Rachana Ranade. Blog

Who would have imagined that something as basic as an average can do wonders when extended to the stock market? A concept which we learned in our school days could not only help us identify trends but also take positions and build an overall perspective about the market. Intriguing, isn’t it? So, without any further due, let’s explore everything about averages and how to use it practically.

What are Moving Averages?
Before we move on to moving averages, let me refresh your memory about what are averages. An average is simply a representative figure, calculated by taking a sum of all data points and then dividing the sum by the number of data points. For instance, you know that on average you take 30 mins to reach your office. How did you come upon this number? You simply calculated an average based on the time you took to reach your office in the past. That’s all!

Now let’s come to the Moving average. Talking about the stock market, every day we see a different closing price of the stocks. So, how do we get to know the average market price of a stock and its general trend? This is where the moving averages come into the picture. The Moving average calculations consider the most recent number of data points (closing price of an asset). For example, for 5 days moving average, it will be continuously recalculated by taking the closing price of the recent 5 trading days. So, after every trading session, that day’s closing price would be included, resulting in the exclusion of the oldest closing price from the previous day’s data. This way the data points keep moving ahead every day and hence the name Moving Averages or Simple Moving Averages (SMA).

What is Exponential Moving Average?

EMA is a type of moving average. We can say that it is an extension of SMA. So, what’s different about EMA? The recalculation remains the same. Additionally, weights are given to the prices. The recent data will be assigned more weight compared to the older data. This makes sense because more importance is given to the price which is already discounted based on recent news, events, etc. Hence, EMA tends to react quickly and give early signals than SMA. For all these reasons, EMA is widely used by technical analysts.

How to use Moving Averages?
MA is a lagging indicator as it reacts to the daily closing prices. It is trend friendly and can help us identify trend reversals. As we all know- Trend is our friend, it is widely used by traders because of its simplicity. When the stock price moves above the MA line from below, a bull run can be expected. Therefore, you may explore buying opportunities in such cases. In an uptrend, MA acts as a support level. As long as the price stays above MA the uptrend tends to continue. When a stock price moves below the MA line from above, a bear run can be expected. In such cases, one may explore shorting/exit opportunities. In a downtrend, MA acts as a resistance level. The stock is said to be in the downtrend as long as the price stays below MA. MA won’t work when the price movement is sideways. You can observe the same on the chart of Tata Coffee shared below.

But simply applying a MA on the chart and taking positions based on it is not enough. Hence, we have something known as crossover strategies where a short-term moving average (also known as fast EMA) and a long-term moving average (also known as slow EMA) are combined to give us an overall picture of a stock. So, let’s have a look at 2 crossover strategies, which uses 50-days and 200-days EMA.

a. Golden Cross
A golden cross is ideally a sign of an upcoming bull market. It is formed when a short-term moving average (50 DEMA) crosses the long-term moving average (200 DEMA) from below. This crossover can help us identify trend reversal from bearish to bullish. If this crossover is backed by strong volumes and bullish signals from other indicators it indicates strength in bullishness. This is when you may explore buying opportunities. Once this crossover takes place, the 200 DEMA will act as an important support level.

This can be observed on Tata Coffee’s daily chart below. A golden cross happened on 26th June 2016 (highlighted) with high volume. After that, the stock continued to move in an uptrend and took support around 200 DEMA multiple times.

b. Death cross
A death cross is ideally a sign of an upcoming bear market. It is formed when a short-term moving average (50 DEMA) crosses the long-term moving average (200 DEMA) from above. This crossover can help us identify trend reversal from bullish to bearish. If this crossover is backed by strong volumes and bearish signals from other indicators, it indicates strength in bearishness. This is when you may explore shorting/exit opportunities. Once this crossover takes place, the 200 DEMA will act as an important resistance level.

This can be observed on Tata Coffee’s daily chart below. A death cross happened on 7th March 2018 (highlighted). After that, the bullish trend was reversed. The stock took resistance around 200 DEMA multiple times.

Bottomline
The important point to remember is that MA works when a stock is trending either on the upside or downside. Hence, you need to take a look at the general trend of the stock before making a trade decision. Avoid using MA in the sideways trend. Another important doubt which my students often ask me is what length should be used while using MA. People use 5 days, 10 days, 25 days or even 200 days. There’s no hard and fast rule about it. It completely depends on your investment horizon. Apart from this, make sure to check other parameters like candlestick patterns, volume, RSI, etc. to get a confident view. If you would love to understand the calculations that go behind MA and how to use these other significant indicators, make sure to check out my course on Technical Analysis. Until next time!

