Sales Executive student handbook (2)

Sales Executive (BFSI) VILT damaged; the shipping company loses the freight. Freight insurance is effected by the shipping company to guard against such risks. 4. Liability insurance: Under liability insurance, the insurance company undertakes to indemnify against the loss which the insured may suffer on account of liability to a third party. For instance, if one ship collides with another and the first ship is required to pay compensation to the second ship; then this compensation can be claimed from insurance company if liability insurance has been taken.  Role of Insurance in Personal Finance THE ROLE OF INSURANCE IN YOUR FINANCIAL PLAN Insurance is an important element of any sound financial plan. Different types of insurance protect you and your loved ones in different ways against the cost of accidents, illness, disability, and death. What Are Your Insurance Needs? The insurance decisions you make should be based on your family, age, and economic situation. There are many forms of insurance and, unfortunately, no one-size-fits-all policy. Life insurance, for example, is a virtual necessity if you have a spouse and children, but perhaps is less important for a single person. Disability insurance, which provides an income stream if you are unable to work, is important for everyone. Following is a list of the forms of insurance most people require. Auto Insurance Auto insurance protects you from damage to the often considerable investment in a car and/or from liability for damage or injury caused by you or someone driving your vehicle. It can also help cover expenses you or anyone in your car may incur as a result of an accident with an uninsured motorist. Auto liability coverage is necessary for anyone who owns a car. Many states require you to have liability insurance before a vehicle can be registered. However, state-required minimum coverage often does not provide adequate protection. Suggested minimums are $100,000 for medical expenses per injured person, $300,000 for the total per accident, and $50,000 for property damage. Collision, fire, and theft coverage is also advisable for a vehicle having more than minimal value. You can cut costs, however, by choosing a higher deductible — the amount of loss that must be exceeded before you are compensated. The cost of auto insurance varies greatly, depending on the company and agent offering it, your choice of coverage and deductible, where you live, the kind of vehicle, and the ages of drivers in 50

Sales Executive (BFSI) VILT the family. Substantial discounts are often available for safe drivers, nonsmokers, and those who commute to work via public transportation. Homeowner's Insurance Homeowner's insurance should allow you to rebuild and refurnish your home after a catastrophe and insulate you from lawsuits if someone is injured on your property. Coverage of at least 80% of your home's replacement value, minus the value of land and foundation, is necessary for you to be covered for the cost of repairs. There are several grades of policies, ranging from HO-1 to HO- 8, with increasingly comprehensive coverage and cost. Unless you increase coverage, most homeowner's policies cover the contents of the house for 50% to 75% of the amount for which the house is insured. Liability Insurance Often called umbrella liability coverage, this takes effect when the personal liability and lawsuit coverage in other policies is exhausted. The cost for $1 million worth of protection — especially necessary for high-income individuals and those with considerable assets — may be only a few hundred dollars a year. Life Insurance Life insurance, payable when you die, can provide a surviving spouse, children, and other dependents with the funds necessary to maintain their standards of living, can help repay debt, and can fund education tuition costs. The amount you need depends on your situation. If you make $100,000 a year, have a sizable mortgage, and have two kids headed to an expensive college, you could need $1 million in coverage. Talk with an insurance agent who offers policies from companies whose financial strength is ranked high by rating agencies. And remember that you can shop around. Disability Income Insurance A long-term disability policy is activated, replacing a portion of your lost income, when you are unable to work for an extended period. Some, but certainly not all, employers cover their employees with some form of company-paid disability income insurance. Typically, such coverage is only partial and/or short-term in nature. Thus, many people seek to purchase an individual disability income insurance policy. If you're buying, try to get a no cancelable policy with benefits for life, or at least to age 65, and as much salary coverage as you can afford. However, keep in mind that the duration of coverage may be limited because of your occupation. Insurers will usually cover up to 65% of your salary. Generally, you should have total coverage equal to two thirds of your current pretax income. 51

Sales Executive (BFSI) VILT If your company provides disability insurance, check to see whether it's enough for your needs. Group disability insurance policies may be capped at six months and provide benefits that won't cover your expenses. Health Insurance Most people enjoy medical insurance as an employee benefit, often with their employers paying whole or part of the premiums. Many employers offer a choice between HMOs (health maintenance organizations) and traditional fee-for-service care. Rates for HMOs are usually cheaper but have more constraints. Privately purchased health insurance is much more expensive — often by several hundred dollars a month — depending on such things as deductibles, coverage choices, and location. Long-Term Care Insurance With an aging population and uncertainty about the future of Social Security, insurance to cover the high cost of nursing home or at-home health care is becoming more widespread. Medicare pays very little of the cost of long-term care in the United States. Medicaid will pay for the care, but only for patients whose assets are almost completely depleted. With Congress always debating the future funding of these programs, financial planning for long- term care is more crucial than ever. Medigap insurance can help pay medical expenses of the elderly not covered by Medicare. However, it doesn't cover custodial nursing home costs. In fact, about half of all nursing home residents pay for the care with personal savings. Contact a qualified insurance professional or AARP for more information on long-term care insurance. Points to Remember 1. Your insurance needs will vary based on your family, age, and economic situation. 2. Anyone who owns a car should have auto liability insurance. Collision, fire, and theft coverage can protect your investment in a valuable car. 3. Homeowner's insurance should provide coverage up to 80% of the cost of replacing your home, minus land and foundation. Homeowners should also have liability coverage, and those with considerable assets may want to purchase liability up to $1 million. 4. Life insurance is important for those who have families to cover living and other expenses in the event of death. 5. Long-term care insurance can be expensive and complex, but may be a necessity for older people as the long-term coverage of Medicare is often inadequate. 52

Sales Executive (BFSI) VILT  Classification of Insurance Classified Insurance What Is Classified Insurance Classified insurance is coverage provided to a policyholder that is considered riskier and thus less desirable to the insurer. Classified insurance, also known as substandard insurance, is most commonly associated with life insurance. Conversely, the insurer may provide life insurance coverage to less healthy individuals. However, the insurer would likely charge a higher premium to compensate for the added risk of an insurance claim being filed. In other words, there's a higher probability for less healthy people to die sooner than healthy people. As a result, the classification of insurance helps insurers identifies the policyholders or insureds that are more likely or less likely to file a claim. Classified insurance is designed to provide insurance for those with substandard risk profiles, or what the insurance industry considers, a high-risk group for claim payouts. Factors that can cause life insurance policies to be considered substandard include whether the insured uses tobacco and the age of the individual involved. Also, health insurance premiums can be three times higher for older people than for younger folks.1 How Rated Policies Work Insurance companies are for-profit corporations, and they ideally want to financially shield themselves if there's a policyholder that's more likely to be involved in an event that could result in a filed claim. Many insurers use a rating system to classify and group policyholders based on the level of risk that the insurer would need to pay out a claim. Ratings can vary, depending on the insurance carrier, but they typically group people into a preferred, standard, and substandard classification. Preferred policyholders would likely have lower premiums, and perhaps more extensive coverage than those who have a standard rating assigned to them. Individuals who have less than perfect health or are at high-risk due to their occupation might get assigned to a substandard policy, which is called a rated policy. A rated policy is essentially synonymous to a classified insurance policy, although coverage can vary depending on the individual involved. Reduced Coverage An insurance company, for example, might protect itself from known medical conditions, such as heart disease when issuing life insurance policies. As a result, the insurer may deny claims based on or stemming from cardio events of the insured. This exclusion would be stated in the insurance contract. Alternatively, the insurer may provide reduced benefits for the condition. In general, eligibility for the policy is expanded to a larger group of people. Still, the scope of the insurance 53

Sales Executive (BFSI) VILT coverage is reduced compared to the coverage provided to policyholders with a standard risk profile. The Premium Markup The policy premium is established according to how substandard the risk is considered to be for the insured. Insurers will use a mortality or morbidity table to determine the premium for covering particular health risks, adding a percentage markup to account for the higher risk. Getting Help Most applicants for insurance coverage are considered standard risks. For those seeking life insurance and who have a condition that may cause the policy to be rated, should consult an agent or agency that specializes in substandard policies. These agents will know which insurers have the best rates for each type of rated condition. Special Considerations In the past, insurance companies could deny coverage or charge a higher premium for health insurance to people with pre-existing medical conditions. However, with the passage of the Affordable Care Act (ACA), that policy is no longer allowed. In other words, insurance companies can't deny coverage, charge higher rates, nor can they subject individuals to a waiting period because they have pre-existing medical conditions. Also, insurers cannot charge based on gender, meaning they can't charge women and men different premiums or prices.  Functions of Insurance 7 Functions of Insurance Functions of insurance are to spread the loss caused by a particular risk over several persons, who are exposed to it and who agree to insure themselves against the risk. The most important function of insurance is to spread the risk over a number of persons who are insured against the risk, share the loss of each member of the society on the basis of the probability of loss to their risk and provide security against losses to the insured. So, insurance functions are; 54

