The Most Comprehensive Financial Guide for Women - Preview

7/24/2019 The Most Comprehensive Financial Guide for Women - Preview

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The MostComprehensive

Financial Guide For

Women

2 0 1 4 A n a n d s B l o g

Anand Vijayakumar

AWomanisalwaystheHeart&SouloftheFamilyandher

contribution to the family isSecond toNone.ThisBook is

MyAttempttohelpherBecomeFinanciallyIndependent


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The Most Comprehensive Financial Guide For Women

2014 Anands Blog. All Rights Reserved. Page 1

Foreword

Haveyoueverseenyourmotheroryourfriendsmotherpulloutahundredrupeenoteorafiftyrupee

notefrom insideaJarofCerealswhenyouneedmoneyinahurryanddadisntaround?Forpeoplein

our generation, the Woman was almost always a Home Maker and did not earn. But, when the

monthendcomescloser,theladyofthehousealmostalwayshasmoremoneyatherdisposalandeven

sometimes bails out the husband. Just imagine this; our mothers never had any formal financial

educationor training.They learnt things thehardwayandsavedmoney fromwhateverwasgiven to

themtorunthehousebytheirhusbands.Evenwiththe limitedresourcestheyhad,theymanagedto

enroll themselves intochitfundschemesor intoGoldSavingschemesandhelpedcontributetowards

thefamilysSavings.

WhatiftheyhadanopportunitytolearnaboutInvestingandFinancialDiscipline?OurMomswouldve

beenabletosavealotmorethanwhattheyusedto

Asyoumightalreadyknow, Iamabloggerandwritea lotabout financialtopics.However,my lovely

wife ismytotalopposite.Shedoesnteventrackherownbankaccountthroughonlinebanking.Most

Womenwouldfallintothesamecategoryasmywife.Itisnotasiftheycannotdoit.Awomanwhocan

workinanofficeandgrowinhercareercanveryeasilystartplanningherfinancesaswell.Inmostcases

theydontgetintoInvestmentsorFinancebecausetheirfatherorhusbandorsondoesitforthem.

So, if you want to understand what your father or husband is doing, its pretty easy. It is not that

complicatedandyoucaneasilyunderstandit.

Thisbookismyattempttohelpwomenunderstandthebasicsofthefinancialmarkets,Investments,Life

Insuranceand

everything

else

about

money.

Hopeyoufindituseful.

BestRegards,

Anand


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This bookisdedicatedtomywife Dharini who hashadthe Patience toPutUp

withme spendingcountlesshours in frontofthelaptop.


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Copyright 2014 Anands Blog. All Rights Reserved. No part of this publication may be reproduced,

stored ina retrievalsystem,or transmitted, inany formor inanymeansbyelectronic,mechanical,

photocopying,recordingorotherwisewithouttheexplicitpriorwrittenpermissionoftheAuthor.

LEGAL DISCLAIMER:The Author is an Independent Blogger and Financial Advisor. Use of the information contained in

this book is at ones own risk. This is not an offer to sell or solicitation to buy any investment products. All stock market

investments carry an inherent risk of loss and the author will not be liable for any losses incurred out of the investment(s)

made by the reader. Information contained herein does not constitute a personal recommendation or take into account the

particular investment objectives, financial situation or needs of individual investors. All content and information provided in

this book is on an As Is basis by the Author. Information in this book is believed to be reliable but the Author does not

warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or

implied. The author may hold investments in any of the products discussed here however the author has NO Vested Interest

in recommending any of the products outlined in this book. The Performance of the products quoted in this book may or may

not be sustained in future. All rate of returns used in calculations are for indicative purposes only and do not guarantee

future results. The actual returns your portfolio will gain will be based on multiple factors like your investment choice, market

performance etc.


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Table of Contents

Introduction.................................................................................................................................................. 8

BeforeWe

Begin

...........................................................................................................................................

9

1.1:BankingServices.................................................................................................................................. 11

1.1.1:WhatisaBank?............................................................................................................................. 11

1.1.2:WhoRegulatestheBankingSysteminIndia?............................................................................... 11

1.1.3:HowdoesabankWork?............................................................................................................... 12

1.1.4:WhyBankingSystemsWork?....................................................................................................... 14

1.1.5:WhatHappensifaBankFails?...................................................................................................... 14

1.1.6:WhatServicesDoBanksProvide?................................................................................................. 15

1.1.7:ABankCheque.............................................................................................................................. 16

1.1.8:DemandDrafts.............................................................................................................................. 22

1.2:TheDebtMarkets................................................................................................................................ 23

1.2.1:FixedDeposits............................................................................................................................... 23

1.2.2:Bonds............................................................................................................................................ 24

1.2.3:RisksInvolvedinInvestinginBonds............................................................................................. 25

1.2.4:Debentures................................................................................................................................... 27

1.3:The

Equity

or

Stock

Markets

................................................................................................................

