Friday, December 24, 2010

Your Savings... it's essential!

Mutual funds, shares, indexation, Provident fund, equity......
Whirrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrl ! L
Do they sound too heavy? Do these terms make you feel uncomfortable since you aren’t familiar with them? This article throws light on the basics of banking and marketing. It is explained in a very simple way. You’ll get an idea of what is what and will be able to differentiate these terms. Let these statements be not taken as exact technical definitions.


You usually safeguard your money by depositing in banks (i.e. savings account) and you get some interest on it. But what are the other ways of doing it?
1. Fixed deposits
2. Post office schemes
3. Market linked (equity, mutual fund,...)
4. Gold
5. Land
The 4th and 5th options are self explanatory. We can convert money into gold (which can be kept in bank lockers and for that, monthly service charges are applied) or we can purchase land with that money. Both are properties whose value appreciates with time.

Fixed deposits (FD)
FD: more risk free returns on your money than regular savings account
Here, you decide to deposit money for a fixed amount of time (min: 15 days). Here, the interest rates are higher than normal savings account.
Say, you have 10 lakhs in hand & you need it only after 2 months. If you invest it in normal savings bank, you may get interest at rate of 2-3%. But if you invest as FD at any bank for those 2 months, you get higher interest rate, say 6%. (Rates vary with banks.) At the end of the period (in this example 2 months), you’ll have to take back your money. But in case you want to extend the period, you can.
You can withdraw your money even before the fixed period, but the interest rate fixed will be brought down and you’ll have to make adjustments with the bank for it.
You need to be careful in selecting a bank offering very high interest rates. So better choose a bank that has a good & longer history.
FDs are the most popular investment vehicle for retail investors in India because investors find banks very convenient to deal with.


Post Office savings

What is the difference between depositing in banks and post office? Both are more or less similar. Banks come under RBI control, whereas India post is direct government controlled.
Options:
· Savings account : can have individual or joint accounts with an 3.5% interest per annum
· Monthly Income Scheme (MIS): If you deposit Rs X for min 5-6 yrs, 8% of Rs X will be paid as interest every month.
· Recurring Deposit: 7.5% interest (quarterly compounded). 5 yrs maturity period. Say you deposit Rs 10 in RD, after maturity (i.e. 5 yrs) it will fetch you Rs 728.90.
· Time Deposits: Depositing money for a particular/fixed time. 1/2/3/5 years time deposits are available with 6.25%, 6.50%, 7.25%, 7.50% respectively.
· Senior Citizens Saving Schemes (SCSS): For senior citizens. Only one deposit allowed in the account. 9% per annum.
· Public Provident Fund: 8% per annum, compounded yearly. 15 years agreement. Withdrawal allowed from 6th year.
· Kisan Vikas Patras: Money doubles in 8 years & 7 months. No limit on investment
· National Savings Certificates: 100/- grows to INR 160.10 after 6 years. i.e. 8% interest compounded every six months, but payable at maturity (6 yrs).

Market Linked options
· Equity
· Mutual Fund

Equity

Equity is the amount/fund contributed by the members of a company for the company. Say, there are 5 members who together raise a company. Each has contributed 10 lakhs. These funds refer to equity.
Now, if the members don’t have enough money to expand their business, they declare the company as public from being private. So people will contribute/invest small amounts of funds and these refer to shares. So, they become the shareholders of the company.
Equity and shares both give the same meaning. But equity refers to more of ‘ownership’. “Equity is a one financial instrument by which company
invite the public to invest their money in the company and
investor can become a partner of the company. Generally,
when the company have insufficient money to expand its
business it comes with equity shares.” – allinterview.com

What is stock?

Stock is the net capital of the company. Stock is divided into shares. But stocks and shares are commonly used as synonyms of each other.

"Stock is a general term used to describe the ownership certificates of any company, in general, and shares refers to the ownership certificates of a particular company. So, if investors say they own stocks, they are generally referring to their overall ownership in one or more companies. Technically, if someone says that they own shares - the question then becomes - shares in what company?” – investopedia.com

Share market and Sensex

There are two stock exchanges:
Bombay Stock Exchange (BSE) at Bombay
New Delhi Stock Exchange (NSE) at Delhi.

