BASICS

OF
INVESTMENTS
WHAT IS INVESTMENT?

“Investment is Wealth Creation for fulfilling Life Goals.”

“Investment is compromising today's Comfort to achieve future Goals.”
“Investment is Letting Your Money Work for You.”
“Investment is Creating Second Source of Income”.

AN OVERVIEW ON THE VARIOUS INVESTMENT OPTIONS:

FIXED DEPOSIT (FD)/RECURRING DEPOSIT (RD)

PUBLIC PROVIDENT FUND (PPF)
MUTUAL FUNDS
NATIONAL PENSION SCHEME (NPS)
GOLD
GOVERNMENT BONDS
PROPERTY

VARIOUS LIFE STAGES:

LEARNER (20-25 YRS)

EARNER (25 YR ONWARDS)
PARTNER (28-30 YRS)
PARENT (28-35 YRS)
PROVIDER (35-55 YRS)
EMPTY NESTER (55-65 YRS)
RETIREMENT (AGE 60 & BEYOND)

WHY INVESTMENT PLAN?

1. Wealth Creation by beating Inflation

2. Child Education
3. Retirement Planning
4. Marriage
5. Tax Saving
6. Disciplined Saving Tool

WHO’S WHO IN INURANCE

Proposer: A proposer is the person who sends the proposal form for taking an insurance
policy and pays the premium.
 Insurer: An insurer is the company which provides insurance.
Insured: An insured is the person whose risks have been covered by the insurer.
Nominee: The person nominated by the policyholder is known as Nominee. He only gets the
right to receive the policy money in the event of the death of the policyholder. Nominee
cannot use the money. Nominee can be more than one. Nominee can be changed later.
Beneficiary: The person to whom the policy proceeds will be paid in the event of the death
of the insured. These proceeds are paid to the beneficiary through a Trust. Beneficiary has
the right to use the money. Beneficiary cannot be changed.
Assignment: This is the process of assigning or transferring the rights and title of the policy
from one person to another.
Assignor: Assignor is the policyholder who transfers the rights and the title.
Assignee: Assignee is the person who derives the title and the rights from the assignor.
The assignment can be of two types. They are as follows:
a. Absolute Assignment: It is the act of complete transfer of the ownership (all rights, benefits and
liabilities) of the policy completely to other party without any terms and condition.
b. Conditional Assignment: It is one of an Assignment form where transfer of an ownership in a life
insurance policy will happen subject to certain terms and conditions. After fulfilling the condition lay
down at the time of Assignment ownership will again get transferred back to Assignee from assignor.

COMMON TERMINOLOGIES
Sum Assured: It is the guaranteed or the claim amount which is paid in case of the death or
maturity, whichever is earlier (in case of traditional plan) and in case of death in ULIP. This is
paid to the policyholder in case of the maturity & the nominee or the beneficiary in case of
insured’s death.
Premium: The amount paid by the insured to the insurer to cover his risks. In other words,
premium is the price of insurance. It is always paid in advance.

Policy Term: The duration or the tenure of the policy.

Premium Payment Term: It is the term for which the premiums are paid by the policy holder
to give him the insurance cover. It can be regular pay, limited pay and single pay.

Grace Period: Policy holders are required to pay the premiums to the insurer on the due
dates. If in case they fail to do so the customer gets some extra time to make the payment
for the premium. This extra time given to the customer is called Grace Period.
For monthly mode Grace period is 15 days and for yearly, half yearly and quarterly mode it is
30 days.

Free Look Period: This period is a time period that an insurance company allows the
customer after the receipt of the policy papers or policy bond. If the customer is not
satisfied with the terms and conditions of the policy, then he/she has the right to cancel or
make modifications in the policy.
For Online mode it is 30 days and for offline mode it is 15 days.
Cancel Before Issuance: No Deduction
Cancel After Issuance: Pro rata risk premium, stamp duty, admin cost, medical charge (if any)
 Reinstatement Period: The Reinstatement Period begins after the grace period is over and
the premiums remain unpaid. The process wherein the customer can restart the lapsed
policy. It is of 2 years from due date. The requirements for revival are

Fill the revival form

Pay the unpaid premium and penalty charges

Good health Certificate (If revival is done after 6 months)