29

1.3.1:WhatisanEquityShare?.............................................................................................................. 29

1.3.2:HowDoesaCompanyIssueShares?............................................................................................ 29

1.3.3:TheSecondaryMarket.................................................................................................................. 35

1.3.4:TheStockExchangesofIndia........................................................................................................ 35

1.3.5:MarketTrendsBearsandBulls................................................................................................... 37

1.3.6:SecuritiesandExchangesBoardofIndiaSEBI........................................................................... 38

1.3.7:ChoosingaGoodStockforInvestment?....................................................................................... 39

1.3.8:HowtoTradeandInvestinEquityMarkets................................................................................. 42

1.3.9:ExchangeTradedFunds................................................................................................................ 44

1.4:TheMutualFundsMarket................................................................................................................... 46

1.4.1:WhatisaMutualFund?................................................................................................................ 46

1.4.2:WhatDoIdowiththeMoneyyouInvested?............................................................................... 46


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1.4.3:DoMutualFundsHaveAnyFeeorCharges?................................................................................ 47

1.4.4:TheAssociationofMutualFundsinIndiaAMFI........................................................................ 48

1.4.5:TypesofMutualFunds.................................................................................................................. 49

1.4.6:ChoosingaGoodMutualFundForYourPortfolio..................................................................... 52

1.4.7:MutualFundMyths....................................................................................................................... 55

1.4.8:WhatistheBestWaytoInvestinMutualFunds?........................................................................ 57

1.4.9:HowtoInvestBuy/SellMutualFunds........................................................................................ 59

1.5:TheDerivativesMarket........................................................................................................................ 60

1.5.1:WhatareDerivatives?................................................................................................................... 60

1.5.2:ARealLifeExampleforDerivatives.............................................................................................. 60

1.5.3:PurposeofDerivatives.................................................................................................................. 61

1.5.4:Types

of

Derivatives

......................................................................................................................

61

1.5.5:ParticipantsinaDerivativeMarket.............................................................................................. 62

1.5.6:DerivativeCategories.................................................................................................................... 64

1.5.7:HowtoTradeintheDerivativesMarket?..................................................................................... 75

1.5.8:TheCommodityFuturesMarket................................................................................................... 76

2.1:CreditCards.......................................................................................................................................... 80

2.1.1:WhatisaCreditCard?.................................................................................................................. 80

2.1.2:HowaCreditCardWorks.............................................................................................................. 81

2.1.3:OnlinePurchases........................................................................................................................... 82

2.1.4:So,HowDoestheBankMakeMoney?......................................................................................... 82

2.1.5:ThingstoCheckBeforeyouSignupforaCreditCard............................................................... 83

2.1.6:ThingsYouShouldKnowAboutYourCreditCard........................................................................ 84

2.1.7:Zero%InterestSchemesareNotReally0%................................................................................. 85

2.1.8:Credit/DebitCardSafetyInstructions........................................................................................ 86

2.2:LifeInsurance....................................................................................................................................... 89

2.2.1:So,

what

is

Life

Insurance?

............................................................................................................

89

2.2.2:HowLifeInsuranceWorks............................................................................................................ 89

2.2.3:HowInsuranceCompaniesWork.................................................................................................. 90

2.2.4:InsuranceRegulatoryandDevelopmentAgencyIRDA.............................................................. 92

2.2.5:TypesofLifeInsurancePolicies.................................................................................................... 94


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2.2.6:HowMuchInsuranceDoINeed?................................................................................................. 95

2.2.7:InsuranceasanInvestmentABIGNO....................................................................................... 95

2.2.8:DoYouHaveMedical/HealthInsurance?..................................................................................... 99

2.2.9:WhattoDoIfyouhaveanInsuranceRelatedGrievance?......................................................... 100

2.3:UnitLinkedInsurancePlansULIPs.................................................................................................. 102

2.3.1:WhatareULIPs?......................................................................................................................... 102

2.3.2:HowdoULIPswork?................................................................................................................... 102

2.3.3:So,WhyDoPeopleLikeULIPsSoMuch?.................................................................................... 103

2.3.4:WhataretheFee&ChargesAssociatedwithULIPInvestments?.............................................. 104

2.3.5:ThingsMostPeopleDONOTKnowAboutULIPs........................................................................ 105

2.3.6:AREALLIFEEXAMPLE:................................................................................................................ 107

2.3.7:Am

ITotally

Against

ULIPS?

........................................................................................................

108

2.3.8:ThingsToDoBeforeYouPurchaseaULIPPlan....................................................................... 109

2.3.9:WhatToDowithyourExistingULIPInvestments?.................................................................... 110

3.1:InvestmentPortfolio.......................................................................................................................... 114

3.1.1:WhydoweneedaPortfolio?..................................................................................................... 114

3.1.2:InvestingInGold......................................................................................................................... 118

4.1RetirementPlanning........................................................................................................................... 124

4.1.1:WhyPlanforRetirement?.......................................................................................................... 125

4.1.2:HowmuchmoneywillIneed?.................................................................................................... 126

4.1.3:Wherewillthemoneycomefrom?............................................................................................ 129

4.1.4:BuildingtheRetirementCorpus................................................................................................. 133

4.1.5:EmployeeProvidentFundandEmployeePensionScheme....................................................... 134

4.1.6:WithdrawalofEPF...................................................................................................................... 139

4.1.7:TransferofEPF............................................................................................................................ 140

4.1.8:HowMuchPensionWillWeGetThroughEPS?.......................................................................... 142

4.1.9:Gratuity

Benefits

.........................................................................................................................

