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Why monthly income plans are better than FDs?

An MIP, as the name suggests, provides investors with a monthly income. Well, almost. MIP is
similar to your bank deposit with a monthly interest option, but unlike a fixed deposit where
interest rate is known before you invest and the capital is repaid to you when you close it, neither
the returns nor the capital is guaranteed in an MIP.
Who Should Invest?
MIPs are typically suitable for investors who want to largely play it safe. They are for conservative
investors who might be investing for the first time and are eyeing marginal exposure to the equity
These investors don’t mind taking a little risk in order to increase the potential returns that pure
income/debt funds or fixed instruments will provide. Also, MIPs are better for investors who are
nearing retirement, do not have any other substantial source of regular income and do not mind a
marginal additional equity risk.
In MIPs, typically a large portion (75-100 %) of the fund is invested in debt and money market
instruments and the rest (0-25 % approximately) in equity. The equity portfolio of an MIP can
provide additional returns when the market is bullish.
With the Sensex touching 20000, the equity market seems to be on a strong wicket. MIPs, on an
average, have managed to deliver over 7% returns over the past one year, partly aided by a
decent rally in the equity market. Crisil MIP blended index over the past one year have shown
returns of around 7%.
HDFC MIP Long-Term plan and Reliance MIP are among the top performing funds with one-year
returns of 9.6% and 7.9%, respectively and five-year return of 11.88% and 12.42%, respectively,
which is quite high compared to your bank fixed deposit. It is important to note that the dividends
earned are free of tax, unlike interest income.
Though MIPs offer liquidity, unlike a bank deposit and you can redeem your funds anytime, but it
always advisable to look at MIPs more as a longterm product instead of an investment that yields
monthly income.
Tax benefits
MIP dividend schemes give out regular dividends. These dividends are not taxable in the hands
of the investor since the MF house issuing the scheme pays a dividend distribution tax of 14% on
the payouts.
The capital gain at the time of redemption though, would be subject to tax like any other debt
fund. The tax treatment for MIP growth scheme is different. Growth MIP, if redeemed in the first
year, will attract short-term capital gain (STCG) tax which will be as per the individual’s income-
tax slab.
For redemptions in subsequent years, the scheme will draw long-term capital gain (LTCG) tax
which will be 10% without indexation or 20% with indexation whichever is lower. Indexation is a
process in which the purchase price of an asset is adjusted for inflationary changes. Always
remember to know your investment instrument well before investing .
5 Jan, 2011, 05.23AM IST, Vidyalaxmi,ET Bureau
Insurance traps you should be wary of
2011 has arrived. Most of you would have chalked out some resolutions to would bring about
some order in your life, Just as a regular exercise regime or healthy eating habits are important
for good health, financial wisdom is equally important to keep your money intact and growing. As
most of you must be drawing up plans for tax investments as well as regular savings, ET lists out
some sales pitches that you should strictly avoid.
‘Invest in Ulips for only 5 years’
Beware of your insurance agent if he tries to sell you a Ulip as fiveyear policy. Often the agents
use this as a sales pitch as it’s difficult to convince customers to lock in money for as long as 10-
15 years.
“The logic is that it is always easier to tap a customer to get into a short-term contract. The
concept of a lock in and annual/quarterly frequency in premium payments is not very popular with
customers. Ulips are very popular among customers than a simple term plan,” says Rahul
Aggarwal, CEO at Optima Insurance Brokers. Pranav Mishra, senior V-P & head, products, ICICI
Prudential Life Insurance says, “If you anticipate some liquidity need in one to three years from

now, Ulips is not meant for you. You should look at this investment product only if you leave your
money untouched for be-yond five years. A good time horizon would be around five years to 30
For example, if you invest Rs 1,00,000 in a Ulip for 30 years, the first year return will be negative
at around 80,000. This is because the investment amount itself shrinks to Rs 75,000 after
accounting for charges such as mortality, policy, allocation and fund management.
However, the investor breaks even after the fourth year and doubles the investment in 30 years.
Even if the investor locks in for 15 years, he earns Rs 20.5 lakh if he has invested Rs 15 lakh.
Ulips are designed in a way that they attract maximum front loading in the first 3-4 years of the
policy. So, stay long to reap maximum benefits.

‘Take home loan insurance’

The aspiration to own a house comes with a heavy price tag and a huge liability. Until you pay off
the loan, it doesn’t become your house in the true sense. Hence, you have to cover the liability so
that your family doesn’t have to shoulder the burden of EMIs if something happens to you during
the tenure of the loan.
Although the home loan insurance policy works similar to a term life insurance policy, term cover
is the cheapest option. The risk cover/ sum assured will be equally to the outstanding loan
amount at any point of time. But home loan insurance works on a reducing balance principle. As
the outstanding loan amount reduces, the size of the cover also decreases.
“The biggest advantage of a term plan is that the risk cover (sum assured) remains constant in a
term plan over a period of time whereas in a home cover, it is a declining cover,” says Amar
Pandit, certified financial planner, My Financial Advisor.
Save more to buy that dream home
Most people eagerly wait to know what their stars foretell in the New Year. However, Pramod has
different priorities this year. All he wants to know from yearly forecasts — he has been devouring
every forecast for every sector — is whether he would be able to buy a house in Mumbai. He has
been waiting since the past two years for his turn to own a house.
First, it was the runaway prices which dissuaded him from chasing his dream home. Then, the
interest rate spike further dampened his enthusiasm. But he is determined to buy a house this
year — provided there is a20-25 %correction in prices and slight easing of interest rate. So, what
do the stars have in store for him?
We really don’t know whether it is Saturn or Pluto or their combination, but the forecast says
Pramod will have to wait at least three to six months to see his wish come true. And, not too
many astrologers are willing to bet on whether the price would decline across the board all over
the country. As for interest rates, they are fairly certain they would peak in the next six months
and start easing... provided stars don’t turn retrograde during the period.
However, even before that potential buyers have to confront some unpleasant developments on
the home front. First, one has to shell out more towards down payment to the bank. “Recently,
Reserve Bank of India (RBI) directed banks to reduce their exposure on flats costing above Rs 20
lakh from the earlier up to 90% to 80% now.
This means that the buyer would have to take care of the extra margin money of 10%,” Pankaj
Kapoor, managing director of Laises Foras, a real estate research agency said. Simply put,
earlier banks used to lend around Rs 45 lakh for a Rs 50-lakh house, now they will lend only Rs
40 lakh.
That means if you were banking on a bigger loan from the bank, it is time to hit the pause button
and take stock whether you can shell out the extra money without stretching your finances .
Imagine, this could be a crucial factor if you are opting for floating rate loan, as your EMI could
soar if there is a hike in base rate of the bank.

Soaring interest rates

As if higher realty prices were not enough, buyers must now also deal with rising interest rates.
Recently, a host of banks have increased interest rates on both deposit and lending rates. The
so-called teaser loan with lower interest rates in the initial three years also has been tweaked.

Geojit BNP Paribas . If your current depository account is in the name of Mr A and Mrs B and if the new account is also in the same order i. a stock broker transfers the shares to your depository account.” That is not the only bad news for Mumbai buyers. based on the rate that he charges. you also need to ensure there is no negative cash balance in your account. says the Income Tax Act. “This means that the stamp duty and the registration charges.In short. When you buy shares. Taxmann Publications’ latest edition of the Act runs into 1. without realising that there are annual maintenance charges levied for every account that we hold. Depositories receive shares from depository participants who could be brokers like Religare. If . as per the government circular. Here are eight deductions that can help you save tax over and above the tax saving investments you make during the year. ICICI Bank and so on. 1. Besides this. Once this request is received the depository will transfer all the shares to the new depository account within 3-5 working days. To transfer your depository account to another depository of your choice you need to submit an application in the prescribed format . Along with that you also have to submit all the unused delivery instruction slips issued by the depository participant. then there are no charges which will be levied by the depository for the transfer. The details of the new depository account have to be mentioned in the application form.e. one also now needs to pay an additional interest component of 25 to 50 basis points if the loan is above Rs 75 lakh. along with annexure Q to your depository participant. your shares are transferred to the broker's account. leave alone ordinary taxpayers. PF PRIMER: How to close a depository account You need a depository or demat account if you want to buy or sell shares. But hidden away in the 300-odd sections and 14 schedules are clauses that can benefit ordinary taxpayers-provided they know how to claim those benefit. then the depository participant could levy a charge for transferring each stock to that account. ET Wealth spoke to a range of tax experts to glean information on little-known tax benefits you may be entitled to. the depository can reject your application. property buyers in Maharashtra will have to pay an additional 1% value added tax and 3. And when you sell them. to close your depository account first and foremost there should be no shares lying in it. Mr A and Mrs B. So here is how you could close or transfer your demat account. which are generally a fixed percentage of the property price. are also expected to go up. The ready reckoner rates of Mumbai property prices were recently revised and property rates. Also. Eight tax saving secrets you should know The Income Tax Act 1961 is a voluminous piece of legislation. Negative cash balances may arise due to non-payment of annual maintenance charges or past transfer charges not paid up. However.3% service tax on the value of the property to the state government. However if the new account order is not the same but in a different order say Mr A and Mr C. India Infoline or banks like HDFC Bank .125 pages. Kapoor also says that apart from the interest paid on the loan. “This comes into play as none of the new projects in Mumbai is priced below Rs 1 crore. you should be ready to fork out more if you are taking a home loan. are expected to go up by 25-30 % on an average. Investors keep shares in the electronic form in two depositories: the Central Depository Services Limited ( CDSL )) or National Depository Services Limited ( NSDL). you need to transfer them to some other account or remat them (get them back in physical form).” says Kapoor. Many a times we open multiple depository account. Use losses in stocks to cut tax Can you gain from the short-term losses you made on stocks? Yes. If there are shares lying in the account. The Process: If you have no shares lying in your depository account (because you sold them off) or if you are unhappy with the services of your depository participant you can consider closing your account. It’s enough to intimidate even the most diligent law student and tax expert. If you request for an account closure without settling the negative balance.

