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What is Investment?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment.

earn return on your idle resources
generate a specified sum of money for a specific goal in life
make a provision for an uncertain future

One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100purchase today would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any long-term investment strategy. Remember to look at an investment's 'real' rate of return, which is he return after inflation. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value. For example, if the annual inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in value. If the after-tax return on your investment is less than the inflation rate, then your assets have actually decreased in value; that is, they won't buy as much today as they did last year.

When to start Investing?
The sooner one starts investing the better. By investing early you allow your investments more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by accumulating the principal and the interest or dividend earned on it, year after year. The two golden rules for all investors are:

Invest early
Invest regularly

Physical assets like real estate, gold/jewellery, commodities etc. and/or
Financial assets such as fixed deposits with banks, small saving instruments with post offices, insurance/provident/pension fund etc. or securities market related instruments like shares, bonds, debentures etc.

Shares
Government Securities
Derivative products
Units of Mutual Funds etc., are some of the securities investors in the securities market can invest in.

Broadly speaking, savings bank account, money market/liquid funds and fixed deposits with banks may be considered as short-term financial investment options:
Savings Bank Account is often the first banking product people use, which offers low interest, making them only marginally better than fixed deposits.
Money Market or Liquid Funds are a specialized form of mutual funds that invest in extremely short-term fixed income instruments and thereby provide easy liquidity. Unlike most mutual funds, money market funds are primarily oriented towards protecting your capital and then, aim to maximise returns. Money market funds usually yield better returns than savings accounts, but lower than bank fixed deposits.
Fixed Deposits with Banks are also referred to as term deposits and minimum investment period for bank FDs is generally 30 days. Fixed Deposits with banks are for investors with low risk appetite, and maybe considered for 6-12 months investment period as normally interest on less than 6 months bank FDs is likely to be lower than money market fund returns.
Equities or cash market is also good option for short term investment. The return provided by the cash Market are higher as compared to saving account or fixed deposits with banks but carry more risk.

When you buy a share of a company you become a shareholder in that company. Shares are also known as Equities. Equities have the potential to increase in value over time. It also provides your portfolio with the growth necessary to reach your long term investment goals. Research studies have proved that the equities have outperformed most other forms of investments in the long term. This may be illustrated with the help of following examples:
a) Over a 15 year period between 1990 and 2005, Nifty has given an annualised return of 17%.
b) Mr. Raju invests in Nifty on January 1, 2000 (index value 1592.90). The Nifty value as of end December 2005 was 2836.55. Holding this investment over this period Jan 2000 to Dec 2005 he gets a return of 78.07%. Investment in shares of ONGC Ltd for the same period gave a return of 465.86%, SBI 301.17% and Reliance 281.42%.
Therefore, Equities are considered the most challenging and the rewarding, when compared to other investment options. Research studies have proved that investments in some shares with a longer tenure of investment have yielded far superior returns than any other investment. However, this does not mean all equity investments would guarantee similar high returns. Equities are high risk investments. One needs to study them carefully before investing.

Other Benefits of investing in shares
Tax Benefit

When companies have already paid tax on their profits, tax credits known as franking credits may be attached to the dividends the company pays to you. These franking credits can be used to offset tax payable by you on other income. In addition, shares held for more than 12 months qualify for around 50% discount on any capital gains tax payable.

Diversification
Many people know the saying "don't put all your eggs in one basket". The Indian share market helps you to do this by offering a wide choice of companies in which to invest. There are over more than 1000 companies listed on NSE. These companies are involved in a wide range of industries covering most sectors of the economy including financial services, industrials and healthcare. By investing in a range of companies you can spread your risk.

Flexibility
You can buy and sell shares quickly. You can sell shares and generally have access to your money in no more than three days. Other investments often take longer to sell and get your money back. This concept is known as liquidity. Remember some shares can be traded quicker than others due to their increased liquidity. (Liquid investments have the benefit of greater flexibility).

Control over your financial future

You can decide exactly how your money is invested, enabling you to have a lot of control over your finances. You can of course choose to share this responsibility with a stock broker who can advise you on what shares to buy and sell.

What has been the average return on Equities in India?
Since 1990 till date, Indian stock market has returned about 17% to investors on an average in terms of increase in share prices or capital appreciation annually. Besides that on average stocks have paid 1.5% dividend annually. Dividend is a percentage of the face value of a share that a company returns to its shareholders from its annual profits. Compared to most other forms of investments, investing in equity shares offers the highest rate of return.

Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporate, entrepreneurs to raise resources for their companies and business ventures through public issues. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporate) is most efficiently achieved through the securities market. Stated formally, securities markets provide channels for reallocation of savings to investments and entrepreneurship. Savings are linked to investments by a variety of intermediaries, through a range of financial products, called ‘Securities’. The securities market has two interdependent segments: the primary (new issues) market and the secondary market. The primary market provides the channel for sale of new securities while the secondary market deals in securities previously issued.
For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions.

In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading venue in which already existing/pre-issued securities are traded among investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is part of the dealer market.

Research
There are two ways of analysing scrips viz Technical Analysis and Fundamental Analysis
Technical Analysis
A method of evaluating securities by relying on the assumption that market data, such as charts of price, volume, and open interest, can help predict future (usually short-term) market trends. Unlike fundamental analysis, the intrinsic value of the security is not considered. Technical analysts believe that they can accurately predict the future price of a stock by looking at its historical prices and other trading variables. Technical analysis is primarily (but not exclusively) conducted by studying charts of past price action. Technical analysis assumes that market psychology influences trading in a way that enables predicting when a stock will rise or fall. Many different methods and tools are used in technical analysis, but they all rely on the assumption that price patterns and trends exist in markets, and that they can be identified and exploited. Technical analysis does not try to analyze the financial data of a company such as cashflow, dividends and projection of future dividends etc.

Fundamental Analysis

A method of security valuation which involves examining the company's financials and operations, especially sales, earnings, growth potential, assets, debt, management, products, and competition. Fundamental analysis takes into consideration only those variables that are directly related to the company itself, rather than the overall state of the market or technical analysis data.Fundamental analysis of a business involves analysing its financial statements and health, its mangement and competitive advantages, and its competitors and markets.The objectives of the analysis may be to calculate credit risk, to evaluate management and make internal business decisions, or to determine the value of a company's stock and its probable future. The analysis is performed on historical and present data, but the objective is to predict future stock or business performance. Here we look at several valuation methods, factoring in price/earnings ratio, PEG, dividend yields, book value, price/sales ratio, and return on equity.

Derivative is a product whose value is derived from the value of one or more basic variables, called underlying. The underlying asset can be equity, index, foreign exchange (forex), commodity or any other asset. Derivative products initially emerged as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years. The financial derivatives came into spotlight in post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about two thirds of total transactions in derivative products.

What are Types of Derivatives?
There are four basic types of derivative contract:

forward contracts
futures
options, and
Swaps.

The term future is normally applied to an exchange-traded forward contract (although you may also see some OTC contracts described as futures). A future commits the holder to take or make delivery of a standard amount of a specified commodity or financial instrument, on a fixed future date, for an agreed price. In practice, most futures contracts are not held to maturity. The holder of the contract can close out his or her position by entering into an equal and opposite transaction. For example, a company which has bought 150 Nifty futures could close out the position by selling 150 futures. A company which has sold 300 Government Treasury Bond futures could close out its position by buying 300 of the same contracts.

Futures contracts are highly standardised. The underlying physical or financial asset is closely defined (for example, soybeans futures contracts might specify the minimum protein level, maximum moisture content and so on), and the delivery date normally runs on a fixed cycle of March, June, September and December each year. A company which holds a future at maturity will not necessarily receive or deliver any physical asset – most futures are cash settled.

Futures differ from forward contracts in that they are marked to market at the end of each trading day. So instead of each party’s obligations being settled at the end of the contract, a company trading in futures realises its profits or losses on a day-to-day basis. The company will have to make initial cash payment, known as initial margin, as a guarantee that it will be able to cover a loss arising from one day’s price movements in the event of default

Forward contracts
At its simplest, a forward contract is an agreement to buy or sell

a given quantity of a particular asset
at a specified future date,
at a pre-agreed price.

A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price. For example, a frozen food manufacturer might contract with a vegetable grower to buy a given number of tonnes of peas (of a specified quality) at a given price, delivery to be made directly after harvest. This type of agreement, in relation to commodities, has been used for centuries to protect both buyer and seller from the risks of movement in prices.

Today, the most prevalent use of forward contracts is in the currency and interest rate markets. It is very common for companies exposed to foreign exchange risks to hedge those risks by entering into a forward foreign exchange contract, normally with a bank. A forward foreign exchange contract (sometimes just called a currency forward) is a legally binding agreement to buy, or sell, an agreed amount of one currency for an agreed price payable in another currency, on a specified future date.

Example
Basu Ltd has borrowed €500,000 to finance the launch of a new product in France. The loan is repayable in 12 months’ time. When the loan is taken out, the exchange rate is 1 euro = Rs.80, so that €500,000 is worth Rs. 400, 00,000. When the company comes to repay the loan, it might have to repay more than Rs. 400, 00,000 if the rupee has weakened against the euro, so that it suffers a loss. Alternatively, if the rupee strengthens, it may make a profit.