144

4.1.10:SuperAnnuationBenefits.......................................................................................................... 146

5.1:PlanningYourChildrensFuture........................................................................................................ 150

5.1.1:WhyPlanforourKidsFuture?.................................................................................................... 150

5.1.2:HowtoCalculatetheFutureMoneyRequirement?................................................................... 151


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5.1.3:So,HowtoAccumulatethemoney?.......................................................................................... 151

5.1.4:So,WhatNext?........................................................................................................................... 152

5.1.5:ATIPfortheParentWhoisExtremelyBusy:.............................................................................. 153

6.1:BuyingaHouse................................................................................................................................... 155

6.1.1:Thingstodobeforebuyingahome:........................................................................................... 155

6.1.2:IdeasfortheSmartHomeBuyer................................................................................................ 155

6.1.3:DocumentsyouwillNeedToAvailaHomeLoan.................................................................... 157

6.1.4:HomeLoanPartRepayment.................................................................................................... 157

7.1:MoneyTipsForTodaysWomen.................................................................................................... 161

7.1.1:TipNo.1:OvercometheGenderBarrier.................................................................................... 161

7.1.2:TipNo.2:SaveUpforaContingencyFund................................................................................ 161

7.1.3:Tip

No.

3:

Get

yourself

Insured

Sufficiently

................................................................................

163

7.1.4:TipNo.4:AlwaysPrepareaBudgetandTrytoSticktoIt.......................................................... 163

7.1.5:TipNo.5:AlwaysSetSavingTargetsandTrytoAchieveThem................................................. 164

7.1.6:TipNo.6:ControlYourUrgetoSplurge..................................................................................... 164

7.1.7:TipNo.7:DontIgnoreYourFamilysFinances.......................................................................... 164

7.1.8:TipNo.8:KnowYourHusbandsFinancialStatus........................................................................ 164

7.1.9:TipNo.9:DontLetFearStopYou.............................................................................................. 165

7.1.10:TipNo.10:LearnFromYourMistakes...................................................................................... 165

7.2:InvestmentDosandDonts............................................................................................................ 166

7.2.1:TheDos:..................................................................................................................................... 166

7.2.2:TheDonts:.................................................................................................................................. 166

7.2.3:WhenandWhattoBuy............................................................................................................... 167

7.2.4:SomeGeneralGuidelines............................................................................................................ 167

7.3:TrackingyourPortfolioPerformance................................................................................................. 168

7.3.1:TrackingyourPortfolioTheManualRoute.............................................................................. 169

7.3.2:Tracking

your

Portfolio

The

Finance

Websites

Route

..............................................................

169


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Introduction

OursocietyandcultureplacesanimmenseemphasisontheManofthehousetobethebreadwinnerof

thefamily.Inthepastcoupleofdecades,moreandmorewomenhavestartedworking&earningand

the

%

of

women

who

can

survive

on

their

own;

is

going

up

every

day.

Though

a

lot

of

women

work

and

earn,notmanyofthemarefullyawareof InvestmentConcepts,RetirementPlanningandmanyother

financerelatedtopics.

In fact, one of the leading investment firms in the world had conducted a survey among working

women.Youwillbeshockedwiththefindings

90% of working women do not handle their own finances and let their Spouses handle their

investments

ManyWomenjustlettheirmoneystayidleintheirbankaccounts

Morethan50%ofworkingwomendonothaveanyRetirementPlan

Morethan80%ofretiredwomendonothaveanypensionincome

Ifyouconductasimilarstudyamongworkingmen, the resultswillbestarklydifferent.Whysomuch

difference?

IsitbecauseWomenareanylesscompetentwhenitcomestoinvestmentandfinance?

SomeofthemostsuccessfulinstitutionsacrosstheglobehavebeenmanagedbyWomen.Infact,even

intheMutualFundsworld,someofthetopperformingEquityMutualFundsaremanagedbyWomen

andtheyhavebeenabletomeetorbeatthereturnsgeneratedbytheirpeerfundsmanagedbyMen.

So,abilityisdefinitelynottheproblemhere.IaskedthisquestionontheWHYparttomywifeandher

answeramazedme

Before

Marriage

my

Dad

handled

my

finances

and

After

Marriage

you

are

doing

it.

So,

when

a

ManIfullytrustandloveisdoingit,whyshouldIbother?


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Before

We

Begin

So,youhavepurchasedthisbookandpaidadecentamountofmoneytogetit.Ifyouwentthroughthe

previewcopyofthisbookorifyoujustreviewedtheTableofContentsyouwouldvebeensurprised

thatthisbookdoesnotcovertwomaintopics:

a. IncomeTaxes

b. ARetirementPortfolio

Ifyoudidnotnoticethisandyoujustrealizedthatthisbookdoesnotcover IncomeTaxesorhowto

buildaRetirementPortfoliodontworry.Iwouldnevershortchangemyloyalreaders.Ihadpublishedan

ebooklastyeartitledYourCompleteGuidetoIndianIncomeTaxandRetiringasaCrorepati.Asyou

havepaid

asignificant

amount

of

money

in

purchasing

this

book,

Iam

going

to

give

you

that

book

ABSOLUTELYFREE!!!


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1.1:

Banking

Services

ABankAccountissomethingthatallofushave.Rightfromourchildhoodwearetaughttosavemoney

inourlittlePiggyBanksandaswegrowup,wemoveontoSavingsBankAccountswherewekeepour

money.So,

how

does

abank

work

and

is

the

role

of

the

bank?

1.1.1:WhatisaBank?

AccordingtotheOfficialDefinition Abankisaninstitutionthatdealsinmoneyanditssubstitutesand

providesother financialservicesto itsCustomers.Banksacceptdepositsandmake loansandderivea

profitfromthedifferenceintheinterestratespaidandcharged,respectively.

1.1.2:

Who

Regulates

the

Banking

System

in

India?