400 a year in the highest tax bracket. However. “Short term capital losses can be set off against both shortterm capital gains as well as taxable long- term capital gains. the law makes a distinction here. the rent will be taxable as the income of the parent after a 30% standard deduction. But what if your salary does not include an HRA component or you are a self-employed professional or businessman? Under Section 80GG. “Long term capital losses can only be set off against taxable long-term capital gains. it's their money and spouses are in the list of specified relatives whom you can gift any sum without attracting a gift tax. Proof required: Keep record of your equity trading account statement with details of the transactions that resulted in losses. This means. “Not many people are aware of this deduction. Section 64 of the Income tax Act says that income derived from money gifted to a spouse will be treated as the income of the giver. If your parent has no other income or pays a lower tax. However. if you are living in your parents’ house. gold or debt funds. Similarly. . the interest would be taxed as your income. He has no problems if one spouse gives money to the other.000 as deduction per month under Sec 80GG. The meshing together of the investments of the husband and wife not only strengthens the household's financial fibre but gives them a comprehensive view of the real situation. you can pay a senior citizen parent up to Rs 3. For instance. he or his spouse or minor child should not own a house in the city where he stays and he should not be claiming tax benefits for some other self-occupied house. Incidentally. or 25% of total income.” says Sandeep Shanbhag. Whew. How to cut tax by investing in spouse's name Financial planners contend that couples should ideally combine their finances. a Mumbai- based tax planning and financial consultancy. The least of the following three can be claimed as deduction: rent paid less 10% of total income. Then the gain from the property will get reduced to only Rs 27 lakh and the tax payable will be Rs 5. director of Wonderland Consultants. However.000. you can set them off against short-term capital losses made on stocks and bring down your tax liability. But if that money is invested and earns an income. Also. That’s why the house rent allowance is exempt from tax to a certain limit. the tax payable on this long-term capital gain is Rs 6 have made any long-term capital gains from sale of property. this can bring down your tax liability significantly. How much tax can you save: Given the stiff conditions. But there are stiff conditions to be met. the clubbing provisions of the Income Tax Act come into play. the taxpayer should not be drawing any HRA or any housing benefit. or Rs 2. Don't think you can get away by clever ploys involving other relatives. Besides. After all. Proof required: Taxpayer has to submit a declaration on form 10-BA that he is paying rent and not receiving HRA. Suppose you have sold a property and made a long-term capital gain of Rs 30 lakh after indexation. the taxman has set limits to this joining of the finances of the two spouses.43 lakh a year. At 20%. Get deduction for rent even without HRA House rent can account for as much as 40-50% of the total household expense. then the rental income from that house would be treated as your income and taxed at the applicable rate.000 a month. It will be clubbed with his (or her) income for the year and taxed accordingly. you can set this off against the gains from the property. 2. However. if you give money to your wife as a gift and she puts it in a fixed deposit. one can’t claim more than Rs 2. you can claim deduction of the rent paid even if you don’t get HRA.4 lakh. if you have also sold some junk stocks during the year and made a short-term loss of Rs 3 lakh. if you buy a house in your wife's name but she has not monetarily contributed in the purchase. How much tax can you save: Setting off a short-term loss of Rs 3 lakh against longterm gains can help you save Rs 60.” says chartered accountant Mehul Sheth. But this can bring down your tax by Rs 7. This can be especially useful for someone who has booked profits on gold ETFs and physical gold this year. you can pay rent to them.” says Shanbhag. One cannot set off short-term gains from stocks against long-term capital losses from the other assets.

” says Gagan Maini.295. The money can then be invested without attracting clubbing provisions. HSBC bundles a cover with its premier credit card. In-built insurance: Several banks offer protection to cardholders against misuse of credit or debit cards. The scheme is issuer-neutral. online transaction or cloning (where your card is duplicated). “Depending on the plan selected. then the rental income from that house would not be taxable to you. mutual funds. under its basic variant. For example. it may not be difficult to put two and two together. there is no additional tax liability. it makes sense to insure your credit card against theft. which eliminates the need to intimate the individual banks of the loss. Then a few days later. brokerages. CEO. Are there ways to avoid the clubbing provisions without crossing the line between tax avoidance and tax evasion? Yes. you can loan her the money. which comes at no extra cost. Others such as ICICI Bank. you have to register your cards with your card issuer. she can give you her jewellery. over the past few months. Given that most big-ticket transactions are now reported to the tax department by third parties (banks. Alternatively. with Rs 290 being the annual premium.For instance. The misuse of stolen cards can range from making purchases at shops. Specialised covers: This apart. There is no premium charged for this insurance and the cover is in-built into the card. which again does not have any tax implications. a consumer-services provider. you can also approach CPP directly. which specifically insures you against the misuse of credit or debit cards. you need to inform CPP through its toll-free number. CPP. several banks like Citibank. One can also avoid clubbing of income by opting for tax exempt investments. if a fraudster obtains a credit card by impersonating you and runs up a huge bill. For availing of the scheme. “The cardholder is insured for Rs 3 lakh against expenses incurred on his card 24 hours before reporting the loss. Insurance companies: Tata AIG General Insurance offers a wide suite of products. If the taxman discovers this circuitous transaction. ICICI Bank and HSBC have tied up with CPP Assistance Services. ATM and online transactions are not covered.000 (Rs 1 lakh . The cover is provided through a group insurance policy from Bajaj Allianz. promises reimbursement for fraudulent purchases made on a stolen debit card at point of sale terminals. The extent of the cover. “For instance. if one invests in these options in the name of the spouse. CPP's scheme does not cover online frauds. There is no tax on income from the Public Provident Fund (although the 8% interest rate offered and the 15-year lock-in does not compare with fixed deposits). the maximum cover pre-notification amounts to Rs 50. This facility. depending on the bank. The fraudulent charges cover costs Rs 170 a year for a sum insured of Rs 1 lakh. you may be hauled up for tax evasion. which you have to clear. For instance.” says an HSBC official. MD and CEO. Annual fees range from Rs 995 to Rs 1. which includes identity theft and fraudulent charges cover. the protection is extended for up to 12 hours prior to reporting the loss. HDFC Bank . this policy will cover the loss. ranges from Rs 1- 2 lakh. In most cases. one may think of gifting money to his mother-in-law. Banks and card issuers have stepped in to provide some relief to those affected. the service is extended only to the premium category of cardholders. Tata AIG General Insurance. The maximum sum insured under the identity theft cover is Rs 2 lakh. There is also no tax on gains from shares and equity mutual funds if held for more than a year. Also. In exchange. it comes into play only if the card is lost or stolen. So. Typically. Axis Bank. right? Wrong. Protect your credit card against misuse In an age when many prefer plastic money to the paper variety. a transaction that has no gift tax implications. In the event of your card being lost or stolen. fraudulent transactions involving cash advances are not covered.” says Gaurav Garg. Axis Bank also offer zero-liability protection to select customers. the cover could go up to Rs 1 lakh prior and Rs 20 lakh post-intimation. the lady gifts the money to her daughter. If you want to buy a house in your wife's name but don't want the rent to be taxed as your income. insurance companies). if you transfer a house worth Rs 10 lakh to your wife and she transfers her jewellery for the same amount in your favour. Under the other policy. to offer specialised covers. However.

She just can’t understand why anyone would opt for a credit card — an easy way to fall into a credit trap. the older people in the group may have had a bad experience dealing with credit cards and they consciously stay away from further trouble.” says Rita.000 (or Rs 1 lakh depending on your plan). Nita. For example. Sure.” says a financial advisor. “If you don’t clear your outstanding amount on the due date.” says Mashruwala. She used her credit card (an add-on card her father gave her) as if there was no tomorrow and in no time she was in trouble. However. Not in a mood to get into longdrawn boring conversations about the merits of using credit case of the premium plan). Credit card companies charge around 36% interest on the outstanding amount. you will be compensated only to the extent of Rs 50. “Free credit is a very good feature. .” he says. according to her — to pay bills. every tool – including the much abused credit card – has its plus and minus sides. a young mediaperson. who have grown up hearing stories about the perils of easy credit. “When someone is using a credit card. Why not opt for a debit card to settle the bill instead. It seems. The only thing you have to be particular about is to make sure that you clear off your dues on the specified date on which you are supposed to make the payment. Also. He also underscores the convenient factor: you don’t have to carry a lot of cash around to shop. Sajag Sangvi.” says Gaurav Mahruwala.” she says. Rita stays away from the credit card because of the lessons learnt the hard way early in life. I am sure they have a huge outstanding at the end of the month. Istart thinking how much money that person would have to pay at the end the month. They don’t think people should develop an irrational fear about this piece of plastic unless they think that they are incapable of responsible behaviour. Many people are content with their debit cards and they are not comfortable with the idea of using credit cards to pay up their bills. but some people don’t like the idea of using debit cards for shopping as it may expose their entire savings account. cringes every time someone in her group flashes his or her card to take care of the bill at a restaurant. please — we are young and credit-averse. but it is true that more and more people are aware of using credit cards in a reckless manner. which is the highest form of credit. for example. says the best thing a person can do is to stay away from using the credit card if s/he cannot resist the temptation to shop and go on revolving credit. much to their amusement. That is why I have decided that I will not get into the habit of accumulating debt. however. they are far outnumbered by the flashy crowd of youngsters working for BPOs and KPOs. “Credit cards are a useful payment mechanism and people don’t have to avoid them unless they feel they would be irresponsible when it comes to using them. a small bunch of youngsters will do anything to resist a credit card being pushed into their wallet. who live by credit cards and swear by easy credit. To cut the story short. Nita. a small number of youngsters are consciously resisting the desire to own a credit card. Increasingly. she would often confront her friends. For the financially-savvy. According to him. Of course. The way people use their credit card. you earn interest rates on savings deposit on a daily basis and some other entity is giving you free credit for that period. Some cards offer even more time. “I somehow also start thinking about the interest rate they would be paying to clear off the debt. according to financial experts. Nita is yet to figure out why people keep collecting credit cards as if they are life-saving masks. “I don’t have any figures to support the claim. thanks to easy availability of credit. some travel sites insist on a credit card to make reservations. Imagine. seem to have learnt early lessons in life and keep away from free credit cards for the rest of their life. It allows you to shop without bothering about the money in your account. Why using a credit card makes sense No credit cards.” she says. a certified financial planner (CFP). “I maxed up my credit card and my father had to bail me out. free credit period and so on. a credit card gives you around 50 days of free credit period. But she knows that it is an expensive form of credit available and many people tend to accumulate huge debt. Kids. you can use your debit cards at most places now. That is why I have decided that I am not going to use credit cards all my life. hasn’t heard any horror stories about credit card traps. the convenience and free credit periods are literally the rewards for using credit cards. This is the feature that tempts the financial geek. However. her friends would mutter key phrases like convenience. This means that if the fraudster runs up a claim of Rs 2 lakh before you are able to notify CPP. you are in for trouble.

