rates. Interest rates affect the cost of monthly mortgage payments. A period of
high-interest rates will increase cost of mortgage payments and will cause lower demand for
buying a house. High-interest rates make renting relatively more attractive compared to
buying. Interest rates have a bigger effect if homeowners have large variable mortgages. For
example, in 1990-92, the sharp rise in interest rates caused a very steep fall in INDIA house
prices because many homeowners couldn’t afford the rise in interest rates.
 Consumer confidence. Confidence is important for determining whether people want to
take the risk of taking out a mortgage. In particular expectations towards the housing market is
important; if people fear house prices could fall, people will defer buying.
 Mortgage availability. In the boom years of 1996-2006, many banks were very keen to
lend mortgages. They allowed people to borrow large income multiples (e.g. five times income).
Also, banks required very low deposits (e.g. 100% mortgages). This ease of getting a mortgage
meant that demand for housing increased as more people were now able to buy. However,

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 since the credit crunch of 2007, banks and building societies struggled to raise funds for
lending on the money markets. Therefore, they have tightened their lending criteria requiring a
bigger deposit to buy a house. This has reduced the availability of mortgages and demand fell.
 Supply. A shortage of supply pushes up prices. Excess supply will cause prices to fall. For
example, in the Irish property boom of 1996-2006, an estimated 700,000 new houses were
built. When the property market collapsed, the market was left with a fundamental oversupply.
Vacancy rates reached 15%, and with supply greater than demand, prices fell.
 Affordability/house prices to earnings. The ratio of house prices to earnings influences
the demand. As house prices rise relative to income, you would expect fewer people to be able
to afford. For example, in the 2007 boom, the ratio of house prices to income rose to 5. At this
level, house prices were relatively expensive, and we saw a correction with house prices falling.
 Geographical factors. Many housing markets are highly geographical. For example,
national house prices may be falling, but some areas (e.g. London, Oxford) may still see rising
prices. Desirable areas can buck market trends as demand is high, and supply limited. For
example, houses near good schools or a good rail link may have a significant premium to other
areas.

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 UNIT - 4
Property Insurance
Property insurance provides protection against most risks to property, such as fire, theft and some
weather damage. This includes specialized forms of insurance such as fire insurance, flood
insurance, earthquake insurance, home insurance, or boiler insurance. Property is insured in two
main ways—open perils and named perils.
Open perils cover all the causes of loss not specifically excluded in the policy. Common exclusions
on open peril policies include damage resulting from earthquakes, floods, nuclear incidents, acts of
terrorism, and war. Named perils require the actual cause of loss to be listed in the policy for
insurance to be provided. The more common named perils include such damage-causing events as
fire, lightning, explosion, and theft.
Types of Coverage
There are three types of insurance coverage. Replacement cost coverage pays the cost of repairing
or replacing your property with like kind & quality regardless of depreciation or appreciation.
Premiums for this type of coverage are based on replacement cost values, and not based on actual
cash value. Actual cash value coverage provides for replacement cost minus depreciation. Extended
replacement cost will pay over the coverage limit if the costs for construction have increased. This
generally will not exceed 25% of the limit. When you obtain an insurance policy, the limit is the
maximum amount of benefit the insurance company will pay for a given situation or occurrence.
Limits also include the ages below or above what an insurance company will not issue a new policy
or continue a policy.
This amount will need to fluctuate if the cost to replace homes in your neighborhood is rising; the
amount needs to be in step with the actual reconstruction value of your home. In case of a fire,
household content replacement is tabulated as a percentage of the value of the home. In case of
high-value items, the insurance company may ask to specifically cover these items separate from
the other household contents. One last coverage option is to have alternative living arrangements
included in a policy. If property damage caused by a covered loss prevents you from living in your
home, policies can pay the expenses of alternate living arrangements (e.g., hotels and restaurant
costs) for a specified period of time to compensate for the “loss of use” of your home until you can
return. The additional living expenses limit can vary, but is typically set at up to 20% of the
dwelling coverage limit. You need to talk with your insurance company for advice about
appropriate coverage and determine what type of limit may be appropriate for you.
Fire insurance in India
Fire insurance business in India is governed by the All India Fire Tariff that lays down the terms of
coverage, the premium rates and the conditions of the fire policy. The fire insurance policy has
been renamed as “Standard Fire and Special Perils Policy”. The risks covered are as follows:
 Dwellings, offices, shops, hospitals:
 Industrial, manufacturing risks
 Utilities located outside industrial/manufacturing risks
 Machinery and accessories
 Storage risks outside the compound of industrial risks
 Tank farms/gas holders located outside the compound of industrial risks

