KNOWLEDGE CENTER

  • LIFE INSURANCE
  • MUTUAL FUNDS
  • GOLD ETFs
What is life insurance?
Do I need life insurance?

If you have dependents and financial responsibilities towards them, then buying life insurance should be a priority for you.

Who is most benefited by taking life insurance?

Life insurance is particularly useful if you are the principal earning member in the family. In case of an eventuality, your family can aim at achieving financial security in your absence with the proceeds of your life insurance policy.

What are the benefits of life insurance?
  • The most important benefit of life insurance is financial security of the family in the event of death. Insurance is also useful as a tool to plan for your future i.e. retirement, children's educational and marriage, among others.
  • Life insurance can also be effective in mobilizing savings. Certain plans have a built in savings element to meet the dual financial goals of life cover and savings.
  • Your insurance policy can be pledged as collateral for availing a loan from banks and financial institutions. In case of death, the loan can be repaid from the proceeds of the insurance policy.
How much does life insurance cost?

Life insurance is bought by paying premium to the insurance company. The premium amount depends upon the term of policy contract, type of policy, sum assured and your age – the amount is indicated at the beginning even before you opt for the policy.

What tax benefits are associated with life insurance?

Tax exemptions available under insurance and pension policies include:

  • Under Section 80C premiums paid up to maximum of Rs 150,000 subject to maximum of 20% of sum assured under unit linked plans and endowment plans.
  • Under Section 80CCC premiums paid up to maximum of Rs 150,000 under pension plans. Under Section 80CCE, the aggregate amount of deduction under Section 80C, Section 80CCC, and Section 80CCD cannot exceed Rs 150,000.
  • Under Section 80D premium towards critical illness rider, subject to a maximum of Rs.10,000 (an additional Rs 5,000 for senior citizens).
  • Maturity benefits are tax-free under Section 10(10D). However,when premium exceeds 20% of sum assured for a year, benefits paid in excess of premiums paid will be taxable.
What is the ideal amount of insurance?

The most widely accepted method for calculating the life cover involves taking into account the total income you are expected to earn over your remaining working life, expressed in 'present' rupee terms. Also referred to as ‘Human Life Value’ (HLV), this is the sum your dependents will need in your absence and should be the minimum insurance you must consider taking.

What is term insurance?

Term insurance is the most basic form of life insurance. It offers life cover with no savings / profits. As a result, premiums are low and affordable compared to other life insurance variants.

A term plan pays out a fixed sum of money or the sum assured, to the beneficiaries if the policyholder dies over the policy tenure. If the policyholder survives the term, there is no pay out.

What is endowment insurance?

An endowment plan combines life cover with savings. There is a pay out, which includes profits, under both scenarios – death and survival.

Endowment plans provide life cover and accumulate wealth which explains the higher premium vis-à-vis term plans.

What is Unit linked insurance plan (ULIP)?

Unit linked insurance plan or ULIP is a variant of the endowment plan with investments linked to markets. They carry higher risk, with commensurate rewards. They offer the option to choose the allocation for investments in stock/debt markets. ULIPs declare what is known as net asset value (NAV) on the lines of mutual funds. An investor enters and exits the ULIP based on the NAV.

What is moneyback life insurance?

A moneyback life insurance policy is a variant of an endowment plan. As the name suggests, the policy makes periodic payments over the policy term. The risk cover continues for the entire sum assured notwithstanding the installments already paid. If you survive the term, the balance sum assured plus accumulated bonus is paid back to you.

What is a whole life plan?

A whole life plan covers the policyholder over his life time. The plans have an extended tenure vis-à-vis regular insurance plans as the policyholder pays a premium till the time he is alive. On death, the proceeds are paid to his family.

What are riders?

A rider is an add-on to the primary policy and offers benefits over and above the policy subject to certain conditions. They offer financial cover over and above the basic sum assured which is triggered by a specific event like incidence of critical illness, death by accident, death by cancer, among others. The life cover remains intact even after the event. So if you have drawn on a particular rider, you still remain eligible for the death benefit on the life insurance plan.

What is a mutual fund?

Mutual fund is a trust that pools savings of investors with a common financial goal. Each scheme of a mutual fund can have different character and objectives. Mutual funds issue units to investors which represents an equitable right in the assets of the mutual fund.

What is an asset management company?

An asset management company (AMC) is a regulated organisation that pools money from investors and invests the same in a portfolio. They charge a management fee, which is normally governed by the market regulator (SEBI).

While fund house, mutual fund and AMC appear the same and are used interchangeably they differ in a technical sense.

Who is a Sponsor?

The Sponsor(s) is the company that launches the mutual fund / AMC. For instance, SBI Mutual Fund is sponsored SBI Bank, HDFC Mutual Fund is sponsored by HDFC and so on.

What is net asset value (NAV)?