TheReserveBankofIndiaorRBIistheCentralBankofIndiaandistheGoverningBodythatsupervises

allbankingservicesinourcountry.TheReserveBankofIndia(RBI)isIndia'scentralbankinginstitution,

whichcontrols themonetarypolicyofthe Indianrupee. Itwasestablishedon1April1935duringthe

BritishRaj inaccordancewith theprovisionsof theReserveBankof IndiaAct,1934.Following India's

independence in 1947, the RBI was nationalized in theyear 1949. The Reserve Bank Governor is the

person who is at the helm of the RBI. Though the Finance Minister has the power to influence the

decisionsoftheRBI,theRBIisanautonomousbodyandhasthepowertotakedecisionsonitsown.

1.1.2.1:FunctionsoftheRBI

ThefollowingarethekeyfunctionsoftheRBI:

DeveloptheBankingSysteminIndia

BanksaretheFinancialIntermediariesoftheEconomy.TheirMainaimistofacilitatetheflowof

moneyfromthosethathaveitinsurplus(ByAcceptingDeposits)tothosethatneedit(ByGiving

outLoans).WithoutBanks,ourEconomywouldjustcometoastandstill


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IssueCurrencyNotesinIndia

ServeastheMonetaryAuthorityoftheCountry

RegulatorandSupervisoroftheFinancialIndustryintheCountry

ManageForexRequirements&SetForexRegulations

GrantLoanstootherBanksthatoperateinIndia

SetPolicy

Rates

and

Reserve

Ratios

for

Banks

Etc

The list isactuallyvery long.Toput itsimply,anybank that servescustomers in Indiawouldhave to

obtain approvals from the RBI before they start the same and they have to follow every rule and

regulationthatissetbythem.

1.1.3:HowdoesabankWork?

Banksarecriticaltooureconomy.Theprimaryfunctionofbanksistoputtheiraccountholders'money

tousebylendingitouttootherswhocanthenuseittobuyhomes,businesses,sendkidstocollege...

When you deposit your money in the bank, your money goes into a big pool of money along with

everyoneelse's,andyouraccountiscreditedwiththeamountofyourdeposit.Whenyouwritechecks

ormakewithdrawals,thatamount isdeducted fromyouraccountbalance. Interestyouearnonyour

balanceisalsoaddedtoyouraccount.

Banks create money in the economy by making loans. The amount of money that banks can lend is

directlyaffected

by

the

reserve

requirement

set

by

the

RBI.

This

amount

can

be

held

either

in

cash

on

handorinthebank'sreserveaccountwiththeRBI.Toseehowthisaffectstheeconomy,thinkaboutit

likethis.WhenabankgetsadepositofRs.100,assumingareserverequirementof10percent,thebank

canthenlendoutRs.90.That90goesbackintotheeconomy,purchasinggoodsorservices,andusually

endsupdepositedinanotherbank.ThatbankcanthenlendoutRs.81ofthatRs.90deposit,andthat

Rs.81goes into theeconomy topurchasegoodsorservicesandultimately isdeposited intoanother

bankthatproceedsto lendoutapercentageof it.Inthisway,moneygrowsandflowsthroughoutthe


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communityinamuchgreateramountthanphysicallyexists.ThatRs.100makesamuchlargerripplein

theeconomythanyoumayrealize!

Letus

say,

your

dad

just

retired

and

got

his

final

settlement

from

his

employer.

He

has

25

lakhs

with

him

rightnowbutdoesntwanttospendit.Heconsultsafinancialadvisorwhoconsideringhisageandrisk

appetitesuggests thathe invest themoney inaBankFixedDeposit.Now, thebankhas25 lakhsasa

deposit and they need to do something with it so that they can afford to pay your dad the Interest

Amount.Forex:IftheRateofInterestis9%thenthebankhastogiveyourdadRs.2,25,000/ asInterest

attheendof1yearwhenhisdepositmatures.

Ontheotherhand,letssayIamplanningtobuyaHondaCityCarwhichcostsapprox.10lakhs.Ihave

around3lakhsinmysavingsaccountascashbutneed7morelakhstofinishmypurchase.So,Itakea

CarLoan.Theaverage rateof interest thatbankscharge isaround11%and theyalsochargea small

processing

fee

on

the

loan.

So,

if

I

borrow

7

lakhs

I

will

end

up

paying

around

8.5

lakhs

at

the

end

of

the

loantenure. Ifthebankmanagestoattractsomemorecustomers likeme, itwilldisbursemore loans

andtheywillcollectan interestfromallofus.Theywillusethis interesttopaydepositcustomers like

yourdad.

Ofcourse,thebalanceremainingamountistheirincome


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1.1.4:WhyBankingSystemsWork?

Banking isallabouttrust.Wetrustthatthebankwillkeepourmoneyforuswhenwegotogetit.We

trustthat itwillhonorthechequeswewritetopayourbills.Thethingthat'shardtograsp isthefact

thatwhile

people

are

putting

money

into

the

bank

every

day,

the

bank

is

lending

that

same

money

and

more tootherpeopleeveryday.Banksconsistentlyextendmorecredit than theyhavecash.That'sa

littlescary;butifyougotothebankanddemandyourmoney,you'llalwaysgetit.However,ifeveryone

goestothebankatthesametimeanddemandstheirmoney,theremightbeproblem.

ABankdoesnothavetherighttodemandafullsettlementon its loansfromcustomersanytimethey

wantbuttheCustomerhastherighttodemandhisdepositanytimehewants.

1.1.5:WhatHappensifaBankFails?

