What is life insurance?

Life Insurance is a contract between you and a life insurance company, which provides your nominee with a pre-determined amount in case of your death during the contract term. Buying insurance is extremely useful if you are the principal earning member in the family. In case of your unfortunate premature demise, your family can remain financially secure because of the life insurance policy that you have purchased.

The primary objective of life insurance is to protect your family in the event of death. Today, insurance is also seen as a tool to plan effectively for your future years, your retirement, and for your children's future needs. Today, the market offers insurance plans that not just cover your life, but at the same time grow your wealth too.

How much does life insurance cost?

It depends on the policy you opt for. In order to buy a life insurance policy, you must pay premiums to the life insurance company. The amount of premiums payable depends upon the type of policy, policy term, sum assured, and your age.

You could pay the premiums monthly / half-yearly / annually or as a single premium.

The simplest rule is to assume that insurance is a replacement for your lost earning capacity. Calculate your total income for the years that you expect to work.

Assuming that the prevailing interest rate is 8%, you need to insure your life for at least 12 times your current annual income. Assuming that your family needs Rs.10000 annually for household expenditure and the rate of interest would be at 8%, then you need to have a life insurance policy of approximately Rs.120000. If the insurance amount is deposited in a bank by the family, they will get Rs.9600 p.a., which will at least let the family to comfortably lead the current life style.

What is an endowment policy?

An endowment policy is a combination of savings along with risk cover. These policies are specifically designed to accumulate wealth and at the same time cover your life. In simple words, these polices are issued for specific period during which you pay regular premiums. In case of unfortunate death during the tenure of the policy, your beneficiaries will receive the sum assured along with the accumulated bonus (if any). If you survive till the end of the policy term, you will receive the sum assured along with accumulated bonus (if any).

What is term insurance?

Term insurance also known as pure life cover, is the cheapest and the simplest form of insurance. Under this insurance policy, against payment of regular premiums, the insurer agrees to pay your beneficiaries the sum assured in event of your premature death. However, if you survive till the end of the policy term, nothing will be payable to you. This policy has no savings component and the premiums you pay are purely the cost to buy you life cover. The premiums paid for a term policy is very less as compared to the endowment policy. This is beneficial for people those who are under lower income group.

Is there any policy where I can receive money during the tenure of the policy?

Yes, a money back policy will do. This is an anticipated endowment policy with an additional feature of receiving a benefit at regular intervals during the tenure of the policy. The risk cover continues for the entire sum assured in spite of the installments already paid. If you survive till the end of the policy term, the balance sum assured along with accumulated bonus will be paid to you.

What are riders?

Riders are additional benefits that can be attached to your life insurance policy. These riders give you the benefit of increasing your risk cover in case of certain events happening. For instance, if you have taken the “Accident Death Benefit” rider and in case of death by an accident, your nominees can get up to a maximum of twice the basic sum assured or a specific amount depending upon the policy terms.

Are there any advantages in buying insurance at an early age?

Yes. The premium that you pay on your insurance policy is mainly dependent upon two things - your age and the tenure of the policy. The younger you are, the lower is your insurance premium amount. At younger age, you would be physically sound and may not be suffering from any illness. This would entitle you to pay lower premiums for the policy. Therefore, it is advisable to buy a life insurance policy at an early age to reduce the cost of insurance.

What is a mutual fund?

A mutual fund is an investment tool that allows small investors gain access to a well-diversified portfolio of equities, bonds, and other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can be redeemed as needed. The fund's Net Asset Value (NAV) is determined each day.

Mutual funds are financial intermediaries, set up by companies to receive your money and invest via an Asset Management Company (AMC). Also, a mutual fund is an ideal tool for people who want to invest but do not want to be bothered with deciphering the numbers and deciding whether the stock is a good buy or not. A mutual fund manager proceeds to buy a number of stocks from various markets and industries.

The beauty of mutual funds is that anyone with an investible surplus of a few hundred rupees can invest and reap returns as high as those provided by the equity markets or have a steady and comparatively secure investment as offered by debt instruments. Depending on the amount invested in a mutual fund, investors own a part of the overall fund.

What are the different types of mutual funds?

Mutual fund schemes can be classified as open-ended or close-ended schemes depending on its maturity period.

Open-ended Funds

An open-ended mutual fund is the one that is available for subscription and repurchase on a continuous basis.