The company is willing to forego any windfall profit, provided it can guarantee that it will not make an unexpected loss. Basu Ltd therefore arranges with its bank to buy €500,000 in 12 months’ time. The bank quotes a one year forward rate of 1 euro = Rs. 82, so that the company will have to pay Rs. 410, 00,000 for the euros. The company will have made an exchange loss of Rs.10, 00,000 but it now knows about this in advance and can budget for it.

An option contract differs from other sorts of derivative because it gives the holder a choice. Any option agreement gives the holder the right, but not the obligation, to buy or sell a specified underlying asset, on or before a particular date.

A call option confers the right (but not the obligation) to buy the underlying. A put option confers the right (but not the obligation) to sell the underlying.

The sale or purchase is often simply notional. For example, someone who buys a call option on the Nifty index will not (normally) buy every share represented by that index if he or she exercises the option. Instead there would be a cash settlement based on the difference between the price specified in the option agreement (the strike or exercise price) and the value of the index at the exercise date.

An option contract will always include an expiry date. You may come across the following terms relating to when, in relation to the expiry date, the option can be exercised:

Term	When option may be exercised
European (or European style)	Only on the expiry date of the option.
American (or American style)	On any business day up to and including the expiry date.

The rights acquired by the holder of an option have a value. So someone who enters into an option contract will almost always have to pay a premium in order to do so. The premium is normally payable at the start of the contract, although you may sometimes see option arrangements where the premium is paid in instalments over the life of the contract, or even rolled up and paid at the expiry date.

Valuing options is working out how much someone should pay by way of premium – involves some quite complex mathematics i.e. the use of Greeks like Theta, Gamma, Vega.

Many types of standardised option contracts like contracts over interest rates, currency, shares, bonds or commodities are exchange-traded. Companies may also use over the counter (OTC) options.

Call Option is an option to buy a stock at a specific price on or before a certain date. In this way, Call options are like security deposits. If, for example, you wanted to rent a certain property, and left a security deposit for it, the money would be used to insure that you could, in fact, rent that property at the price agreed upon when you returned. If you never returned, you would give up your security deposit, but you would have no other liability. Call options usually increase in value as the value of the underlying instrument rises.
When you buy a Call option, the price you pay for it, called the option premium, secures your right to buy that certain stock at a specified price called the strike price. If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium.

Put Options are options to sell a stock at a specific price on or before a certain date. In this way, Put options are like insurance policies
If you buy a new car, and then buy auto insurance on the car, you pay a premium and are, hence, protected if the asset is damaged in an accident. If this happens, you can use your policy to regain the insured value of the car. In this way, the put option gains in value as the value of the underlying instrument decreases. If all goes well and the insurance is not needed, the insurance company keeps your premium in return for taking on the risk.
With a Put Option, you can "insure" a stock by fixing a selling price. If something happens which causes the stock price to fall, and thus, "damages" your asset, you can exercise your option and sell it at its "insured" price level. If the price of your stock goes up, and there is no "damage," then you do not need to use the insurance, and, once again, your only cost is the premium. This is the primary function of listed options, to allow investors ways to manage risk.

What is an ‘Option Premium’?
At the time of buying an option contract, the buyer has to pay premium. The premium is the price for acquiring the right to buy or sell. It is price paid by the option buyer to the option seller for acquiring the right to buy or sell. Option premiums are always paid upfront.

This is the value that any given option would have if it were exercised today. It is defined as the difference between the option's strike price (X) and the stock's actual current price (CP). In the case of a call option, you can calculate this intrinsic value by taking CP - X. If the result is greater than zero (in other words, if the stock's current price is greater than the option's strike price), then the amount left over after subtracting CP - X is the option's intrinsic value. If the strike price is greater than the current stock price, then the intrinsic value of the option is zero--it would not be worth anything if it were to be exercised today (please note that an option's intrinsic value can never be below zero). To determine the intrinsic value of a put option, simply reverse the calculation to X – CP.

This is the second component of an option’s price. It is defined as any value of an option other than its intrinsic value. Looking at the example above, if RIL is trading at Rs.105 and the RIL 100 call option is trading at Rs. 7, then we would say that this option has Rs. 2 of time value (Rs.7 option price – Rs.5 intrinsic value = Rs.2 time value). Options that have zero intrinsic value are comprised entirely of time value. Time value is basically the risk premium that the seller requires to provide the option buyer with the right to buy/sell the stock up to the expiration date. Think of this component as the “insurance premium” of the option.
Time value is easy to see when looking at the price of an option, but the actual derivation of time value is based on a fairly complex equation. Basically, an option's time value is largely determined by the amount of volatility that the market believes the stock will exhibit before expiration. If the market does not expect the stock to move much, then the option's time value will be relatively low. Meanwhile, the opposite is true for stocks that are expected to be very volatile.