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Importance
Protection Against Property Damage. Property insurance offers coverage against a lot of natural
disasters including, but not limited to, monsoons and floods, fires, earthquakes, theft, and other
weather-related damages. Regardless of your home’s size, location, and other security features that
you may have added, no property is invulnerable to fires, floods, or burglaries. In some cases, the
land your property is built in can also erode and send your home crashing down. Being a huge
structure, homes have a lot of vulnerabilities; cover it with an earthquake or hurricane property
insurance.
Protection Against Liability. A less known benefit of property insurance policies is its liability
coverage clause. Many other forms of insurance policies including auto insurance include this
provision. Sure, being a careful homeowner can help prevent a lot of accidents and injuries, but an
incident could include your neighbors or your neighbor’s home. Liability coverage from your
property insurance can help protect against these potentially costly incidents.
Protection Against Power Outages. Power outages were more frequent in the past, but still occur
from time to time. If you run your computer or other electronics on a power cord, these outages
can cause serious damage to your devices and shorten their lifespan significantly due to surges,
Power outage can also cause food to spoil, which is why a lot of property insurance from
homeowners include a refrigerator-restocking provision that can pay out up to $500.
Protection For Your Art And Jewelry. For homeowners who have expensive jewelry, art pieces,
or other valuable possessions in their home, ask your insurance provider about adding a floater to
your property insurance. This add-on feature will pay out for any damages to your personal items.
Keep in mind, though, that these add-ons only usually have a fixed amount that will be paid.
Protection For Commercial Ventures. If you decide to rent your property out to a third-party,
whether as a dorm room for college students, for families with kids, or for singles with pets, you
are held responsible for any structural damages or personal injuries that they cause during the
occupancy. In the event that your tenant gets hurt and files a law suit, the insurance may also offer
some protection. Moreover, if you are caught in a situation wherein you need to file a lawsuit
against your tenants for not paying rent or causing damage to your property, property insurance
can also pay out for that.
Final Thoughts. These are just some of the many things that a property insurance can protect you
from. Note that not all insurance policies are cut from the same cloth. You’ll want to sit down and
discuss with a trusted insurance provider about specific coverage features that work best for your
property and personal circumstances. For instance, if you live in a neighborhood that has
historically withstood power outages, then tailoring your insurance policy to cut that feature from
your coverage makes practical sense.
Exclusions
The following are excluded from insurance coverage:
 Loss or damage caused by war, civil war, and kindred perils
 Loss or damage caused by nuclear activity
 Loss or damage to the stocks in cold storage caused by change in temperature
 Loss or damage due to over-running of electric and/or electronic machines
Claims In the event of a fire loss covered under the fire insurance policy, the insured shall
immediately give notice thereof to the insurance company. Within 15 days of the occurrence of
such loss the insured should submit a claim in writing giving the details of damages and their
estimated values. Details of other insurances on the same property should also be declared.

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Motor Vehicle insurance
Vehicle insurance (also known as car insurance, motor insurance, or auto insurance) is insurance
for cars, trucks, motorcycles, and other road vehicles. Its primary use is to provide financial
protection against physical damage or bodily injury resulting from traffic collisions and against
liability that could also arise from incidents in a vehicle. Vehicle insurance may additionally offer
financial protection against theft of the vehicle, and against damage to the vehicle sustained from
events other than traffic collisions, such as keying, weather or natural disasters, and damage
sustained by colliding with stationary objects. The specific terms of vehicle insurance vary with
legal regulations in each region.
Auto insurance in India deals with the insurance covers for the loss or damage caused to the
automobile or its parts due to natural and man-made calamities. It provides accident cover for
individual owners of the vehicle while driving and also for passengers and third-party legal
liability. There are certain general insurance companies who also offer online insurance service for
the vehicle.
Auto insurance in India is a compulsory requirement for all new vehicles used whether for
commercial or personal use. The insurance companies have tie-ups with leading automobile
manufacturers. They offer their customers instant auto quotes. Auto premium is determined by a
number of factors and the amount of premium increases with the rise in the price of the vehicle.
The claims of the auto insurance in India can be accidental, theft claims or third-party claims.
Certain documents are required for claiming auto insurance in India, like duly signed claim form,
RC copy of the vehicle, driving license copy, FIR copy, original estimate and policy copy.
There are different types of auto insurance in India:
Private Car Insurance: Private Car Insurance is the fastest growing sector in India as it is
compulsory for all the new cars. The amount of premium depends on the make and value of the car,
state where the car is registered and the year of manufacture. This amount can be reduced by
asking the insurer for No Claim Bonus (NCB) if no claim is made for insurance in previous year.
Two Wheeler Insurance: The Two Wheeler Insurance in India covers accidental insurance for the
drivers of the vehicle. The amount of premium depends on the current showroom price multiplied
by the depreciation rate fixed by the Tariff Advisory Committee at the beginning of a policy period.
Commercial Vehicle Insurance: Commercial Vehicle Insurance in India provides cover for all the
vehicles which are not used for personal purposes like trucks and HMVs. The amount of premium
depends on the showroom price of the vehicle at the commencement of the insurance period, make
of the vehicle and the place of registration of the vehicle. The auto insurance generally includes:
 Loss or damage by accident, fire, lightning, self-ignition, external explosion, burglary,
housebreaking or theft, malicious act
 Liability for third party injury/death, third party property and liability to paid driver
 On payment of appropriate additional premium, loss/damage to electrical/electronic
accessories
The auto insurance does not include:
 Consequential loss, depreciation, mechanical and electrical breakdown, failure or breakage
 When vehicle is used outside the geographical area
 War or nuclear perils and drunken driving