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What are moving averages?

Just like Jay has Veeru, Munna Bhai has Circuit, and Bunny has Avi, even our chart patterns come in duos. Head & shoulder has Inverted head and shoulders, Double top has Double bottom similarly, Ascending Triangle has Descending triangle. We have already discussed the Ascending triangle in our previous blog. If you haven’t read it yet, click here. Now, let’s begin with understanding the Descending triangle pattern.

What is a Descending Triangle Pattern?

The Descending Triangle pattern is a continuation pattern. I am sure you can recall what the continuation pattern means from the previous blog. It just means that the price will ideally continue moving in the same trend as before the consolidation. Since Descending triangle is a bearish formation, it is formed in an ongoing downtrend and the price continues to move downward after consolidating in this pattern. If this pattern is formed at the end of an uptrend, it may signal a bearish reversal.

How is it formed?

This pattern is formed with two lines. The first one is the support level from where the price keeps rebounding. The second line is formed by joining the lower highs in the price movement, making it a descending (Downward sloping) line. This complete formation appears to be like a triangle with a descending line and hence, it’s called a Descending Triangle pattern. Minimum two touchpoints are needed to make the support line and descending line valid.

What does it tell you?

Now, let’s have a look at the price movement in this pattern and understand what it indicates. We already know that the prior trend has been a downtrend for this pattern. After that, the price starts to consolidate. The price reaches the support level multiple times showing buying interest at this level. But whenever the price has bounced back up after testing the support it makes lower highs. These lower highs indicate that the sellers are fighting back to go beyond this support level. This whole scenario creates a bearish build up and eventually, there’s a breakdown at the support level, followed by continuation in the previous downtrend.

What can be an ideal entry, price target and stop-loss?

For this pattern, one may take a short position (F&O) at the breakdown candle. The price target is calculated by taking the distance of the vertical line of the triangle and then adding it to the breakdown candle. Stop-loss can be placed at the recent high.

Example

Below is the daily chart of ITC which formed a Descending triangle pattern between 20th September 2019 till 1st February 2020. The support level is around 210, being tested 4 times (marked with a tick) The lower highs making the descending trendline was tested twice (marked with a tick) before it gave a strong breakdown with significant above 5-day average volume. Post that the price moved in the previously existing downtrend for a while. The price target was around 170 which was achieved on 4th March 2020 (marked with a tick).

Bottom line

As is the case of Ascending triangle, even Descending triangle may give false breakouts and/or longer consolidation duration. Hence, it is the best practice to get multiple confirmations from other indicators like MACD, RSI, etc. before entering into a position. If technical analysis intrigues you, make sure you click on the link to check out my course where I have explained more such patterns, indicators, and strategies in the most simplified way. Until next time!

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Descending Triangle Pattern

Valentine’s day is around the corner and I am sure you have already planned a surprise gift for your loved ones. One more thing I am sure of is that CARR students will plan a financial gift for their loved ones. And when it comes to financial gifts, the first choice will obviously be shares. But before you gift shares to your loved ones, you must consider the costs associated with it in the form of charges and taxation.

1. Charges for gifting shares:

Let us say that I have decided to gift a few shares of different companies that I think are good to my husband. It will cost me 0.03% (of gift value) or Rs.25/-, whichever is higher. Additionally, GST @ 18% will be levied on the charges. The Gift charge is charged per company or ISIN. The following example will clear the doubts –

I have decided to gift shares of Jubilant Food Works, Bharti Airtel, and D Mart, before we go ahead let me be very clear that this is not a recommendation. So, the gift charges will be:

There are a few things to keep in mind while calculating the charges
i. The highest closing price of the stock between NSE and BSE is considered for computation
ii. The charges are computed by considering the highest closing price on the day the gift transaction is processed
iii. Charges are rounded off to two decimal places
So that is it about the charges. Now there is another cost involved in gifting shares and that is taxation. Let us see what do we have there.