The time value of an option is, in simple terms, what that chance is worth. This will depend on three things:

How long the option has to run before it expires. The nearer an option gets to expiry, the less chance there is of an out of the money option moving into the money (or an in the money option moving more deeply into the money). So its time value will decrease as the expiry date draws nearer.
The volatility of the underlying asset. Volatility is a measure of the ‘scatter’ of the different values which the price of the underlying asset might take. Suppose, for example, a call option over shares will only move into the money if the share price rises from 300p to 400p. There is much more chance of this happening if the volatility is high than if it is low.

It is, of course, the future volatility that matters but this cannot be known. Future volatility is often assumed to be the same as in the past. So you might assume it more likely that the price could rise from 300p to 400p if the price had fluctuated between 250p and 500p in the previous year than if the price had never fallen below 290p or risen above 320p. The more volatile the price of the underlying asset, the greater the time value of the option.

Market rates of interest. Normally someone who buys an option will pay a premium up-front. They will either have to borrow money to do this, or withdraw money from existing investments. So they will need to factor the time value of money into the price they are prepared to pay for the option.

If an option is out of the money, it will only have time value. If it is in the money, its value will be a combination of intrinsic value and time value.

Swaps
In very general terms, a swap is a legally binding agreement to exchange a series of cashflows based on the value of, or return from, one property with a series of cashflows based on a second property. ‘Property’ can include an index, or some other measurable factor.
Example
Leena plc is a cash-rich company which has spare cash invested in money market deposits paying a floating rate of interest. The finance director believes that a better return is to be had on the stock market, but does not have the resources to manage a share portfolio, and does not wish to have to pay Stamp Duty Reserve Tax and other transaction costs on direct dealings in shares.
It therefore arranges an equity index swap with its bank, based on the Nifty index. The basis of the arrangement is:

Leena Ltd makes payments to the bank each quarter (or at some other agreed interval) based on interest payable on a notional loan.
The bank makes quarterly payments to Leena plc based on the percentage increase in the Nifty index.

The arrangement can continue for a year, 2 years, 5 years or any other term agreed by the parties.
If the finance director is right, and the Nifty outperforms the company’s money market investments, the company will make a profit. In effect, Leena plc has replicated the economic effect of taking its money out of interest-bearing investments and buying instead a portfolio of the shares that make up the Nifty.

We can say that the company has ‘swapped’ the return on money market deposits for the return on the Nifty 100 index. But it is important to note that Fonzap Ltd still retains the right to receive interest from its deposits. It has not assigned that right to the bank – it is merely making payments to the bank based on an interest rate. Indeed, the company could in theory enter into the swap even if it didn’t have the existing interest-bearing investments – although in the majority of cases companies will use a swap to hedge an asset or liability.

Mutual Fund

Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India) that pools money from individuals/corporate investors and invests the same in a variety of different financial instruments or securities such as equity shares, Government securities, Bonds, debentures etc. Mutual funds can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. Mutual funds issue units to the investors. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors. The investment objectives outlined by a Mutual Fund in its prospectus are binding on the mutual fund scheme. The investment objectives specify the class of securities a mutual fund can invest in. Mutual Funds invest in various asset classes like equity, bonds, debentures, commercial paper and government securities. The schemes offered by mutual funds vary from fund to fund. Some are pure equity schemes; others are a mix of equity and bonds. Investors are also given the option of getting dividends, which are declared periodically by the mutual fund, or to participate only in the capital appreciation of the scheme.

What is NAV?
NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net of its liabilities. NAV per unit is simply the net value of assets divided by the number of units outstanding. Buying and selling into funds is done on the basis of NAV-related prices. The NAV of a mutual fund are required to be published in newspapers. The
NAV of an open end scheme should be disclosed on a daily basis and the NAV of a close end scheme should be disclosed at least on a weekly basis

What is Entry/Exit Load?
A Load is a charge, which the mutual fund may collect on entry and/or exit from a fund. A load is levied to cover the up-front cost incurred by the mutual fund for selling the fund. It also covers one time processing costs. Some funds do not charge any entry or exit load. These funds are referred to as ‘No Load Fund’. Funds usually charge an entry load ranging between 1.00% and 2.00%. Exit loads vary between 0.25% and 2.00%.For e.g. Let us assume an investor invests Rs. 10,000/- and the current NAV is Rs.13/-. If the entry load levied is 1.00%, the price at which the investor invests is Rs.13.13 per unit. The investor receives 10000/13.13 = 761.6146 units. (Note that units are allotted to an investor based on the amount invested and not on the basis of no. of units purchased). Let us now assume that the same investor decides to redeem his 761.6146 units. Let us also assume that the NAV is Rs 15/- and the exit load is 0.50%. Therefore the redemption price per unit works out to Rs. 14.925. The investor therefore receives 761.6146 x 14.925 = Rs.11367.10.