Close-ended Fund

A close-ended mutual fund has a stipulated maturity period; for example, 5-7 years. The fund is open for subscription only for a specific period from the time of launch of the scheme.

What are the benefits of investing in a mutual fund?

There are several benefits from investing in a Mutual Fund.

Small investments: Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide spectrum of companies with small investments. Such a spread would not have been possible without their assistance.

Professional Fund Management: Professionals having considerable expertise, experience, and resources manage the pool of money collected by a mutual fund. They thoroughly analyze the markets and economy to pick good investment opportunities.

Spreading Risk: Investors with a limited amount of fund might be able to invest in only one or two stocks or bonds, thus increasing their risk. However, a mutual fund will spread its risk by investing a number of sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is diversified at the same time taking advantage of the position it holds. Also in case of liquidity crisis where stocks are sold at a distress, mutual funds have the advantage of the redemption option at the NAVs.

Transparency and interactivity: Mutual funds regularly provide investors with information on the value of their investments. They also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type. Mutual funds clearly layout their investment strategy to the investor.

Liquidity: Closed ended funds have their units listed at the stock exchange, thus they can be bought and sold at their market value. Over and above this the units can be directly redeemed to the mutual fund as and when they announce the repurchase.

Choice: Mutual funds offer investors a wide variety of schemes to choose from. Investors can pick up a scheme depending upon their risk or return profile.

Regulations: All mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investors.

How is investment in a mutual fund different from a bank deposit?

When you deposit money in a bank, the bank promises to pay you a certain rate of interest for the period you specify. On the date of maturity, the bank is supposed to return the principal amount and interest to you. Whereas, in a mutual fund, the money you invest, is in turn invested by the manager, on your behalf, as per the investment strategy specified for the scheme. The profit, if any, less expenses of the manager, is reflected in the NAV or distributed as income. Likewise, loss, if any, with the expenses, is to be borne by you.

What is Net Asset Value (NAV)?

NAV is the actual value of one unit of a given scheme on any given business day. It reflects the liquidation value of the fund's investments on that particular day after accounting for all expenses. It is calculated by deducting all liabilities (except unit capital) of the fund from the realizable value of all assets and dividing it by the number of units outstanding.

How do I track the performance of the fund?

You can track the performance of a fund by checking its NAV. The NAVs are published in financial newspapers and also available on the AMFI (Association of Mutual Funds in India) website www.amfiindia.com on a daily basis.

What is a switching facility?

Switching facility provides investors with an option to transfer the funds amongst different types of schemes or plans. Investors can opt to switch units between dividend plan and growth plan at NAV based prices. Switching is also allowed into/from other select open ended schemes currently within the fund family or schemes that may be launched in the future at NAV based prices.

While switching between debt and equity Schemes, one has to take care of exit and entry loads. Switching from a debt scheme to equity scheme involves an entry load while the vice versa does not involve the entry load.

What is a Systematic Investment Plan (SIP)?

This is an investment technique where you deposit a fixed, small amount regularly into the mutual fund scheme (every month or quarter as per your convenience) at the prevailing NAV, subject to applicable loads.

What is a systematic withdrawal plan?

The unit holder may set up a systematic withdrawal plan on a monthly, quarterly or semi-annual or annual basis to redeem a fixed number of units.

What is a sale price?

It is the price paid by an investor while investing in a scheme of a mutual fund.

What is redemption or repurchase price?

Redemption or repurchase price is the price at which an investor sells back the units to the mutual fund.

Why do mutual funds come out with different schemes?

A mutual fund may not, through just one portfolio, be able to meet the investment objectives of all their unit holders. Some unit holders may want to invest in risk-bearing securities such as equity and some others may want to invest in safer securities such as bonds or government securities. Hence, mutual funds come out with different schemes, each with a different investment objective.

What is the difference between growth plan and dividend reinvestment plan?

Under the Growth Plan, investors realize the capital appreciation of investments while under the Dividend Reinvestment Plan, the dividends declared are reinvested automatically in the scheme.

What are equity or growth schemes?

The aim of growth funds is to provide capital appreciation over the medium to long-term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.

What are debt or income schemes?

The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.

Can the NAV of a debt fund fall?

A debt fund invests in fixed-income instruments, where safety of capital and regular returns are assured. These include Commercial Paper, Certificates of Deposit, debentures, and bonds. While the rate of interest for these instruments stays the same throughout their tenure, their market value keeps changing, depending on how the interest rates in the economy move.