Riders: These are the additional benefits which can be purchased by the customer on paying an
extra amount with the premium. They are optional for the customers and can be purchased at the
time of inception of the policies.
Types of Riders:
Accidental Death Benefit Rider: This rider gives the benefit to the nominee in case the death
of the customer is accidental
Accidental Total and Permanent Disability Rider: This rider gives the benefit to the
customer in case there is no death but the insured is permanently disabled because of the
Accident.
Accidental Total and Temporary Disability Rider: This rider gives the benefit to the
customer in case there is no death but the insured is temporary disabled because of the
Accident.
Term Rider: This rider is to increase the death benefit for the customer. It would only give
the benefit on the death of the customer.
Waiver of Premium Rider: This rider gives the benefit if in case the proposer dies and the
insured is alive. The insured does not have to pay the future premiums of the policy and the
policy continues.
Critical Illness Rider: This rider gives the benefit to the insured that if case the insured is
suffering from any of the critical illnesses the Sum Assured of the Rider is given to the
insured.

TYPES OF INVESTMENT PLAN

1. TRADITIONAL
A. PARTICIPATING: WITH BONUS POLICIES
B. NON PARTICIPATING : WITHOUT BONUS POLICIES
2. UNIT LINKED INSURANCE PLAN

DIFFERENCE BETWEEN TRADITIONAL & ULIP

Traditional Plan ULIP

Returns (Sum Assured) are Returns are Non- Guaranteed in Nature.
Guaranteed in Nature Based on Market Performance.
 Low Returns. High Returns.
Not Able to Beat Inflation Able to Beat Inflation
Rigid in Nature Flexible in Nature
Non Transparent in Nature Transparent in nature

TYPES OF BENEFIT IN TRADITIONAL PLAN:

A. Death Benefit: Benefit payable after the death of Life assured during the policy term is known as
death benefit.

Higher of Sum Assured or 10 * Annual Premium or 105% of Total Premium Paid

B. Maturity Benefit: Benefit payable after the completion of policy term is known as maturity benefit.

Participating Plans: Sum Assured + Bonus (Only SA is Guaranteed)

Non Participating Plans: Sum Assured (Fully Guaranteed)

C. Survival Benefit or Money Back benefit: A fixed percentage of Sum Assured paid at fixed regular
intervals in between the policy term.

BONUSES IN TRADITIONAL PLAN

Since most of the Traditional Plans are participating plans, hence there are bonuses declared by the
company for the customer.
Actuary: Actuary is the person hired by IRDA; the major woks of the Actuary are as follows:
 To design the plans for the companies and decide the basic premium for the policies
 Do the actuarial valuation of the company and declare the bonuses from the profit.

Formula to Calculate Bonus is Mortality + Income - Expenses

Expenses: Whatever the company spends are the expenses like salary, infrastructure cost, claims
given to the customer.
Mortality: The charge that the company charges to cover the risk of death in Investment Plans.
Income: The co. invests the premiums given by the customer in the market. 85% of the total
premiums paid by the customer would be invested in the Guaranteed Market e.g., Government
Securities, FDs, RDs, PF, Loans. Rest 15% of the total premium paid by the customer is invested in
Equity Market.

TYPES OF BONUS:
1. Reversionary Bonus: This bonus is declared by the company on the basis of their market
performance. This is revised every year based on the actuarial calculation of the company.
This can be Simple Reversionary Bonus or the Compound Reversionary bonus.
2. Interim Bonus: When there is a claim because of death of the insured or when the policy
is maturing between the two valuation dates that policy would not participate in the
valuation so there is a surplus given to the customer depending on the period that the policy
was active after the last valuation.
3. Terminal Bonus: This is the bonus given to the customer by the insurance company as an
incentive to continue with the company for long-term until the end of the policy. This bonus
 is also known as a ‘persistency bonuses.

CONDITIONS IN TRADITIONAL PLAN:

What if the Customer is not able to pay premium in Traditional Plan?

1. GRACE PERIOD
2. SURRENDER
3. PAID UP

SURRENDER:

When the customer terminates the contract before the expiry of the Policy Term is known as
Surrender of the policy.