Are there any risks involved in investing in Mutual Funds?
Mutual Funds do not provide assured/stable returns. Their returns are linked to their performance. They invest in shares, debentures, bonds etc. All these investments involve an element of risk. The unit value may vary depending upon the performance of the company and if a company defaults in payment of interest/principal on their debentures/bonds the performance of the fund may get affected. Besides incase there is a sudden downturn in an industry or the government comes up with new a regulation which affects a particular industry or company the fund can again be adversely affected. All these factors influence the performance of Mutual Funds.

Mutual funds are classified in the following manner:
(a) On the basis of Objective

Equity Funds/ Growth Funds
Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over the medium to long-term. They are best suited for investors who are seeking capital appreciation. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based funds.

Diversified funds
These funds invest in companies spread across sectors. These funds are generally meant for risk-averse investors who want a diversified portfolio across sectors.

Sector funds
These funds invest primarily in equity shares of companies in a particular business sector or industry. These funds are targeted at investors who are bullish or fancy the prospects of a particular sector.

Index funds
These funds invest in the same pattern as popular market indices like S&P CNX Nifty or CNX Midcap 200. The money collected from the investors is invested only in the stocks, which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 stocks. The objective of such funds is not to beat the market but to give a return equivalent tothe market returns.

Tax Saving Funds
These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under this scheme are in the form of tax rebates under the Income Tax act.

Debt/Income Funds
These funds invest predominantly in high-rated fixed-income-bearing instruments like bonds, debentures, government securities, commercial paper and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. They provide a regular income to the investor.

Liquid Funds/Money Market Funds
These funds invest in highly liquid money market instruments. The period of investment could be as short as a day. They provide easy liquidity. They have emerged as an alternative for savings and short term fixed deposit accounts with comparatively higher returns. These funds are ideal for corporates, institutional investors and business houses that invest their funds for very short periods.

Gilt Funds
These funds invest in Central and State Government securities. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk.

Balanced Funds
These funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion. They provide a steady return and reduce the volatility of the fund while providing some upside for capital appreciation. They are ideal for medium to long-term investors who are willing to take moderate risks.

Open-ended Funds
These funds do not have a fixed date of redemption. Generally they are open for subscription and redemption throughout the year. Their prices are linked to the daily net asset value (NAV). From the investors' perspective, they are much more liquid than closed-ended funds.

Close-ended Funds
These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter closed for entry as well as exit. These funds have a fixed date of redemption. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but the discount narrows as maturity nears. These funds are open for subscription only once and can be redeemed only on the fixed date of redemption. The units of these funds are listed on stock exchanges (with certain exceptions), are tradable and the subscribers to the fund would be able to exit from the fund at any time through the secondary market.
Choosing a fund
Mutual fund is the best investment tool for the retail investor as it offers the twin benefits of good returns and safety as compared with other avenues such as bank deposits or stock investing. Having looked at the various types of mutual funds, one has to now go about selecting a fund suiting your requirements. Choose the wrong fund and you would have been better off keeping money in a bank fixed deposit. Keep in mind the points listed below and you could at least marginalise your investment risk.
Past performance
While past performance is not an indicator of the future it does throw some light on the investment philosophies of the fund, how it has performed in the past and the kind of returns it is offering to the investor over a period of time. Also check out the two-year and one-year returns for consistency. How did these funds perform in the bull and bear markets of the immediate past? Tracking the performance in the bear market is particularly important because the true test of a portfolio is often revealed in how little it falls in a bad market.
The Fund manager
The success of a fund to a great extent depends on the fund manager. The same fund managers manage most successful funds. Ask before investing, has the fund manager or strategy changed recently? For instance, the portfolio manager who generated the fund’s successful performance may no longer be managing the fund.
Risk Profile considerations
Certain sector-specific schemes come with a high-risk high-return tag. Such plans are suspect to crashes in case the industry loses the market men’s fancy. If the investor is totally risk averse he can opt for pure debt schemes with little or no risk. Most prefer the balanced schemes which invest in the equity and debt markets. Growth and pure equity plans give greater returns than pure debt plans but their risk is higher.
Information in the prospectus
The prospectus says a lot about the fund. A reading of the fund’s prospectus is a must to learn about its investment strategy and the risk that it will expose you to. Funds with higher rates of return may take risks that are beyond your comfort level and are inconsistent with your financial goals. But remember that all funds carry some level of risk. Just because a fund invests in government or corporate bonds does not mean it does not have significant risk. Thinking about your long-term investment strategies and tolerance for risk can help you decide what type of fund is best suited for you.
How will the fund affect the diversification of your portfolio?
When choosing a mutual fund, you should consider how your interest in that fund affects the overall diversification of your investment portfolio. Maintaining a diversified and balanced portfolio is the key for maintaining an acceptable level of risk.