2. Taxation on gifting shares:

As per the Income Tax Act, 1961 a “gift” can be in the form of money and movable/immovable property that an individual receives from another individual or organization without making a payment. In legal terms, the person or organization providing the gift is termed the transferor while the gift receiver is known as the transferee.
Simplifying the definition further, examples of gifts that are taxable in India include:-
i. Money received by cash, draft, cheque, bank transfer, etc.
ii. Immovable property such as land, building, residential/commercial property.
iii. Movable property such as jewelry, shares, ETFs, bonds, paintings, sculptures, etc.

Now that we know what can be said as a gift let us understand the taxes levied on the transferor as well as the transferee

I. Tax in the hands of transferor:

The transferor is not liable to pay any tax on gifts. As per the Income Tax Act, Capital Gains is charged on the transfer of a Capital Asset. But, section 47 specifically excludes ‘gift’ from the definition of ‘transfer’. Therefore, the transferor of a gift is not liable to pay income tax.

II. Tax in the hands of transferee :

A. On receipt of the gift

Section 56(2)(x) of the Income Tax Act, 1961 states that the Gift of movable property such as shares, ETFs, mutual funds, etc. received without consideration and exceeding Fair Market Value of more than Rs. 50,000 is taxable in the hands of the transferee as ' Income from Other Sources ' and tax should be paid at slab rates. This means if the gift amount is Rs. 50,001 then tax is to be paid on the entire Rs. 50,001 and not just Re. 1. Hope this point is clear. There are certain exemptions to it –
    a) Gifts received from any relative. Relative here means:
    a. in case of an individual—
    i. spouse of the individual;
ii. brother or sister of the individual;
iii. brother or sister of the spouse of the individual;
iv. brother or sister of either of the parents of the individual;
   v. any lineal ascendant or descendant of the individual;
vi. any lineal ascendant or descendant of the spouse of the individual;
vii. spouse of the person referred to in items (ii) to (vi); and
    b. in the case of a Hindu undivided family, any member of the HUF; or
b) Gifts received on the occasion of the marriage of the individual; or
c) Gifts received by way of inheritance.
In the above three exemptions, there shall be no tax irrespective of the fair market value of the gift received.

B. On the sale of the gift

The subsequent sale of the gift by the receiver would be taxable under the head Income from Capital Gains. To determine the nature of capital gains whether STCG or LTCG, the holding period would be determined from the date of purchase by the previous owner i.e. the transferor till the date of sale by the transferee. To compute the capital gain, the cost of purchase by the transferor would be considered as the cost of acquisition.

I hope now you have got some clarity on the taxation of gifts. It can be confusing at times, so many people tend to simply ignore it. But, having an idea about taxation helps you take an informed decision. So, if you are planning to get a gift for your special ones this valentine’s day don’t forget to watch my valentine's day special video releasing on Saturday 12^th February 2022 at 9:00 PM on my YouTube channel. Until next time!

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How much does it cost to gift shares?

Let’s say you have received a job opportunity in a big city, far away from your home town. It’s the job of your dreams in the city of dreams, Mumbai!
While discussing with your friend about moving to Mumbai for this amazing job, he tells you about how exciting but challenging it is to live in Mumbai; the crowded local trains, the need for you to constantly be on your toes, and the most important thing, the rent expenses being sky-high.
After giving it a thought, you realize, you are quite excited about the fast life and travelling in local trains, but, oh no!! What about the high rent expenditure? How will you manage that? Will your employer give you any extra money in addition to your salary for the rent expense?

Let’s find out...

Why HRA?

Salaried individuals often need to move out of their respective home towns to big cities for work. Most of them opt for living in an apartment on rent, rather than purchasing property, as it is economically beneficial for them.Keeping the high rental expenses in mind, many employers choose to give an allowance for the rent paid by their employees. This allowance forms part of their salary.

What is HRA?

HRA (House Rent Allowance) is a benefit given by the employer to the employee for his house rent expenses. Okay then! You check your offer letter and YASS! Your problem is solved! Your gross salary includes HRA! But wait, what about the increased tax liability on the increased income? Well, that problem will also be solved in a few minutes!

Tax benefits of HRA
Although the allowance leads to an increase in gross salary, it is not fully taxable under the Income Tax Act, 1961. As per section 10(13A) of the Income Tax Act,1961, read with Rule 2A of the Income Tax Rules, the least of the following will be exempted, and will not form part of the taxable income:

1. Actual HRA received
2. 40%/50%* of salary**
3. Actual Rent paid in excess of 10% of salary**

Salary for this purpose = Basic salary + Dearness allowance (In terms i.e. forming part of retirement benefits)
** 50% for metro cities (which includes Chennai, Kolkata, Delhi, Mumbai) and 40% for other cities
I know, this complex calculation is beyond the understanding capacity of a layman. But don’t worry, let’s see some examples to understand this calculation better.