Net asset value or NAV is the market value of the assets of the mutual fund scheme minus its liabilities / expenses. The NAV per unit is the net asset value of the scheme divided by the number of units outstanding as on that date.

What is the difference between an open ended and close ended scheme?

Open-ended funds can issue and redeem units over the life of the mutual fund scheme. Investors can enter and exit at will although there might be some consequences in the form of an exit load on premature redemptions.

Close-ended funds issue new units only at the time of the launch; investors are usually locked in for a predetermined period of time. Close-ended funds may be listed on the stock exchange to impart liquidity and new investors can buy units from existing investors.

What are the benefits of mutual fund investing?

Investing in mutual funds offers a host of benefits:

  • Access to many stocks
  • Diversification of risk by spreading money across several companies and sectors
  • Inexpensive mode of investing
  • Access to a team of professional fund managers with access to in-depth research
Why should I invest in a mutual fund?

For retail investors with limited time and expertise to study markets and companies, mutual funds offer a viable and convenient investment alternative.

What are the different types of mutual funds?

The broad categories of mutual funds include

  • Equity funds
  • Debt funds
  • Hybrid funds or balanced funds
  • Liquid funds

There are sub-categories within each broad category – for instance – equity funds include sector funds, tax-saving funds – hybrid funds include balanced funds, monthly income plans (MIPs) and so on.

How do I decide which mutual fund is best suited for me?

It depends on your investment object, income, age, financial responsibilities, risk taking capacity and tax status. If you are risk-averse debt funds are more suitable. If you prefer taking risk, then you must consider equity funds. If you are looking to park your money for a few days, you should look at liquid funds.

Do mutual funds offer tax benefits?

Investments in tax-saving mutual funds or ELSS (equity linked saving scheme) are eligible for tax benefits under Section 80C upto a limit of Rs 150,000.

Can I get fixed regular income by investing in mutual funds?

Although mutual funds are known to declare dividends at regular intervals viz. weekly, monthly, half-yearly, annually, this should be seen as a best effort initiative dictated by availability of reserves. Mutual funds are not mandated to declare dividend regularly.

What is switching?

Fund houses provide investors with an option to shift their money from one mutual fund to another. This is known as transfer or switching

What is load?

Load is a charge collected by mutual funds at the time of transacting. It can be levied as an entry load – the charge is collected when an investor buys the units or as an exit load – at the time of selling.

No-load funds do not charge a load.

Can non-resident Indians (NRIs) invest in mutual funds?

Yes, NRIs can also invest in mutual funds.

What is a gold ETF?

A gold ETF (exchange-traded fund) is an ETF with gold as the underlying security. The value of the ETF is based on the value of underlying gold.

What is the expense ratio of the gold ETF?

The total expense ratio is usually about 1.00% per annum.

How can I invest in a gold ETF?

As the name indicates, the ETF is listed on stock exchanges. Investors can buy / sell the ETF on the exchange, through any broker-member.

Are there any specific requirements for investing in gold ETF?

Gold ETF is available in dematerialized form so applicants must own a (demat) beneficiary account with a depositary participant (DP) of either NSDL or CDSL. These are prerequisites for investing over the exchange, be it in ETFs or stocks.

How are gold ETF transactions settled?

The transactions are settled in demat mode based on normal exchange settlement procedures.

Who are Authorized Participants and what is their role? Who are eligible investors

The Authorized Participants (APs) are appointed by the fund house. They act as market makers to improve the liquidity of the gold ETF on the exchanges. The APs provide quotes in the exchange and ensure that investors have a ready buyer and seller any time they wish to enter into a transaction over market hours. Only APs and eligible investors can create/redeem units directly with the fund. Eligible investors are investors who buy units in creation unit size. They can directly create or redeem units in lieu of physical gold and multiples thereof from the fund house if they desire.

What is the benchmark index for the gold ETF?

The value of gold ETF units is determined by the value of underlying gold. As there are presently no standardized indices or benchmarks catering to gold, the gold ETF is benchmarked against the price of physical gold in the domestic market.

Who can benefit from investing in gold ETFs?

Given the unique and diversification-related benefits of gold, gold-linked ETFs have a role to play in the portfolios of all types of investors – retail, institutional, long term, short term.

Are gold ETFs liquid?

Gold ETFs are traded over the exchange and you can sell / buy ETF units as there are usually enough buyers as also fund house-authorized participants, whose job it is to fuel liquidity in the ETF.

What is the minimum investment for gold ETF?

The minimum investment varies across fund houses - some go as low as one unit, which equals one gram.

How are gold ETFs superior to gold funds?

Gold ETFs are less volatile than gold funds. Also, while gold ETFs invest in physical gold, gold funds invest in equities of gold mining companies. Gold ETFs have lower expense ratios than gold funds, which reflects in superior performance vis-à-vis the latter. Over time, all else being the same, gold ETFs should outperform gold funds based on lower expenses.

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