What it costs you?
A fund with high costs must perform better than a low-cost fund to generate the same returns for you. Even small differences in fees can translate into large differences in returns over time.
Finally, don’t pick a fund simply because it has shown a spurt in value in the current rally. Get information of a fund for at least three years. The one thing to remember while investing in equity funds is that it makes no sense to get in and out of a fund with each turn of the market. Like stocks, the right equity mutual fund will pay off big -- if you have the patience. Similarly, it makes little sense to hold on to a fund that lags behind the total market year after year.

Why invest in Mutual Funds?
Investing in mutual has various benefits which makes it an ideal investment avenue. Following are some of the primary benefits.
Professional investment management
One of the primary benefits of mutual funds is that an investor has access to professional management. A good investment manager is certainly worth the fees you will pay. Good mutual fund managers with an excellent research team can do a better job of monitoring the companies they have chosen to invest in than you can, unless you have time to spend on researching the companies you select for your portfolio. That is because Mutual funds hire full-time, high-level investment professionals. Funds can afford to do so as they manage large pools of money. The managers have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale. When you buy a mutual fund, the primary asset you are buying is the manager, who will be controlling which assets are chosen to meet the funds' stated investment objectives.
Diversification
A crucial element in investing is asset allocation. It plays a very big part in the success of any portfolio. However, small investors do not have enough money to properly allocate their assets. By pooling your funds with others, you can quickly benefit from greater diversification. Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund unit-holders can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities.
Low Cost
A mutual fund let's you participate in a diversified portfolio for as little as Rs.5, 000, and sometimes less. And with a no-load fund, you pay little or no sales charges to own them.
Convenience and Flexibility
Investing in mutual funds has its own convenience. While you own just one security rather than many, you still enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. It also uses the services of a high quality custodian and registrar. Another big advantage is that you can move your funds easily from one fund to another within a mutual fund family. This allows you to easily rebalance your portfolio to respond to significant fund management or economic changes.
Liquidity
In open-ended schemes, you can get your money back promptly at net asset value related prices from the mutual fund itself.
Transparency
Regulations for mutual funds have made the industry very transparent. You can track the investments that have been made on you behalf and the specific investments made by the mutual fund scheme to see where your money is going. In addition to this, you get regular information on the value of your investment.
Variety
There is no shortage of variety when investing in mutual funds. You can find a mutual fund that matches just about any investing strategy you select. There are funds that focus on blue-chip stocks, technology stocks, bonds or a mix of stocks and bonds. The greatest challenge can be sorting through the variety and picking the best for you.

Insurance
Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of potential financial loss. Insurance is defined as the equitable transfer of the risk of a potential loss, from one entity to another, in exchange for a premium and duty of care. Life insurance policies provide payments depending on the life or the death of a particular person or persons.

Life insurance policies are issued in two basic types: term life and permanent life.

Term life insurance, in a level term form, requires fixed, regular premiums and pays the death benefit, also called the principle sum, only if the insured dies during the policy's term. There are no cash values built under these policies.
Insurance that guarantees a specific sum of money to a designated beneficiary upon the death of the insured or to the insured if he or she lives beyond a certain age.