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Third-party insurance
This cover is mandatory in India under the Motor Vehicles Act, 1988. This cover cannot be used for
personal damages. This is offered at low premiums and allows for third party claims under “no
fault liability. The premium is calculated through the rates provided by the Tariff Advisory
Committee. This is branch of the IRDA (Insurance Regulatory and Development Authority of India).
It covers bodily injury/accidental death and property damage.
Salient Features of Third Party Insurance
 Third party insurance is compulsory for all motor vehicles. In G. Govindan v. New India
Assurance Co. Ltd., Third party risks insurance is mandatory under the statute. This
provision cannot be overridden by any clause in the insurance policy.
 Third party insurance does not cover injuries to the insured himself but to the rest of the
world who is injured by the insured.
 Beneficiary of third party insurance is the injured third party, the insured or the policy
holder is only nominally the beneficiary of the policy. In practice the money is always paid
direct by the insurance company to the third party (or his solicitor) and does not even pass
through the hands of the insured person.
 In third party policies the premiums do not vary with the value of what is being insured
because what is insured is the legal liability’ and it is not possible to know in advance what
that liability will be.
 Third party insurance is almost entirely fault-based.(means you have to prove the fault of
the insured first and also that injury occurred from the fault of the insured to claim
damages from him)
 Third party insurance involves lawyers aid
 The third party insurance is unpopular with insurance companies as compared to first
party insurance, because they never know the maximum amounts they will have to pay
under third party policies.

Health insurance
Health insurance is an insurance that covers the whole or a part of the risk of a person incurring
medical expenses, spreading the risk over numerous persons. By estimating the overall risk of
[health risk] and health system expenses over the risk pool, an insurer can develop a routine
finance structure, such as a monthly premium or payroll tax, to provide the money to pay for the
health care benefits specified in the insurance agreement. The benefit is administered by a central
organization such as a government agency, private business, or not-for-profit entity.
According to the Health Insurance Association of America, health insurance is defined as “coverage
that provides for the payments of benefits as a result of sickness or injury. It includes insurance for
losses from accident, medical expense, disability, or accidental death and dismemberment”
In India, provision of health care services varies state-wise. Public health services are prominent in
most of the states, but due to inadequate resources and management, major population opts for
private health services.
To improve the awareness and better health care facilities, Insurance Regulatory and Development
Authority of India and The General Corporation of India runs health care campaigns for the whole
population. IN 2018, for under privileged citizens, Prime Minister Narendra Modi announced the
launch of a new health insurance called Modicare and the government claims that the new system
will try to reach more than 500 million people.
In India, Health insurance is offered mainly in two Types:

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  Indemnity Plan basically covers the hospitalization expenses and has subtypes like
Individual Insurance, Family Floater Insurance, Senior Citizen Insurance, Maternity
Insurance, Group Medical Insurance.
 Fixed Benefit Plan pays a fixed amount for pre-decided diseases like critical illness,
cancer, heart disease, etc. It has also its sub types like Preventive Insurance, Critical illness,
Personal Accident.
Depending on the type of insurance and the company providing health insurance, coverage
includes pre-and post-hospitalisation charges, ambulance charges, day care charges, Health
Checkups, etc.
It is pivotal to know about the exclusions which are not covered under insurance schemes:
 Treatment related to dental disease or surgeries
 All kind of STD’s and AIDS
 Non-Allopathic Treatment
Few of the companies do provide insurance against such diseases or conditions, but that depends
on the type and the insured amount.
Some important aspects to be considered before choosing the health insurance in India are Claim
Settlement ratio, Insurance limits and Caps, Coverage and network hospitals.
Benefits of having a Health insurance Policy
1. Cashless Treatment: If you are insured, you can get cashless treatments as your insurance
company would work in collaboration with various hospital networks.
2. Pre and post hospitalization cost coverage: Insurance policy also covers pre and post
hospitalization charges up to the period of 60 days, depending on the insurance plans
purchased.
3. Transportation Charges: Insurance policy also covers the amount paid to ambulance
towards the transportation of insured.
4. No Claim Bonus (NCB): This is the bonus element which is paid to the insured if the
insured does not file a claim for any treatment in the previous year.
5. Medical Checkup: Insurance policy also provide options for health checkups. Free health
checkup is also provided by some insurers based on your previous NCBs.
6. Room Rent: Insurance policy also covers room expenses depending on the premium being
paid by the insured.  
7. Tax Benefit: Premium paid on Health insurance is tax deductible under section 80D of the
Income Tax Act.
Selection the Right Insurance Policy
It’s difficult to select the best insurance policies as all insurance company provides a similar type of
insurance plan. Hence some of the important points that any Person should look before purchasing
any plans are:
1. Sum Assured
2. Minimum Entry Age and renewability clause
3. Room Rent Capping
4. Inclusion and Exclusion
5. No Claim Bonus