you can use your credit card to withdraw cash from an ATM. the credit period ranging from 30-45 days affords a sense of comfort which can often lead to overspending. and scores of points to be gained on every purchase made that will entitle you to discounts. The ‘real’ credit limit: You may know your credit limit courtesy the figure indicated by your card issuer. Get Credit-Savvy Credit cards are a useful payment mechanism as you don’t have to carry around much cash for your purchases They are especially useful for people who travel frequently within the country and abroad Credit card bills give you an insight into your spending behaviour at the end of the month or quarter They provide you a free credit period of around 50 days. Seven pitfalls to avoid before swiping credit card or taking a personal loan The spending season — if it can be called that — is finally over. if you fall for the revolving credit facility (that is. the same cannot be said about the former. but are you aware of what it is made up of? It is not restricted to the amount spent using the card alone. ‘Easy’ cash from credit card: In an emergency. Because the standing joke is that you can go on paying the credit till you are alive if you are only paying the minimum amount due every month. it will not be able to rescue you from the debt trap.” explains Madan Mohan. this year: The ‘minimum amount due’ trap: It is a mode of clearing your outstanding credit card dues that seems very convenient — paying only 5% of the amount every month to prevent the bank from initiating any action against you. rest assured you will hurtle towards a debt trap. “Several cardholders are ignorant about the fact that the limit includes any penal charges levied by the issuer. However. “Many are not aware that in such a case the payment becomes due from the date of withdrawal and not after the expiry of the credit period. chances are that you have been offered a ‘membership’ or ‘loyalty’ cards a number of times. With the interest on the balance amount being a hefty 39-45 % per annum. no doubt. However. Most of them score high on utility. which is extremely attractive If you think you can go overboard with your shopping and may fail to make full payment on the due date.5% of the amount withdrawn – for the purpose. That may be reassuring. eating out. or for that matter. is to use your credit card merely as a facilitator and ensure that the bill is cleared before the due date. particularly if you shop there often. If you exceed the limit despite being in the process of paying interest on any . the outstanding amount is unlikely to shrink in a hurry. parties and the like have taken a toll on countless wallets or. The lure of ‘loyalty cum credit’ card: If you have ever visited malls and supermarkets. And what better time than the new year to put the learnings into practice? Here are seven points you need to bear in mind before swiping your card. there’s nothing to lose. In case of a credit card. chief counsellor with the Bank of Indiabacked Abhay Credit Counselling Centre. more appropriately. The ideal approach. ICICI Bank-supported Disha Financial Counselling Centre . avoid using credit cards If you are using credit cards as a financing tool. you need to be wary of cards that insist on you using them for spending – these could be co-branded credit cards that carry at least an annual maintenance charge. Holidaying. knocking on your bank’s doors for a personal loan. do remember that it is one of the most expensive forms of credit. if not an enrollment fee. credit and debit cards. All you have to do is to clear off the outstanding on the due date. it is never too late to learn some lessons on prudent borrowing. chief counsellor. you don’t have to avoid credit cards like a plague.” says VN Kulkarni. While the damage facilitated by debit cards is measurable and hence can be controlled to an extent.In short. But you need to remember that even if you pay this amount every month. pay up a small part of the outstanding immediately and pay the rest later). Though the season of excesses is now behind us. The store staff often cajole you into signing up for one – after all. but you need to remember that you will have to incur additional charges – around 2. therefore.

you can produce the documents as proofs of complete repayment. A record of your credit history: The credit report – issued by credit information companies like Cibil ( Credit Information Bureau )) and Experian – is a record of loans you may have borrowed in the past. we will announce our rate hike. make sure your bank gives you an assurance that the settlement will be intimated to the credit information companies so that your credit record is updated accordingly. let’s make sense of the basis points. While the settlement may spare you reminder or follow-up calls from bank.75-13 %. car prices will zoom and to top it all EMIs will get steeper as a combination of cost factors make their presence felt in the car industry. To avoid these charges. the outgo is lower at Rs 60 per month or Rs 720 a year and Rs 2.5-11 . your outgo will be . HDFC Bank. car loans from big ticket auto financiers like ICICI and Kotak Mahindra Prime are all set to go up by anywhere between 25 bps to 50 bps (100 bps = 1%). This will be over and above the 50 bps hike we took last month. It is an indicator of whether you have been a good borrower – that is. the car financing arm of Kotak Mahindra Bank . Along with this. a 50 bps hike will increase your monthly EMI by Rs 25 per lakh in a 36-month tenure. Which means if you have bought a Rs 4. your loan request is turned down because of an unfavourable credit history. If you find yourself short of cash to make those investments. It will be to the tune of 50 basis points.2 lakh Hyundai i10 Magna and your loan amount is Rs 3 lakh. senior executive vice-president and business head auto loans. Thanks to the latest liquidity crunch.75% for a 36-month tenure. make sure you read the terms and conditions of your credit card thoroughly. First up. Therefore. Those like HDFC Bank that have decided to hold on to the interest rates for now. Financiers expect another round of rate hikes in the next 4-6 weeks given the liquidity crunch in the market.” says Sumit Bali. do so only when you are assured of a fund inflow capable of clearing the debt in the near future. also heralds the tax-saving season. If. you may feel tempted to use your card or take a personal loan to tide over your ‘temporary’ fund shortage. the interest rates. it would be a good idea to regularly monitor your credit history. If that is not possible. If those numbers are beginning to buzz. Dangerous leveraged investments: The New Year apart. As for HDFC Bank. Therefore. anytime in the future. your outgo increases by Rs 75 per month or Rs 900 a year. If your loan tenure is 48 months. As a result of this. our rack rates will now be between 10. It holds the key to the approval of your loan applications in the future.880 over four years. our rack rates will range between 11.” says Ashok Khanna. Cars to get costlier as liquidity crunch forces auto financiers to hike rates PUDUCHERRY: Forget about the discount frenzy in December as a warm and fuzzy memory. A fundamental mistake. That’s not all.earlier outstanding amount. So. Fellow car financier ICICI Bank has also decided to hike rates though it is still working out the quantum . if you must borrow. Auto loan rates typically follow home loan rates and the top three financiers are already talking hikes. are pulling back their discounts thus increasing the rack rates by anywhere between 25 to 100 bps. If you’ve taken a 24-month loan for the same vehicle . over three years you pay Rs 2. According to auto financiers. Importance of a no-due certificate: One of the most common pieces of advice doled out to borrowers. January 1. Such investments could come to haunt you later as they come with a lock-in period or necessitate recurring payments. you may have to shell out overdrawing charges. it is only the no-dues certificate that will back your claim of having a clean slate.700 more. especially to those who close their loans under a compromise settlement with lenders. As a result. and the one that can burn a bigger hole in your pocket than what the tax outgo would have otherwise done. “In the next two days. if you have been regular in repaying your loans – and is one of the factors that banks take into account while sanctioning a loan. it has simply decided to withdraw its discounts. What do all these numbers mean? TOI does the maths for you. ensure that you obtain your credit re-port before approaching a bank for a loan. prompting insurance agents and mutual fund distributors to persuade you into making tax-related investments. is to insist on a no-due certificate. The discounts will peter off. chief executive officer of Kotak Mahindra Prime. “We were offering discounts to the tune of 25-100 bps which we will now stop.