Example 1:
Let’s say, Mr P, residing in Mumbai has the following receipts from his employer:
Basic Salary (pa) Rs.8,50,000
DA (In terms) Rs.20,000
HRA received Rs.4,20,000
Actual rent paid Rs.5,30,000
Therefore, the exemption shall be the least of the following.
1. Actual HRA received – 4,20,000
2. 50% of salary - 4,35,000
3. Actual rent paid (–) 10% of salary – 4,43,000 (5,30,000 – 87,000)

Exemption = Rs.4,20,000

Example 2:
Mr. X, residing in Pune has the following receipts from his employer:
Basic Salary (pa) Rs.6,50,000
DA (In terms) Rs.15,000
HRA received Rs.2,40,000
Actual rent paid Rs.3,00,000
Therefore, the exemption shall be the least of the following:

1. Actual HRA received - Rs.2,40,000
2 .40% of salary – Rs.2,66,000
3. Actual rent paid (–) 10% of salary – Rs.2,33,500 (3,00,000-66,500)
Exemption = Rs.2,33,500

Some important points to keep in mind:

1.From FY 2020-21 (AY 21-22), taxpayers have an option to choose from two tax regimes, old or new. So, individuals opting for the new tax regime will not get the benefit of any exemptions, which includes HRA. However, if an individual chooses to opt for the old tax regime, he/she will get the benefit of the exemption.
2.HRA is fully taxable for employees who do not pay any rent or the accommodation occupied is owned by him/her.
3.To avail of the HRA exemption, the employee has to provide rent receipts to the employer as proof of rent payment.
So, I hope you now know what HRA (House Rent Allowance) is and how it is taxed. Until next time!

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What is HRA?

1. A stock split is a corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares.

2. The primary motive is to make shares more affordable for retail investors even though the underlying value of the company has not changed.

3. Since many retail investors think that the stock is now more affordable, they buy the stock and end up boosting demand which drives up prices. So, it results in an increase in share price following a decrease immediately after the split.

We can see this market reaction reflecting in the example of the Apple Stock split in June 2014. Apple Inc. split its shares 7-for-1 to make them more accessible to a larger number of investors. Right before the split, each share's opening price was approximately $649.88. After the split, the price per share at market open was $92.70, which is 648.90 ÷ 7.

The day after the stock split, the price had increased to a high of $95.05 to reflect the increased demand from the lower stock price.

The scenario of Stock Split in Indian Markets

On 22/05/2019, HDFC Bank announced a stock split of 1:1 (Old Face Value- 2, New Face Value- 1)Following were the key dates:

1.Record Date: 20/09/2019- determines which shareholders are entitled to receive additional shares due to the split.

2.Ex-Split Date: 19/09/2019- ex-date is usually set one business day prior to the record date since India follows a T+2 rolling settlement for delivery of shares.

To be eligible for a stock split, investors need to buy the stock at least on or before 18/09/2019 because the stock price will be split-adjusted on 19/09/2019. So, the record date is very important for shareholders to be eligible for a stock split because of the T+2 settlement.

The scenario of Stock Split in USA Market

Apple Stock Split Timeline 2020:There are several key dates.

1.The Record Date – August 24, 2020 - determines which shareholders are entitled to receive additional shares due to the split.
2.The Split Date – August 28, 2020 - shareholders are due to split shares after the close of business on this date.
3.Ex-Date – August 31, 2020 - the date determined by Nasdaq when Apple common shares will trade at the new split-adjusted price.

If you notice, Ex-Date in the USA stock market is after the record date! In USA markets Ex-Date is the most important date. This means that even if you buy the stock on 28th August 2020, you will be eligible for a stock split because the stock price will be split-adjusted after market hours on 28th August 2020. There is no significance of record date left in the USA stock market. Please note that 29th August and 30th August are holidays for the stock market.

