Ø
Life insurance
o Many
life insurance products apart from an insurance cover have a savings
o Component,
o Ex:
participating endowment,
o Participating
whole life, where investment risk is borne by insurance company on behalf of the policyholders and
the returns earned are shared with the
policyholders in the form of bonuses.
Ø
Bank deposit
o
Bank deposits are products where an individual
has to invest a lump sum amount for a fixed tenure at a fixed rate of interest
decided at the time of making the deposit.
o
There are three types of bank deposits-
§
traditional deposits
§
Cumulative de posits
§
Recurring deposits;
Ø
Mutual fund
o Mutual
funds provide risk diversification
o Managed
by asset management companies (AMCs),
o Brings
people with a common objective together. Money collected from these people is
o Invested
on their behalf and the returns are shared back amongst them.
o Provides
regular income & capital appreciation.
o The buying and selling of shares is done through
brokerage houses on the two stock exchanges in India-
§
Bombay stock exchange (BSE) and the
§
National
stock exchange (NSE).
o
Equity shares provide three types of income to
the investor dividend income.
o
Bonus share& capital appreciation.
o
An investor can also incur a capital loss on
equity investments.
o
Investors can incur capital loses in equity, if
shares are bought at a higher price and
sold at a lower price due to poor financial performance of the company.
Ø
Bonds
Ø
Bonds are debt instruments that tare issued by
companies, governments and other institutions to raise money from the public.
Ø
Bonds are like bank fixed deposits & pay
regular interest to the investor.
Ø
There are different kinds of bonds:
o
Corporate
bonds;
o
‘government securities (G-secs);
o
Commercial paper; and.
o
Treasury bills.
Ø
Post office savings
Ø
Post offices in India offer several savings
products such as:
o National
savings certificate (NSC).
o Kisan
vikas patra (KVP).
o Public
provident fund(PPF).
o Post
office saving account
o Recurring
deposit account.
o Time
deposit account.
o Post
office monthly income scheme (POMIS).
o Viii)
senior citizens saving scheme (SCSS)
Ø
investment in gold & silver
Ø
a) Gold ETFs (exchange traded funds) are like
mutual funds in which gold units cable traded in electronic format on the stock
exchange, just like shares. Just like shares, in gold ETFs one unit represents
one gram or half a gram of gold.
Ø
B) reasons for investing in gold and silver
include:
o Good
returns;
o Portfolio
diversification
o Hedge
(protection) against inflation; and
o Insurance
against uncertainties
Ø
Tax and inflation implications for savings
products
Income tax act a deduction from taxable income is
allowed for investments made in the following products;
o came into effect on 1 april 1962.
o Under
section 80c a deduction from taxable income is allowed for investments made in
the following products;
o Life
insurance premium paid for traditional products.
o Unit-linked
insurance plans(ULIPs).
o Pension
plans.
o Repayment
of the principal component of home loan.
o Employee
provident funds (EPFs).
o Tuition
fees p aid for children.
o Five-
year tax saving bank deposits.
o Public
provident funds(PPFs).
o National saving certificates (NSCs).
o Senior
citizen savings schemes (SCSs).
o Stamp
duty and registration charges
o Infrastructure
bonds.
o Pension
funds.
o Post
office time deposit – five years
o The
above list is for financial year 2010/2011. The list is revise d from time to
time.
o Section
80d allows deductions from taxable income for the premium paid towards health
insurance for the individual, their spouse and children.
o Section
80 DD allows deduction for expenditure incurred on medical
treatment/training/rehabilitation for a disabled/ handicapped dependent.
o Section
80e deduction from table income is allowed for the interest paid on an
education loan
o Section
24 (B) a deduction from taxable income is allowed on the interest paid (subject
to specified provisions) on a home loan.
Ø
Inflation implication
o
The difference between the inflation trate and
interest earned on investment is called as the return net of inflation
o
When producing future calculations, it
o
‘s better
to consider higher rate of inflation that the actual tr=rate in the post five
to ten years.
o
Inflation and taxation together suppress the
real returns turning out to be lower than the anticipated return.
Ø
Implication of increase in interest rates on
savings products.
o
Loans become expensive & people postpone purchase.
o
People choose to save in bank deposits &
bonds as the interest become attractive.
o
Not a good scenario for the stock marker –
higher interest payment on borrowings can put pressure on profitability.
o
Interest rates are increased to reduce the
demand for credit and increase saving among individuals.
o
The decision to increase interest rates of bank
deposits is mad4e by the reserve bank of India.
Ø
Implication of decrease in interest rates on
savings products.
o
Low interest rates increase demand and
consumption increases.
o
Investment in other products like equities and
real estate are reference due to low interest rates.
o
Investors who have invested at a higher interest
rate in bonds and bank deposits are at an advantage when interest rates fall.
o
Tax benefits of any savings or investment
product should be considered as an additional benefit rather than the primary
benefit.
Ø
Prioritizing savings need
o
Can be prioritized as follows:
o
Contingency/emergency fund-
§
For medical emergencies due to illness or
accidents, sudden travel, child’s tuition fees, temporary job loss etc.
o
Insurance-
§
To have sufficient funds to cover family in case
unexpected death of income provider – this should be the top priority.
§
After having suitable term plan an individual
can look at saving products lime endowment, whole life plans, money-back plans
or ULIPs address their savings needs.
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