and do not change often. you could get as much as 8. In addition. This figure is the highest in the past five years. Hence. Public-sector banks are not far behind in this number race. take the trouble of checking the company’s credit rating. With the recent revision in bank deposit rates. Money Honey Financial . investors have to be very careful while choosing a company.” says Anil Chopra.8% interest.25-1. it offers 8.25% guaranteed higher returns by locking in money for a few days more than one year or its multiples. A 555-day SBI FD offers you an interest rate of 8. “People generally flock to post office schemes when bank deposits pay lower than them.5% interest). You can earn 0. unlike bank deposits.25-8. Liquidity is an issue in this and partial withdrawal is possible but only if you have completed five years of service. so choose your tenure accordingly. even though banks have revised deposit rates upwards.5% per annum. it seemed banks had caught the numerology bug. So. Every month a small amount is deducted from your salary which is invested in the EPF account. the rate offered by the State Bank of India (SBI) will be different from that offered by ICICI Bank or a foreign bank such as HSBC. the Senior Citizens Savings Scheme offers you a 9% per annum rate of interest. Interest rates here are fixed by the Government of India. Company Deposits: These are unsecured instruments. Find out how you can gain from this At first. post offices are yet to follow suit. “NSC and PPF are eligible for deduction under Section 80C and. Except. For a senior citizen. Their safety depends on the financial position of the company. with the employer also contributing a similar amount.080 in a year. National Savings Certificate and Post Office Monthly Scheme and Public Provident Fund offer you a return of 8% p. Bajaj Capital. So. What else could explain the high interest rates on fixed deposits (FDs) with odd tenures? ICICI Bank is offering 8% interest on FDs for 390 days whereas one-year deposit earns 7. HDFC Bank is ready to give you 1. The fact that they give an assured return is another positive. If you are a senior citizen. FDs are available across tenures ranging from seven days to 10 years. the interest rate on a seven-day deposit is merely 3% per annum.and 33-month deposits. a. Post Office Schemes: The schemes offered by the post office give guaranteed returns and are attractive investment options. On September 15. With inflation moving up due to rising commodity and oil prices.25% extra if you hold it for 16 days more than a year (which earns 6. Currently. what should a fixed income investor do in such a situation? Bank Fixed Deposits: Around 55% of Indian savings find their way to bank fixed deposits (FDs). numerologists’ forecasts is a risky way to determine an investment period. A point to be noted is that different banks offer different rates on FDs. All you have to do is walk in to your friendly neighbourhood bank and open an FD. However. it goes up to 9% per annum. The opportunity is too good to ignore. Why Fixed income will grow in 2011 2010 has been a tough time for those living on fixed income investments. the Deposit Insurance and Credit Guarantee Corporation of India guarantees repayment of Rs 1 lakh in case of default. So.5% interest on 555. “These schemes find favour with investors who are looking for sovereign guarantee. a bank FD is easy to operate. but for that you need to be 60 years of age. So. On 22. you could earn 50 basis points extra on your FD.” says Anup Bhaiya. Allahabad Bank will give you 8% interest for a 300-day deposit.and 1000-day FDs. Bajaj Capital.” adds Chopra. Group CEO. Employee Provident Fund: EPF is a retirement benefit provided to the salaried class. Rising fuel and food prices have increased inflation and the middle class is struggling with its monthly finances. High returns come with higher risks. In case of bank FDs.5% per annum. this could be the best time to get into it.” says Harish Sabharwal. the Employees’ Provident Fund Organisation raised the interest rate by 1% for 2010-11 to 9.75% interest. So. Standard Chartered Bank has fixed the interest rate of 121-179-day and 261-day FDs at 7. the central bank may be forced to increase rates in the near future despite already raising it six times in 2010. find favour with some taxpayers. if you have not yet built your FD portfolio or are looking for higher interest from bank deposits. State Bank of India and Punjab National Bank are offering 8. The simplest of all investment products. Banks play numerology with FD rates.5%. MD and CEO.75%. chief operating officer. “Most retired people find FDs easy to operate. 2010.Rs 90 a month or Rs 1. What if they think of new number . It would make more sense to invest in a PPF as interest income is tax-free. hence.

5%. Bank FD vs Company FD: Most of the company FDs still offer a higher interest rate compared to that of bank FDs but one should also consider the financial soundness of the company. Investors should consider the time left before the date of maturity of their FDs before breaking the FD. KVS Manian. So.midway in the tenure? You don’t have to worry. then it will offer a 390-day deposit. But this is just one side of the coin.” The second factor to keep in mind is the penalty on premature withdrawals. “If you had invested around four months back for one year at 7. certified financial planner . The bank fixed deposit rates (FDs) have increased in the range of 0. Ladder 7 Financial Advisories explains. The safety and return on company deposits depend on the rating.5% will be applied. If the rates have gone up by 0.Most banks charge a penalty of around 1-2 % on premature withdrawal of fixed deposits. “Banks are trying to build a commitment for a period by offering an attractive rate. it may not be a prudent decision to opt for a premature withdrawal. which have added some zing to this safe investment instrument. You will lose some interest income on that deposit.5% and the rate for one-year deposits has gone up to 8%.” Sadagopan adds. lower is the return . if the FD is nearing maturity. Similarly. the 700- day deposits are meant to match the asset and liability for two-year loans. If a customer makes a pre-mature withdrawal. As the FDs mature a little later. executive director and chief financial officer at IDBI: “These periods are determined by our lending requirement. death of a family member etc.5% and if the premature withdrawal penalty is also 0. For example.” says an industry expert. banks are ensuring they have money to give loans by extending the tenure of matching FDs. But banks have waived off this penalty for certain unexpected financial emergencies such as illness. it has higher demand for one-year loans. This acts as an automatic penalty. The loss in the interest income may offset the gain you earn from higher deposit rates. it gives them more breathing space to get the money back from the borrowers and return it to the depositors. there is a loss of 2% on annualised interest or 0. For the banks have a very logical reason for offering higher interest for odd tenures. SBI levies a penalty of 1% below the rate applicable for the period of time the deposit remains with the bank. group head.66% for the period. As Suresh Sadagopan. But if it crosses this period. then on breaking the previous one. you will earn a lower interest rate if you break the deposit before it matures.” says Manian. So is this the time to book fresh deposits or break your old one to benefit from the new rates? Should You Keep Your Old FD?: There is no single answer to this question. you could switch.” Simply put. It is called the loan cycle. Is this the right time to break your old FD? Rising interest rates are always associated with expensive loans and an overburdened borrower. then there is no point exiting at this stage. we get slightly more time to match assets and liabilities. “If the higher rates are able to compensate the penalties or lower rate for the tenure you have invested for. Says RK Bansal. the rate applicable for four months.25-1 . Deposits are mainly up to one year. But if a customer has to withdraw before the actual maturity date.5% across tenors. Like traditional FDs. For instance. But this waiver happens on a case-to-case basis and the customer has to convince the bank about the nature of his emergency. The other side of the coin reflects the rising deposit rates. There is no better way than offering a slightly higher interest than the traditional tenures. retail liabilities and branch banking at Kotak Mahindra Bank . he earns a lower interest which applies to the tenure shorter than that of the specific scheme. banks must incentivise the odd lock-in periods. since the interest rate is calculated on an annualised basis .” For this to happen. explains. Usually higher the rating. “Typically the return . the bank may waive off the penalty. which maybe 5. Say. though there is no pre-mature withdrawal charge. “These time periods are meant to match the bank’s asset and liability in a particular bucket. “But no bank has a defined list of emergencies under which a customer can be spared from the premature withdrawal penalty.

and how responsive they are. then the actual return after tax of 30. For the same period.000 and get . FDs can’t beat inflation: Inflation. as an economic indicator. They act as a good balance in a portfolio.528% if the FD offers an interest rate of 8% per annum. A company’s non-convertible debenture is a safer bet than a company FD. CFP managing director Optima Money Managers.75%. An investor whose income is above . This could be higher depending upon the com- pounding effect. More the number of times a bank compounds the interest.5% more for senior citizens. banks which lend your money to several borrowers and companies. the net yield will actually be 5. Even if the company has a fair reputation in the market.” Sadagopan adds. It is rated FAAA by Crisil. Bank deposits up to . the actually rate would be higher at around 8. 1 lakh are covered under the Deposit Insurance and Credit Guarantee Corporation (DICGC). Now this rate is comparable because the company has been given a safe rating.6% on one-year deposits. Let us assume you invested Rs 1. compute the future value after accounting for inflation of 8-10 % to get accurate results. But at today’s FD rates. “Bank FDs offer assured returns but they are taxable at a slab rate which may go up to 30. This is because they tend to invest the money (you park in form of deposits ) for specific use. which indicates the highest degree of safety regarding payment of interest and principal. Unlike. certified financial planner. 8 lakh will get the net yield of 5. if you fall in the 30% tax bracket (income above .6%. Hence. But that is not the ultimate realisable return you earn on the deposit. reflects the value of money over a period of time. the net yield is much lower. the risk is diversified. you have to see if it has been rated by any agency like Crisil.236. Icra etc. there is not much of a difference. If a person is in the highest tax bracket.000 in a one-year fixed deposit at 7%.25%-0 . which adds to the safety blanket. Also.8%. there is no protection for depositors if a company is in financial trouble as FDs are a part of a company’s unsecured debt. 1. Also. So. the rate offered by LIC Housing Finance on a one-year deposit is 7. profitability of the company. Income from FD is fully taxable as income. the impact is lesser. in most of the cases. the reputation of the promoters etc. If you know of people who invest in FDs.070. The net value of your money is Rs 990 only. If these companies are highly cash-strapped . For instance.9% for individuals under the highest tax bracket. Low risk-free avenues such as bank deposits and small . as it comprises a part of se-cured debt. feel financial advisors. interest cheques. try to find out if they are prompt in sending the maturity proceeds. your tax liability will be . it could be a good idea to consider bank FDs themselves at this point of time. One of the biggest risks associated with company deposit rates is the default risk. it may not be in a position to pay off your money and interest on time. higher is the interest income. if you invest . “Also. At times. the net gain after computing the loss of value due to inflation is actually negative. How to calculate your actual return?: Banks are offering 8. one can look at the number of years in business. the value of Rs 1. 54. However. which carries a higher default risk. 50. 8 lakh in the current financial year). The value of the deposit will be Rs 1. Company FDs have traditionally offered higher interest rates than those of banks. Given that the interest income on bank deposits is fully taxable. Hence.6%.9% is 5. Companies come out with deposit schemes whenever they require cash to fund their business activities. in case of company FDs. Now. it takes a longer time to get the credit in case you want to break your company FD before its due maturity. Bank FDs are an essential ingredient in everyone’s investment kitty.on an AAA-rated company comes very close to that of a bank deposit as the investor is assured of the company’s financial soundness. Whenever you invest in an instrument.000 decreases by Rs 80. banks typically give a 0. If a bank compounds the interest on a quarterly basis . SBI is offering 7. Inflation has the abil-ity to erode the value of your investments even as you may have earned some return on them. Then.” says Pankaj Mathpal.” says Kartik Jhaveri. Transcend India. So. public sector banks offer higher returns than company deposits. But if the inflation has been 8% of the year. then they will offer even higher rates to woo the public money. bank FDs tend to yield relatively lower interest (in view of their lower risk profile). It will be commensurately higher for those in the lower income slabs. For example.528%.000 on maturity with 8% interest.