This is clarified by FAQ on Apple’s website:
What happens if I buy or sell shares on or after the Record Date and before the Ex-Date? If you sell shares on or after the Record Date (August 24, 2020) but before the Ex-Date (August 31, 2020) you will be selling them at the pre-split price. At the time of the sale, you will surrender your pre-split shares and will no longer be entitled to the split shares. Following the split, the new owner of the shares will be entitled to the additional shares resulting from the stock split. If you buy shares on or after the Record Date but before the Ex-Date, you will purchase the shares at the pre-split price and will receive (or your brokerage account will be credited with) the shares purchased. Following the split, you will receive (or your brokerage account will be credited with) the additional shares resulting from the stock split.

Source: https://investor.apple.com/faq/default.aspxIf you are still not clear about the difference between a stock split concept in India and the USA, you can watch a detailed video on our Youtube Channel.

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Stock Split Concept

The day before yesterday, I went to my friend’s house for her daughter’s birthday party. Although such a memorable day, she seemed nervous. On asking her she said that she faced some losses in the stock market. After a detailed conversation, I got to know that she had not done a fundamental analysis of the stocks she invested in. This made me realize that many people fail to fundamentally analyze a stock before investing. But do people know the exact meaning of “Fundamental Analysis”? So, if you are also in the same boat as her, then stay tuned till the end of this blog.

What is Fundamental Analysis?

Fundamental Analysis is the study of a business, its financial statements, its peers, its strengths and weaknesses, and the industry and economy the business operates in. This study enables an investor to arrive at an intrinsic value (or fair value) of that company and to form an opinion about the future growth of the company. But what is intrinsic value and why is it calculated? The intrinsic value is what a stock (or any asset, for that matter) is actually worth. The intrinsic value calculated using fundamental analysis is compared with the current market price of the security to know whether the security is undervalued or overvalued. E.g.: - A particular stock has an intrinsic value of Rs.100, but the market price of the stock is Rs.150, then the stock is overvalued, and buying the stock may not be a good decision as all the future growth of the business is already factored into the current price. At this point, you would be eager to know about what is involved in Fundamental Analysis. But first, let us understand why is it so important?

Why Fundamental Analysis is important?

Fundamental analysis involves the study of everything from generic factors like the state of the economy and industry conditions to specific factors like the effectiveness of the company’s management. Is it important to carry out this fundamental analysis and compute the intrinsic value? Of course, YAAS! If my friend would have invested in fundamentally strong stocks, then she would have been happy on her daughter’s birthday. Fundamental analysis helps an investor to identify whether a stock is worth investing in or not. It helps an investor to frame his/her own view rather than acting on random tips. So, based on Fundamental Analysis, if an investor considers a stock's worth to be more than what it is currently trading at, then he may purchase the stock.

Who should learn Fundamental Analysis?

Whether you are from a finance background, or you are an artist, an engineer, or a sportsman, or from any other field, and are motivated to increase your wealth, then investing in the stock market can help you. But the investments can also work in the opposite direction if not analyzed properly and this is where learning Fundamental Analysis is useful. Fundamental Analysis helps us identify an inherently strong and sound company. Hence, everyone should learn fundamental analysis and perform fundamental analysis before making any investment decision. Warren Buffett, the world’s most successful investor, is also a promoter of fundamental analysis.

Approaches to Fundamental Analysis.

Till now, we have discussed the meaning of Fundamental Analysis. But, a very important question “How to do Fundamental Analysis?” is still unanswered. Well, there are two approaches to it. The Top-down approach and the Bottom-up approach. An investor can follow any of the two approaches. Let’s understand them one by one.

a) Top-down investment approach.
As the name suggests, the Top-down approach begins with the study of the overall economy followed by industry analysis and ends with the study of the selected stock. The economic analysis involves the study of inflation, interest rates, GDP growth which helps to determine the overall health of the economy. The investor then identifies the industries and sectors by studying the growth trends of the industry and understanding industry cycles. Finally, the most promising stocks, within the identified industry are selected for further analysis to make an informed decision. Stocks are analyzed based on company-specific metrics such as revenue, profit, earnings, the dividend declared, the integrity of the management personnel, etc. Now, you might wonder about where to find all this data? Don't worry! The data relating to the economy is published in the newspapers as and when released by the government. For studying industry trends websites like ibef.org can be valuable and the company-related data is available in the annual report, which is easily accessible on the company’s website.

b) Bottom-up investment approach.
Alternatively, an investor can use the Bottom-up approach, which is exactly the opposite of the top-down approach. It starts with the analysis of the company, followed by industry and economy analysis. This approach lays more emphasis on the company rather than the industry and the economy. So, what can be the reason behind starting the analysis from the company? The rationale behind this approach is the belief that individual stocks may perform better than the overall industry or the economy. Such belief is built when you are attracted to the company’s innovative business model, strategies, a financial position that is not in line with the industry trend, etc. The metrics studied under both approaches however remain the same. I hope that you have got a basic introduction to Fundamental Analysis. Now, have a look at this video to understand the exact crux of Fundamental Analysis and cement everything you have read in this blog till now.