Both represent the status of stocks of almost all the companies. There are other stock exchanges, e.g. Calcutta stock exchange. But all the trading and investing are generally done through BSE/NSE.

Stock Exchanges use an index that indicates whether value of stocks is increasing/decreasing.

Sensex: index for BSE
Nifty: index for NSE

Investing in share market

This is a long term acquisition. i.e. Buy and hold.
You buy some shares of a performing company and when after a period of time( few days/months/years) the share values increase, you sell it at a good profit.

Trading

Short term acquisition. i.e. Buying/selling in a day.
Here, you need to clear both the transactions (i.e. buy and sell) within that day.
You can also sell shares without owning them, and later buy them when their rates fall down. But, it should be done within that day.

Generally, trading seems to be rewarding and people get more tempted towards making more profit. But it is this temptation that leads to loss, and people realize it after a long time, when they start calculating their net loss/gain.

The best way is to go by investing.

Mutual Funds

Buying or selling shares can be done individually by a person. Here the person maintains an account in a bank for trading/investing. The person should have knowledge about the system of seeing the stocks status, how to buy shares, how to hold or sell, etc.

But in general, nobody does these transactions on their own. People generally go to share brokering company, wherein the brokers, who are trained in doing these transactions, will be available ready with their systems. The brokering company will register its name in NSDL/CSDL and will carry out the trading as per the customers wish. The transactions are done through the brokering company’s account and later, the customers settle the amounts with them.

But, the concept of mutual funds is different. Big organizations have market analysts and experts, who are very skilled in share market activities. People invest their money in these organizations, and the organization performs the trading with these funds called “mutual funds” through the market experts. The profit is divided and given to the investors.

Thus, the concept in mutual funds is that, the customer doesn’t even need to do the trading. It is done by experts on their behalf.

e.g. Birla Sun Life, Reliance Mutual Fund, etc.

But in case, there is a net loss, the customer will have to bear it.

Hence, whatever may be the means, risks will always be there in share market.

What is bear and bull signify in share market?
Bear signifies downward market trend (market values are low), Bull signifies upward market trend (market values are high).

TAX saving

Under the existing tax laws, Section 80C allows every tax payer a deduction of up to Rs 1 lakh on investing in certain notified instruments such as

· Provident fund or PPF
· Life insurance
· Pension plans
· ELSS
· Infrastructure bonds
· NSC
· Principal repayment of house loans (if any)
· Tution fees of children towards school/universities, etc.

ELSS: Equity Linked Saving Scheme.

It is a tax saver scheme. You can invest upto 1 lakh in ELSS and get tax ememptions. It has a lock in period of 3 yrs. E.g.if ur salary is 3 lakhs p.a. and if you invest 1 lakh in Birla Sunlife Tax relief 96, your taxable income is now 3-1 = 2 lakhs. i.e. zero tax for that 1 lakh.



Infrastructure bonds

These investments are in the form of shares, bonds, debentures and are issued by public financial institutions. These are subject to a 3-year lock-in period.

(The two significant economic factors playing vital role in the investment decisions in the infrastructure bonds are Inflation and interest rate movements. For instance, price of a bond will fall if interest rates rise and vice-versa. Bonds are available through issues of ICICI and IDBI, in the name of ICICI Safety Bonds and IDBI Flexibonds. They can reduce tax liability by upto Rs 16,000 per annum.) – mapsofindia.com



What is inflation?

Inflation is the decrease in the purchasing power of money. E.g. if item X costs a rupee today and 1.07 rupee tomorrow, then the inflation is of rate (1.07-1)/1 * 100% i.e. 7%. Thus the value of rupee has come down.
Indexation is the adjustment factor done in income payments according to the inflation rate.

What is liquidity?

Liquidity refers to how often a product is bought or sold. More the liquidity, more are the buyers and sellers, more are the market transactions.

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