Investment School: 2008-09-07

What are child insurance plans?

As most of us have plans on fulfilling our children's upcoming dreams on their career, we are more vigilant in planning for their future financial needs. As with any other financial needs, proper planning will ensure that your child's future financial needs are catered to.

          Most of you would have heard about "children's life insurance plan". The very common misconception is that it insures child's life, but it is not so. It is a policy which insures the parent only but the child get benefited out of it. Lets see how it works.

1. A children policy is taken by the parent as the policy holder.

2. The important feature of the policy is WOP(Waiver of Premium). In case if the parent dies during the term of the policy, all the future premiums are waived for the policy and the sum assured is paid immediately to the child of the parent.

Eg. For a 25 years old with a kid of 1 year old, the child insurance policy from hdfc for 20 years of sum assured of 1 lac have a premium of 4900/month. In case of eventuality to the parent 5 years down the line, the kid will get 1 lac immediately and all future premiums will be cancelled. On the other hand, if policy matures 20 years down the line, the kid will get 2.25 lacs when he/she turns 21.

3. There are quiet interesting child insurance policies. For eg LIC has a child insurance policy gives the option of giving 10 half-yearly installments on maturity instead of giving a bulk amount.

4. There are few insurance policies, which gives a assured amount to kid in various period of their life. (when kids turns 18, he/she receives certain %age of amount, when he/she turns 21, she gets certain %age and so on).

5. Child insurance policies comes in two flavours - ULIP and Endowment type. Endowment offers fixed rate of return while ULIP returns depends on the market. So you can make a decision after evaluating both the options.

     So as with any other investment products, there are variety of child insurance plans available in the market. Have a good analysis of the policies before buying it, BUT one should definitely give  a portion of insurance premium to child insurance policies.

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What is ELSS?

Most of us during the month of march rush up to our auditors or financial planners for tax planning to invest upto 1 lac which qualifies for tax exemption under section 80 (c) . Most of us end up in paying LIC premium,PPF,NSC,5 year bank FDs and other traditional tax savings instrument. Let us go through one another option available to us - ELSS

ELSS - Equity Linked Savings Scheme is a type of mutual fund which is qualified for tax exemption under section 80 c. Lets dig into more information on this scheme.


1. It is a mutual fund with a lock in period of 3 years. The lock in period of 3 years is much lesser than lock in period of 15 years in PPF and 6 years in NSC or 5 years in bank FD.

2. It is a equity diversified fund and hence the returns over a longer period of time is higher than the fixed income instruments like PPF,NSC.

3. With high returns, comes high risk associated with the investment.Hence if you are an investor who does not want to take any risk with your investment, you can avoid ELSS.

4. You can invest upto 1,00,000 in ELSS for getting tax exemption.

5. You can invest periodically via SIP option and that brings in discipline and cost averaging in your investment.

6. You can opt for dividend option and get some money out of the scheme even during the lock in period. This is not possible in PPF or NSC in a duration of 3 years from investment.

So start exploring the various ELSS schemes in the market and choose a one with good track record and a good rating. You can refer for fund ratings

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What are the benefits of mutual funds?

Of late there is an increase in awareness on various investment products among investors and it goes without saying that mutual funds have got its own share in 4% of Indian household savings.

So why is mutual fund preferred over direct investment in stocks?For a first time investor who doesnt have much knowledge on investments, mutual fund provides numerous advantages.

1. The most obvious reason in favour of Mutual Funds are that you can make an investment even at Rs 100 per month via SIP. You need not be blessed with huge sum of money to invest in mutual funds. Typical SIP amount per month is 1000-2000 in most cases.

2. Professional management of money put in by investors is an added advantage in mutual funds. Most of us do not have the time and bandwidth to place buy and sell orders in markets in a regular basis. It is always better to leave a job to professional fund managers than we breaking our heads.

3. Another advantage is that a mutual funds invests in a good set of stocks and it is not limited to 1 or 2 stocks. Typically a fund invests in 30-50 stocks and hence there is diversification in investment. It also reduces the risk associated with the failure of single stock.

4.Mutual funds (except for ELSS) have no lock in period. They provide ample liquidity to investors.

5.ELSS - a category of mutual funds which is eligible for tax benefits and at the same time can generate better returns than traditional tax saving instruments over a long period of time.

Keeping these in mind, for a beginner in investments, it is always advisable to opt for mutual funds than directly jumping into stocks.

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What is the right time to invest?

Most investors in their initial days asks the famous question - "What is the right time to invest (or) When can i start investing in markets?". A simple answer to this question is "Anytime is good time for investing provided you have a defined time frame of your investment".