Guaranteed Surrender Value: Every company guarantees its customers a percentage of the total
premiums paid as a refund amount when he surrenders the policy. This percentage varies depending
on the year of Surrendering the Policy.
Basic calculation formula:
GSV = x% of all the premiums paid – Survival Benefits
(Where x depends upon the year of surrender)

Conditions:
If a policy has a Premium Paying Term < 10 years, the plan can be surrendered after initial 2 years of
premium payment.
If the policy has a Premium Paying Term >=10 years, the plan can be surrendered after initial 3 years
of premium payment

PAID UP:

If the customer has stopped paying the premium before the expiry of the premium paying term,
however the premiums for 2 or 3 continuous years have been paid, the customer has an option to
continue the policy without paying any further premiums. The Sum Assured is reduced. This is called
a Paid-Up policy.

When the policy has attained the Paid-Up status, there would be a value calculated on the basis of
the premiums paid by the customer.

The formula to calculate

Paid Up Value = Number of Premiums Paid/ Number of Premiums Payable*
Basic Sum Assured + Bonus (if any)

This value is also known as Paid-Up Sum Assured or Reduced Sum Assured.
It is paid to the customer on the maturity of the policy or the death of the insured and Life Cover
continues.
(Conditions are same as for GSV)

LOAN:
Traditional policies offer the Loan Against the policies when they have attained a Guaranteed
Surrender Value. It is almost 80% to 90% of Surrender Value.
The loan given is a percentage of Surrender Value.

UNIT LINKED INSURANCE PLAN

A Unit Linked Insurance Plan (ULIP) is a product offered by Life Insurance companies that, unlike a
pure insurance policy, gives investors both insurance and investment under a single integrated plan.
INSURANCE + INVESTMENT
Investment is done on the basis of the need and the Risk Appetite of the customer.
The investment amount is expressed in Units.

FINANCIAL MARKET

1. EQUITY (High Risk, High Return)

A. ULIP
B. MUTUAL FUNDS
C. GOLD
D. PROPERTY
2. DEBT (Low Risk, Low Return)
A. TRADITIONAL PLAN
B. FIXED DEPOSIT
C. RECURING DEPOSIT
D. PUBLIC PROVIDENT FUND NATIONALSAVING CERTIFICATE
E. SUKANYA SAMIRIDHI YOJANA
3. CAPITAL GUARANTEE (Zero Risk,High Return): 100% of your Premium paid will be Guaranteed.
EQUITY + DEBT
TYPES OF BENEFIT IN ULIP:
A. Death Benefit: Benefit payable after the death of Life assured during the policy term is known as
death benefit.

Higher of Sum Assured or Fund Value or 105% of Total Premium Paid

B. Maturity Benefit: Benefit payable after the completion of policy term is known as maturity benefit.
Fund value is the Maturity benefit in ULIP.

FUNDS IN ULIP: A resource or pool where the investor’s money is collected and managed.
Equity Fund: The funds in which the customer's amount is invested by Insurance Company by in
different types of shares of different types of the company. In order to diversify the loss of the
customer the investment in done in different sectors and in the companies of a different nature.
Large Cap Companies: Market Cap Greater than 20000 Cr
Mid Cap Companies: Market Cap between 5000 Cr to 20000 Cr
Small Cap: Market Cap less than 5000 Cr
Debt Fund: The customer's money is invested majorly in the Government Securities and the
Government investment tools available in the market.
Balanced Fund: The fund wherein the money is invested both in Equity and in Debt and Money
Market Instruments.
Money Market Fund: The fund wherein the investor money is invested in instruments having
maturity period less than a year like treasury bills, certificate of deposits etc.
BSE: Bombay Stock Exchange. Established in 1875, the BSE (formerly known as Bombay Stock
Exchange Ltd is Asia's oldest stock exchange. The BSE is the world's 10th largest stock exchange with
an overall market capitalization of more than $2.2 trillion on as of April 2018.
Sensex: (Year 1979) Top 31 Companies
NSE: National Stock Exchange Established in 1992
Nifty: (Year 1996) Top 50 Companies
Net Asset Value: It is the market value of the assets of the scheme minus its liabilities. In
simpler words it value of the Units.
Fund Value: It is the product of the total number of units under the policy and the NAV. The
fund value for the purpose of claims, surrenders or any other clause stated shall be
calculated on the basis of NAV. On the maturity the Fund Value is given to the insured.
FLEXIBILITIES IN ULIP:
Top Up: Any additional amount paid over & above regular premium is known as top up. This
facility is available for the customers after the first year of the inception and before the last 5
years of the policy maturity. When the customer makes the top-up premium the Sum
Assured is increased in accordance with the top-up premium paid and also the fund value
increases.
Switch: An option which enables you to transfer your units from one fund to another. This is
on the customer’s decision where he wants to transfer his money. Virtual redemption is
required. No prior notice is required. Can be done through both online and offline mode.
Premium Re-Direction: It is the facility that allows a policyholder to modify the allocation of
amount of renewal premium into a different investment pattern from the option
 (investment pattern) exercised at the inception of the policy.