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 6. Other Benefits

Disability insurance
Disability Insurance, often called DI or disability income insurance, or income protection, is a
form of insurance that insures the beneficiary’s earned income against the risk that a disability
creates a barrier for a worker to complete the core functions of their work. For example, the
worker may suffer from an inability to maintain composure in the case of psychological disorders
or an injury, illness or condition that causes physical impairment or incapacity to work. It
encompasses paid sick leave, short-term disability benefits (STD), and long-term disability benefits
(LTD). Statistics show that in the US a disabling accident occurs, on average, once every second. In
fact, nearly 18.5% of Americans are currently living with a disability, and 1 out of every 4 persons
in the US workforce will suffer a disabling injury before retirement.
Factors to consider while selecting a disability insurance coverage:
 Coverage amount: Be diligent in assessing your needs and select the plan, keeping in mind
your income level and age. Choose the sum assured such that you and your family could
continue to maintain your current lifestyle even if a contingency arises.
 Determine the disabilities covered: While buying health insurance for disabled, there
are a wide variety of options available in the market. Compare the degree of disability (total or
partial) and types of disabilities covered across various products and choose the one with the
widest coverage.
 Refund feature: Some products provide the functionality of refund of a part of your
premium amount if no claim is made within the specified period.
 Read the policy wording: For the different degree of disability, different percentages of
the sum insured is paid. In the case of partial disability, the percentage may differ depending on
the policy wording. So, read the policy document carefully.
There are various government-sponsored health insurance policies for the disabled:
1. Nirmalya Health Insurance: It is a government-sponsored health insurance scheme for
people with mental disabilities. This scheme provides coverage of Rs. 1 Lakh at a low premium
rate with benefits including pre and post hospitalisation expenses and OPD treatment.
2. Swavalamban Health Insurance: It is a custom-tailored insurance scheme to suit the
needs of those with disabilities. This plan requires the insured to pay a single premium in one
go and avail the coverage at any time of treatment. This policy can be availed only for those
disabled individuals with a family income of Rs. 3 Lakh and below. No pre-medical test is
required. There is no exclusion of pre-existing conditions. It aims in providing affordable
insurance to people with blindness, vision problem, disability related to hearing and mental
disabilities.

Long-Term Care Insurance

Long-term care insurance (LTC or LTCI) is an insurance product, sold in the United States, United
Kingdom and Canada that helps pay for the costs associated with long-term care. Long-term care
insurance covers care generally not covered by health insurance, Medicare, or Medicaid.
Individuals who require long-term care are generally not sick in the traditional sense but are
unable to perform two of the six activities of daily living (ADLs) such as dressing, bathing, eating,
toileting, continence, transferring (getting in and out of a bed or chair), and walking.
Age is not a determining factor in needing long-term care. About 70 percent of individuals over 65
will require at least some type of long-term care services during their lifetime. About 40% of those

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receiving long-term care today are between 18 and 64. Once a change of health occurs, long-term
care insurance may not be available. Early onset (before 65) Alzheimer’s and Parkinson’s disease
occur rarely.
Long-term care is an issue because people are living longer. As people age, many times they need
help with everyday activities of daily living or require supervision due to severe cognitive
impairment. That impacts women even more since they often live longer than men and, by default,
become caregivers to others.

Life insurance
The insurance sector in India has come a full circle from being an open competitive market to
nationalization and back to a liberalized market again. Tracing the developments in the Indian
insurance sector reveals the 360-degree turn witnessed over a period of almost two centuries.
A brief history of the Insurance sector
The business of life insurance in India in its existing form started in India in the year 1818 with the
establishment of the Oriental Life Insurance Company in Calcutta.
Some of the important milestones in the life insurance business in India are:
 1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the
life insurance business.
 1928: The Indian Insurance Companies Act enacted to enable the government to collect
statistical information about both life and non-life insurance businesses.
 1938: Earlier legislation consolidated and amended to by the Insurance Act with the
objective of protecting the interests of the insuring public.
 1956: 245 Indian and foreign insurers and provident societies taken over by the central
government and nationalised. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a
capital contribution of Rs. 5 crore from the Government of India.
The General insurance business in India, on the other hand, can trace its roots to the Triton
Insurance Company Ltd., the first general insurance company established in the year 1850 in
Calcutta by the British.
Some of the important milestones in the general insurance business in India are:
 1907: The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes
of general insurance business.
 1957: General Insurance Council, a wing of the Insurance Association of India, frames a
code of conduct for ensuring fair conduct and sound business practices.
 1968: The Insurance Act amended to regulate investments and set minimum solvency
margins and the Tariff Advisory Committee set up.
 1972: The General Insurance Business (Nationalisation) Act, 1972 nationalised the general
insurance business in India with effect from 1st January 1973.
 107 insurers amalgamated and grouped into four companies viz. the National Insurance
Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company
Ltd. and the United India Insurance Company Ltd. GIC incorporated as a company.
Insurance sector reforms
In 1993, Malhotra Committee headed by former Finance Secretary and RBI Governor R.N. Malhotra
was formed to evaluate the Indian insurance industry and recommend its future direction.