if a holder decides to break it after 3 years. it is senior citizens who are more sensitive to the changes in the deposit rates. With returns getting better as banks begin to hike rates. And in case interest rate on five-year deposit is more than three-year deposit. Fixed maturity plans offer better returns Fixed maturity plans (FMPs) are back in vogue. Interest is the price of one key raw material – money. FD switch-over for better returns Chennai: Fixed deposits have once again become an attractive option for investors with a large number of existing FD holders converting their old term deposits into new FDs at higher interest rates.” When interest rates inch up. and they are the ones who shift their deposits from a lower rate to higher rates deposits. Of course. said S C Bansal. said. If the rates on the long-term fixed income instruments. investors lose money. Since FDs do not allow negotiating rates in future. as a quarter percentage change in the interest rates may make a lot of difference in their income. they are finding it difficult to catch the peak. about 35% for an investor nearing retirement. “Of the total approvals. “It should be around 15% for an investor at the start of the career or nearing 30s. chief financial officer at SBI . the interest rate differential will be deducted from the principal amount.” Sitaram said. some customers may find it beneficial to readjust their FDs to a higher interest rate. 25% for an investor at 40. if you are of the opinion that the rates have already peaked on long-term instruments. Hence. according to Value . However . the profitability of companies with debt on books goes down. debt funds. “When interest rates go up.savings have gained prominence due to vagaries of risky instruments linked to equity market. then the prices of these bonds fall. you may consider investing in long-term funds to earn good returns over the next couple of years. The biggest challenge an investor faces in a rising-rate scenario is to identify the peak and lock in the rates around that level. people tend to convert their deposits to higher rates. But FDs alone cannot grow the size of your portfolio. CFO of IDBI Bank . FDs should just be a small component of your investment portfolio. rise. However. more customers are now breaking their existing FDs and are re-fixing them at higher rates.).” Govindan Bomba. Equity investors are also not spared by interest rate movements. they keep locking in money in fixed maturity plans (FMPs) at regular intervals. 90% are new deposits while the rest are conversion of old deposits to new ones. when the interest rates rise. more than 100 such schemes have been launched which have managed to collect Rs 24. he will have to settle down with interest rate for three years only. executive director at United Bank of India . while changing an existing term into a new FD. According to P Sitaram. Though the investors living on interest income are happy about it. As prices dip. Investors should avoid interest-rate sensitive sectors such as real estate.” S S Ranjan. the investors feel trapped in the old FD. “For a fiveyear deposit. such as bonds having a 5-10 year maturity . “Thus.” Sadagopan adds. Smart investors can start by putting in a good chunk of money in liquidplus funds. A better way to deal with a rising interest-rate scenario is to invest in floating-rate bond funds that invest in short-term instruments whose interest rates float in sync with benchmark rates. he said that such type of switching will be useful only for those customers who have opened FD accounts six months ago. The other option is to invest in liquid-plus funds. This ensures that the money is deployed at attractive yields and saves you from the risk of missing the peak. one needs to bear in mind the interest rate one might have to forego in the process. Make smart moves to ride rising interest rates Fixed deposits rates are on the rise. FMPs etc. general manager at Union Bank of India . As the rates rise. (another 25% could be in other debt instruments like PPF. said. automobiles and consumer durables as a large chunk of demand for these goods is satisfied using borrowed funds. Since September. It is typical for an investor to put his money in a one-year fixed deposit (FD) a couple of months too soon and then repent at leisure when s/he finds one-year fixed deposit available at 75-200 basis points more than what s/he would earn from the old FD. it is better to avoid mutual fund schemes that invest in long-term instruments. the conversion of an old FD into a new one at a price.518 crore. Hence. Hence.

73 lakh crore as on September 30. life insurance . deductions under Section 80C are available. Then we are trying to set up a subsidiary in Canada.9 per cent rise in net profit at Rs 1. 2010.000. adding the deposits were not growing in tune of credits and the money was probably going in other instruments. With the credit picking up. long-term savings instruments such as contributions to provident funds. PNB reported 15.1 per cent to Rs 7. gratuity funds. Deduction of LIC premiums: It is also proposed that premiums paid to LIC should be included in the additional deduction of ‘ 50. however. provident fund." Kamath told reporters yesterday on the sidelines of fifth National Conference organised by the Jaipuria Institutive of Management (JIM) on changing role of the banking sector. "The bank's total business has registered a growth of 22.e. buying a bank in Kazakhstan and a representative licence in Australia. Kamath said that PNB was having a number of off- shore branches and was planning more in the current fiscal. The bank's total income rose by 18. which has received AICTE affiliation is offering a certified programme in advance diploma in banking technology. Negative real interest rates refer to the difference between the deposit rates and inflation. which is currently available to other payments such as health insurance and education of children.3 per cent. Kamath said that in the current fiscal bank's total business has crossed 4. "You should expect a better rate (on fixed deposits)." Currently. for various investment instruments including premium paid for life insurance. For the second quarter ended September. he said. is that only those insurance policies where the premium does not exceed 5 per cent of the capital sum assured in any year during the term of the policy would be eligible for this deduction ." the CMD said. only sums paid to towards a contract for an annuity plan of any insurer (subject to it being an approved plan) is eligible for a deduction of up to an aggregate limit of ‘1 lakh (along with other approved funds). etc. will continue to be tax free. "We have four subsidiaries in London. "Right now the institute. RBI in its first mid-quarterly review in September observed "if bank credit is not to become a constraint to growth. up to ‘1 lakh.Tax free investments: As the EEE (Exempt-Exempt-Exempt ) system of taxation (i. Given these reasons even smaller retail investors should be looking at FMPs Depositors can expect better returns on fixed deposits: PNB LUCKNOW: Depositors can expect better returns on their savings as banks may increase fixed deposit rates to mobilise more funds to meet credit growth. savers are earning negative return as inflation is higher than deposit rate. contributions are tax free. especially among high net worth individuals.82 lakh crore mark and deposit rose to 2. Also. accretions are tax free and withdrawals are also tax free) will continue.174 crore during July-September. etc. approved superannuation funds. the real rates need to move in the direction of encouraging bank deposits. the banks would have to mobilise funds to meet growing demand of funds by the industry. It indicates that the bank deposits have not been adequately protected against declining value of money on account of inflation. which the bank intends to increase to seven. Under the DTC. Punjab National Bank chairman and managing director K R Kamath has said. An important condition .Research. . the fact that interest on fixed deposits (FDs) is taxable makes investing in an FMP a better bet than investing in FDs.075 crore against Rs 927 crore in the same quarter of the previous fiscal. He said that the PNB's Institute of Information Technology was all set to start a full fledged Post Graduate Diploma in Banking Technology. An environment of rising interest rates has helped increase their popularity. Ill effects of DTC on policy holders and companies By: Chirag Vajani (CA) & Tulsi Vajani (CA) Implications for policyholders Deductions under Section 80C: Presently." he said. On bank's plan to foray into global market. upgrade one in Norway." he said.

They also want their investments to be as simple as possible. life insurance companies are subject to a concessional tax rate of 12. DTC proposes to do away with this taxation scheme and proposes to tax the profits in the shareholders’ account at the normal corporate tax rate of 30 per cent. MAT would be charged on both the companies at the rate of 20 per cent. company deposits and so on. global investors invested only 58% of their individual wealth in debt instruments during the same period. is in the case of polices where the premium paid does not exceed 5 per cent of the sum assured or the insurer has paid distribution tax. However. public provident funds. in respect of insurance covering any risk in India. According to an India Wealth Report 2010 by Karvy Private Wealth. The profits.Any insurance premium. There was a time when fixed-income investors earned as high as 12% by investing in bonds of reputed companies such as Tata Capital and Shriram Transport Finance or fixed deposits (FDs) . want safety of principal and do not believe in churning their portfolios too much. While a retired individual wants a monthly income to meet his day-to-day expenses. without any deduction for expenses.000. an important departure from the present position is that a provision for loss in the diminution of the value of investments held should be allowed and unrealised gains on revaluation. The exception. but also those of young professionals. Compared to this. through whom the non-resident collects premiums in India/ insures risk situated in India. the withholding would be at the rate of 20 per cent. in case of ‘approved equityoriented life insurance schemes’ . less the opening surplus disclosed by that valuation . where payment exceeds ‘10. if a tax treaty provides a definition narrower than what has been prescribed under the DTC. Such payments are subject to withholding tax at the rate of 20 per cent on a gross basis. Fixed income investors are generally risk-averse. including re- insurance premiums accrued from or payable by any resident or non-resident . is in fixed income assets. the definition of ‘Permanent establishment’ has been expanded to include the person acting in India on behalf of a non-resident engaged in the business of insurance. Now. Tips to grow your money the safe way Plain-vanilla fixed income assets can pump up the savings of not only the retired. then that definition would apply. the life insurance company would have to withhold tax at specified rates from these proceeds being paid to policy holders. as per the Insurance Act. And not all of them are retired individuals who do not want the uncertainty of stocks ruining the fun of their sunset years. however. if any. the working individual looks at building a fixed-income corpus to save for a rainy day or emergencies which may come his way. Distribution tax In addition to corporate tax. In such cases. on revaluation could become taxable. which is around Rs 48 lakh crore. in the case of any other deductee. leaving policyholders’ funds to be taxed in the hands of shareholders. There are many young executives. as much as 66% of Indian wealth. if routed through the Profit and Loss Account statement. insurers will have to pay a 5 per cent distribution tax on the income distributed or paid to policyholders . You won’t catch them dead near the stock market. 1938.Life Insurance Companies Higher corporate tax: Presently. continue to be the basis of computing the taxable income. General Insurance Company No significant change: The taxation scheme remains more or less the same as existing presently.Tax on maturity proceeds: DTC provides that proceeds on maturity of life insurance policies (in cases other than the death of the policyholder) will be taxable in the policyholder’s hands. In the case the policy holder is an individual or has HUF status the tax withheld will be at the rate of 10 per cent. who don’t want to take the extra risk of investing in stocks.5 per cent (plus surcharge and education cess) on the surplus disclosed by the actuarial valuation. is deemed to accrue or arise in India and is subject to tax in India. These are life insurance schemes where more than 65 per cent of the total premiums received are invested in equity shares of domestic companies. Under the DTC. Apart from the above change. as per the profit and loss account submitted to the insurance regulator IRDA. They are very happy putting away their hard- earned savings in fixed deposits.