In the event of a bank failure, your money is protected (to a certain extent) as long as the bank is

insured by the RBI. RBI has a Deposit Insurance Scheme which is mandatory for all banks in India to

enrollwith.EachdepositorinabankisinsureduptoamaximumofRs.1,00,000/ (RupeesOneLakh)for

bothprincipalandinterestamountheldbyhimwiththebank.IncaseofaDefault,theRBIwillgiveyou

onelakh

as

abare

minimum

and

then

work

towards

helping

to

claim

as

much

of

your

deposit

as

possible

bysellingthebanksassets.

A point to note here is that, even if you have multiple deposits with the bank, the total maximum

guarantee is one lakhonly. However, if you have deposits with multiple banks, your depositswill be

insuredforupto1lakhineachindividualbankwithwhichyouhaveanaccount.

ABank

Run

is

asituation

where

all

the

customers

of

aBank

visit

its

branch

to

withdraw

their

money.AsIjustexplained,Bankswillkeepa%ofthemoneyyoudeposittomeettheReserve

RequirementssetbytheRBIandlendouttheremaining.So,ifeveryonevisitsthebankonefine

dayandasksfortheirmoney,thereisagoodchancethatthebankmaynothaveenoughmoney

topayallitscustomers.Infact,thisishowmanysmallBanksandfinancialinstitutionsacross

theworldcollapsedafewyearsagoduringtheEconomicCrisis.Theydidnotclosebecausethey

didnothaveenoughmoney.Theyhadmoneybutitwasalllentouttoothercustomerswhichthey

couldntaskfor


16/26



1.1.6:WhatServicesDoBanksProvide?

As I mentioned towards the beginning of this book, Banks are the Financial Intermediaries of the

Economyandprovideawidevarietyofservicestoitscustomers.

TheKeyServicesInclude:

a. Savings Accounts Thesearethebasicbankaccountswhereyoucanparkyoursurplus

funds for saving.Themoney is totally liquidand youcanwithdraw it any timeyouwant.

Banksgiveyou4%interestonyoursavings.Someprivatebanksofferinterestsofupto6%

on your Savings Account Balance. There are certain limitations on the number of

transactionsthatyoucandoinamonth/yearbuttheselimitsareveryhighandsufficientfor

regularcustomerslikeyouandme.

b. Checking

or

CurrentAccounts These are accounts for businessmen and traders.

Themoney

in

this

account

is

totally

liquid

and

you

can

withdraw

it

any

time

you

want.

These

accountsdonothaveany limitationsonthenumberoftransactionsbecausebusinessmen

needtodohundredsoftransactionseachmonthandregularsavingsaccountwouldntsuit

them.Becauseofthehighvolumeoftransactionsandliquidityrequirements,banksusually

donotofferanyinteresttosuchaccounts.

c. Fixed

Deposits

Thesearespecialdepositaccountswhereinthecustomer(You)specify

thequantumoftimethatyoufeelyouwontbeneedingthemoney.Asyouaredepositing


17/26



yourmoneyforalongerduration,thebankoffersyouamuchhigherrateofinterest.Fora1

yeardeposit,banksofferinterestsofaround8to10%dependingonthebank.

d. Recurring DepositNoteveryonewillhavea lotofsurplusthattheycanopenFixed

Depositswith.So, inordertohelpoutsuchcustomerssavemoney,banksofferRecurring

DepositsorRDs.AnRD isnothingbutasimpledepositaccountwhereyousaveaspecific

amountof

money

each

month

for

apre

specified/pre

planned

duration.

As

the

RD

will

be

open for a longer duration and you wont withdraw the funds quickly, banks offer much

higherinterestrates.Banksofferanaverageofaround8%interestforRDs.

e. Loans

Not everyone will have investible surplus. There may be times when you need

moneybutyoudonthave it forex:whenyouwanttobuyahouse.Youwontpossibly

have20or30lakhslyingaroundforyoutobuythehouse.So,youtakealoanfromaBank.

TheBankwillgrantyoua loanbasedonyour incomeandeligibilityandyouwillrepaythe

money as monthly instalments. Banks offer different loans like Home Loan, Automobile

Loan,PersonalLoan,MortgageLoan,GoldLoanetc.

f. Insurance

Adv isory

Services

Banks also provide Insurance Advisory services

wherein they sell Insurance Products to its customers. Most Bank Branches will have

authorizedandtrainedindividualswhocanadvisecustomersontheInsuranceProductsthat

thebankiscurrentlyselling.

g. Investment

Adv isory

Services

Banksalsoprovide InvestmentAdvisoryServicesto

its customers wherein they sell Investment Products like Mutual Funds, ULIPs, and Gold

Bars. Just like Insurance Advisors, most bank branches will also have qualified individuals

whocanofferadviceonInvestmentProductsthatthebankiscurrentlyselling.

h. SafetyDepositLockers Just likewehave lockers inourcupboardorcabinet,Banks

tooprovideLockerswhichwecanrentout.Bypayingasmallfee,youcanrentoutasafety

depositlocker

from

the

bank

and

keep

your

valuables

inside.

The

locker

is

usually

housed

in

aSafeRoomthatisheavilyarmoredandguardedatalltimes.

i. Cheques &DemandDrafts ChequesandDemandDraftsaremonetary instruments

thatcanbeconsideredatparwithCash. If Ineedtopayyousomemoney Ican issuethe

payment incashorasa chequeordemand draft. When youdeposit thechequeor draft

withyourbank,youwillgetthemoneythatIamsupposedtogiveyou.Thenextsectionwill

explainingreaterdetailabouthowtheseinstrumentswork.