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The Malhotra committee was set up with the objective of complementing the reforms initiated in
the financial sector. The reforms were aimed at “creating a more efficient and competitive financial
system suitable for the requirements of the economy keeping in mind the structural changes
currently underway and recognizing that insurance is an important part of the overall financial
system where it was necessary to address the need for similar reforms…”
In 1994, the committee submitted the report and some of the key recommendations included:
1) Structure
 Government stake in the insurance Companies to be brought down to 50%.
 Government should take over the holdings of GIC and its subsidiaries so that these
subsidiaries can act as independent corporations.
 All the insurance companies should be given greater freedom to operate.
2) Competition
 Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter
the industry.
 No Company should deal in both Life and General Insurance through a single entity.
 Foreign companies may be allowed to enter the industry in collaboration with the domestic
companies.
 Postal Life Insurance should be allowed to operate in the rural market.
 Only One State Level Life Insurance Company should be allowed to operate in each state.
3) Regulatory Body
 The Insurance Act should be changed.
 An Insurance Regulatory body should be set up.
 Controller of Insurance (Currently a part from the Finance Ministry) should be made
independent.
4) Investments
 Mandatory Investments of LIC Life Fund in government securities to be reduced from 75%
to 50%.
 GIC and its subsidiaries are not to hold more than 5% in any company (There current
holdings to be brought down to this level over a period of time).
5) Customer Service
 LIC should pay interest on delays in payments beyond 30 days.
 Insurance companies must be encouraged to set up unit linked pension plans.
 Computerisation of operations and updating of technology to be carried out in the
insurance industry The committee emphasized that in order to improve the customer
services and increase the coverage of the insurance industry should be opened up to
competition.
But at the same time, the committee felt the need to exercise caution as any failure on the part of
new players could ruin the public confidence in the industry. Hence, it was decided to allow
competition in a limited way by stipulating the minimum capital requirement of Rs.100 crores. The
committee felt the need to provide greater autonomy to insurance companies in order to improve
their performance and enable them to act as independent companies with economic motives. For
this purpose, it had proposed setting up an independent regulatory body.

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Major Policy Changes
Insurance sector has been opened up for competition from Indian private insurance companies
with the enactment of Insurance Regulatory and Development Authority Act, 1999 (IRDA Act). As
per the provisions of IRDA Act, 1999, Insurance Regulatory and Development Authority (IRDA)
was established on 19th April 2000 to protect the interests of holder of insurance policy and to
regulate, promote and ensure orderly growth of the insurance industry. IRDA Act 1999 paved the
way for the entry of private players into the insurance market which was hitherto the exclusive
privilege of public sector insurance companies/ corporations. Under the new dispensation Indian
insurance companies in private sector were permitted to operate in India with the following
conditions:
 Company is formed and registered under the Companies Act, 1956;
 The aggregate holdings of equity shares by a foreign company, either by itself or through its
subsidiary companies or its nominees, do not exceed 26%, paid up equity capital of such
Indian insurance company;
 The company’s sole purpose is to carry on life insurance business or general insurance
business or reinsurance business.
 The minimum paid up equity capital for life or general insurance business is Rs.100 crores.
 The minimum paid up equity capital for carrying on reinsurance business has been
prescribed as Rs.200 crores.
The Authority has notified 27 Regulations on various issues which include Registration of Insurers,
Regulation on insurance agents, Solvency Margin, Re-insurance, Obligation of Insurers to Rural and
Social sector, Investment and Accounting Procedure, Protection of policy holders’ interest etc.
Applications were invited by the Authority with effect from 15th August, 2000 for issue of the
Certificate of Registration to both life and non-life insurers. The Authority has its Head Quarter at
Hyderabad.

LIFE INSURERS Websites

Public Sector

Life Insurance Corporation of India http://www.licindia.com

Private Sector

Allianz Bajaj Life Insurance Company Limited http://www.allianzbajaj.co.in

Birla Sun-Life Insurance Company Limited http://www.birlasunlife.com

HDFC Standard Life Insurance Co. Limited http://www.hdfcinsurance.com

ICICI Prudential Life Insurance Co. Limited http://www.iciciprulife.com

ING Vysya Life Insurance Company Limited http://www.ingvysayalife.com

Max New York Life Insurance Co. Limited http://www.maxnewyorklife.com

MetLife Insurance Company Limited http://www.metlife.com

Om Kotak Mahindra Life Insurance Co. Ltd. http://www.omkotakmahnidra.com

SBI Life Insurance Company Limited http://www.sbilife.co.in

TATA AIG Life Insurance Company Limited http://www.tata-aig.com

AMP Sanmar Assurance Company Limited http://www.ampsanmar.com

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 Dabur CGU Life Insurance Co. Pvt. Limited http://www.avivaindia.com

GENERAL INSURERS

Public Sector

National Insurance Company Limited http://www.nationalinsuranceindia.com

New India Assurance Company Limited http://www.niacl.com

Oriental Insurance Company Limited http://www.orientalinsurance.nic.in

United India Insurance Company Limited http://www.uiic.co.in

Private Sector

Bajaj Allianz General Insurance Co. Limited http://www.bajajallianz.co.in

ICICI Lombard General Insurance Co. Ltd. http://www.icicilombard.com

IFFCO-Tokio General Insurance Co. Ltd. http://www.itgi.co.in

Reliance General Insurance Co. Limited http://www.ril.com

Royal Sundaram Alliance Insurance Co. Ltd. http://www.royalsun.com

TATA AIG General Insurance Co. Limited http://www.tata-aig.com

Cholamandalam General Insurance Co. Ltd. http://www.cholainsurance.com

Export Credit Guarantee Corporation http://www.ecgcindia.com

HDFC Chubb General Insurance Co. Ltd.