though they do carry a higher risk compared to government schemes. premature closure after one year attracts a penalty of 2% while closure after three years attracts a penalty of 1%.of companies like Telco (now Tata Motors) and Mahindra Finance. receives a lump sum on his retirement. liquidity will be of prime importance to you. Look for winners in company FDs Talk about interest rates going up has picked up pace after the Reserve Bank of India (RBI) raised key policy rates last week. banks were flush with liquidity and did not raise interest rates. So. they can opt for a post office monthly income scheme (MIS). Also. managing director. like home and car loans. The scheme has a five-year tenure and can be extended further for a period of three years. However. they realise that the company has folded up. Working Individuals: We are assuming that you are averse to taking risks and.5% for a 1-3 year tenure. However. Investors can also look at company FDs. aged 55 and above. hence. can invest in the scheme. Money Honey Financial Services. when it comes to getting the capital back.50 lakh in a single account and Rs 9 lakh in a joint account. where in some cases the returns can be as high as 9. The Senior Citizens Savings Scheme. “This is the highest return that a retired individual can get with the highest degree of safety from the central government.5- 11%. do not want to invest any money in equity. interest rates were in the range of 6-7% per annum. If individuals want a monthly income. which gives 9% per annum payable quarterly. No wonder. while inflation was close to 10%. As a result. Here. Safety of capital is of prime importance to him. executive vice-president. gilt funds. Remember. ING Mutual Fund. His objective is to generate a monthly income out of this corpus to sustain his lifestyle. as many retired people often fall victim to bogus companies offering high interest rates. chief investment officer. with a nominal penalty. the maximum limit is Rs 4. to repay. it is almost a non-event — unless you have a floating rate housing loan — as a quarter percentage increase in fixed deposits (FDs) does not make many people rush to the dance floor. Here. don’t go by returns alone while zeroing on company FDs. Individuals. when an investor gets 7% from his FD while the inflation rate is 10%. who advises retired individuals to invest in this scheme. which gives a return of 8% per annum. When it comes to mutual funds for retired investors.” says Anup Bhaiya. Due to spiralling . The Reserve Bank of India raised rates five times during the year. and retiring employees. Typically.” says Ramanathan K. you may have some loans. debt mutual funds (liquid funds. earning double-digit interest on FDs is no longer possible. Safety is one of the biggest priorities for retired individuals. Bajaj Capital . However. Fixed deposits account for 30% of the overall individual wealth in India. However. However. that was during the global financial crisis in 2008-2009. who has worked during his active years. fixed maturity plans) and post office investments like National Savings Certificates and 8% Government of India (GoI) bonds. an individual. which keenly follows the trends in interest rates — people whose idea about investing and savings end with bank FDs and company FDs. aged 60 and above. income funds. investors got negative real returns from their fixed income investments. So. one must note that premature closure is possible only after one year. in a bid to rein in rising inflation. “We advise senior citizens to invest in companies with AA or AAA rating and spread their investments across a number of companies. there is another large group. while small savings constitute around 7% of the estimated wealth in India. For most of us. With the crisis receding. meets this important need. “FMPs give you the benefit of indexation and returns could be in the range of 8-8. we take a look at some solutions for retired and working individuals: Retired Individuals: Typically. fixed income investors have choices such as FDs (bank and company FDs). as the accumulated surplus money can be used in times of emergencies or fulfil short-term goals like a vacation. fixed maturity plans (FMPs) and short-term income funds are considered the best bet. Simply put. Here. 2010 has been a tough year so far for fixed income investors. some lump sum money for his children’s wedding or education and some surplus money to take care of medical emergencies or to go for a dream vacation as the case may be. too. Inflation has sky- rocketed and remained in double digits for a major part of the year. he actually earns negative returns.” says Uttam Agarwal.

you get 3% less than the guaranteed return. However. that enter the market with the promise of extremely higher returns. Investors looking for higher returns mostly end up chasing company FDs. that does not mean you should not check the company deposit space. the only factor that could assure you timely payment of interest as well as repayment is the company’s financial strength.” says Vineet Arora. managing director. you could take a look at the financial results before making an investment decision. ICICI Securities. Another starting point could be the rating enjoyed by the company.a. which has led to lot of people making a beeline for company FDs that offer a slightly higher return than bank FDs. mostly on the verge of shutting down. compared with mutual funds or bank FDs. the real return from bank deposits is negative. “On an average. say financial advisors. inflation is in the double-digit territory and bank FDs are.a. So. Sure. the problem with company FDs is the presence of dubious players who enter the market time and again. an AA-rated company offers around 2% higher return than a bank fixed deposit. That is why you should opt for companies that pay dividends and are profit-making. you should. Finally. which has also attracted new investors to these deposits. There are companies. check with your financial advisor about the credentials of the company.However. the interest rate offered by them can vary. the company deposit space is also inhabited by a variety of species. That is because those deposits are covered by a Deposit Insurance and Credit Guarantee Corporation of India guarantee. the Sensex has moved from 8000 to 19000. Bluntly put. an unexpected windfall for many investors. ask whether the company has ever duped investors in the past. you should ask yourself whether you can actually part with the money for the term you have chosen for the deposit. but a relatively-unknown recent entrant in the deposit market like Ankur Drugs offers 12%. you don’t do any of these things while putting money in a bank FD. you shouldn’t rush to invest your entire corpus in . at best. In case of a listed company. company deposits offer no such guarantee and the safety of the FD depends on the company’s financial position. Money Honey Financial Services.Before investing in a company.Before investing in a company deposit. “We have seen some equity investors book profits and allocate money to debt products such as company fixed deposits in the recent past. not a reason to call for a party. we have seen an increased flow in company fixed deposits due to higher interest rates. Financial experts say investors should go only for triple-A or double-A rated schemes.To start with. For example. which assures repayment of Rs 1 lakh in case of a default. they say. Secondly. premature withdrawal is not allowed before three months. over the past one-and-a-half year. However. This has prompted some investors to book profits and invest the money in safe and simple products like company FDs. Indeed. If you are forced to withdraw the money between six months and a year. but even an extra percentage or two count a lot when you are living on interest income — as most retired people do in our country. fetching merely 7-8% interest per annum. making them a bit nervous about the future course of the market in the expenses. If you wish to withdraw between the third and sixth month. for a three-year fixed deposit. while Asian Electronics offers 10% p. the company with a stronger financial record will pay less and the emaciated ones will be forced to offer a little extra. Why do these company FDs offer you higher returns? Because these deposits are a little riskier than the state-sponsored small saving schemes or mutual fund schemes which invest in a debt portfolio.75% p. This is because. Here. Depending on their reputation.Just because some companies offer better interest than banks. you may not get any interest at all.Just like the stock market.Over the last one month. Company FDs have seen a renewed interest and higher flows from investors in the past one month. Often some people tend to overlook the rating assigned to these companies (which are invariably low) and end up being cheated by the company at the time of repayment. head-products and distribution. this class of investors has started taking a hard look at company deposits lately.” adds Vineet Arora. company FDs are not very liquid instruments. But why do this exercise? Sure. These rules are simple. So. In most cases. More than half of Indian savings find their way to bank FDs. interest rates have hardened by around 1% over the past one month.” says Anup Bhaiya. a veteran player in the market like HDFC will offer you only 7. but they have stood the test of time. But stick to certain rules which you should never break in search of better returns.

. “It makes sense to diversify by spreading your deposits across a number of companies and industries to reduce risk. He also warns investors against putting the entire money in a single company. It makes sense to diversify here by spreading your deposit across a number of companies and industries to reduce risk. They also have to worry about their investments in debt mutual funds. interest rates — the key variable to watch out for a fixed income investor — are surely north-bound. company deposits are not as safe as bank FDs. if any. What do you do in such a scenario? Consider this: you can’t lock the money in long tenure FDs because you can’t take advantage of rising interest rates.The Reserve Bank of India (RBI) has started raising the policy rate since February in its effort to contain inflation.” says Harish Sabharwal. The expenses may mount. as exit loads erode returns. Company deposits pay a little better than bank FDs. forcing many investors to opt for company deposits Typically. giving you higher yields in the process. However.” says Harish Sabharwal. Unless you need a regular income. chief investment officer. JP Morgan AMC. it is crucial that you pick instruments that match your investment horizon and risk appetite.High inflation is eating into the real rate of return from FDs. It has increased the repo rate (the rate at which it lends to banks) by 1. you could select from a range of cumulative schemes to regular income options since the interest earned automatically gets reinvested at the same coupon rate. as companies rated below could be risky However. but they are more risky. an AA-rated company offers around 2% higher interest than a bank FD Always opt for an AA or AAA-rated company. at least. The liquid-plus option is more suitable for an investment horizon of more than a fortnight.25%. you should consider short-term bond funds. According to investment FDs. don’t treat these funds as investment avenues. most investors. For short-term investments of three months to a year. are in a fix. Bajaj Capital. These funds can give better tax-adjusted returns than saving bank accounts. Never forget the principle of diversification even when it comes to the debt market — never put all your eggs in a single basket. as a rising interest rate regime is bad news for these schemes. chief operating officer. Bajaj Capital.”Some companies like HDFC also offer you a monthly income plan (MIP) wherein you can draw your interest on a monthly basis to help meet your expenses. but their interest income remains steady. you could invest up to 10% of your investment in company fixed deposits. This means. “Based on your risk profile. in the recent past? With living expenses soaring each day. choose a liquid fund. especially those who swear by FDs and other relatively safer avenues like company deposits and mutual fund (MF) schemes.If you are looking to park your money for less than a fortnight. “Based on your risk profile. He says that investors should not put all your money in a single company. They also offer a SIP where you can invest every month instead of a lump sum to build a bigger corpus. take a look at exit loads charged by the schemes. How many times have you heard this refrain from someone.You can consider company deposits and Fixed Maturity Plans for your medium term investment needs. the banking regulator is likely to raise rates further. as the safety of your money depends on the financial strength of the company Spread your money across a number of companies to make sure your entire corpus is not affected by a default by any company Higher rates can adversely impact your fixed-income savings BANKS are quick to lower fixed deposit (FD) rates when the interest rates fall. “We expect a 50-basis point increase in policy rates in the near future. you have to be very careful while investing in MF debt schemes because of the inverse relationship between the price and yield of securities. especially a retired aunt or an uncle. chief operating officer. but they take their own sweet time to raise rates when the interest rates rise. Before investing. in the short term. Also. you could invest up to 10% of your investment in company fixed deposits. So.” says Nandkumar Surti. as there is not guarantee on capital repayment Check the past record of the company. They are meant for parking money temporarily. reverse repo rate (rate it pays to banks) by 1% and cash reserve ratio (the percentage of deposits banks have to keep with RBI) by 1% this calendar year to check easy liquidity.