Sales Executive (BFSI) VILT 1. The system to spread the risk over several persons who are insured against the risk; 2. The principle to share the loss of each member of the society based on the probability of loss to their risk; and 3. The method to provide security against losses to the insured. The functions of insurance can be studied into two parts; 1. Primary Functions, and, 2. Secondary Functions. 7 functions of insurance are; 1. Insurance provides certainty, 2. Insurance provides protection, 3. Risk-Sharing, 4. Prevention of loss, 5. It Provides Capital, 6. It Improves Efficiency, 7. It helps Economic Progress. Primary Functions of Insurance 1. Insurance provides certainty Insurance provides certainty of payment at the uncertainty of loss. The uncertainty of loss can be reduced by better planning and administration. But, the insurance relieves the person from such a difficult task. Moreover, if the subject matters are not adequate, the self-provision may prove costlier. There are different types of uncertainty in a risk. The risk will occur or not, when will occur, how much loss will be there? In other words, there is the uncertainty of happening of time and amount of loss. Insurance removes all these uncertainties and the assured is given certainty of payment of loss. The insurer charges the premium for providing the said certainty. 2. Insurance provides protection The main function of insurance is to protect the probable chances of loss. The time and amount of loss are uncertain and at the happening of risk, the person will suffer the loss in the absence of insurance. The insurance guarantees the payment of loss and thus protects the assured from sufferings. The insurance cannot check the happening of risk but can provide for losses at the happening of the risk. 3. Risk-Sharing 55

Sales Executive (BFSI) VILT The risk is uncertain, and therefore, the loss arising from the risk is also uncertain. When risk takes place, the loss is shared by all the persons who are exposed to the risk. The risk-sharing in ancient times was done only at the time of damage or death; but today, based on the probability of risk, (he share is obtained from every insured in the shape of premium without which protection is not guaranteed by the insurer. Secondary Functions of Insurance Besides the above primary functions, the insurance works for the following functions: 4. Prevention of loss The insurance joins hands with those institutions which ate engaged in preventing the losses of the society because the reduction in loss causes the lesser payment to the assured arid so more saving is possible which will assist in reducing the premium. Lesser premium invites more business and more business causes lesser share to the assured. So again premium is reduced to which will stimulate more business and more protection to the masses. Therefore, the insurance assists financially to the health organization, fire brigade, educational institutions and other organizations which are engaged in preventing the losses of the masses from death or damage. 5. It Provides Capital The insurance provides capital to society. The accumulated funds are invested in the productive channel. The death of the capital of the society is minimized to a greater extent with the help of investment in insurance. The industry, the business, and the individual are benefited by the investment and loans of the insurers. 6. It Improves Efficiency Insurance eliminates worries and miseries of losses at death and destruction of property. The carefree person can devote his body and soul together for better achievement, it improves not only his efficiency but the efficiencies of the masses are also advanced. 7. It helps Economic Progress The insurance by protecting the society from huge losses of damage, destruction, and death, provides an initiative to work hard for the betterment of the masses. The next factor of economic progress, the capital, is also immensely provided by the masses. The property, the valuable assets, the man, the machine and the society cannot lose much at the disaster.  Knowing About Products Available in Markets How to Determine if There Is a Market for Your Business 56

Sales Executive (BFSI) VILT Knowing whether or not your product is something that will sell is one of the biggest questions in marketing. You might think your new product or service is going to sweep the market away, but without having a foundation of information about your customer’s wants and needs, you can’t know if your product is going to do well. Conducting research to determine if there is a market for your business is key to successfully selling your product. Here are four ways to think about your business idea before moving forward to selling your product. 1. Pick Proven Categories There are more challenges, and consequently more risk, when hopping into a market with a new product that is already highly competitive and successful. For example, it is difficult for companies to successfully introduce a new smartphone into a market that is already dominated by Apple and Android. Entering the market in proven categories that show success is a great place to start. But, select proven markets that are more broad and general if you want to face less risk and competition. There are tons of problems that currently need to be solved and services that customers are looking for. By finding the answer to a problem that already exists, you automatically have interested customers, and you do not have to search for them yourself. 2. Listen to the Market If you are in the business world, you need to accept that customers in the market determine the fate of your company’s success. Customers have the final word when determining whether an item is purchased or not. Getting to know the market before you begin selling your product can give a clearer outline of what you will experience. Before you begin developing your product or service, know the basics of the market you are entering:  Revenues in the local, regional and national market  Know the competition  Determine what life cycle the market is in  Know the target audience for your product Once you have a better understanding of the market you are about to dive into, you can make better business decisions on how to approach the market. 3. Keep Current Customers Remember that customer loyalty and brand awareness are two of the biggest factors in selling products. With the amount of choices that are in the market, you are more likely to get your current customers to purchase a new product then try and attract new ones. Consider how willing your 57

Sales Executive (BFSI) VILT customers are to buy, and how much they are willing to spend. Repeat business is also less expensive than “buying” a new customer. 4. Test Your Product Some of the biggest companies test their products before introducing the product to an entire market. Beginning with small testing, either online or in select stores, can help you answer questions to a degree that research may not answer. Getting customer feedback can help you tweak your product or idea before mass producing something that might fail. Understanding the market for your product is one of the most important steps of marketing. Researching your customer’s wants will help you decide whether to move forward and begin producing and selling your product.  Steps Taken in Insurance Planning 5 steps to financial planning success We spend our lives planning; our next holiday, for a family, buying a yacht! Being able to realise our plans requires objectives, information, organisation and compromise. Successful plans will also require a significant degree of financial planning. Following a 5 step financial planning process should significantly increase the potential of developing a winning financial plan. Step 1 - Defining and agreeing your financial objectives and goals The goals and objectives will be the guide to the financial plan and should provide a roadmap for your financial future. They should contain the following features:  Quantifiable and achievable  Clear and have a defined timeframe  Separate your needs from your wants They should be agreed and documented with your financial adviser to assist you measure progress. They should also be reviewed periodically to capture changing circumstances and to ensure they remain relevant. Step 2 – Gathering your financial and personal information The financial planning process and its success will depend on the quality and clarity of the information communicated to your adviser. Your adviser will complete a detailed financial fact- find to capture all relevant information in relation to your finances. This will include:  Income and expenditure  Assets and liabilities  Risk attitude, tolerance and capacity Step 3 – Analyzing your financial and personal information 58

Sales Executive (BFSI) VILT Your financial adviser reviews the information provided in step 2 and uses it to produce a report that reflects your current financial profile. The following ratios are produced to improve your understanding of your financial circumstances and to pinpoint areas of strength or weakness:  Solvency Ratio  Savings Ratio  Liquidity Ratio  Debt Service Ratio Your attitude, tolerance and capacity for risk are assessed using a psychometrically designed risk tolerance questionnaire in relation to investment assets. This is also analyzed to assess your asset allocation for investment or pension goals. Step 4 – Development and presentation of the financial plan The financial plan is developed based on the information received in step 2 and analysis completed in step 3. Each of the goals and objectives in step 1 should be addressed and a recommendation for each identified. It will include:  Net worth statement (a balance sheet)  Annual consolidated tax calculation  Annual cash flow report (displaying surplus or deficit) The report is presented, explained, discussed and then signed by both client and adviser. Step 5 – Implementation and review of the financial plan Once the analysis and development of the plan is complete, the adviser will outline the recommended courses of action. This can involve implementing:  A new pension or investment strategy  Changing debt provider  Additional life or serious illness insurance  Income and expenditure adjustments The Adviser may carry out the recommendations or serve as your coach, coordinating the process with you and other professionals such as, accountants or investment managers. They may also handle the interaction with financial product providers. Financial planning is a dynamic on-going process that requires continuous monitoring. Review of the actions recommended in the plan should take place regularly, and the goals should be reviewed annually to take account of a change in income, asset values, business or family circumstances.  Choosing an Appropriate Insurance Policy - First Time Investors The First Time Investor: 7 Important Tips to Help Minimize Financial Risk I remember being a first time investor back in 2014, although that really wasn’t that long ago. But I do recall being nervous to get in the stock market, but also excited and a bit overwhelmed. 59