A debt fund's NAV is the market value of its portfolio holdings at a given point in time. As the interest rates change, so do the market value of fixed-income instruments - and hence, the NAV of a debt fund. Thus it is a misnomer that the debt fund's NAV does not fall.

What are the difference between bonds and debentures?

A bond is a promise in which the issuer agrees to pay a certain rate of interest, usually as a percentage of the bond's face value to the investor at specific periodicity over the life of the bond. Sometimes interest is also paid in the form of issuing the instrument at a discount to face value and subsequently redeeming it at par. Some bonds do not pay a fixed rate of interest but pay interest that is a mark-up on some benchmark.

World over, a debenture is a debt security issued by a corporation that is not secured by specific assets, but rather by the general credt of the corporation. Stated assets secure a corporate bond, unlike a debenture. But in India, these are used interchangeably.

What is Load?

The charge collected by a mutual fund from an investor for selling the units or investing in it. When a charge is collected at the time of entering into the scheme, it is called an Entry load or front-end load or sales load. The entry load percentage is added to the NAV at the time of allotment of units. An exit load or back-end load or repurchase load is a charge that is collected at the time of redeeming or for transferring units between schemes (switch). The exit load percentage is deducted from the NAV at the time of redemption or transfer. Some schemes do not charge any load and are called "No Load Schemes" such as an Equity Linked Savings Scheme (ELSS).

What are sector specific schemes?

These are the funds or schemes, which invest in the securities of only those sectors or industries as specified in the offer documents; for example, pharmaceuticals, software, Fast Moving Consumer Goods (FMCG), petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors or industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors or industries and must exit at an appropriate time. They may also seek advice from an expert.

What are Exchange Traded Funds (ETFs)?

ETFs are passively managed mutual fund schemes tracking a benchmark index and reflect the performance of that index. These schemes are listed on the stock exchange and therefore have the flexibility of trading like a share on a stock exchange. It can also be looked as a security that tracks an index, a commodity or a basket of assets such as an index fund, but trades like a stock on an exchange, thus experiencing price changes throughout the day as it is bought and sold.

What are Fixed Maturity Plans (FMPs)?

FMPs are basically debt oriented investment schemes with a pre-specified tenure offered by mutual funds. They invest in a portfolio of debt instruments whose maturity coincides with the maturity of the concerned FMP. The primary objective of a FMP is to generate income while aiming to protect the capital by investing in a portfolio of debt and money market securities. Since FMPs are available with several maturity options, one can invest in the relevant plan depending upon his investment horizon and the requirement of cash flows.

What is an IPO?

IPO is a way for a company to raise money from investors for its future projects and get listed in a stock exchange. Or an IPO is the mode of selling shares to the public in the primary stock market.

A company raising money through IPO is also called as the company ‘going public'. From an investor point of view, IPO gives a chance to buy shares of a company, directly from the company at the price of their choice (In book build IPO's). Many a times there is a big difference between the price at which companies decide for its shares and the price on which investors are willing to buy the shares and that gives a good listing gain for shares allocated to the investor in the IPO.

From a company’s prospective, IPOs help them to identify their real value which is decided by millions of investors once their shares are listed in stock exchanges. IPOs also provide funds for their future growth or for paying their previous borrowings

Who decides the price band?

The company with help of lead managers (merchant bankers or syndicate members) decides the price or price band of an IPO. SEBI, the regulatory authority in India or stock exchanges do not play any role in fixing the price of the public issue. SEBI just validates the content of an IPO’s prospectus.

Companies and lead managers do a lot of market research and road shows before they decide the appropriate price for the IPO. Companies carry a high risk of IPO failure if they ask for higher premium. Many a times investors do not like the company or the issue price and do not apply for it, resulting in unsubscribed or undersubscribed issue. In this case, companies either revise the issue price or suspend the IPO.

Who decides the date of the issue?

Once the draft prospectus of an IPO is cleared by SEBI and approved by stock exchanges, then it is up to the company to go public to finalize the date and duration of the IPO. The company consults with the lead managers, registrar of the issue, and stock exchanges before decides the issue date.

How many days an IPO issue is open?

As per Clause 8.8.1, of SEBI’s (Regulator of IPO) subscription list for public issues shall be kept open for at least 3 working days and not more than 10 working days. In case of book built issues, the minimum and maximum period for which bidding will be open is 3-7 working days extendable by 3 days in case of a revision in the price band.