REINSURER

General Insurance Corporation of India http://www.gicindia.com

Protection of the interest of policy holders:
IRDA has the responsibility of protecting the interest of insurance policyholders. Towards
achieving this objective, the Authority has taken the following steps:
 IRDA has notified Protection of Policyholders Interest Regulations 2001 to provide for:
policy proposal documents in easily understandable language; claims procedure in both life
and non-life; setting up of grievance redressal machinery; speedy settlement of claims; and
policyholders’ servicing. The Regulation also provides for payment of interest by insurers
for the delay in settlement of claim.
 The insurers are required to maintain solvency margins so that they are in a position to
meet their obligations towards policyholders with regard to payment of claims.
 It is obligatory on the part of the insurance companies to disclose clearly the benefits, terms
and conditions under the policy. The advertisements issued by the insurers should not
mislead the insuring public.
 All insurers are required to set up proper grievance redress machinery in their head office
and at their other offices.
 The Authority takes up with the insurers any complaint received from the policyholders in
connection with services provided by them under the insurance contract. 
General Insurance Companies:
Private Sector Companies

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  Aditya Birla Health Insurance Co. Ltd.
 Bajaj Allianz General Insurance Co. Ltd.
 Bharti AXA General Insurance Co.Ltd.
 Cholamandalam General Insurance Co. Ltd.
 Future Generali India Insurance Co.Ltd.
 HDFC ERGO General Insurance Co. Ltd.
 ICICI Lombard General Insurance Co. Ltd.
 IFFCO-Tokio General Insurance Co. Ltd.
 Kotak General Insurance Co. Ltd.
 L&T General Insurance Co. Ltd.
 Liberty Videocon General Insurance Co. Ltd.
 Magma HDI General Insurance Co. Ltd.
 Raheja QBE General Insurance Co. Ltd.
 Reliance General Insurance Co. Ltd.
 Royal Sundaram Alliance Insurance Co. Ltd
 SBI General Insurance Co. Ltd.
 Shriram General Insurance Co. Ltd.
 TATA AIG General Insurance Co. Ltd.
 Universal Sompo General Insurance Co.Ltd.
Health Insurance Companies
 Apollo Munich Health Insurance Co.Ltd.
 Star Health Allied Insurance Co. Ltd.
 Max Bupa Health Insurance Co. Ltd.
 Religare Health Insurance Co. Ltd.
 Cigna TTK Health Insurance Co. Ltd.
This collaboration with the foreign markets has made the Insurance Sector in India only grow
tremendously with a high current market share. India allowed private companies in insurance
sector in 2000, setting a limit on FDI to 26%, which was increased to 49% in 2014. IRDAI states –  
Insurance Laws (Amendment) Act, 2015 provides for enhancement of the Foreign Investment Cap
in an Indian Insurance Company from 26% to an Explicitly Composite Limit of 49% with the
safeguard of Indian Ownership and Control.
Private insurers like HDFC, ICICI and SBI have been some tough competitors for providing life as
well as non-life products to the insurance sector in India.
The Future of Insurance Sector in India
Though LIC continues to dominate the Insurance sector in India, the introduction of the new
private insurers will see a vibrant expansion and growth of both life and non-life sectors in 2017.
The demands for new insurance policies with pocket-friendly premiums are sky high. Since the
domestic economy cannot grow drastically, the insurance sector in India is controlled for a strong
growth.

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With the increase in income and exponential growth of purchasing power as well as household
savings, the insurance sector in India would introduce emerging trends like product innovation,
multi-distribution, better claims management and regulatory trends in the Indian market.
The government also strives hard to provide insurance to individuals in a below poverty line by
introducing schemes like the
 Pradhan Mantri Suraksha Bima Yojana (PMSBY),
 Rashtriya Swasthya Bima Yojana (RSBY) and
 Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY).
Introduction of these schemes would help the lower and lower-middle income categories to utilize
the new policies with lower premiums in India.
With several regulatory changes in the insurance sector in India, the future looks pretty awesome
and promising for the life insurance industry. This would further lead to a change in the way
insurers take care of the business and engage proactively with its genuine buyers.
Some demographic factors like the growing insurance awareness of the insurance, retirement
planning, growing middle class and young insurable crowd will substantially increase the growth
of the Insurance sector in India.