Sales Executive (BFSI) VILT Technically, I already had a 401k for a year at this point, but I had no idea what was in it or what that even was. So opening my first account with Vanguard and putting a plan together to start saving and investing was a whole new experience. Putting your money to work in investments can be extremely smart, but it can still put you in some financial risk if you don’t know what you are doing. Below are some important first time investor tips I think you need to understand and put in place in order to ensure a great start to the investing experience. Note: Even the best investor can lose money and feel the effects of market swings (stocks, real estate, etc.). If top-notch Investors can make mistakes, you certainly won’t be perfect either. Don’t be afraid to get started, but certainly don’t get too gung-ho without taking in some of the below tips. 1. Get educated before investing Before putting a dime of your money investing in the stock market or real estate, you need to educate yourself first. Investing is exciting and feels good, but you can make costly mistakes without learning the basics. For example, learn some stock market investing terms, learn how to read a prospectus, read finance and investing books, etc. You have to set aside some time every week to reading and learning. If you have a successful investing mentor, consult with them too and ask questions. Going in blindly with your hard-earned money will put you in some financial risk. You may get lucky, but that’s more like gambling than investing. 2. Lose the “get rich quick” mentality When it comes to being a first time investor, it’s easy to get idealistic and start seeing dollar signs everywhere. But you need to take a step back. Too many people are looking for the quick way to get rich, but having that mentality can burn a hole in your pockets…FAST. Sure, you may strike gold and get lucky, but you are bound to have a lot more lows than highs. Approach investing with a long-term approach, with the idea to grow steadily and effectively. This will help you avoid investment money traps like random investing tip emails, latest trends, media headlines tugging at your emotions, etc. If it sounds too good to be true with investing, 99% of the time it is. And if getting rich quick was real, don’t you think more people would be successful? 60

Sales Executive (BFSI) VILT 3. Know your goals for investing Pretty much like anything else you might do, what is your goal for actually investing your money? It’s something you need to ask yourself before you start putting your money to work. Are you investing for retirement? Diversifying your assets? Looking for passive monthly income? A combination of things? Knowing and writing these financial goals down can help you better visualize your purpose for investing money. This helps you analyze if you should be more conservative or more aggressive pending your timelines. Your goals may shift as you start a family, different life events happen, or your timelines change — so remember it’s fine to re-evaluate. 4. Understand what fees are involved A big mistake first time investors make, especially if it relates to the stock market, is not understanding the fees involved. Unfortunately, many financial institutions have quite high fees that eat away at any of your potential gains. A lot of people are not aware of these fees, ignore it, or really don’t think it affects much on their gains. But many mutual funds for example, may have 1-3% fees on them. So if you had 8% returns that year, you are actually only at 5-7% pending your weighted average of fees now. Extrapolate that over years of compound interest, you’ve missed out on thousands and thousands of dollars. Money, that could have helped you hit your goals or reach retirement faster. I had a company 401k, where every fund had recurring fees of 1.2-2%. Again, doesn’t seem like much but it eats into your gains. No thanks! Look for low-cost index funds or ETFs like those on Vanguard or Fidelity, which can be more efficient. The point is, look at the fees associated with any funds. 5. Don’t go all in – diversify Sort of two parts here for the first time investor to know, which I’ll go into a bit more below. Whatever cash you have, never go all in 61

Sales Executive (BFSI) VILT As you are just learning and getting started with investing, ensure you do not use all the cash you have. You are bound to make some of these mistakes listed in this article anyway (I sure did), but you could do some serious financial damage by using all your money. Ensure you have a basis in your savings and checking accounts, then take a fraction for investing (outside of your company 401k if you have one). I started with $500 in a brokerage account, then started expanding with IRA’s once I saved more money. And $500 may seem like a lot right now to you, and that’s okay. You can test the waters with investing in fractions of shares with as little as $5 with Stash. It might not be a long-term solution, but the app is a great learning tool and way to start investing some money with minimal risk. The money you do invest, make sure to diversify When you do start to invest more money, make sure you are not putting all your eggs in one basket. Ugh, super cliche statement. But necessary to say. If you are investing in the stock market, make sure to have some various exposure to stocks and bonds. Find a good balance that doesn’t devastate you during a bear market. As you get more money saved and invested, look at putting money into some alternative investments — things like real estate, art, businesses, etc. Find ways to mix up where your money goes. 6. Leave your emotions at the door While it’s good to show emotion in your life — when it comes to investing– you need to leave it behind. Emotional investing and decision making can be devastating for your investment portfolios and pockets. Sounds easy right? But when you see the stock market plummet, can you hold ground and not make irrational decisions? There, of course, is some time where you may need to sell or cut losses in investing, but you have to know when to ignore the noise. Even though I knew this when I first started, I’d still sell or move funds around because it wasn’t working right away. Guess what? I lost money and 9/10 times, it would have recovered and then some if I stood my ground. Similarly, you may want to buy a stock or not want to sell because it holds some sentimental value to your life. 62

Sales Executive (BFSI) VILT I understand why, but unless you truly review the investment and it looks good, you have no business investing in it on pure emotion or sentiment. If you think you are going to make a rash decision, back off for now and keep your money on the sidelines. 7. Reassess your investments and goals Once you start investing and get your rhythm going, don’t get too complacent. Even if something does appear to be working, you should still be reassessing your investments and investing goals. Your personal life changes, timeframes for certain things are altered, and what you can risk may differ. All can and probably will change over time. Because of this, you should periodically review your investments and how things are going based on your goals. However, you also don’t want to fall in the trap of obsessive tinkering either as it can affect your financial gains and put you at risk. The real skill is to find a good balance of reassessment.  If No Insurance at All in Your Portfolio Portfolio Insurance What is Portfolio Insurance? Portfolio insurance is the strategy of hedging a portfolio of stocks against market risk by short- selling stock index futures. This technique, developed by Mark Rubinstein and Hayne Leland in 1976, aims to limit the losses a portfolio might experience as stocks decline in price without that portfolio's manager having to sell off those stocks. Alternatively, portfolio insurance can also refer to brokerage insurance, such as that available from the Securities Investor Protection Corporation (SIPC). Understanding Portfolio Insurance Portfolio insurance is a hedging technique frequently used by institutional investors when the market direction is uncertain or volatile. Short selling index futures can offset any downturns, but it also hinders any gains. This hedging technique is a favorite of institutional investors when market conditions are uncertain or abnormally volatile. This investment strategy uses financial instruments, such as equities, debts, and derivatives, combined in such a way that protects against downside risk. It is a dynamic hedging strategy that emphasizes buying and selling securities periodically to maintain a limit of the portfolio value. The workings of this portfolio insurance strategy is driven by buying index put options. It can also be done by using listed index options. Hayne Leland and Mark 63

Sales Executive (BFSI) VILT Rubinstein invented the technique in 1976 and is often associated with the October 19, 1987, stock market crash. Portfolio insurance is also an insurance product available from the SIPC that provides brokerage customers up to $500,000 coverage for cash and securities held by a firm. The SIPC was created as a non-profit membership corporation under the Securities Investor Protection Act. The SIPC oversees the liquidation of member broker-dealers that close when market conditions render a broker-dealer bankrupt or put them in serious financial trouble, and customer assets are missing. In a liquidation under the Securities Investor Protection Act, SIPC and a court-appointed trustee work to return customers’ securities and cash as quickly as possible. Within limits, SIPC expedites the return of missing customer property by protecting each customer up to $500,000 for securities and cash (including a $250,000 limit for cash only). Unlike the Federal Deposit Insurance Corporation (FDIC), the SIPC was not chartered by Congress to combat fraud. Although created under federal law, it is also not an agency or establishment of the United States government. It has no authority to investigate or regulate its member broker-dealers. The SIPC is not the securities world equivalent of the FDIC. Benefits of Portfolio Insurance Unexpected developments – wars, shortages, pandemics – can take even the most conscientious investors by surprise and plunge the entire market or particular sectors into free fall. Whether through SIPC insurance or engaging in a market hedging strategy, most or all of the losses from a bad market swing can be avoided. If an investor is hedging the market, and it continues going strong with underlying stocks continue gaining in value, an investor can just let the unneeded put options expire. 64