Switch Premium Redirection

Deals in units Deals in Cash
Done after payment of premium Done before payment of premium
Virtual redemption is required No virtual redemption required
No prior notice is required Prior notice is required

Settlement Option:
It is applicable after the maturity of the policy.
It is also known as periodical payment, means an option available to the policyholder to
receive the maturity benefit as a structured payout over a maximum period of 5 years after
maturity. It can be for 2/3/4/5 years.
No death benefit is present during this option.
Anytime you can discontinue this option without any charges.
The payouts will be in yearly, half yearly, quarterly and monthly mode.
This is optional for the customer to opt for it or not.
Only Fund Management Charge will be applicable during this period.
Redemption: It means encashment of the units at the prevailing NAV offered by the company or
conversion of units into cash. This is applicable in case of exercising partial withdrawal, switch,
maturity, surrender, settlement option or in the case of payment of death benefit.

LOCKIN PERIOD: All the ULIPs have a lock-in period of 5 years. This is the time when the
customer cannot withdraw the amount from the policy. This promotes the long term saving
habits amongst the customers. In this period Fund Management Charge and Discontinuance
policy charge are applicable.

DISCONTINUANCE PROCESS IN ULIP

PRE LOCKIN DISCONTINUANCE:

If the customer wants to discontinue the plan before the lock in period there is a procedure
that is followed and the customer would get the money after the Lock-in Period. The
procedure is as follows:

Fund Value - Discontinuance Charges

=> Remaining Amount -> Moved to Discontinuance Fund

The customer gets a min guaranteed Compound Interest of 4% on the remaining amount.
There is FMC charge of 0.5% deducted from the Compound Interest of 4%.
Finally the customer gets the Compound Interest of 3.5% on the remaining amount.

The customer gets the Final Amount when the Lock-in Period is over (after the first 5 years of the
Policy)
POST LOCKIN DISCONTINUANCE:
The customer get the Fund Value if he plans to discontinue the plan post lock in period.
There is another option available with the customer that the customer can opt for the paid
up. The customer's life cover would be reduced as per the paid up value. The fund value
available would be re-invested for the time period which is left in the policy term. The
customer would get the fund value at the maturity.

CHARGES IN ULIP:

There are a few charges which are there in all the ULIPs and are applicable to for all the
plans. The charges are as follows:

Premium Allocation Charges These charges are deducted upfront from the premium paid by
the client. These charges account for the initial expenses incurred by the company in issuing
the policy- e.g. Cost of underwriting, medicals & expenses related to distributor fees. After
these charges are deducted the money gets invested in the chosen fund. There is a premium
allocation charge for the top-up premiums as well.
Policy Administration Charges: These charges are deducted on a monthly basis to recover
the expenses incurred by the insurer on servicing and maintaining the life insurance policy
like paperwork , work force etc. These charges are deducted by the decreasing the units.
Fund Management Charges: A portion of the ULIP premium, depending on the fund chosen,
is invested either in equities, bonds, g-sec or money market instruments. Sometimes it is a
combination of these. Managing these investments incurs a fund management charge
(FMC). The FMC varies from fund to fund even within the same insurance company
depending on the underlying assets in the fund. Usually a fund with higher equity
component will have a higher FMC. These charges are also deducted by the decreasing the
NAV.
Mortality Charges: Mortality expenses are charged by life insurance companies for providing
a life cover to the individual. The expenses vary with the age and either the sum assured or
the sum-at-risk which is the difference between Sum Assured and fund value of the
insurance policy of an individual. Mortality charges are deducted on a monthly basis. They
are again deducted by decreasing the units.

