A GUIDE TO INVESTMENT CONTENTS CHAPTER PARTICULARS PAGENO NO. 1. Introduction 2. Financial Planning 3. Insurance Planning 4. Investment Planning a) Equity b) Fixed Income c) Post Office Schemes d) Gold e) Commodities f) Currency g) Derivatives h) Mutual Funds i) ETFs j) Real Estate k) Alternate Investments l) Options for NRIs 5. Tax Planning 6. Retirement Planning 7. Estate Planning DISCLAIMER The book provides general information, not individually targeted personalised advice. Any advice given does not take into account any investor’s particular investment objectives, financial situation and personal needs. Investors should assess for themselves whether the advice is appropriate to their individual investment objectives, financial situation and particular needs before making any investment decision on the basis of such general advice. Investors can make their own assessment of the advice or seek the assistance of a professional adviser. Investing entails some degree of risk. Investors should inform themselves of the risks involved before engaging in any investment. We endeavour to ensure accuracy and reliability of the information provided but does not accept any liability whatsoever, whether in tort or contract or otherwise, for any loss or damage arising from the use of this book. Past performance is not necessarily indicative of future results. Information and advice provided here is not an offer to buy or sell securities. Before commencing an investment program we recommend you seek independent professional legal, tax and investment advice as to whether it is suitable for your particular needs and circumstances. Failure to seek detailed professional personally tailored advice prior to acting could lead to you acting contrary to your own best interests and could lead to losses of capital. We expressly deny any liability to you for loss in any manner or form now or at any time in the future. You should be aware that some investments will lose money. Conscious investment selections are on the basis of probabilities ‐ that they are proven profitable at some point in time in the future more often than not. Any action based on this information should observe standard investment and trading rules such as diversification, stop losses and matching to personal risk tolerances. Investing strategies and actions discussed in our publications may not be suitable for you. You must make your own investment decisions in light of your own circumstances. About the Author CA. Rajkumar S. Adukia B.Com (Hons.), FCA, ACS, AICWA, LL.B, M.B.A, Dip In IFRS(UK), Dip In LL & LW Mobile: 098200 61049 Email: [email protected]/ Wesite: www.carajkumarradukia.com Address: 1/3, Meridien Apartments, Veera Desai Road, Andheri (West), Mumbai-400058. Mr. Rajkumar S. Adukia is a highly acclaimed academician and an eminent and experienced Chartered Accountant. An active member of various professional bodies, he is a member of the Central Council of the Institute of Chartered Accountants of India and numerous committees of the Institute of Chartered Accountants of India and is actively involved in their working. He is constantly engaged in knowledge development and has conducted more than 500 seminars & workshops on topical issues relating to trade & industry. Based on his rich experience, he has written numerous articles in newspapers and business magazines and has authored books on varied topics. His books are known for their practicality and for their proactive approaches to meeting practice needs. He has a wide range of experiences over a career spanning more than two decades and has always shared his experiences by working in close contact with the industry and trade bodies from different forums. Mr Rajkumar S. Adukia is also an advisor to many industries and organizations. His firm of chartered accountants offer comprehensive advice and assistance in all areas of business like company formation, forex matters, trade policy including free trade agreements, anti dumping duties and cross border supply chains, taxation, investment etc. Services offered are in the nature of Strategic Consulting and Advisory, Compliance Support, Litigation support and Representations and Trade Facilitation. Over the years the firm had gained strength and grown in size and has extended their services in the international market as well. PREFACE Most of the people know the virtues of investment. In the Indian culture, saving and for that matter investing – particularly in gold is very common. However, when you ask someone what are the investment options available for you, the most common answers are equity (shares), fixed deposits, gold and real estate (property). Though the Indian Financial Market is not so developed as that of the developed nations, there are a plethora of options available in India which should be explored and used by the investor depending on his financial circumstances. The Indian Market has grown tremendously beyond the traditional options available. This book is an attempt to discuss the various investment options available in the Indian context. The focus of the book is not on ‘how to invest’ but ‘where to invest’. Each investor’s goals and needs differ. He has to draft a financial plan to suit his needs and at the same time the investment should be tax efficient. The investment option chosen must be based on his financial plan. The book covers general information on the various investment options in simple language and relevant tax laws have been incorporated. We have tried to make the contents as readable, understandable and nonmathematical as possible. The information has been collected from various public sources. Though we have tried our best to keep the information as accurate and updated as possible, it’s possible that some errors have crept in. The book has been updated till November 2011. Comments, suggestions and corrections are most welcome from the reader. Remember, With money, one can command devils, Without it, one cannot even summon a man. So, Work hard, Save regularly and invest wisely. Hopefully, the readers will be benefited. Happy reading INTRODUCTION Do you have money put away for a rainy day? How will you manage if there’s a family emergency? What about a down payment for a home, or a fund for higher education, or retirement? Do you have loans to repay? In this era of recession, deflation, and job cuts, it is especially important for you to consider where your hard-earned money is going; financial security is the key in today’s unpredictable world. And the first step towards gaining that security is to start investing. Still not convinced? Then ask yourself why you need to save and invest. The answer’s really very simple: so that your money can start earning money, and work towards reducing the effort you put in everyday. By investing, you'll have a lot more money for things like retirement, education, recreation -- or you could pass on your riches to the next generation so that you become your family's Most Cherished Ancestor. If you borrow money to pay for things you want, you are paying interest to others instead of to yourself. Investing offers you a way to pay yourself instead of others. For example, if you wish to send your children to college some day, you may be able to borrow money for tuition, but either you or they will have to pay it back with interest. If you choose to invest money today instead, you can earn interest and pay yourself, up until the time you need the money. SAVING Vs. INVESTING At this point, we need to address the differences between saving and investing. Savings provide for emergencies and fund specific purchases in the near future (within two years). The primary goal is to store funds and keep them safe. However, you invest to increase net worth and work toward long-term goals. Also realise that investing involves risk, where you could lose some of your original investment. Only consider an investment plan when you have in place an emergency fund, insurance, control over credit use, and a retirement plan. WEALTH MANAGEMENT Private wealth management encompasses a wide range of services aimed at managing the financial affairs of an individual and family. Accordingly, this discipline covers: 1. Financial Planning – 1. Financial planning 2. Risk management and insurance planning 3. Retirement planning and employee benefits 4. Estate planning 5. Tax planning 6. Investment planning 2. Advisory services 3. Research services 4. Banking and finance a. Day to day banking b. Liquidity management services c. Lending d. Foreign exchange services 5. Portfolio management services a. Discretionary mandates b. Non-discretionary mandates Why to go to a wealth manager/financial advisor/financial planner? With the growth of the Indian economy and the increase in the divide between the rich and the poor, more excess capital is becoming available in the hands of the individuals and their families. This money needs to be invested smartly to increase returns bearing in mind the risk constraints. With the rapid increase in the number of investment products creating a problem of choice, growing awareness towards one’s finances and an increase in financial frauds has made it increasingly difficult for the individuals and families as a whole to manage their finances on their own. The most important point to bear in mind is that we are dealing with ourselves – humans where the decision making process is greatly influenced by personal concerns and preferences. The universe of private investors is heterogeneous with diverse investment objectives, tastes (likes and dislikes), time horizons, perceptions of risk, taxation along with the varying degree of stability and logic. Hence, all the problems of individuals are unique and the solutions cannot be tailor made by blindly applying the assumptions of modern financial theory. A Wealth Manager or financial advisor understands the needs of the investor and provides him with an investment package which suits him.