Bottom line:

Fundamental Analysis empowers you to determine the actual worth of a stock and its growth potential by analyzing the characteristics of the economy, the industry, and the company. It is better to invest in a fundamentally strong company for wealth creation in the future. I hope this blog has made understanding “Fundamental Analysis” a bit simpler. If you want to learn more, do check out my course on Fundamental Analysis, where I have taught it systematically and practically. Until next time!

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What is Fundamental Analysis?

What is an Index?

An Index is an indicator of a stock exchange. Currently, there are 1644 companies listed on NSE as on 30th June 2020. But if you have to answer how is the market performing, would you look at all these stocks one by one? Obviously, No. As boring as it may sound it is not feasible to check these many companies every time. Therefore, an index like Nifty 50 is built to give you an indication of the performance of the top companies listed on NSE.

What is Nifty 50?

Nifty 50 popularly known as NIFTY, is a market index setup by National Stock Exchange. It showcases the top 50 equity stocks traded on the stock exchange based on pre-defined criteria. Ideally, one look at Nifty should indicate how the overall markets are performing.

Is Nifty a correct representation of Markets?

Investors are putting in a lot of thought lately if Nifty is an appropriate representation of the market. Let us understand, why this thought is coming up by looking at the sector representation in the Nifty 50 Index. The sector allocation strengthens the doubts raised on the Nifty 50 Index. The Index is heavily overweight in the Financial Services sector which covers nearly 33% of the index. The top four sectors i.e. Financial Services, IT, Oil & Gas and Consumer Goods make up ~79% of the Index.

What are the constituents of Nifty 50?

We have seen that the portfolio is overweight in the top 4 sectors. Let us see what is inside two of these sectors, whether these sectors are well-diversified or not –

In the chart above, we see that inside the Financial Services sector the HDFC group has a 16.1% allocation out of the total 33.3% allocated to this sector. Does this story repeat in Oil and Gas Sector? Let us see –

Again, the same story repeats here, or it gets even worse. Of the 16.7% allocated to the Oil and Gas sector, Reliance holds 14.9%. This is a pretty one-sided allocation. There is no need to mention that even a small change in the share prices of Reliance Industries or HDFC Bank shall have a major impact on the Nifty 50 Index. Below are the Top 10 Constituents of Nifty 50 (As on 30th Sep 2020) –

For a portfolio having 50 constituents, 24.6% allocation to the top 2 constituents is huge. This further strengthens the thought if Nifty 50 is a real market indicator? But so far it is still a very popular index used and followed in India.

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Is Nifty50 Index a proper representatin of the Equity Market?

Many people find it difficult to buy insurance online directly, and hence they take the help of an insurance agent and end up paying high insurance commissions.

Insurance companies commission rates range from 7% to as high as 40%,

Do you know that depending on insurance plans and tenure of the plan the commission varies and hence we have tried here to decode the jargon terms related to insurance so that an individual can buy insurance plans online without the help of an agent and thus save on the commissions? Also buying online plans has become more beneficial because nowadays some insurance companies provide discounts on the premium amount if you buy it online, or if the amount is paid via credit card.

1. Sum Assured:

The sum assured is the guaranteed amount that the policy-holder will receive in case of death/permanent disability.

2. Rider:

Riders are additional features to enhance the scope and benefits of a life insurance policy.

For instance, in addition to life coverage, a subscriber can avail of riders like accidental death benefit rider and accidental permanent disability benefit rider which might help the policyholder get a claim in case of death in an accident.

Riders are beneficial for policyholders because there is no need to again purchase a separate policy for particular purposes.

3. Bonus:

To be eligible for bonuses, the policy should be participating in nature. It enables the policyholder to share the profits of the insurance company. It is also known as a “with-profit policy”.