Sales Executive (BFSI) VILT Chapter 3 RETIREMENT PLANNING AND ESTATE PLANNING  Introduction to Retirement Planning Process Retirement Planning What Is Retirement Planning? Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve those goals. Retirement planning includes identifying sources of income, estimating expenses, implementing a savings program, and managing assets and risk. Future cash flows are estimated to determine if the retirement income goal will be achieved. Some retirement plans change depending on whether you're in, say, the United States, or Canada. Retirement planning is ideally a life-long process. You can start at any time, but it works best if you factor it into your financial planning from the beginning. That's the best way to ensure a safe, secure—and fun—retirement. The fun part is why it makes sense to pay attention to the serious and perhaps boring part: planning how you'll get there. Understanding Retirement Planning In the simplest sense, retirement planning is the planning one does to be prepared for life after paid work ends, not just financially but in all aspects of life. The non-financial aspects include lifestyle choices such as how to spend time in retirement, where to live, when to completely quit working, etc. A holistic approach to retirement planning considers all these areas. The emphasis one puts on retirement planning changes throughout different life stages. Early in a person's working life, retirement planning is about setting aside enough money for retirement. During the middle of your career, it might also include setting specific income or asset targets and taking the steps to achieve them. Once you reach retirement age, you go from accumulating assets to what planners call the distribution phase. You’re no longer paying in; instead, your decades of saving are paying out. Retirement Planning Goals Remember that retirement planning starts long before you retire—the sooner, the better. Your “magic number,” the amount you need to retire comfortably, is highly personalized, but there are numerous rules of thumb that can give you an idea of how much to save. People used to say that you need around $1 million to retire comfortably. Other professionals use the 80% rule (i.e., you need enough to live on 80% of your income at retirement). If you made $100,000 per year, you would need savings that could produce $80,000 per year for roughly 20 years, or $1.6 million. Others say most retirees aren't saving anywhere near enough to meet those benchmarks and should adjust their lifestyle to live on what they have. 65

Sales Executive (BFSI) VILT Whatever method you, and possibly a financial planner, use to calculate your retirement savings needs, start as early as you can. Stages of Retirement Planning Below are some guidelines for successful retirement planning at different stages of your life. Young Adulthood (ages 21–35) Those embarking on adult life may not have a lot of money free to invest, but they do have time to let investments mature, which is a critical and valuable piece of retirement saving. This is because of the principle of compound interest. Compound interest allows interest to earn interest, and the more time you have, the more interest you will earn. Even if you can only put aside $50 a month, it will be worth three times more if you invest it at age 25 than if you wait to start investing at age 45, thanks to the joys of compounding. You might be able to invest more money in the future, but you’ll never be able to make up for lost time. Young adults should take advantage of employer-sponsored 401(k) or 403(b) plans. An upfront benefit of these qualified retirement plans is that your employer has the option to match what you invest, up to a certain amount. For example, if you contribute 3% of your annual income to your plan account, your employer may match that, depositing the equivalent sum into your retirement account, essentially giving you a 3% bonus that grows over the years. However, you can and should contribute more than the amount that will earn the employer match if you are able to; some experts recommend upwards of 10%. For the 2020 tax year, participants under 50 can contribute up to $1,500 of their earnings to a 401(k), some of which may be additionally matched by an employer. Additional advantages of 401(k) plans include earning a higher rate of return than a savings account (although the investments are not risk-free). The funds within the account are also not subject to income tax until you withdraw them. Since your contributions are taken off your gross income, this will give you an immediate income-tax break. Those who are on the cusp of a higher tax bracket might consider contributing enough to lower their tax liability. Other tax-advantaged retirement savings accounts include the IRA and Roth IRA. A Roth IRA can be an excellent tool for young adults, as it is funded with post-tax dollars. This eliminates the immediate tax deduction, but it avoids a bigger income-tax bite when the money is withdrawn at retirement. Starting a Roth IRA early can pay off big time in the long run, even if you don’t have a lot of money to invest at first. Remember, the longer the money sits in a retirement account, the more tax-free interest is earned. 66

Sales Executive (BFSI) VILT Roth IRAs have some limitations. Single filers can only contribute fully (up to $6,000 a year) to a Roth IRA if you make $124,000 or less annually, as of the 2020 tax year. After that, you can invest to a lesser degree, up to an annual income of $139,000 (the income limits are higher for married couples filing jointly). Like a 401(k), a Roth IRA has some penalties associated with taking money out before you hit retirement age. But there are a few notable exceptions that may be very useful for younger people or in case of emergency. First, you can always withdraw the initial capital you invested without paying a penalty. Second, you can withdraw funds for certain educational expenses, a first-time home purchase, health care expenses, and disability costs. Once you set up a retirement account, the question becomes how to direct the funds. For those intimidated by the stock market, consider investing in an index fund that requires little maintenance, as it simply mirrors a stock market index like the Standard & Poor's 500. There are also target-date funds designed to automatically alter and diversify assets over time based on your goal retirement age. Keep in mind that certain federal agencies and uniformed services offer thrift savings plans. Early Midlife (36–50) Early midlife tends to bring a number of financial strains, including mortgages, student loans, insurance premiums, and credit card debt. However, it’s critical to continue saving at this stage of retirement planning. The combination of earning more money and the time you still have to invest and earn interest makes these years some of the best for aggressive savings. People at this stage of retirement planning should continue to take advantage of any 401(k) matching programs their employers offer. They should also try to max out contributions to a 401(k) and/or Roth IRA (you can have both at the same time). For those ineligible for a Roth IRA, consider a traditional IRA. As with your 401(k), this is funded with pre-tax dollars, and the assets within it grow tax-deferred. Finally, don't neglect life insurance and disability insurance. You want to ensure your family could survive financially without pulling from retirement savings should something happen to you. Later Midlife (50–65) As you age, your investment accounts should become more conservative. While time is running out to save for people at this stage of retirement planning, there are a few advantages. Higher wages and potentially having some of the aforementioned expenses (mortgages, student loans, credit card debt, etc.) paid off by this time can leave you with more disposable income to invest. 67

Sales Executive (BFSI) VILT And it's never too late to set up and contribute to a 401(k) or an IRA. One benefit of this retirement planning stage is catch-up contributions. From age 50 on, you can contribute an additional $1,000 a year to your traditional or Roth IRA, and an additional $6,000 a year to your 401(k). For those who have maxed out tax-incentivized retirement-savings options, consider other forms of investment to supplement your retirement savings. CDs, blue-chip stocks, or certain real estate investments (like a vacation home you rent out) may be reasonably safe ways to add to your nest egg. You can also begin to get a sense of what your Social Security benefits will be, and at what age it makes sense to start taking them. Eligibility for early benefits begins at age 62, but the retirement age for full benefits is 66. The Social Security Administration offers a calculator here. This is also the time to look into long-term care insurance, which will help cover the costs of a nursing home or home care should you need it in your advanced years. Such health-related expenses can decimate your savings if not properly planned for. 8 Essential Tips for Retirement Saving Other Aspects of Retirement Planning Retirement planning includes a lot more than simply how much you will save and how much you need. It takes into account your complete financial picture. Your Home For most Americans, their home is the single biggest asset they own. How does that fit into your retirement plan? In the past, a home was considered an asset, but since the housing-market crash, planners see it as less of an asset than they once did. With the popularity of home-equity loans and home equity lines of credit, many homeowners are entering retirement in mortgage debt instead of well above water. Once you reach retirement there’s also the question of whether you should sell your home. If you still live in the home where you raised multiple children, it might be larger than you need, and the expenses that come with holding onto it might be considerable. Your retirement plan should include an unbiased look at your home and what to do with it. Estate Planning Your estate plan addresses what happens to your assets after you die. It should include a will that lays out your plans, but even before that, you should set up a trust or use some other strategy to keep as much of it as possible shielded from estate taxes. The first $11.4 million of an estate is exempt from estate taxes, but more and more people are finding ways to leave their money to their children in a way that doesn’t pay them in a lump sum. 68