1.1.7:ABankCheque

A cheque is a negotiable instrument that can be issued by one person to pay money to another

person/entity.Thepersontowhomthechequeisissuedisentitledtoreceivethesummentionedinthe

cheque(providedtheaccounthassufficientbalance)fromthebankwherethechequeissuerholdshis

account. A Sample Image of an HDFC Bank Cheque that I picked from the Internet can help you

understandhowarealchequewouldlook.


18/26



1.1.7.1:WhocanissueCheques?

Anyone who holds a valid bank account can issue a cheque to make payment to anyone or any

organization.

1.1.7.2:HowaChequeWorks

LetssayIoweyouRs.10,000/ andgiveyouachequedrawnonmybankaccount(ICICI).Letusseethe

sequenceofevents

1. IhandoverthechequeworthRs.10,000/ drawnonICICIBanktoyou

2. Youtakeittoyourbank(letssayHDFC)anddeposititintoyourbankaccount

3. HDFCProcessesthechequeandsendsarequesttoICICIforpayment

4. If Ihaveenough funds inmyaccount, ICICIwillprocessthepaymentandreleasethe fundsto

HDFCBank

5. HDFCBankprocessesthepaymentandcreditsthefundsintoyourbankaccount

Theabove

is

asimple

illustration

of

how

this

whole

Cheque

Collection

&

Clearing

mechanism

works.

If

you had an ICICI Bank account too, this whole process would be much faster because, step 3 is not

requiredatall.Thebankwilljustcheck ifyouhaveenough funds inyouraccountand ifso,movethe

moneyintothepayee'sbankaccountrightaway


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1.1.7.3:ChequeClearing&CollectionTimelines

With the use of latest technology, most banks issue Cheques that are Payable at Par In all their

Brancheswhich

has

significantly

shortened

the

Cheque

Clearing

Timelines.

Once

upon

atime,

acheque

issued from an different city could take up to 7 days and from a village could take up to 14 days.

However,thesedaysalmostallchequesgetclearedwithin3to5BusinessDays.

1.1.7.4:WhathappensifyourAccountDoesnthaveSufficientBalance?

Aspertheexample Ijustused, IhavegivenyouachequeforRs.10,000/.Letssaymybankaccount

doesnothavesufficientmoneytopayforthisCheque,theChequewillBOUNCE.YouWILLNOTgetany

money.

Issuingsuchchequesisanoffense.Notonlywillyourbankchargeyoupenaltiesandfeesforissuingsuch

cheques,thepersonwhogotthechequecanfileapolicecomplaintagainstyouandyoumaybejailed

for the same. So, we must always make sure that our account has sufficient funds before we issue

cheques.


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1.1.7.5:ChequeClearing&CollectionFees

If you are using an At Par cheque, your bank CANNOT and SHOULD NOT be charging you any fee.

Anyways, in case of the remote possibility that you actually got a cheque from a bank in a different

city/town(from

where

you

reside)

which

isnt

an

At

Par

Cheque,

your

bank

may

charge

you

asmall

fee.

RBIhassetguidelinesonthesechargesandtheyare:

UptoandincludingRs.5000Rs.25perinstrument+servicetax

Above Rs.5000 and Up to and including Rs. 10,000 not exceeding Rs. 50 per instrument+

servicetax

AboveRs.10,000anduptoandincludingRs.1,00,000notexceedingRs.100perinstrument+

servicetax

Rs.1,00,001andabovelefttothebankstodecide.

Youneed

to

check

your

banks

outstation

cheque

collection

policy

&

fees

document

to

find

out

the

fee.

However,RBIhasrecentlyaskedBanks inarecentcirculartoreconsidertheircharges&Reducethem.

Thereisnotmuchclarityonhowmuchbankswillreducethesefeesbuttheywillbereducingitsoon.

Noadditionalchargessuchascouriercharges,outofpocketexpenses,etc.,shouldbelevied.

So,ifyouusedanoutstationchequeandwerechargedafeethatismorethantheamountsabove,you

havetherighttoquestionyourbank.

1.1.7.6:

Important

things

to

note

while

writing

a

cheque

ACheque isaPowerfulMonetary Instrumentand ifwearecareless,wemayendup introuble.There

areanumberofimportantthingsthatwemustkeepinmindwhilewritingacheque.Theyare:

RemembertoCrosstheCheque Crossingachequemeansputtingtwoparallel linesonthe

lefthand topcornerof thecheque.Thismeans that, thecheque isanAccountPayeecheque

whichmeans itcanonlybedeposited intoanotheraccountandcannotbeexchangedforcash

overthecounter.Thisservestwopurposesyoucankeepatrackofwhoencashedyourcheque

andalsoensurethateven ifthecheque islost, itcannotbemisusedbyanyone.Thepersonto

whomthe

cheque

was

paid

will

be

recorded.

Write the Name of theperson to whom the cheque is to bepaid In Full. It is very

importanttostatethechequepayeesnameinfullwithoutmissinganypartofthenameinthe

payto lineThenameenteredhereshouldmatchthenameunderwhichthepersonholdsa

validbankaccount.Ifthereisanymismatchorspellingmistakethechequewillnotbepaid.

Writetheamounttobepaidbothinnumbersandwords.Itisadvisabletowriteboththe

numbervalueaswellasvalue inwords inthecheque.Alsocaremustbetakentoensurethat


21/26



there are no leading or trailing blank spaces while entering these values which might cause

tamperingofthechequeandmodificationofthechequevalue

WritethechequedateCorrectly Donotissuechequesthatdonothaveachequeissuedate.