say 78 months. long-term rates are likely to ease a bit. there are many who argue that this need not be the case. the fund manager may not declare dividends for that period. But gilt schemes are highly liquid. If you do not want to take credit risk. The investor can decide the periodicity at which he wants dividends. retired people or those nearing retirement (in their late 50s) can opt for MIPs as they can generate an adequate income flow that can help them meet their monthly expenses. Investors can also look at non-convertible debentures (NCDs) listed on the stock exchanges. say investment experts. director- investments. novices to the market who wish to take a small exposure to equity can also consider investing in equity. Tight liquidity conditions provide a good entry point for FMP investors these days. annuity and so on. Altamount Capital Management. investors should remember that dividends are not guaranteed.In a rising interest rate scenario. However. Fixed maturity plans (FMPs) are back in vogue.Typically. This is a risk the investor should be able to factor in. you don’t have to fear default risk. are hybrid instruments that invest a small part of their portfolio (around 5-25 %) in equities and the remaining (75-95%) in debt and money market instruments. But remember. the fund manager is under no obligation to declare a monthly dividend. Delta Global Partner. income funds make a good investment sense with a two-to-three years’ horizon. If you cannot remain invested till the FMP matures. They can also pocket extra returns. you can enjoy long-term capital gains. thanks to the stocks in the portfolio. the first thing most advisors will ask you is to stay away from long-term debt schemes. don’t invest in deposits over a year. Sure. However. tax was supposed to be deducted by banks even if only provisioning was made for interest payment. half-yearly or annually. where gains come in the form of capital appreciation. If the stock market runs into rough weather. One can expect better post-tax yield on an FMP than a corporate FD of similar credit quality for equal tenure. this was creating problems for banks using Core-Branch Banking Solutions (CBS).Always look at the credit rating of the company and don’t invest more than 10% of your debt portfolio in a single company. quarterly. the absence of indicative yields is a thorny issue. “Though FMP are listed on stock exchanges. Their portfolio is essentially biased towards debt. That means. In addition to this.” says Devendra Nevgi. founder and principal partner. while the debt portion will preserve the capital. The modest equity exposure will generate extra income. This is the main difference between MIPs and fixed deposits (FDs) that offer assured interests. though most fund houses try their level best to declare dividends regularly. In short. you can look at gilt funds that invest in government securities. MIPs aim to give a monthly income to investors. If you choose to invest in an instrument that doubles your money in the long term. avoid investing them. despite the fund manager’s best effort it could underperform in certain periods due to bad market Tax only when interest credited to fixed deposits: CBDT NEW DELHI: No income tax at source will be deducted if banks have only made a provision for interest on fixed deposits and not actually paid it to the depositor. With inflation tapering off. as they can give better tax-adjusted returns. Investors can look at FMPs for 370 days. Also. compared with FDs. However. which are taxed at lower rates compared with regular interest which is added to your income What are MIPs and how are they different from FDs? Monthly Income Plans. “As corporate balance sheets have improved notably. MIPs can only be an additional source of income to the regular income form pension. MIPs are tax-efficient as dividends declared under MIPs are tax- free. the yield on an FMP is a function of the credit quality of the papers in the portfolio and the tenure. However. a growth option is also available. or MIPs. you will be exposed to higher interest rate risk than in an FMP. However. which could be monthly. Until now. always remember that equity is a risky investment option. . Since these are issued by the government. but a small exposure to equity is added as a kicker. you may not get the exit at all or may have to exit at a price substantially less than fair price. However.Apart from retirees. the Finance Ministry has clarified. given the low liquidity.” says Richa Karpe. MIP returns are market-driven.

Though the online channel as of now does not contribute significantly to the total sales pie. next year:Following Irda’s cap on Ulip charges that has hit the sales targets of several companies. According to a Finance Ministry official. according to a source. there is a heightened need to promote traditional products. tax need not be deducted at source on such provisioning of interest. marketing and direct channel. Nevertheless. Last heard. Income tax is charged at the rate of 10 per cent on interest income of more than Rs 10. policyholders covered under corporate group mediclaim. the impact of the changes. The New Year is expected to herald several other changes. you may not be affected greatly if your company goes public or decides to acquire or merge with another insurer.Many insurance companies are gearing for initial public offers (IPOs) next year. While toning down the Ulip obsession is welcome. a large number of corporate hospitals had given in to the insurers’ demands to lower their charges.” says Mayank Bathwal. As Irda allows differential rates for offline and online products.Post September 1." the board clarified. From a policyholder’s point of view. you could hope for certain fringe benefits. Whether the slew of Ulip-centric regulations. citing exorbitant charges. will be clearer in 2011. some insurers offer online term policies that are significantly cheaper (by up to 45% in some cases). "In such cases. “Acquisitions and mergers may bring down the administration cost and policyholders can expect higher returns from their insurance policies.” explains Sanjay Tripathy. the changes can be attributed more to the much reported duel between capital market regulator Sebi and Irda rather than any consumer activism. too. “The significant impact on profitability due to the new regulations on Ulips will lead to companies exploring cost-effective modes of distribution. interest payable on fixed deposits is calculated generally on a daily or a monthly basis but is parked in the provisioning account for monitoring only. when Irda is expected to come up with detailed final guidelines in this regard. The interest is actually credited to the depositor's account either at the end of the financial year or at periodic intervals or on maturity of the deposits.000 in a year. “There is a growing need to further broad-base the product mix to include a healthy proportion of non-unit linked products and cater to customer segments across their life cycle. this mode of distribution is expected to gain momentum in the coming years. Oddly enough. CBDT clarified that since no credit is given to the depositors while calculating interest on fixed deposits on daily or monthly basis in the CBS software used by banks. chief financial officer. ” says certified financial planner Pankaj Mathpal.which enables customers to access their accounts from any branch. remains to be seen. 2011 is likely to be a worthy successor to 2010. Here are some likely trends and developments identified by industry experts and watchers that could affect you as a policyholder. which has been a loss-making portfolio for most insurers. Cover for some more swing in insurance The insurance sector saw a series of changes in 2010. will make any noticeable difference to the way insurance products are bought and sold. However. were spared. insurers are now looking at alternative distribution channels to bring down costs. at least. though many others in Mumbai continue to remain defiant. Several distributors are recommending endowment products over Ulips now. On that count. HDFC Life. tax shall be deducted at source on accrual of interest. including guidelines on initial public offering (IPOs) as well as mergers and acquisitions (M&As) by insurance companies. policyholders need to remain alert as the scope for mis-selling is huge even in endowment products whose opaque structure makes it difficult to ascertain the charges deducted and actual money invested. with the Insurance Regulatory and Development Authority (Irda) finally deciding to clamp down on mis-selling of Ulips (unit-linked insurance plans). The matter was considered by the Central Board of Direct Taxes to plug this loophole. And what about health policies that have to be renewed annually? “For a policyholder. Many companies have taken to the online channel with gusto for selling term policies. Among the several steps that the regulator took included imposing ceiling on Ulip charges. Ironically. In a separate development. executive vice-president and head. Birla Life Insurance. The Indian Banks' Association in a representation to the Income Tax department had said that for banks using the CBS software. if his insurance . or the lack of it. which came into effect from September 1. public sector general insurers withdrew the cashless facility at several leading corporate (or five-star) hospitals starting July 1.