Is it mandatory to have PAN number to apply for an IPO?

Yes, since July 2006, SEBI made the PAN number mandatory for IPO applicants. Forms submitted without PAN number or with wrong PAN numbers are considered as faulty applications and they are not considered for IPO allotment.

Is it mandatory to have a DEMAT account to apply for an IPO?

Yes. It is mandatory to have a DEMAT account to apply for an IPO. The allocated shares are transferred to the investors’ DEMAT account. If you do not provide the correct DEMAT account information, your application will not be considered for IPO allotment.

Can I apply in an IPO through multiple applications on same name?

No, one person cannot apply multiple times through multiple applications for an IPO. It is a rule and if you want to apply for an IPO though multiple applications with same name or same DEMAT account or PAN Number, all your applications will be rejected. However, you can apply in your family member names. But again all eligible family members should have a DEMAT account and a PAN number.

Can a minor apply for an IPO?

Some companies allow minors to bid for their IPOs and others do not. So it differs from one company to another.

What information should I keep after I submit the IPO application form?

This is a very important question from all IPO investors. If you are applying for an IPO, make sure you retain the following information for future correspondence with the company or registrar of the issue.

1. Photocopy of the application form

2. Photocopy of the cheque issued

3. Application number in case of online IPO submission

Can I revise or cancel my IPO application?

Book Building IPOs: Yes. An investor can revise the bid quantity and the price of an already applied Book Building IPO anytime if the issue is still open for subscription. The investor has to fill a revision form and submit it to the syndicate member.

What is the difference between floor price and cut-off price for a book building issue?

A company coming up with book building public issue decides the price band for the issue. The price band usually contains an upper level and a lower level.

Floor price is the minimum price (lower level) at which bids can be made for an IPO.

Investors can bid for the book build IPO at any price in the price band decided by the company. In the book building process, retail investors have an additional option to choose "cut-off" price for bidding.

Cut-off price means that an investor is ready to pay whatever price decided by the company at the end of the book building process. Retail investor has to pay the highest price while placing the bid at cut-off price. If the company decides the final price lower than the highest price asked for IPO, the remaining amount will be returned to the retail investor.

What is 'Market Lot Size' and 'Minimum Order Quantity' for an IPO?

'Market Lot' and 'Minimum Order Quantity' are two important factors that investors should know while bidding for an IPO.

Minimum Order Quantity, as the name says, is the minimum number of shares that an investor can apply while bidding in an IPO. If the investor wants to bid for more shares, they can apply in multiples of IPO market lot (lot size or IPO bid lot) of shares.


IPO: Power Grid Corporation of India Limited IPO

Public Issue Price: Rs. 44/- to Rs. 52/- Per Equity Share

Market Lot: 125 Shares

Minimum Order Quantity: 125 Shares

Investor can apply in this IPO as below:

At Rs. 44/- * 125 Shares * 1 Lot = Rs. 5500/-

At Rs. 44/- * 125 Shares * 2 Lot = Rs. 11000/-

At Rs. 44/- * 125 Shares * 18 Lot = Rs. 99000/-

At Rs. 52/- * 125 Shares * 2 Lot = Rs. 13000/-

At Rs. 52/- * 125 Shares * 1 Lot = Rs. 6500/-,

At Rs. 52/- * 125 Shares * 15 Lot = Rs. 97500/-

What is the difference between retail investor, Non-institutional bidders and Qualified Institutional Bidders (QIB’s)?

1.Retail Individual Investor (RII) - In retail individual investor category, investors cannot apply for more than one lakh (Rs. 1,00,000) in an IPO. Retail individual investors have an allocation of 35% of shares of the total issue size in Book Build IPO's.

NRI's who apply with less than Rs.1,00,000 /- are also considered as RII category.

2.High Networth Individual (HNI) - If a retail investor applies more than Rs.1,00,000/- of shares in an IPO, they are considered as HNI.

3.Non-institutional bidders - Individual investors, NRIs, companies, trusts etc., who bid for more than Rs.1 lakh are known as non-institutional bidders. They need not to register with SEBI like RII's. Non-institutional bidders have an allocation of 15% of shares of the total issue size in Book Build IPOs.

4.Qualified Institutional Bidders (QIBs) - Financial institutions, banks, FIIs (Foreign Institutional Investors), and mutual funds that are registered with SEBI are called QIBs. They usually apply in very high quantities