FAQs - Planning

Investment Planning

Q. In mutual funds, should one invest in growth or dividend?
Ans. This choice depends upon various parameters like investment discipline, investment horizon and income requirement. In case of debt funds, it is advisable to invest through dividend option, whereas in equity funds people who want some income and have less than 1 year horizon(which is not advised as equity is very volatile and there is always a risk to the capital), can invest through dividend payout option, otherwise it always make sense to invest through growth option(after 1 year ,long term capital gains is nil and anyone entering equity should have at least 2.5-3 years horizon). Only factor against growth option is that the long term capital gains tax can be revised in the annual budget every year, which will be applicable for any withdrawals there after. Dividend reinvestment option  has the benefit of dividend payout as well as growth option as the amount distributed is again reinvested(so there is no opportunity loss on account of that money sitting idle in the bank account) but the only problem is that the units keep on changing and tracking takes an extra effort. Tracking is the easiest in growth option.

Q. For an inward remittance, how do I guarantee the exchange rate?
It is difficult for individuals to guarantee the rate on a daily basis. They can get a better rate of 5-10 paise above the daily card rate, the day the money is received by the local bank. That too depends on the relationship you share with the bank and the amount of money being remitted. The only option is booking of a forward contract with the bank, wherein you enter into an agreement for a period (if you are not sure of the date of remittance). There might be a lower limit and upper limit for the amount of remittance for the contract to happen. The bank will charge the rate for that period and a hedge premium.

Q. How do I determine my networth?
You can calculate your networth by subtracting sum total of your liabilities from sum total of your assets.

Q. How do chit funds work?
In a chit scheme, a specific number of individuals come together to pool a specific amount of money at periodic intervals. Usually the number of individuals and the number of periods will be the same. At the end of each period, there will be an auction of the money. Members of the chit will participate in this auction for the pooled money during that interval. The money will be given to the highest bidder. The amount, foregone by the member is distributed as dividend amongst all the members in every draw. The bid amount will be divided by number of members, and thus determining per head contribution during that period. Usually the discount will continue to decrease over periods. The person getting money in the last period will receive the full scheme amount.

Q. What is the basis of derivatives?
Derivatives are financial instruments whose value is derived from the value of something else, which can be called an underlying asset. Examples of underlying assets include.

The main types of derivatives are futures, forwards, options, and swaps. The main use of derivatives is to reduce risk for one party. The diverse range of potential underlying assets and pay-off alternatives leads to a huge range of derivatives contracts available to be traded in the market. Derivatives can be based on different types of assets such as commodities, equities (stocks), bonds, interest rates, exchange rates, or indexes (such as a stock market index, consumer price index (CPI) — see inflation derivatives — or even an index of weather conditions, or other derivatives). Their performance can determine both the amount and the timing of the pay-offs.


Risk Management & Insurance Planning

Q. What kind of a travel or general insurance do I need when I am travelling abroad?
Travel insurance is insurance that is intended to cover medical expenses, financial and other losses incurred while traveling, either within one's own country, or internationally. The most common risks that should be covered by travel insurance are:

  • Medical and hospitalization expenses
  • Emergency evacuation/repatriation
  • Trip Cancellation
  • Curtailment
  • Delayed departure
  • Loss, theft or damage to personal possessions and money (including travel documents)
  • Delayed baggage (and emergency replacement of essential items)
  • Most important among the above is the first one.There are other specific covers available from various insurance companies.

Q. What percentage of ULIP should I configure towards investment and towards the life cover?
If you want to fulfill your entire life cover requirement through ULIPs, then you will need to invest heavily in it per annum and if you do that, due to the front loaded nature of the product in general, you tend to lose a big chunk of your annual investment in the initial 5 years in most of the products available. Look at taking a term policy which will provide atleast 60% of the life cover requirement, remaining cover can be taken through ULIPs but make sure that the life cover taken is not more then 10 times the annual investment( Minimum 5 times is compulsory for getting tax benefit at withdrawal under sec 10 (10 D), otherwise the increased mortality charges reduce your returns on the corpus.


Retirement Planning

Q. Should one open a PPF account at all or no?
One should open a PPF account as its one of the highest return generators amongst all debt instruments and helps in creating a long term corpus which can be utilized for various long term goals. The investment limit of Rs 70000/- p.a. gets income tax benefit under Section 80 C and the interest generated is also tax free, so the effective return is approx 11.5 % for the 30% tax bracket, which is great.

I would advise having a PPF account in every family members name.

Q. How does one utilize the EPF money on retirement?
EPF money on retirement is a corpus which should be utilized primarily for generating a fixed income during your retirement. So part of it can be utilized to purchase an annuity from insurance companies, part of it can be invested in short term debt instruments for liquidity and part of it in equity to give that extra boost to your corpus.


Tax & Estate Planning

Q. What is the basis of estate tax and how does one avoid it?
World wide, the estate tax, also sometimes called the death tax, is very much a reality. Wherever it is levied, it is usually payable on the value of the accumulated savings (by way of assets accumulated) of a deceased person. The policy intention is to bring about inter-generation equity, i.e., to ensure the children of the rich don’t have too much of an advantage in life compared to the less privileged.
India does not levy estate tax so you don’t have to worry about it.