OTHER CHARGES:
Partial Withdrawal Charges: These are the charges which are charged to the customer if the
customer is availing the facility of the partial withdrawal.
Revival Charges: If in case the customer wants to revive a lapsed policy there would be an
extra charge that would be levied on the customer.
Premium Re-direction Charges: These are the charges that are levied to the customer in
case if he wants to avail the facility of the Premium Re-direction.
Switching Charges: There are a few free switches provided to the customer in ULIPs. After
exhausting all the free switches if the customer wants to do further switching there would
be a charge levied to him.

Discontinuance Charges: If the customer stops paying the premiums for the policy before
the maturity or the expiry of the PPT, the policy is discontinued and the customer is charges
 with the Discontinuance Charges as per the company’s policy.

TAX BENEFITS
SECTION 80(C)

This section has been introduced by the Finance Act 2005. Broadly speaking, this section provides
deduction from total income in respect of various investments/ expenditures/ payments in respect
of which tax rebate u/s 88 was earlier available. The total deduction under this section (along with
section 80CCC) is limited to Rupees 1.50 lakh only.

Some of the financial instruments are mentioned below

 Repayment of Home Loan Principal

 Registration Charges and Stamp Duty paid for a House Property

 Life Insurance Premiums (LIP)

 Provident Fund (PF) & Voluntary Provident Fund (VPF)

 Public Provident Fund (PPF)

 Equity Linked Savings Scheme (ELSS)

 Pension Funds – Section 80CCC

 Fixed Deposit with Scheduled Bank with lock-in greater than 5 years

 Unit linked Insurance Plan

 Sum deposited in 10 year/15 year account of Post Office Saving Bank

 Investments in Sukanya Samriddhi Scheme (w.e.f. 01.04.2015}

 Certain payment made by way of instalment or part payment of loan taken for
purchase/construction of residential house property.

 Sum paid under contract for deferred annuity for individual, on life of self, spouse or any
child.

 National Savings Certificate (NSC)

 Senior Citizen Saving Scheme

 Children's Tuition fees

SECTION 80 D
In case the payment of medical insurance premium is paid by the assess e for himself, spouse
dependent children- Rs.25,000 In case, the person insured is a senior citizen, the deduction allowed
should be Rs.50000.

In case the payment of medical insurance premium is paid by the assesse for parents, whether
dependent or not Rs.25000. In case the parents of the assesse are senior citizen the deduction
allowed under Section 80D should be Rs.50000.

SECTION 10(10D)

Under this section, if the policyholder has taken the sum assured as 10 times or more than 10 times of
the annual premium while buying the policy, then the maturity benefit as well as a death benefit will
be totally tax free. If the sum assured is less than 10 times of Annual premium then 2% TDS will be
deducted.

Existing Tax Slab:

INCOME TAX SLAB TAX RATE

Upto 2.5 Lac NIL

2.5 Lac to 5 Lac 5%

5 Lac to 10 Lac 20%

Above 10 Lac 30%

New Tax Slab:

INCOME TAX SLAB TAX RATE

Upto 2.5 Lac NIL

2.5 Lac to 5 Lac 5%

5 Lac to 7.5 Lac 10%

7.5 Lac to 10 Lac 15%

10 Lac to 12.5 Lac 20%

12.5 Lac to 15 Lac 25%

Above 15 Lac 30%

Along with HRA, other deductions removed under New Tax Regime are

U/S 80C – Up to Rs.1.5 lakh

U/s 80D – Up to Rs.25000 (For senior citizens Rs.50000)

Tax rebate u/s 87A – Up to Rs.12500 on taxable income up to Rs.5 lakh

Deduction on Home Loan interest – Up to Rs.2 lakh

Deduction on Auto Loan interest for purchase of electric vehicle u/s 80EEB – Up to Rs.1.5 lakh

Additional deduction on Home Loan interest on affordable houses u/s 80EEA – Up to Rs.1.5 lakh