Sales Executive (BFSI) VILT Tax Efficiency Once you reach retirement age and begin taking distributions, taxes become a big problem. Most of your retirement accounts are taxed as ordinary income tax. That means you could pay as much as 37% in taxes on any money you take from your traditional 401(k) or IRA. That's why it's important to consider a Roth IRA or a Roth 401(k), which allow you to pay taxes upfront rather than upon withdrawal. If you believe you will make more money later in life, it may make sense to do a Roth conversion. An accountant or financial planner can help you work through such tax considerations. Insurance A key component to retirement planning is protecting your assets. Age comes with increased medical expenses, and you will have to navigate the often-complicated Medicare system. Many people feel that standard Medicare doesn't provide adequate coverage, so they look to a Medicare Advantage or Medigap policy to supplement it. There's also life insurance and long-term-care insurance to consider. Another type of policy issued by an insurance company is an annuity. An annuity is much like a pension. You put money on deposit with an insurance company that later pays you a set monthly amount. There are many different options with annuities and many considerations when deciding if an annuity is right for you.  Estimating The Retirement Corpus How to Calculate How Much I need for Retirement How to calculate how much I need for retirement? The first and foremost reason to compel you to retirement planning is that the average life expectancy is rising continuously and that the best days of work will last. Best retirement plans ensure that after retirement, you don’t have to worry about your expenses. They ensure that you do not have to get back to work and curb your spending. They help you to live life at the fullest, even after retirement. The primary step to retirement planning is to calculate how much money you will need when you retire. This is particularly important as this is the basis, on which, you can choose from the best 69

Sales Executive (BFSI) VILT retirement plans. Here is a step by step guide on how to calculate the amount you need for retirement. • Calculate the expected household expenses when you retire Expenses do not stop, no matter at what step of your profession you are. The first step to retirement planning is to calculate your regular expenditure. Divide your expenses into two. Expenditures such as food, grocery, medicine, clothing, etc. will stay even when you retire, but expenses such as work travel cost, professional attire, education loan, personal loan, etc. might not be there. Taking these points into consideration, calculate the expected expenses. • Calculate expected income after retirement Include income from all sources that you expect to earn once you retire. This income might be coming from the properties you own, income from a pension scheme, pension under other sources such as EPS etc. • Calculate the additional income needed This step is relatively easy. You just need to deduct the expected income from the expected expenditure. The answer will help you to analyze the surplus income you need after retirement and should form your basis of retirement planning. • Factor in the future value of additional income required You need to factor in the future value because the additional requirement might seem low today, but over the years it is bound to grow due to inflation. Take expert advice if needed at this step. Usually, 6% (the long term average) is used for accurate forecasting. • Decide on the retirement corpus This step comes with a series of sub-steps. First, find by how much your current investment corpus will grow to at the time of your retirement. Next, find out how much retirement corpus you need at the age of your retirement by taking into numerous factors such as life expectancy, asset values, and return expectations, and so on. Doing this will help you to arrive at the additional corpus required for a smooth retirement. 70

Sales Executive (BFSI) VILT • Find the best retirement plan After following each and every step carefully, you will arrive at the corpus you need to maintain at the start of your retirement. Find a retirement plan that proves helpful to you in these efforts. A retirement plan should be flexible, have proper returns and should provide additional riders to suit the individual’s exact requirements. • Try out the retirement calculator Many financial entities provide a tool called the retirement planning calculator which operates on a series of algorithms, rules and predefined sets to provide you with a fairly accurate overview of your needs when you retire. The calculator takes into different factors such as saving balance, investment, age, and income. It assesses your financial position based on these parameters and helps to forecast future values. The tool is easy, simple to use and available on the internet. The earlier one starts to plan for retirement, the better. The reason is that collecting and saving funds for ideal retirement may take many years. Starting from a young age ensures that you have enough funds to spend your retirement worry free and the bottom line is, it is never too early to start for retirement. You need to comprehend the importance of retirement planning. So, what are you waiting for? Go on, contact your bank, your insurance company or your financial advisor, seek out retirement plans and get ready to tick off all the things in your bucket list post-retirement.  Determine The Retirement Corpus Here’s the formula you need to calculate your retirement corpus The first step of retirement planning is determining your retirement corpus. So, what exactly is a retirement corpus? It’s the fund you need to have put aside and saved by the end of your work life to receive an adequate pension for your retired life. And, that’s why, you need to know how to calculate your retirement corpus. 71

Sales Executive (BFSI) VILT At Aegon Life, we offer you a retirement planning calculator, which is easy to use and shows how much money you need to save to reach you desired retirement corpus. Yes, it’s that simple! But the question remains how did we arrive at this equation? Calculating your retirement corpus is no rocket science. A simple formula was devised by the financial planner Bill Bengen way back in 1994 to tackle the vagaries of inflation and purchasing power called the “4 percent rule.” The 4 percent rule retirement planning calculator says that one needs enough saved to be able to meet annual expenses in the first year of retirement by withdrawing 4 percent of the retirement corpus. In the Indian context, this means, if you aim to save a pension plan fund of Rs. 1 crore, you will potentially have a post-retirement annual income of Rs. 4,00,000. AEGON Life’s retirement planning calculator will also offer you an estimate on your retirement corpus, thus helping you to sort through your savings and monthly expenses. A more exhaustive way of how to calculate retirement corpus demonstrated in the table below, showing the various items and variables behind another typical retirement planning calculator formula: Calculating Retirement Corpus The Inflation Adjusted Return can be calculated using the formula r= (((1+R)/(1+i)) –1)100 where i is the inflation. FV= PV(1+ (i/100))^T – the Future Value of your Current Expenses Where, PV= C(1–(1/(1+r)^N))/r 72

Sales Executive (BFSI) VILT Once you determine how to calculate retirement corpus, choose your preferred retirement planning calculator and fill in your details, the retirement corpus amount is calculated. With this figure in mind you can get down to retirement planning. Your retirement plan must adequately cover all aspects of your projected retirement needs and expenses. There are myriad ways to calculate retirement corpus and a ton more retirement planning calculator apps and tools available at the click of a button. The key is to find a retirement planning calculator suited to your personal needs. Where you live, what quality you expect, current standard of living and current salary and inflation rates as well as the economy all need to factor into the calculation. If you live in an Indian metro, you will need less than someone planning a retirement in the developed world. If you plan to retire to a small town or a cheaper retirement destination from a first world country that also will need to be factored into your retirement planning calculator. Since many people are put off their retirement planning flabbergasted by the multiple variables that could affect post retirement financial security a simple tool or a simplified formula on how to calculate retirement corpus can help curb the procrastination and ensure early retirement saving. Then the miraculous power of compounding becomes the saver’s friend and makes the process simpler and more lucrative. More simply put, if you are 20 and want to accumulate Rs. 1,00,000 by the age of 60, you must invest only Rs. 850 in a monthly plan, assuming a 12 percent annual rate of return. But if you start saving for your retirement at the age of 30, you will have to increase your monthly investments to Rs. 2,861 per month, given all other conditions remain the same. Extrapolating, by starting retirement savings at the age of 40 which means you only have 20 years to save, then and you will have to invest Rs. 10,108 monthly to save Rs. 1,00,000 in 20 years.  Retirement Products What is a Retirement/Pension Plan? A retirement plan or a pension plan is an umbrella term for closely related financial products. Generally, retirement plans provide dual benefits of investment and insurance cover. Individuals invest small amounts regularly in a pension plan for a long time which typically generates decent returns due to compounding. The corpus that accumulates is used to pay the investor monthly 73

Sales Executive (BFSI) VILT income after retirement. You have to diligently contribute to a pension scheme for a retirement plan to be successful. A pension plan can help you take care of the various expenses that crop up after retirement. Public provident funds, National Pension Scheme (NPS) and unit-linked investment plans are an example of retirement plans. Retirement Planning Goals Retirement planning differs from individual to individual depending on several factors such as the expected lifestyle, current income, risk tolerance and the time horizon. Begin by taking into account the lifestyle you expect to maintain after retirement. As a thumb rule, it is said that you will need 70-80% of your current annual income. You can also use online retirement planning calculators to determine the amount that would be needed by your post-retirement. Stages of Retirement Planning Retirement planning is not a task of a few weeks, months or years. A satisfying and fulfilling life post-retirement requires years of planning and implementation. Depending on the age of the policyholder, retirement planning can be divided into three stages. 1.Accumulation In the first stage of retirement planning, you have to contribute regularly to the pension plan. The premiums have to be carved out from your monthly income. The corpus available at your disposal after retirement will depend solely on the number of contributions made to a pension plan during the accumulation phase. 2.Preservation phase Your expenses will change dramatically with age. The change in lifestyle fuels an increase in expenses as one nears retirement. The preservation phase kicks in 10-15 years prior to retirement. In the preservation stage, you can make a better analysis of your post-retirement requirements. Taking the required fund in an account, conduct a thorough review of existing investments. 3.Distribution Phase The distribution phase starts when your regular income stops. This is the final phase of retirement planning when the fruits of the decades-long Labour ripen. In this phase, you begin receiving monthly income from the pension plan to support your post-retirement expenses. Principles of Retirement Planning  Define a goal: The post-retirement needs of every individual is different. It is important to define a goal to get started. After the goal is clear, formulate some checkpoints that would help you keep the growth of the retirement corpus on track.  Save and invest: Retirement planning is not a one-dimensional activity; it requires an array of investments and encompasses several goals. Before retirement, many people have to buy a 74