5 pointers for buying life insurance
Life insurance plays an important role in any individual’s financial planning process. For it is life insurance that helps secure the financial future of the nominees. However, many individuals do not know how to go about while considering life insurance products. We have identified five points to remember before zeroing in on a life insurance product.
1. Identify your needs
Before considering life insurance, it becomes imperative that individuals first identify their needs. An individual should understand whether buying life insurance is necessary to begin with. For example, if an individual is single and earning but has no financial dependants, then he may not really need life insurance. This stems from the fact that nobody is going to be ‘financially hurt’ in the absence of the insured (i.e. the individual in question).
On the other hand, we can consider a married individual who has family members dependent on him. He also happens to be the sole earning member in the family. Such an individual obviously needs life insurance. This stems from the fact that his entire family is dependant on him for financial support and in his absence, their lifestyle would be severely impaired. Such individuals should have adequate life cover as early as possible.
2. How much insurance do you need?
After having identified the need to buy insurance, the next step is to ascertain the amount of cover needed. The concept of human life value (HLV) can help in deciding how much life cover an individual should opt for. The HLV takes factors like the individual’s annual income and expenses along with the inflation rate into consideration while calculating the value.
3. Which product should you consider?
After having quantified the need for insurance, the next step is to finalise a plan that will fulfil the individual’s need. There are two kinds of insurance plans - term plans and savings-based plans. A term plan insures the individual for a high sum at a low cost. A term plan makes for a good fit in all individuals’ portfolios, irrespective of their profile.
Many individuals also look at life insurance as a savings instrument. Here, apart from insuring the individual’s life for a certain amount (i.e. the ‘sum assured’ in insurance parlance) savings-based life insurance plans also give returns on maturity. This is unlike term plans, which act as a pure risk cover and do not give any returns on maturity.
It could become expensive for an individual to adequately cover himself for the necessary amount with a savings-based plan due to the higher premiums. Instead, individuals can look at covering themselves with a term plan for the necessary amount and invest their savings in various instruments at their disposal like the national savings certificate (NSC), public provident fund (PPF), bank deposits and mutual funds.
4. Select an insurance agent
Having understood how much insurance is needed, an individual then needs to approach a life insurance agent. Individuals wanting to buy insurance should preferably opt for full-time life insurance agents. The agent should have a good track record to show for in terms of offering objective advice in the client’s favour and not his own. This will stand the individual in good stead over the long run since life insurance needs call for evaluation every few years and the insurance agent will help the individual with the same over a period of time.
5. Compare policies across companies
Before zeroing in on an insurance plan from any company, individuals should compare policies across insurance companies. This will help them in evaluating which insurance plan is best suited to their needs. One way of doing this is by contacting the insurance agent and asking him for a comparative analysis of insurance plans. Another way is by visiting the websites of different companies and scouting for relevant information.
For example, an ideal term plan for a 25 year old can be the one that offers him the necessary cover at the cheapest cost. For a unit linked insurance plan however, different criteria like expenses, fund management and flexibility offered will come into the picture. The comparison will differ across various parameters depending on individual needs as well as the type of plan chosen.

How do you compare life insurance policies?
It is absolutely necessary to know the following terms in order to compare life insurance policies:
Premium - the amount of money you have to pay regularly to continue your insurance coverage. The premium amount is contingent upon your age, the policy you select, mode of premium payment and policy term. You could choose to pay premium monthly (as deduction from your salary), quarterly, half yearly or annually.
Term - the number of years you want to insure yourself for. The longer the term, the lower the premium. The policy term varies from a minimum of 5 years to a maximum 55 years. Not all policies offer you all the terms.
Term of premium payment - the number of years you pay premium on your policy. Usually the term of premium payment is the same as the policy term. However, some policies allow you to select a term of premium payment lesser than the policy term.
Sum Assured - the minimum amount that your family receives in the event of your demise. Your family could get more than this amount based on the type of policy that you select.
Bonus - is declared as a proportion of the sum assured, by the insurance company each year. Although declared every year, the bonus is a lump sum payment made to the insured person upon maturity or to his family upon death, in addition to the sum assured.

Maturity - is also known as survival benefit. It is the amount of money you receive from the insurance company if you survive the policy term.
Cover - is also known as death benefit. It is the amount of money your nominee receives from the insurance company upon your death. This usually covers the sum assured plus the bonus.
Returns - the amount of money realised at the end of the term of the policy calculated in percentage terms every year. It is akin to the annual rate of interest that you receive on money that you have invested in a fixed deposit or a mutual fund or any other instrument.
For a given sum assured and term you can Compare Policies on the basis of these parameters and choose a policy depending on your insurance objectives - to maximise cover or to maximise returns or both.

Who can buy a life insurance policy?
Any person above 18 years of age, who is eligible to enter into a valid contract, can go for an insurance policy. Subject to certain conditions, a policy can be taken on the life of a spouse or children.

What is a Whole Life Policy?
When most people think of life insurance, they think of a traditional whole life policy. These are the simplest policies to understand. You pay a fixed premium every year based on your age and other factors, you earn interest on the policy's cash value as the years roll by and your beneficiaries get a fixed benefit after you die. The policy takes you into old age for the same premium you started out with. Whole life insurance policies are valuable because they provide permanent protection and accumulate cash values that can be used for emergencies or to meet specific objectives. The surrender value gives you an extra source of retirement money if you need it.