Controlling Your Financial Future: Starting Early, Retirement

Planning, Estate Planning
Starting Early
When you are young, you think you don’t have enough money to invest. Your initial steps into the
working world also come with more expenses. Now that you finally have the money to buy that cell
phone, TV or the car you always wanted, your salary or income disappears faster than you realise.
Keeping some money aside for investing may feel unimportant. So you may think why not start
investing a few years later when you have more money to spend and save? Unfortunately, this cycle
never ends. By the time you realise the importance of investing, you may lose the advantage of time
by your side.
Even a small amount can create a big value if given enough time.
Investing early can give you a big advantage. You can not only plan your investments but also give
them enough time to grow into a corpus that meets your financial goals.
Power of compounding
Compounding essentially means reinvesting the profits from your investments to make your
investments grow exponentially. Let us say you start with just Rs1 that keeps doubling every day
for 25 days. How much do you think will be the final amount at the end of the 25th day? From Rs 1
it will go to Rs 2 the second day, Rs 4 the third day and so on, reaching a phenomenal amount of Rs
1.67 crore rupees on the 25th day!
This is the power of compounding. However, if you follow the same example for 20 days, then the
amount is just Rs 5.24 lakh ‘96% less than what you get after 5 more days. This shows that when
giving your investments the power of compounding, giving enough time for them to grow is equally
important.
Benefits of compounding
So how do you take advantage of the power of compounding in your investments?
Make sure you start investing, even small amounts, as soon as you start earning for compounding
to work.

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Avoid any withdrawals as it reduces your invested amount, giving lower returns.
Consider an example:
Mayank and Vivek are brothers. Mayank is 25 years old and starts a Systematic Investment Plan
(SIP) of Rs 5,000 per month in a mutual fund, with growth option (which means returns will be
reinvested for compounding to work). SIP essentially means that he does not need to have a large
sum to invest in a mutual fund. He can instead break it into monthly regular parts for his
investment.
Meanwhile, 30-year-old Vivek also starts the same SIP with Mayank. They both want to keep
investing till they retire at 60 years. Assuming they got an average return of 9% each year when
they both turn 60, Mayank’s accumulated amount would have reached Rs1.35 crore and Vivek’s
amount will be Rs 85.7 lakh rupees. So by starting just five years earlier, Mayank will get Rs 49.9
lakh more than Vivek!
This simple example shows that if you start early, invest regularly and avoid withdrawing from this
accumulating amount, your investment will grow manifold. This will enable you to create wealth
and fulfil your financial goals in life like buying that dream house, funding your child’s education or
your own retirement in a much easier way.

Retirement Planning
1. Peace of Mind
This is by far one of the most important benefits of retirement planning. Planning ahead not only
reduces your stress during retirement but also in the years leading up to it. The lack of planning
can leave a cloud of uncertainty around the topic that can create an unnecessary level of stress.
2. Contextualize Pre-Retirement Decisions
If you take the time to plan for your retirement early on, you will be able to make more efficient
career-related and general financial decisions prior to retirement with appropriate planning. Is it
better to stay at the current law firm or start your own practice? Will the mid to late career degree,
license or other credential make sense monetarily? These decisions may be different for someone
with fifteen years to retirement compared to someone with only five years until retirement.
3. Getting on the Same Page
One of the benefits of early retirement planning is that you can make sure your plans work well
with other relevant parties. It’s never too early to make sure that you and your spouse are on the
same page with spending and lifestyle desires in retirement, but your significant other may not be
the only family member you may wish to have a conversation with.
Some retirement plans are often affected by a saver’s desire to meet other objectives such as
assisting an adult child in starting or acquiring their business. To the extent that these goals may
affect your own retirement savings, you will benefit from planning beforehand.
4. Tax Benefits
There are several tax benefits of retirement planning, including reducing the amount of income
taxes you will pay during retirement and ensuring that beneficiaries to retirement and other
account types pay as little tax as possible.
One of the key areas that many people overlook during their life while saving for retirement is tax
diversification. This involves establishing different “pools” of money in accounts that are taxable,
tax-free and tax-deferred. These different accounts allow income during retirement to be
strategically withdrawn from a variety of sources depending on future conditions.