Sales Executive (BFSI) VILT house or get a child educated. These goals would need a different financial product, but the outgo will have to be divided with the retirement plan. Taking multiple factors into account, decide the time horizon of your investment for retirement planning.  Plan for a long life: Most people make the mistake of using outdated metrics to plan for retirement in the contemporary world. The life expectancy rate of people is rising across the world. Planning for a short retirement period can lead to exhaustion of the accumulated corpus. With the Whole Life Option of the Invest 4G plan, you can live a stress-free life as the policy remains active for the entire life.  Minimize taxes: Tax-efficient retirement products such as ULIPs indirectly multiply the savings. Lower tax outgo eventually adds up into the retirement corpus. You can avail double tax benefits through the Invest 4G plan. The premiums paid for the policy are eligible for deduction under Section 80C, while the maturity amount is exempted from tax under Section 10 (10D) of the Income Tax Act, 1961. How to choose the retirement plan?  Start early: The earlier you start investing in ULIPs, the better as it gives ample time to the investment to multiply. As soon as you start working, start putting aside small amounts for retirement. Keep on increasing the contributions with the increase in income.  Equity option: Even though equities are volatile when compared to other asset classes, they generate relatively better returns. Studies have proved that equities tend to outperform other assets in the long run. Retirement plans being long-term investment products, even a small exposure to equity markets has the potential to generate significant returns. With Invest 4G ULIP, you can choose to have equity exposure ranging between 0% and 100%.  Option to diversify: When you are saving for something as important as retirement, it would be foolish to have disproportionately high exposure to a particular asset class. Equities generate decent returns but are also risky. Choose a plan that allows you to have exposure across asset classes. You can choose to invest in a single fund or a combination of funds through Invest 4G plan.  Vesting age: Choose a retirement plan with a vesting age that matches your requirements. If you plan to retire early, there are plans with vesting age starting at 40 years. On the other hand, there are plans with a vesting age of 85 years. Factors to Consider While Buying Best Pension Plans There are several factors to consider while buying pension plans, the primary one being the retirement goal. 1.Higher sum assured Opt for a pension plan that offers higher sum assured on maturity. 2.Assured death benefit 75

Sales Executive (BFSI) VILT A plan with maximum payment at death should be preferred. 3.Annuity option An annuity option ensures that your corpus lasts till you live. It is important to choose a plan that has an annuity option best suited for you. There are pension plans which guarantee annuity for a certain number of years regardless of whether the policyholder survives or not. 4.Expenses There are several expenses related to ULIPs such as fund management charges. Choose a plan that has lower administrative charges as the expenses are generally deducted from your investment. The lower will be the expenses, the higher will be the fund value. Range of retirement plans Retirement plans are dynamic products that ensure the financial stability of your post-retirement life. There are numerous types of retirement plans in India. Deferred Annuity, Immediate Annuity, Annuity Certain, With Cover and Without Cover Pension Plans, Guaranteed Period Annuity, Life Annuity, National Pension Scheme, Pension Funds. Retirement Planning Guide for Working Women The 20s are the best time to start investing in a retirement plan. Start with clearing all the debt. High-interest debt such as credit card bills should be paid first. But one should not wait to clear all the debts before investing, even small investments can multiply in the long run. Saving for retirement plans starts with controlling unnecessary expenditure. Distinguish between essential and discretionary spends and channelize the additional savings into retirement policies. Planning for an event that will manifest years later is a complex task.  Estate Planning What Is Estate Planning? Estate planning is the preparation of tasks that serve to manage an individual's asset base in the event of their incapacitation or death. The planning includes the bequest of assets to heirs and the settlement of estate taxes. Most estate plans are set up with the help of an attorney experienced in estate law. Understanding Estate Planning Estate planning involves determining how an individual’s assets will be preserved, managed, and distributed after death. It also takes into account the management of an individual’s properties and financial obligations in the event that they become incapacitated. 76

Sales Executive (BFSI) VILT Assets that could make up an individual’s estate include houses, cars, stocks, artwork, life insurance, pensions, and debt. Individuals have various reasons for planning an estate, such as preserving family wealth, providing for a surviving spouse and children, funding children's or grandchildren’s education, or leaving their legacy behind to a charitable cause. The most basic step in estate planning involves writing a will. Other major estate planning tasks include the following:  Limiting estate taxes by setting up trust accounts in the names of beneficiaries  Establishing a guardian for living dependents  Naming an executor of the estate to oversee the terms of the will  Creating or updating beneficiaries on plans such as life insurance, IRAs, and 401(k)s  Setting up funeral arrangements  Establishing annual gifting to qualified charitable and non-profit organizations to reduce the taxable estate  Setting up a durable power of attorney (POA) to direct other assets and investments Writing a Will A will is a legal document created to provide instructions on how an individual’s property and custody of minor children, if any, should be handled after death. The individual expresses their wishes through the document and names a trustee or executor that they trust to fulfill their stated intentions. The will also indicates whether a trust should be created after death. Depending on the estate owner’s intentions, a trust can go into effect during their lifetime (living trust) or after their death (testamentary trust). The authenticity of a will is determined through a legal process known as probate. Probate is the first step taken in administering the estate of a deceased person and distributing assets to the beneficiaries. When an individual die, the custodian of the will must take the will to the probate court or to the executor named in the will within 30 days of the death of the testator. The probate process is a court-supervised procedure in which the authenticity of the will left behind is proved to be valid and accepted as the true last testament of the deceased. The court officially appoints the executor named in the will, which, in turn, gives the executor the legal power to act on behalf of the deceased. Estate Planning Basics Appointing the Right Executor The legal personal representative or executor approved by the court is responsible for locating and overseeing all the assets of the deceased. The executor has to estimate the value of the estate by using either the date of death value or the alternative valuation date, as provided in the Internal Revenue Code (IRC). 77

Sales Executive (BFSI) VILT A list of assets that need to be assessed during probate includes retirement accounts, bank accounts, stocks and bonds, real estate property, jewelry, and any other items of value. Most assets that are subject to probate administration come under the supervision of the probate court in the place where the decedent lived at death. The exception is real estate, which must be probated in the county in which it is located. The executor also has to pay off any taxes and debt owed by the deceased from the estate. Creditors usually have a limited amount of time from the date they were notified of the testator’s death to make claims against the estate for money owed to them. Claims that are rejected by the executor can be taken to court where a probate judge will have the final say as to whether or not the claim is valid. The executor is also responsible for filing the final personal income tax returns on behalf of the deceased. After the inventory of the estate has been taken, the value of assets calculated, and taxes and debt paid off, the executor will then seek authorization from the court to distribute whatever is left of the estate to the beneficiaries. Planning for Estate Taxes Federal and state taxes applied on an estate can considerably reduce its value before assets are distributed to beneficiaries. Death can result in large liabilities for the family, necessitating generational transfer strategies that can reduce, eliminate, or postpone tax payments. During the estate-planning process, there are significant steps that individuals and married couples can take to reduce the impact of these taxes. AB trusts Married couples, for example, can set up an AB trust that divides into two after the death of the first spouse. Education funding strategies A grandfather may encourage his grandchildren to seek college or advanced degrees and thus transfer assets to an entity, such as a 529 plan, for the purpose of current or future education funding.2 That may be a much more tax-efficient move than having those assets transferred after death to fund college when the beneficiaries are of college age. The latter may trigger multiple tax events that can severely limit the amount of funding available to the kids. Cutting the tax effects of charitable contributions 78