What is an Endowment policy?
Unlike whole life, an endowment life insurance policy is designed primarily to provide a living benefit. Thus, it is more of an investment than a whole life policy. Endowment life insurance pays the face value of the policy either at the time of death of the policyholder or at the time of maturity of the policy. The policy is a method of accumulating capital for a specific purpose and protecting this savings program against the saver's premature death. Many investors use endowment life insurance to fund anticipated financial needs, such as college education or retirement. Premium for an endowment life policy is much higher than that of a whole life policy.

What is a Money Back policy?
It is an endowment policy for which a part of the sum assured is paid to the policyholder in the form of survival benefits, at fixed intervals, before the maturity date. The risk cover on the life continues for the full sum assured even after payment of survival benefits and bonus is also calculated on the full sum assured. If the policyholder survives till the end of the policy term, the survival benefits are deducted from the maturity value

What is an Annuity Scheme?
Annuity schemes are those wherein policyholder’s regular contributions over a period of time (or a one-time contribution) accumulate to form a corpus with the insurance company. This corpus is used to yield a regular income that is paid to policyholders until death starting from your desired retirement age. Some annuity schemes have the option to pay your survivors a lump sum amount upon your death in addition to the regular income you receive while you are alive.

What are With Profit and Without Profit Plans?
Insurance companies distributes its profits among it policyholders every year in the form of a bonus/ profit share. An insurance policy can be "with" or “without” profit. In the former, any bonus declared is allotted to the policy and is paid at the time of maturity/ death (with the contracted amount). In a “without” profit plan, the contracted amount is paid without any profit share. The premium rate charged for a “with” profit policy is therefore higher than for a "without" profit policy. Those who assure under the `with profit' plan gets a share of the profits but these shares are not the same in the case of all such policy holders as the profits of the company are not the same from the premiums paid by the different class of policy holders. Policies of long duration give more profits to the company than the policy of short duration.

What are Medical and Non-Medical Schemes?
Life insurance is normally offered after a medical examination of the life to be assured. However, to facilitate greater spread of insurance and also as a measure of relaxation, insurance companies have been extending insurance cover without any medical examination, subject to certain conditions.

What is Bonus?
Many insurance companies distributes its profits among it policyholders every year in the form of a Bonus. Bonuses are credited to the account of the policyholder and paid at the time of maturity. Bonus is declared as a certain amount per thousand of sum assured. The term "bonus" is used interchangeably with "with profit".

What are guaranteed Additions?
In some policies, insurance guarantees the bonus/ profit declared as a certain amount per thousand of sum assured. This assured bonus will be credited to the policyholder irrespective of the performance of the insurance company and is known as Guaranteed Additions. Guaranteed Additions will be payable at the end of the term of the policy or early death of the policyholders.

What are the various modes of payment for premium?
Premiums other than single premium can be paid by the policyholders to the company in yearly, half-yearly, quarterly or monthly instalments or through a Salary Savings Scheme. If the mode of payment is yearly or half-yearly, the company may give a rebate of 3% and 1.5% respectively on the premium. If the mode of payment is monthly, company may charge an additional 5% (this additional charge is waived for the Salary Saving Scheme).

What is Surrender Value?
The cash value payable by LIC on termination of the policy contract at the desire of the policyholder before the expiry of policy term is known as the surrender value of the policy. A policy can be surrendered provided the policy is kept in force for atleast 3 years. The bonus is also added to the surrender value if the policy has been in force for atleast 5 years.

How is a life insurance policy useful?
Planning for the financial consequences of a premature death is an essential part of every financial plan. Generally, the consequences are simply too large to ignore and cannot be totally covered with your own resources.
Life insurance is nothing but a contract with an insurance company under which the insured (purchaser) pays a premium in exchange for coverage of specified losses. Life insurance protects your family against the risk of the premature death of you (or your spouse). Life insurance planning should consider your family's short-term needs (for example, medical expenses) and long-term needs (for example, replacing your income).
In the course of our life we are accosted by risk-that of failing health, financial losses, accidents and so on. Insurance is a means by which life's uncertainties are addressed in financial terms. It offers a monetary compensation against those losses. Insurance is considered more as a hedging mechanism rather than a true investment avenue. Life insurance, in particular is essentially acknowledged as a mechanism which eliminates risk substituting certainty for uncertainty primarily by transferring risk from the insured to the insurer

Is life insurance a saving instrument?
Life insurance is mainly considered as a saving instrument rather than an investment avenue as it promotes compulsory savings besides reducing tax burden on the policyholder and protect the family of the policyholder in the event of unforeseen happening. It is the only saving instrument, which covers the life risk besides giving tax concession both at entry (premium paid) and at exit points. The section 10 (D) of the income tax act totally exempts payment of tax on any amount received as bonus against life insurance polices (except for some policies) A loan can also be availed against the some policies.