Bharti-AXA Life. If indeed banks are allowed to act as agents for more than one insurer. The trend is likely to make its way into 2011 as well. To sum up. we are seeing an increasing trend of dependent parents of employees being left out of the scope of coverage.” cautions Sudhir Sarnobat. he will still enjoy continuity of cover. “For instance. This will result in a large number of parents going uncovered in 2011. term policy rates are likely to go down. employers are tightening the benefit packages and one of the key casualties has been the cover extended to employees’ parents. this is the time to seal the deal. a bank can offer only one company’s insurance policies to its consumers through the Bancassurance channel. they could. the experience of the insurance markets globally indicates that companies in the life sector take 7-10 years to break even. In India. Health insurance.” reckons Mark Meehan. Alternatively. Therefore. head. where the family including elderly parents (and their pre-existing illnesses) are covered. health insurance.With innovation in distribution mechanism and online products. Private life insurers fail to meet break-even targets MUMBAI: The Insurance Regulatory and Development Authority (Irda) has said private life insurers have failed to meet the breakeven targets indicated by them at the time of seeking a licence. the expected break-even point has shifted forward as compared to what was envisaged at the time of their application for licence to underwrite insurance business in India. it would be wise to cover your parents under an individual mediclaim or a family floater policy to avoid nasty shocks later.” adds Mathpal.” says Mahavir Chopra of MediManage. The policyholder is also entitled to renewals without any break from the original company or the merged company. chief marketing and operations officer. In its annual report for 2009-10 released last week.” he addsThose enjoying the benefits of corporate group mediclaim. In short. “In this segment. introduce the co-pay clause. “Premiums for mediclaim are expected to rise in the quarter of April 2011.” says Meehan. “Mortality rate will come down and term plans will become more economical. several insurance companies will complete 10 years of operations in the current fiscal. Irda has set up a panel to review these rules. Debate on whether an open architecture would be more appropriate is currently on and some industry watchers expect Irda to take a decision next year. may be in for an unpleasant surprise. ICICI Lombard. the regulator said: “But for most of the companies. “Policies with higher sum insured and higher premium would get benefits like permission to avail treatment at luxury hospitals (this would also mean that there would be products which would be priced cheaper with lesser benefits). Such products may hit the market in 2011.” According to Irda. Irda may come up with administrative reforms to standardise terms and procedures. but a few experts have expressed some is taken over by another. things could become a little easier for policyholders who often have to grapple with incomprehensible clauses in insurance contracts.” says Sanjay Datta. CEO of health insurance broking firm Medimanage. However. wherein 10-25% of the approved claim has to be borne by the policyholders themselves. This holds true for both retail and group policies. if you are looking for a pure protection cover to secure your family’s financial future in your absence. Also. the regulations have prevented one bank from distributing policies of multiple life or general insurers. a standard claim and pre-authorisation form as well as list of exclusions and their interpretations.So far. on the other hand. According to an annual employee benefits survey conducted by Marsh Insurance Brokers for 2009-10. 2011 promises to be an eventful year like its predecessor and some prudent choices and inquisitiveness will help you get the better of your agent and make the right decision to secure your family’s needs. higher premiums) for those who are keen on availing treatment at high-end hospitals.” says Sarnobat. “Presently. may not offer any such respite. . it may mean more choices for you. companies have started taking corrective action and have reduced their operating expenses considerably. like many others. A revision would foster competition and hence innovation and better service to consumers. including the bank staff’s lack of in-depth product knowledge in such cases.comSome public sector insurers have already indicated that they would come out with health products with a larger sum insured (and The same holds true for mortality rates as well.

Irda member (non-life ). seven revealed profit after tax as compared to four in the previous two years.99 % in 2008-09 to 20. after setting up operations . SBI Life reported net profits for three consecutive years prior to this from 2005-06 to 2007-08 . The panel will also look at the creation of a ‘declined' pool for commercial vehicles.The regulator has pointed out that the increase in expenses was largely because of the insurance companies’ inability to control procurement costs. existing insurance companies which reported losses during the year. i. when insurance companies raised rates by 150% in 2007. and reviewing the pricing methodology . Irda was forced to scale back the hike to 70% following a nation-wide strike by truckers. the operating expenses ratio declined from 11. ICICI Prudential reported anet profit of . In its circular issued last week.65 % in 2008-09 to 10. 2009. three companies showed profits continuously for the past two years.31 crore in 2008-09 . What made things worse was that lapse rates affected profitability and rendered all pricings insufficient. insurers say they have been bleeding as claims have been rising and premiums have been constant. increase in expenses of management .52AM IST. death claims have been few. and companies have not had an adverse experience. as a percentage of gross premium underwritten. Of the seven companies which reported profit in 2009-10 .22 crore for the second year in a row. creation of a declined pool. Kotak Mahindra had reported a profit of Rs 69. Life Insurance Corporation of India had reported net profit of Rs 1.” The circular added that the terms of reference of the panel included review of the present arrangement. had increased significantly. Expense growth rate far outweighed the premium growth rate. During 2009-10 . “It is important to note that the life insurance sector is witnessing an increasing number of companies which are entering the positive zone. The efforts at rationalising and bringing down the expense ratios are in line with Irda’s stand that private insurance companies should take all steps to ensure compliance with the mandatory stipulations on the expenses of management. have declined sharply for private insurers from 25. is expected to . Earlier. SBI Life reported a profit of Rs 276 crore. To address this anomaly. 2010. 21 Dec. there will be some trucks which no one wants to cover. SBI. have been able to reduce the quantum of losses when compared to that incurred in the previous year. For the industry as a whole. 2010. MetLife. If insurers are free to choose which vehicles they want to insure. MetLife has logged a profit of Rs 25. The panel. ICICI Prudential. stood at Rs 20. “Offering motor third party liability cover to commercial vehicles has been a challenge for non-life insurers in view of the tariff controls prevailing and non- availability of credible data and statutory provisions . although the cover is mandatory.80 % over Rs 957 crore in 2008-09 . The eight companies that have reported profits in 2009-10 include LIC.143 crore. Irda said. extending third-party cover to the driver. insurers press for truck cover hike MUMBAI: The insurance industry will once more attempt to raise the issue of increasing premia on the mandatory third-party insurance for trucks. the companies exceeded their expected levels of management expenses per unit premium. On the positive side. as against Rs 17. “Although some increase in capital expenses was seen. 06. Although the 70% hike gave some relief.ET Bureau Losses spiralling.e.” Irda said. Except for the newcomers whose expense levels in the initial years are bound to result in sizeable losses.061 crore. A ‘declined pool' is seen a precursor to some sort of easing the underwriting restrictions . The cumulative losses of the life insurance industry as on March 31.The other bright spot is that companies are now focusing on cutting costs. Also. Bajaj Allianz . to look into the present pricing mechanism and suggest changes to stem losses. Operating expenses. The regulator has set up a panel headed by M Ramaprasad.85 % in 2009-10 . The insurer has been reporting profits continuously in the past three financial years. among other things. it reported profit for the first time in 2008-09 .304 crore as on March 31. Kotak Mahindra. 258 crore after incurring losses for eight consecutive years. especially procurement costs of business . many countries have the concept of declined pool where the unwanted applications will be accepted and claims shared among all companies. Sahara India and Aegon Religare .06 crore. which includes senior Irda officials and representatives from the non-life industry. as against a loss of Rs 26.” Irda said. out of the 22 private life companies.86 % in 2009-10 . an increase of 10.

wealth creation and protection. the appointed dependents will receive death benefit of the assured sum. Third-party cover refers to the compulsory policy that every vehicle owner has to purchase to compensate accident victims. In case of unfortunate death. The key discrepancy between third-party cover and other forms of insurance is that in all other policies. the insurer has to pay the compensation that is decided by the Motor Accident Claims Tribunal . This is designed to aid you meet your child's financial needs that arises at different phases of his growing years. Further. The popularity of these policies with parents can be gauged by the sheer number of child insurance options laid out. At the same time. but in proportion to the size of the insurance company in terms of the overall premium income. These policies not only offer protection but can also double up as investment instruments. So wide is the platter that you may find it difficult to select a policy that meets your child's needs. There has been a significant shift in the scenario of child insurance options. Some insurance plans provide you with funds at fixed time intervals. all premiums collected on third-party insurance cover issued to commercial vehicles go into a common pool. Although the claims are to be paid out of the pool.When selecting a suitable plan. Why child insurance policy? Inflation has pushed up prices of most essential commodities many folds. Parents seek these plans to mitigate their children's future financial strains and uncertainties. but many flavours in child insurance policies. The cost of education is rising at a phenomenal rate. Some child insurance policies lure parents with more enticing benefits. in turn. Through a ULIP you undertake long-term systematic and disciplined savings towards your specific financial goals like child's education. The compensation . This is not the case in motor thirdparty liability. Insurance to tide over your child's financial needs Large insurance companies offer not one. insurers are expected to make good losses. An interesting aspect of motor pool is that the losses are not shared in the same ratio as the premium contribution. they hold prospect of greater returns. Factors like age of the child. Here are a few tips to help you select the right policy for your child: Pure life not advisable Life insurance that covers pure life risk ensures that if the earning member of a family dies the .Some policies provide a lump sum amount when the child reaches a particular age. parents have to start saving years ahead. child insurance plans help parents secure the financial future of their child. The rest of the premium payments are taken up by the insurance company itself instead of adding to financial stress of the bereaved family. PSU insurers accused private companies of avoiding commercial vehicle cover. the premium has never kept pace with the claim payout and each year. The concept of sharing losses in terms of overall size was introduced by the regulator to prevent insurance companies from cherry-picking . the total liability of the insurance company is limited by the sum insured.submit its recommendation in three months. The policy is not terminated and benefits are given to the child on maturity. Here. This money can be used in whatever way he chooses like for higher education. To enroll a child for a professional degree. periodic monetary requirements for marriage and education. so has the compensation. Since average salaries have been rising. the premium rates have been frozen by the regulator for nearly four years. marriage. Since April 2007. marriage. Following the introduction of the pool. parents must understand their specific financial needs along with the unique needs of the child. novel high-returns schemes and unit-linked insurance plans (ULIPs). A combination of investment and insurance. Traditional favorites like endowment plans or moneyback policies exist alongside. starting a family or setting up own business. additional protection and maturity benefits sought must be taken into account. private insurers have been complaining that the only achievement of the pool was to subsidise the losses of the state- owned companies. Earlier. is largely determined by the earning capacity of the victim and there have been cases where individuals have got settlements to the tune of multiple crores of rupees.

Avoid buying such a cover for children because a child's death is an emotional loss and not a financial loss. career and marriage expenses. Sufficient funds should be available to cater to is paid the insured amount to take care of their expenses and maintain the same standard of life. . Ensure monetary goals are met An ideal insurance plan must meet the numerous monetary goals at various junctions in your child's life.