Bonuses declared every year depends on the profitability of the insurance company, it is not fixed in nature.

4. Life Insured & Nominee:

Life insured is the person whose life is covered by the insurance company

The nominee is the legal heir of policyholder, who is entitled to receive the proceeds from the insurance company

5. Free–look period:

The Free-look period is a time period during which you can return the policy if you are not satisfied with what you wanted.

The Freelook period is generally 30 days from the date of receipt of the policy.

But there is a caveat attached by insurance companies while returning the premium paid (including taxes),

Proportionate risk premium (including taxes) and

Expenses incurred during medical examination (if any) and stamp duty

are deducted and all rights and benefits will now be extinguished

6. Surrender charges:

If a policy-holder for some reason does not want to continue its policy, it can be surrendered by paying a surrender charge.

7. Claim Settlement Ratio:

The claim settlement ratio (CSR) is the percentage of claims the insurer has paid out during a financial year.

For instance, if the death claim settlement ratio of an insurer is 95 percent, it means that the insurer has settled 95 death insurance claims out of every 100 insurance claims received.

"Higher the claim settlement ratio, better it is for policy-holders because it indicates the insurer's commitment to its policy-holders. Hence, a higher claim ratio is one of the parameters for a policy-holder to consider buying a policy from a particular company.

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Basic things to look in Insurance

Our Indian culture has so many instances that teach us about various important aspects of our lives. Today, I am going to tell you one such Legend of “Paal Payasam”(Rice Pudding).

Long ago, there was a king who loved playing chess. Once, he challenged a traveler sage to play Chess. He was ready to reward him whatever he demands if he wins. The traveler is a modest guy asked only for some rice. The sage said, “On the chessboard, one rice grain will be placed on the first square, 2 rice grains will be placed on the second square, 4 rice grains will be placed on the third square, 8 rice grains will be placed on the fourth square and so on for all 64 squares”. The king confidently started adding the rice grains as instructed by the sage. He soon realized that on the 10th square, he needs to place 512 rice grains and the number would further grow exponentially making it impossible to finish the task. The sage won and he revealed his true identity as Lord Krishna. Lord Krishna asked the king to provide Paal Payasam (Rice pudding) in his Temple daily.

This story can accurately explain the Power of Compounding. Isn’t it rightly called the 8th Wonder of the world? Just imagine, how compounding can grow your wealth exponentially over a period of time. Let’s find out how we can put this to work.

50/30/20 Rule of thumb for Budgeting

Before we start putting our money to work, we must analyze our financial position. How much is the monthly spending? Can it be reduced? Figure it out first. The 50/30/20 thumb rule can help us with better allocation of our income. It suggests that we allocate 50% of our income to basic needs - Roti, Kapda, Makaan, and Internet. 30% goes to wants which can include hobbies, vacations, shopping, dining, etc. And the last 20% is allocated to savings and investments. This can cater to various financial goals like buying a house, child education, retirement planning, etc. The allocations suggested in this rule can be altered according to one's needs and financial position.

Emergency Fund

An emergency fund must be kept aside in case any unforeseen situation arises. Since such a situation can be unanticipated, the emergency fund should be invested in a highly liquid investment avenue. Make sure you park in an avenue which is promising your principal amount whenever you liquidate.

An Emergency Fund should comprise monthly expenses for the next 6 months. For instance, if the monthly expense is Rs. 30,000, then the corpus should be Rs. 1,80,000 (30,000*6). You can divide the corpus into Recurring Deposits, Fixed Deposits, and Liquid Funds. Apart from that, some portion of the emergency fund should be kept in savings account for easy access.

Start small with SIPs

A Systematic Investment Plan is a tool for investing a fixed sum at regular intervals in an investment avenue. This will gradually increase the corpus and at the same time compounding will work its magic as we discussed earlier. It will also inculcate a financial discipline. Another benefit is Rupee cost averaging. It simply means whenever markets are low you will gain more units and whenever markets are high you will gain fewer units. So, over the period of time, the cost of holding the units averages out. You can start SIP with as low as Rs. 500 or even Rs. 100 in some cases!

Bottom line

Stock markets can be intimidating but it is essential that we first lay down the foundation. One can gradually work their way up in the markets as they learn more about it.

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50/30/20 Rule of thumb for Budgeting

Emergency Fund

Start small with SIPs

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