The question should be rephrased as "How long should i be invested to attain my financial goals and How much should invest periodically(SIP) over a longer period of time". Investment over a longer period of time is always fruitful and facts supplement it. Sensex has come along all the way from 100 to 15,000. If you had invested 10,000 rs in infosys ipo in early nineties, you are crorepathi by now.

Follow the simple steps while making/tracking your investment.

1. Don't Waste time

The earlier you make investments, the better are your returns. The compounding rate of return increases with the number of years you are invested. Eg. 10,000 invested for 3 years at 15% return is worth 15000 whereas the same sum invested for 10 years at 15% return is worth 40,000. So do not time the markets to buy at lower levels. It is very difficult to find the bottom of the market.

2. When do you need money?

Decide on when you need the money down the line. For anything less than 5 years, do not go for stocks or equity mutual funds. Equity should be considered only for a longer period of greater than 5 years. For short to medium term investment , go for debt instruments

3. When to sell?

After you had made your investment, you should decide on when to cash out to meet your financial goals. There are two scenarios where in you can redeem your investments.

1. When your financial goals are met.
2. When the investment in stocks/mutual funds become overvalued.

4. Don listen to rumours

Do not redeem your investment going by the rumours in television and stock market of a correction or a crash. Take your decision on your own.

5. Consistent Review

The job is not done just by investing. One should always keep monitoring his/her investments in a regular basis and should take a decision based on the review.Do not churn the portfolio too often.

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what is return on equity?

Let us dig through yet another important technical criteria associate with a stock - Return on Equity(ROE). It is simple to calculate and helps in measuring the profitability and asset management of the company.

Return on Income = Net Income/Shareholder's equity

Net Income can be obtained from Profit and Loss statement and Shareholder's equity can be obtained from the balance sheet.

ROE indicates if a company is creating assets or eating up lot of cash in due course of doing its business.

If ROE is 15%, it means 15 rs of asset is created for every 100 rs invested in the stock.ROE also indicates if the additional cash investment made by the company is produced by the return on existing investment or out of fresh cash investment.

ROE can also be interpreted as

ROE = (one year's earnings / one year's sales) x (one year's sales / assets) x (assets / shareholder equity)

Lets see how ROE can give information on profit margin,asset management in the next articles.

Learn More : What is Earnings per share?

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How to analyze company's annual report?

Many of us are proud owners of shares of bluechip companies and we receive company's annual reports every year. Most of us do not give due importance to the annual reports. Many useful information can be obtained from the annual reports and those can help you decide on your future investment in the particular company.

Let us glance through some important information that needs to be looked at a company's annual report mailed to you.

1. Look out for the current state of the company and what are the changes which have evolved in the company over the past one year.Track the progress over the past few years.

2.Get information on new acquisitions or any major developments in the company.

3. Get to know about various offerings/products from the company.Learn what is unique about them and how are they different from the competitors.

4. Know what is the company's plan for the upcoming financial year.

5. Learn more about short term and long term goals from the annual report.

6. Go through the profit and loss account statement.

7. Analyse the sales growth and earnings growth over past 3-5 years which will be given in the annual report.

8. Go through the various assets,liabilities of the company from the balance sheet of the company.

In addition to these, many other useful information can be inferred from a company's annual report.Remember , every share holder has the right to know all details about his/her own company.

So , go and get the annual reports of your companies from your dusty shelves at home and go through them and get knowledgeable about your company.

Learn More : How to invest?

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How to minimize risk in investment?

In the previous article, we had seen the various risks involved in stock investing, let us now drill down on the steps needed to minize the risks involved.

Knowledge - Lack of knowledge is the greatest risk involved in investing.One should get familiar with the concepts and parameters in investing before investing. Knowledge will not only help reduce risk but also helps create wealth in a significant manner. Before investing in any stock, analyze the company thoroughly.

Don't Invest - This may sound strange but it makes sense to stay away from a stock or sector if you don't understand how the industry/company operates. It is always advisable to invest in stock/sector which you understand better than those which you don't understand. Try to read more about a stock/industry to gain more knowledge. Even after investing, you should always track the stock's behavior/reaction to various events in the market.

Get your financials right - Have your buffered cash(3-6 times * monthly expense) always ready before investing. Go for investing only if you have a positive net worth. Have adequate term insurance for your life.

Diversify your investments - Don invest all your money in a single stock/sector. Invest in different types of instruments like debt,equity(mutual funds,stocks). Don put more than 10% of your investment in any one stock. Invest across various sectors and don go for sectoral funds or stocks.

Learn More : How to calculate insurance cover?

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