Sales Executive (BFSI) VILT Another strategy an estate planner can take to minimize the estate’s tax liability after death is by giving to charitable organizations while alive. The gifts reduce the financial size of the estate since they are excluded from the taxable estate, thus lowering the estate tax bill. As a result, the individual has a lower effective cost of giving, which provides additional incentive to make those gifts. And of course, an individual may wish to make charitable contributions to a variety of causes. Estate planners can work with the donor in order to reduce taxable income as a result of those contributions,3 or formulate strategies that maximize the effect of those donations. Estate freezing This is another strategy that can be used to limit death taxes. It involves an individual locking in the current value and thus, tax liability, of their property, while attributing the value of future growth of that capital property to another person. Any increase that occurs in the value of the assets in the future is transferred to the benefit of another person, such as a spouse, child, or grandchild. This method involves freezing the value of an asset at its value on the date of transfer. Accordingly, the amount of potential capital gain at death is also frozen, allowing the estate planner to estimate their potential tax liability upon death and better plan for the payment of income taxes. Using Life Insurance in Estate Planning Life insurance serves as a source to pay death taxes and expenses, fund business buy-sell agreements, and fund retirement plans. If sufficient insurance proceeds are available and the policies are properly structured, any income tax on the deemed dispositions of assets following the death of an individual can be paid without resorting to the sale of assets. Proceeds from life insurance that are received by the beneficiaries upon the death of the insured are generally income tax-free. Estate planning is an ongoing process and should be started as soon as an individual has any measurable asset base. As life progresses and goals shift, the estate plan should shift in line with new goals. Lack of adequate estate planning can cause undue financial burdens to loved ones (estate taxes can run as high as 40%), 79

Sales Executive (BFSI) VILT Chapter 4 ROLE OF MUTUAL FUND IN MODERN ECONOMY  Concept of Mutual Fund What Is a Mutual Fund? A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus. Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments. Understanding Mutual Funds Mutual funds pool money from the investing public and use that money to buy other securities, usually stocks and bonds. The value of the mutual fund company depends on the performance of the securities it decides to buy. So, when you buy a unit or share of a mutual fund, you are buying the performance of its portfolio or, more precisely, a part of the portfolio's value. Investing in a share of a mutual fund is different from investing in shares of stock. Unlike stock, mutual fund shares do not give its holders any voting rights. A share of a mutual fund represents investments in many different stocks (or other securities) instead of just one holding. That's why the price of a mutual fund share is referred to as the net asset value (NAV) per share, sometimes expressed as NAVPS. A fund's NAV is derived by dividing the total value of the securities in the portfolio by the total amount of shares outstanding. Outstanding shares are those held by all shareholders, institutional investors, and company officers or insiders. Mutual fund shares can typically be purchased or redeemed as needed at the fund's current NAV, which—unlike a stock price—doesn't fluctuate during market hours, but it is settled at the end of each trading day. Ergo, the price of a mutual fund is also updated when the NAVPS is settled. The average mutual fund holds over a hundred different securities, which means mutual fund shareholders gain important diversification at a low price. Consider an investor who buys only Google stock before the company has a bad quarter. He stands to lose a great deal of value because all of his dollars are tied to one company. On the other hand, a different investor may buy shares of a mutual fund that happens to own some Google stock. When Google has a bad quarter, she loses significantly less because Google is just a small part of the fund's portfolio. 80

Sales Executive (BFSI) VILT How Mutual Funds Work A mutual fund is both an investment and an actual company. This dual nature may seem strange, but it is no different from how a share of AAPL is a representation of Apple Inc. When an investor buys Apple stock, he is buying partial ownership of the company and its assets. Similarly, a mutual fund investor is buying partial ownership of the mutual fund company and its assets. The difference is that Apple is in the business of making innovative devices and tablets, while a mutual fund company is in the business of making investments. Investors typically earn a return from a mutual fund in three ways: 1. Income is earned from dividends on stocks and interest on bonds held in the fund's portfolio. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution. Funds often give investors a choice either to receive a check for distributions or to reinvest the earnings and get more shares. 2. If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution. 3. If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit in the market. If a mutual fund is construed as a virtual company, its CEO is the fund manager, sometimes called its investment adviser. The fund manager is hired by a board of directors and is legally obligated to work in the best interest of mutual fund shareholders. Most fund managers are also owners of the fund. There are very few other employees in a mutual fund company. The investment adviser or fund manager may employ some analysts to help pick investments or perform market research. A fund accountant is kept on staff to calculate the fund's NAV, the daily value of the portfolio that determines if share prices go up or down. Mutual funds need to have a compliance officer or two, and probably an attorney, to keep up with government regulations. Most mutual funds are part of a much larger investment company; the biggest have hundreds of separate mutual funds. Some of these fund companies are names familiar to the general public, such as Fidelity Investments, The Vanguard Group, T. Rowe Price, and Oppenheimer. Types of Mutual Funds Mutual funds are divided into several kinds of categories, representing the kinds of securities they have targeted for their portfolios and the type of returns they seek. There is a fund for nearly every type of investor or investment approach. Other common types of mutual funds include money market funds, sector funds, alternative funds, smart-beta funds, target-date funds, and even funds of funds, or mutual funds that buy shares of other mutual funds. Equity Funds The largest category is that of equity or stock funds. As the name implies, this sort of fund invests principally in stocks. Within this group are various subcategories. Some equity funds are named for the size of the companies they invest in: small-, mid-, or large-cap. Others are named by their 81

Sales Executive (BFSI) VILT investment approach: aggressive growth, income-oriented, value, and others. Equity funds are also categorized by whether they invest in domestic (U.S.) stocks or foreign equities. There are so many different types of equity funds because there are many different types of equities. A great way to understand the universe of equity funds is to use a style box, an example of which is below. The idea here is to classify funds based on both the size of the companies invested in (their market caps) and the growth prospects of the invested stocks. The term value fund refers to a style of investing that looks for high-quality, low-growth companies that are out of favor with the market. These companies are characterized by low price-to-earnings (P/E) ratios, low price-to-book (P/B) ratios, and high dividend yields. Conversely, spectrums are growth funds, which look to companies that have had (and are expected to have) strong growth in earnings, sales, and cash flows. These companies typically have high P/E ratios and do not pay dividends. A compromise between strict value and growth investment is a \"blend,\" which simply refers to companies that are neither value nor growth stocks and are classified as being somewhere in the middle. The other dimension of the style box has to do with the size of the companies that a mutual fund invests in. Large-cap companies have high market capitalizations, with values over $10 billion. Market cap is derived by multiplying the share price by the number of shares outstanding. Large- cap stocks are typically blue chip firms that are often recognizable by name. Small-cap stocks refer to those stocks with a market cap ranging from $300 million to $2 billion. These smaller companies tend to be newer, riskier investments. Mid-cap stocks fill in the gap between small- and large-cap. A mutual fund may blend its strategy between investment style and company size. For example, a large-cap value fund would look to large-cap companies that are in strong financial shape but have recently seen their share prices fall and would be placed in the upper left quadrant of the style box (large and value). The opposite of this would be a fund that invests in startup technology companies with excellent growth prospects: small-cap growth. Such a mutual fund would reside in the bottom right quadrant (small and growth). Fixed-Income Funds Another big group is the fixed income category. A fixed-income mutual fund focuses on investments that pay a set rate of return, such as government bonds, corporate bonds, or other debt instruments. The idea is that the fund portfolio generates interest income, which it then passes on to the shareholders. Sometimes referred to as bond funds, these funds are often actively managed and seek to buy relatively undervalued bonds in order to sell them at a profit. These mutual funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds aren't without risk. Because there are many different types of bonds, bond funds can vary dramatically depending on where they invest. For example, a fund specializing in high-yield junk bonds is much riskier than a fund that invests in government securities. Furthermore, nearly all bond funds are subject to interest rate risk, which means that if rates go up, the value of the fund goes down. Index Funds 82

Sales Executive (BFSI) VILT Another group, which has become extremely popular in the last few years, falls under the moniker \"index funds.\" Their investment strategy is based on the belief that it is very hard, and often expensive, to try to beat the market consistently. So, the index fund manager buys stocks that correspond with a major market index such as the S&P 500 or the Dow Jones Industrial Average (DJIA). This strategy requires less research from analysts and advisors, so there are fewer expenses to eat up returns before they are passed on to shareholders. These funds are often designed with cost-sensitive investors in mind. Balanced Funds Balanced funds invest in a hybrid of asset classes, whether stocks, bonds, money market instruments, or alternative investments. The objective is to reduce the risk of exposure across asset classes. This kind of fund is also known as an asset allocation fund. There are two variations of such funds designed to cater to the investors objectives. Some funds are defined with a specific allocation strategy that is fixed, so the investor can have a predictable exposure to various asset classes. Other funds follow a strategy for dynamic allocation percentages to meet various investor objectives. This may include responding to market conditions, business cycle changes, or the changing phases of the investor's own life. While the objectives are similar to those of a balanced fund, dynamic allocation funds do not have to hold a specified percentage of any asset class. The portfolio manager is therefore given freedom to switch the ratio of asset classes as needed to maintain the integrity of the fund's stated strategy. Money Market Funds The money market consists of safe (risk-free), short-term debt instruments, mostly government Treasury bills. This is a safe place to park your money. You won't get substantial returns, but you won't have to worry about losing your principal. A typical return is a little more than the amount you would earn in a regular checking or savings account and a little less than the average certificate of deposit (CD). While money market funds invest in ultra-safe assets, during the 2008 financial crisis, some money market funds did experience losses after the share price of these funds, typically pegged at $1, fell below that level and broke the buck. Income Funds Income funds are named for their purpose: to provide current income on a steady basis. These funds invest primarily in government and high-quality corporate debt, holding these bonds until maturity in order to provide interest streams. While fund holdings may appreciate in value, the primary objective of these funds is to provide steady cash flow to investors. As such, the audience for these funds consists of conservative investors and retirees. Because they produce regular income, tax-conscious investors may want to avoid these funds. International/Global Funds An international fund (or foreign fund) invests only in assets located outside your home country. Global funds, meanwhile, can invest anywhere around the world, including within your home country. It's tough to classify these funds as either riskier or safer than domestic investments, 83