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One retirement saver who only has a tax-deferred account (a traditional IRA, for example) may pay
substantially more in taxes for the same withdrawal amount as another saver with a traditional
IRA, Roth IRA and regular taxable funds. The earlier your planning begins, the easier it is to
establish and grow your funds among these available “pools” of money.
5. Cost Saving
There are many ways to reduce costs with appropriate planning. Many of the insurance policies
you may need (long-term care, etc.) can be acquired at a lower premium when younger and in good
health rather than waiting until retirement and risking a higher rate or denial of coverage.
Those who know where they would like to reside geographically often wish to examine options
other than buying at the time they retire. Would it make good financial sense to acquire the
property in the desired retirement location in advance and rent it out until retirement? How much
time do you need beforehand if you plan to build a new property? Early retirement planning can
increase the likelihood that your goals are met with the least cost.
6. Viewing Financial Issues in Context
One of the greatest benefits of planning, in general, is that you can determine how all your financial
objectives relate to one another rather than evaluating them in isolation.
What are the tax consequences of my investment decision? How will the decision to purchase
additional insurance affect my contribution to saving? How do these issues affect my heirs?
Think of your financial decisions not as a series of yes/no decisions unrelated to one another, but
as many competing interests, each of which is affected by the rest.
7. Legacy Opportunities
Planning for retirement can also provide benefit to your heirs or your favorite charitable causes.
View your legacy in total, not just the distribution of your assets at death to various beneficiaries.
Your wishes may be more complex than you think.
Perhaps your retirement decision involves unwinding or selling a business you’ve started. You may
find your decisions affect not just yourself but many employees. Perhaps you have charitable
interests and plan to commit a certain amount of your worth to various causes.
By planning beforehand, you may be able to take from sources (during life or after) that have the
most favorable tax consequences, thus giving in the most efficient manner.
Estate Planning
Provide For Your Family
Without an estate plan in place, your family will get less and it will take them longer to get it. This
means your loved ones will be left in limbo and might end up without enough money to pay bills
and other living expenses. It’s not uncommon for families with an unexpected death to nearly fall
apart due to the financial strain in the weeks, months, and years to come.
Good estate planning will make sure that your family is provided for and not left to face financial
ruin once you’re gone.
Keep Your Children Out Of Child Protective Services
As unpleasant as this next thought is going to be, take a minute and ask yourself what would
happen to your kids if you and/or your spouse were involved in a major car accident on the way
home from work tomorrow?
Really, think about it. Who will pick them up from school or daycare? Where will they sleep that
night and the nights to come? Who will ultimately end up as their guardian?

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If you don’t have an estate plan in place, than you might not like the answers to these questions.
Why let your kids end up in Child Protective Services while the courts sort out who will serve as
their guardian? Why leave that decision up to the courts at all? Do you really want a judge to decide
who will raise your kids without any input from you or your spouse?
Minimize Your Expenses
Do you know where most of the money goes when people don’t have a good estate plan? Attorney’s
fees and court costs.
When you die without an estate plan (and without a living trust, in particular) the courts are forced
to handle everything: the distribution of your property, the guardianship of your children, the
dissolution of your business. This is known as “probate,” and it get’s very expensive easily
exceeding $10,000 for even modest estates. That’s money your family and kids could’ve used for
living expenses and other bills, but instead it’s just lining the pockets of your attorney.
Get Property to Loved Ones Quickly
You have two options here. Option 1, your family has to wait anywhere from 3-9 months to get
anything after you die. Option 2, your family gets money they need to pay bills, to pay for your
funeral, to pay for your outstanding medical bills, and to pay for anything else they need right away
and without delay.
Which one would you choose? Good estate planning let’s you avoid the big delays that can put a
real financial strain on your family.
Save Your Family From The Difficult Decisions
Can you imagine trying to decide when to pull the plug on your spouse who is in a coma or similar
condition? Or deciding how his or her remains should be handled?
Those are heart breaking decisions that no one should have to face. You can ease this burden by
thinking about this kind of thing in advance and planning ahead for it. You can specify in your
estate plan how you want end-of-life care to be handled and what kind of disposal arrangements
you want made for your remains. And there’s no one better to make those decisions than you.
Reduce Taxes
Every single dollar that you pay in taxes is one less dollar that your family will have for paying bills
and other expenses. There are numerous tax reduction strategies that you can use to keep as much
money in the hands of your family as possible. The key is to start tax planning sooner rather than
later and definitely not to wait until it’s too late.
Make Retirement Easier
You might be surprised to hear that estate planning can actually benefit you while you’re alive, not
just your family after you’re gone. Healthcare in particular is an area where estate planning can
benefit you enormously down the road by making sure you’re eligible for government benefits like
Medicare (that you’ve been paying into most of your working life anyways, so you might as well get
something back), that can significantly reduce your healthcare costs and leave more money to your
loved ones.
Plan for Incapacity
Estate planning is not just about death. It’s very common for people to become incapacitated by an
accident or sudden medical episode like a stroke that leaves them unable to manage their financial
affairs.

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If this happens to you, who will take care of paying your bills or managing your healthcare? A
power of attorney designation for both financial and healthcare decisions can save your family a lot
of time and money and make sure everything is handled according to your wishes.
Support Your Favorite Cause
You might have heard that Mark Zuckerberg (the founder of Facebook) decided to join Bill Gates
and Warren Buffet in leaving the vast majority of his fortune to charity instead of his family. Even
though you don’t have billions of dollars to leave to charity, you can still make a difference by
supporting your favorite educational, religious, or other charitable cause. Even if it’s just a hundred
dollars, that money can help others and make a difference in their lives.
Make Sure Your Business Runs Smoothly
If you are a small business owner, then you absolutely must have an estate plan. It’s one of the most
important things you can do and is really not optional. Without one, your business will likely fall
apart quickly and completely if something happens to you, and that can cause incredible financial
hardship on your family.
You have the opportunity to provide for an orderly transition to someone else and continue the
business by spelling out what happens if you become disabled or die. Don’t do a disservice to your
family by leaving these kinds of ends untied.

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