This is to ensure that your cheque isnt Valid Indefinitely. Cheques in India are valid for a

period of 3 months from the date of Issue. Lets say I give you a cheque on 1st January, the

chequeis

valid

until

31st

March.

Starting

1st

April,

the

cheque

is

useless

and

even

ifyou

deposit

thechequeinyourbank,thechequewillnotbehonoredandyouWILLNOTgetanymoney.

Sign the cheque at the bottom right hand corner with the exact signature that is

registeredwiththebankrecords.Ifthereisevenaslightmismatchbetweenthesignaturein

thebankrecordsandthatinthechequethebankwillnotreleasethepayment.

DontOverwriteorMakeEditsintheCheque ThereshouldbeNOEDITSorOVERWRITINGS

intheCheque.Ifanyarepresent,thechequewouldbeconsidered invalidandwillnotbepaid

out.

NEVER Issue Blank Cheques DO NOT issue cheques to anyone that does not contain a

cheque value. If you do so, if the other person fills in some random big amount, you will be

liableto

pay

the

amount

even

ifyou

dont

owe

them

that

much

money.

1.1.7.7:ChequeTruncationSystem

TheRBIhascomeupwithanewstandardforusingchequescalledChequeTruncationSystemorCTS

2010whichallbankshavetofollow.AsperRBI,onlythosechequesthatareCTScompliantcanbeused

aslegalmonetaryinstrumentsbeginning2013.

1.1.7.7.1:Howisitdifferentfromthepreviousstandard?

Earlier,allchequesweresentdirectly (Inphysicalmode) to theotherbank forclearance.Thismeans

that, if youhavean ICICIAccountand Igive youa cheque fromHDFC Bank, ICICIBankwill send the

chequeyoudepositedtoHDFCBanktoconfirmthatthecheque isvalidandthenreceivethepayment

IntheOddChancethatachequethatyouissuedislostyouneedtoimmediatelyvisitthebankor

calluptheircustomercareandrequestthemtoStopPaymentonthecheque.Onceyoudoso,

evenifthechequeispickedupbysomestrangerwhotriestocashit,thebankwillnotpaythe

money.Remember Itisourresponsibilitytokeepthechequessafe.Ifyouloseitandsomeone

encashesit,thebankwillbeliabletomakethepaymentandyouwillenduplosingMONEY.


22/26



onyourbehalfandcredititintoyouraccount.Thisisthereasonwhyotherbankchequestakeatleast2

3daystogetcreditedintoyourbankaccount.

Starting 2013, banks willjust send a digital (scanned) version of the cheque to the other bank and

technicallytheclearancecanhappenveryfast(evenonthesameday).

Thisessentiallymeansthreeveryimportantbenefits:

EasierProcessingforbothbanks

Nophysicaltransferofchequessolesserdelays

QuickerreceiptoffundsForCustomers

Fromthecustomerspointofview,wedontcarewhatthebankdoestogetmyfunds.Allwecareabout

ishow fastwillwegetmymoneyandthisCTS2010standardcanhelpbanksclear fundsmuch faster

thanbefore.

1.1.7.7.2:WhataretheFeaturesofCTSCompliantCheques?

ACTSComplaintChequewouldlooklikebelow:

ThefollowingaresomefeaturesofchequesthatwillbeCTScompliant:

They

will

have

the

wordings

Please

sign

above

this

line

at

the

bottom

right

hand

side

corner

TheywillhaveawatermarkwithwordsCTSINDIAwhichcanbeseenagainstalight

An invisiblebank logowillbeplacedwithanUltraVioletInkwhichcanbeseenonlyunderUV

Scanners

Itwillnotallowanychanges/alterationstothecheque.Ifthereisanymistakeorcorrection,the

chequewillbecomeinvalid


23/26



PayableatparatallbranchesofXXXXBankinIndiatextwillbeprintedatthebottomofthe

cheque

TheBanksIFSCandMICRCodewillbepresentinthecheque

Signatureswillhavetobemadeusingadarkinksothatyoursignaturescanbescannedproperly

Allthese

features

would

ensure

uniformity

across

cheques

issued

by

various

banks

as

well

as

help

banks

scrutinizechequesproperly,whichinturnisexpectedtoactasadeterrentagainstchequefrauds.Below

isaSampleofhowthesenewCTS2010chequesmustlooklikeaspertheRBI:

1.1.8:DemandDrafts

A Demand Draft or DD (as it is frequently called) is very similar to a cheque but has a few minor

differences. Firstly only Banks can issue DDs. Any customer who needs a DD has to visit the bank

branch,fill

up

aform

and

request

for

the

DD.

The

Bank

will

require

an

upfront

payment

to

be

made

and

only then the Draft will be issued. So, a DD is almost equivalent to Cash. Most people will prefer to

receiveDDsinplaceofChequesbecause,theDDwillnotbounce.Thebankwouldvealreadyreceived

money from you and hence the DD will definitely get paid. Apart from this difference, the clearance

processworksexactlythesamewayasCheques.

1.1.8.1:WillaDemandDraftBounce?

Theoretically

Yes,

but

Practically

NO.