Q1. What should a retail investor look for before applying for an IPO?
The retail investor should look at the following factors before applying for an IPO:-

  1. Business and Competitive Position
  2. New Projects Risks and Prospects
  3. Financial Position and Prospects
  4. Management Quality
  5. Corporate Governance practices
  6. Compliance and Litigation History
  7. Time horizon for the investment, e.g. gain at listing or long term play

The investor can also rely upon Grading of IPOs. Grading of Initial Public Offerings (IPOs) is a service aimed at facilitating assessment of equity issues offered to the public and is available from independent rating agencies like CRISIL,CARE and ICRA. The Grade assigned to any individual IPO is a symbolic representation of rating agency’s assessment of “fundamentals” of the issuer concerned relative to other listed securities.

An investor in a hitherto unlisted company may either have limited access to information on it, or may find it challenging to appropriately assess, on the basis of the information available, its business prospects and risks. An IPO Grade provides an additional input to investors, in arriving at an investment decision based on independent and objective analysis.

In recent times, with the stock market participation of new and foreign investors increasing, there is need for greater value-added information on companies tapping the capital market and their intrinsic quality . In this context, IPO Grades, being simple, objective indicators of the relative fundamental positions of the issuers concerned, could help in both widening and deepening the market.

IPO Grading is NOT a recommendation to buy sell or hold the securities Graded. Similarly, it is NOT a comment on the valuation or pricing of the IPO Graded nor is it an indication of the likely listing price of the securities Graded.


Q2. How is the value of an IPO decided?
IPO in India is done through various methods like book building method, fixed price method, or a mixture of both. The method of book building has been introduced in the country in 1999 and it helps the company to find out the demand and price of its shares. A merchant banker is nominated as a book runner by the Issuer of the IPO. The company that is issuing the Initial Public Offering (IPO) decides the number of shares that it will issue and also fixes the price band of the shares. All these information are mentioned in the company's red herring prospectus.

During the company's Initial Public Offering (IPO) in India, an electronic book is opened for at least five days. During this period of time, bidding takes place which means that people who are interested in buying the shares of the company make an offer within the fixed price band. Once the book building is closed then the issuer as well as the book runner of the Initial Public Offering (IPO) evaluate the offers and then determine a fixed price. The offers for shares that fall below the fixed price are rejected. The successful bidders are then allotted the shares.


Q3. What role does SEBI play when a company comes out with an IPO?
Any company making a public issue or a listed company making a rights issue of value of more than Rs 50 lakhs is required to file a draft offer document with SEBI for its observations. The validity period of SEBI’s observation letter is three months only i.e the company has to open its issue within three months period. There is no requirement of filing any offer document / notice to SEBI in case of preferential allotment and QIP. In QIP, Merchant Banker handling the issue has to file copy of placement document with SEBI post allotment for record purpose. Given below are few questions in regard to issues, offer documents of which are submitted to SEBI, for its observations:

a. Does it mean that SEBI recommends an issue?
SEBI does not recommend any issue nor does take any responsibility either for the financial soundness of any scheme or the project for which
the issue is proposed to be made or for the correctness of the statements made or opinions expressed in the offer document.

b. Does SEBI approve the contents of the issue?

It is to be distinctly understood that submission of offer document to SEBI should not in any way be deemed or construed that the same has been
cleared or approved by SEBI. The Lead manager certifies that the disclosures made in the offer document are generally adequate and are in
conformity with SEBI guidelines for disclosures and investor protection in force for the time being. This requirement is to facilitate investors to take
an informed decision for making investment in the proposed issue.

c. Does SEBI tag make my money safe?
The investors should make an informed decision purely by themselves based on the contents disclosed in the offer documents. SEBI does not
associate itself with any issue/issuer and should in no way be construed as a guarantee for the funds that the investor proposes to invest through
the issue. However, the investors are generally advised to study all the material facts pertaining to the issue including the risk factors before
considering any investment. They are strongly warned against any ‘tips’ or news through unofficial means.

d. What are “DIP” guidelines?
The primary issuances are governed by SEBI in terms of SEBI (Disclosures and Investor protection) guidelines. SEBI framed its DIP
guidelines in 1992. Many amendments have been carried out in the same in line with the market dynamics and requirements. In 2000, SEBI issued
“Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000” which is compilation of all circulars
organized in chapter forms. These guidelines and amendments thereon are issued by SEBI India under section 11 of the Securities and
Exchange Board of India Act, 1992. SEBI (Disclosure and investor protection) guidelines 2000 are in short called DIP guidelines. It provides
a comprehensive framework for issuances buy the companies.

e. How does SEBI ensure compliance with DIP?

The Merchant Banker are the specialized intermediaries who are required to do due diligence and ensure that all the requirements of DIP are
complied with while submitting the draft offer document to SEBI. Any non compliance on their part, attract penal action from SEBI, in terms of SEBI
(Merchant Bankers) Regulations. The draft offer document filed by Merchant Banker is also placed on the website for public comments.
Officials of SEBI at various levels examine the compliance with DIP guidelines and ensure that all necessary material information is disclosed
in the draft offer documents.


Q4. Should a retail investor apply for an IPO of a small company?
The size of the company should not matter, only the parameters mentioned in the first question should be deliberated upon. The liquidity of the shares in the market after listing should also be considered as the volumes of trading in a small company are small.