Just

like

cheques

it

is

possible

to

Cancel

aDD

however,

in

order

todoso,youwillbeaskedtosubmit/surrendertheoriginalDD.IncaseoflossortheftoftheDDwhen

thecustomerwantstocancelhis/herDDthebankwillusuallyaskforaPoliceComplainttofacilitatethe

cancellationoftheDD.So, ifsomeonegivesyouaDD,theycantsneakbacktothebankandcancel it

withoutyourknowledge.ThisisexactlythereasonwhyalleducationalinstitutionsaskustoattachaDD

fortheApplicationFeeratherthanaskingustosendCheques.

Justrememberthat,even iftheysomehowmanagetodo itandtheDDyougotBounces, it isILLEGAL

andyoucanfileapolicecomplaintagainstthatperson.


24/26



1.2:

The

Debt

Markets

TheTermDebtMarketsisabroadbasedtermthatreferstoinstrumentswhichareverysimilartoFixed

Deposits. The three main types of Instruments that fall under this category are Fixed Deposits,

Bondsand

Debentures

1.2.1:FixedDeposits

AFixedDepositisarguablethemostcommonandmostwidelyusedDebtProductinIndia.Iampretty

sureyoualreadyknowwhataFDis,amIright?

Anyways, a Fixed Deposit is nothing but an agreement between a Bank and its Customer. The

Customerdeposits

aFixed

Sum

of

Money

for

aFixed

Duration

of

time

at

aFixed

Rate

of

Interest

hence

thetermFixedDeposit.Basedonthedurationofyourdeposit,therateofinterestyouearnwillvary.

At the end of the deposit duration, the bank will return your money along with the Interest you

earnedbykeepingthedepositwiththebank.

Thesedays,FDsthatofferMonthly,Quarterly,HalfYearlyInterestPaymentoptionstoowhereinyou

willgettheInterestpaidoutasperyourselectionandthePrincipalwillbereturnedtousatMaturity.

ChoosingaFD isstraightforward. IfyouselectaGoodbankthat isgoingtoreturntheamountyou

invested, there is absolutely NO RISK for you as an investor here. By doing some research and

selecting the bank that offers the best FD product, you will only earn extra income out of your


25/26



investments.So,ifyoudonthavethetimeorthemeanstoinquirewithmultiplebanks,justopenanFD

withthebankwhereyoumaintainyouraccount.Somebanksofferamuchhigherrateofinterestthan

others.So,Ifyouaregoingtodeposit10LakhsinanFD,abankoffering8%rateofinterestwillgiveyou

Rs.80,000/ attheendoftheyearwhereasthebankoffering9%willgiveyouRs.90,000/

1.2.2:Bonds

ABond isnothingbutanarrangementbetweenan Investor(s)andaBorrowerwherein theBorrower

getsmoneyfromoneormoreInvestors,uses itforhisbusinesspurposesandthenrepaystheamount

alongwithan Interest.Bondsareusedbycompanies,municipalities,statesandevengovernments to

finance a variety of projects and activities. The rate of interest offered on the Bond depends on the

creditworthinessof theborrower.The borrowereithermakesperiodic interestpaymentsorpays the

interestatmaturity.Attheendofthedepositdurationtheinitialdeposit(plusinterest)isreturnedback

totheInvestor.

Bonds are usually backed by some sort of collateral that the borrower has to place with the central

governing bodies. Bonds usually offer a slightly higher rate of interest in comparison to Bank FDs


26/26


becausepeoplehave,forgenerationstrustedBankFDsandtomakethemconsiderotherfixedreturn

investments,therateofreturnshastobeslightlyhigher.

PrivateCompaniesusuallyhavetoofferhigherinterestratesthangovernmentbondissuesbecausethey

need to motivate borrowers to invest in them even though government issues are safer. Another

importantpoint

to

note

here

is

that,

in

official

Bond

Terminology

the

Interest

Component

is

called

Coupon.Ifsomeonesays,thisbondyieldsa8%coupon,itmeansthatthebondearnsarateofinterest

of8%.

1.2.3:RisksInvolvedinInvestinginBonds

Bondsareoneofthemostpreferred investment instrumentsfortheriskaverse investorwhowantsa

decentreturnoninvestment(ROI)andcapitalpreservationatthesametime.Bondsaredebtobligations

whichpay

out

afixed

interest

on

the

invested

sum

and

pay

back

the

whole

invested

principal

at

maturity.Unfortunately,Bondsarenotsostraight forwardastheymightsound.Therearemanyrisks

involved in investing inBonds.Theseriskscancause lossestothe investorsbondportfolioanddefeat

thewholepurposeofcapitalpreservation.

SomeoftherisksinvolvedininvestinginBondsare:

1. InterestRateRisk

2. ReinvestmentRisk

3. CallRisk

4. DefaultRisk&

5. InflationRisk

1.2.3.1:InterestRateRisk

Thisisthemostorwellknownriskinthebondmarket.Thisreferstotheriskthatbondpriceswillfallas

the interest rates in themarket rise. Bondpricesare inverselyproportional to theprevailing interest

ratesinthemarket.Bybuyingabond,thebondholderhascommittedtoreceivingafixedrateofreturn

forafixedperiod.Ifthemarketinterestraterisesfromthedateofthebond'spurchase,thebond'sprice

will fall accordingly. The bond will then be trading at a discount to reflect the lower return that an

investorwillmakeonthebond.Theinvestorwouldendupsufferinglossesifhewishestoliquidatehis

holdingsatthatpointoftime.Marketinterestratesareafunctionofseveralfactorssuchasthedemand

for,andsupplyof,money intheeconomy,the inflationrate,thestagethatthebusinesscycle is inas

wellasthegovernment'smonetaryandfiscalpolicies.

Date post:	22-Feb-2018
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