Sales Executive (BFSI) VILT but they have tended to be more volatile and have unique country and political risks. On the flip side, they can, as part of a well-balanced portfolio, actually reduce risk by increasing diversification, since the returns in foreign countries may be uncorrelated with returns at home. Although the world's economies are becoming more interrelated, it is still likely that another economy somewhere is outperforming the economy of your home country. Specialty Funds This classification of mutual funds is more of an all-encompassing category that consists of funds that have proved to be popular but don't necessarily belong to the more rigid categories we've described so far. These types of mutual funds forgo broad diversification to concentrate on a certain segment of the economy or a targeted strategy. Sector funds are targeted strategy funds aimed at specific sectors of the economy, such as financial, technology, health, and so on. Sector funds can, therefore, be extremely volatile since the stocks in a given sector tend to be highly correlated with each other. There is a greater possibility for large gains, but a sector may also collapse (for example, the financial sector in 2008 and 2009). Regional funds make it easier to focus on a specific geographic area of the world. This can mean focusing on a broader region (say Latin America) or an individual country (for example, only Brazil). An advantage of these funds is that they make it easier to buy stock in foreign countries, which can otherwise be difficult and expensive. Just like for sector funds, you have to accept the high risk of loss, which occurs if the region goes into a bad recession. Socially responsible funds (or ethical funds) invest only in companies that meet the criteria of certain guidelines or beliefs. For example, some socially responsible funds do not invest in \"sin\" industries such as tobacco, alcoholic beverages, weapons, or nuclear power. The idea is to get competitive performance while still maintaining a healthy conscience. Other such funds invest primarily in green technology, such as solar and wind power or recycling. Exchange Traded Funds (ETFs) A twist on the mutual fund is the exchange traded fund (ETF). These ever more popular investment vehicles pool investments and employ strategies consistent with mutual funds, but they are structured as investment trusts that are traded on stock exchanges and have the added benefits of the features of stocks. For example, ETFs can be bought and sold at any point throughout the trading day. ETFs can also be sold short or purchased on margin. ETFs also typically carry lower fees than the equivalent mutual fund. Many ETFs also benefit from active options markets, where investors can hedge or leverage their positions. ETFs also enjoy tax advantages from mutual funds. Compared to mutual funds, ETFs tend to be more cost effective and more liquid. The popularity of ETFs speaks to their versatility and convenience. Mutual Fund Fees A mutual fund will classify expenses into either annual operating fees or shareholder fees. Annual fund operating fees are an annual percentage of the funds under management, usually ranging from 1–3%. Annual operating fees are collectively known as the expense ratio. A fund's expense ratio is the summation of the advisory or management fee and its administrative costs. 84

Sales Executive (BFSI) VILT Shareholder fees, which come in the form of sales charges, commissions, and redemption fees, are paid directly by investors when purchasing or selling the funds. Sales charges or commissions are known as \"the load\" of a mutual fund. When a mutual fund has a front-end load, fees are assessed when shares are purchased. For a back-end load, mutual fund fees are assessed when an investor sells his shares. Sometimes, however, an investment company offers a no-load mutual fund, which doesn't carry any commission or sales charge. These funds are distributed directly by an investment company, rather than through a secondary party. Some funds also charge fees and penalties for early withdrawals or selling the holding before a specific time has elapsed. Also, the rise of exchange-traded funds, which have much lower fees thanks to their passive management structure, have been giving mutual funds considerable competition for investors' dollars. Articles from financial media outlets regarding how fund expense ratios and loads can eat into rates of return have also stirred negative feelings about mutual funds. Classes of Mutual Fund Shares Mutual fund shares come in several classes. Their differences reflect the number and size of fees associated with them. Currently, most individual investors purchase mutual funds with A shares through a broker. This purchase includes a front-end load of up to 5% or more, plus management fees and ongoing fees for distributions, also known as 12b-1 fees. To top it off, loads on A shares vary quite a bit, which can create a conflict of interest. Financial advisors selling these products may encourage clients to buy higher-load offerings to bring in bigger commissions for themselves. With front-end funds, the investor pays these expenses as they buy into the fund. To remedy these problems and meet fiduciary-rule standards, investment companies have started designating new share classes, including \"level load\" C shares, which generally don't have a front- end load but carry a 1% 12b-1 annual distribution fee. Funds that charge management and other fees when an investor sell their holdings are classified as Class B shares. A New Class of Fund Shares The newest share class, developed in 2016, consists of clean shares. Clean shares do not have front-end sales loads or annual 12b-1 fees for fund services. American Funds, Janus, and MFS are all fund companies currently offering clean shares. By standardizing fees and loads, the new classes enhance transparency for mutual fund investors and, of course, save them money. For example, an investor who rolls $10,000 into an individual retirement account (IRA) with a clean-share fund could earn nearly $1,800 more over a 30-year period as compared to an average A-share fund, according to an April 2017 Morningstar report co-written by Aron Szapiro, Morningstar director of policy research, and Paul Ellenbogen, head of global regulatory solutions. 85

Sales Executive (BFSI) VILT Advantages of Mutual Funds There are a variety of reasons that mutual funds have been the retail investor's vehicle of choice for decades. The overwhelming majority of money in employer-sponsored retirement plans goes into mutual funds. Multiple mergers have equated to mutual funds over time. Diversification Diversification, or the mixing of investments and assets within a portfolio to reduce risk, is one of the advantages of investing in mutual funds. Experts advocate diversification as a way of enhancing a portfolio's returns, while reducing its risk. Buying individual company stocks and offsetting them with industrial sector stocks, for example, offers some diversification. However, a truly diversified portfolio has securities with different capitalizations and industries and bonds with varying maturities and issuers. Buying a mutual fund can achieve diversification cheaper and faster than by buying individual securities. Large mutual funds typically own hundreds of different stocks in many different industries. It wouldn't be practical for an investor to build this kind of a portfolio with a small amount of money. Easy Access Trading on the major stock exchanges, mutual funds can be bought and sold with relative ease, making them highly liquid investments. Also, when it comes to certain types of assets, like foreign equities or exotic commodities, mutual funds are often the most feasible way—in fact, sometimes the only way—for individual investors to participate. Economies of Scale Mutual funds also provide economies of scale. Buying one spares the investor of the numerous commission charges needed to create a diversified portfolio. Buying only one security at a time leads to large transaction fees, which will eat up a good chunk of the investment. Also, the $100 to $200 an individual investor might be able to afford is usually not enough to buy a round lot of the stock, but it will purchase many mutual fund shares. The smaller denominations of mutual funds allow investors to take advantage of dollar cost averaging. Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions. Moreover, a mutual fund, since it pools money from many smaller investors, can invest in certain assets or take larger positions than a smaller investor could. For example, the fund may have access to IPO placements or certain structured products only available to institutional investors. Professional Management A primary advantage of mutual funds is not having to pick stocks and manage investments. Instead, a professional investment manager takes care of all of this using careful research and skillful trading. Investors purchase funds because they often do not have the time or the expertise to manage their own portfolios, or they don't have access to the same kind of information that a professional fund has. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments. Most private, non-institutional money 86

Sales Executive (BFSI) VILT managers deal only with high-net-worth individuals—people with at least six figures to invest. However, mutual funds, as noted above, require much lower investment minimums. So, these funds provide a low-cost way for individual investors to experience and hopefully benefit from professional money management. Variety and Freedom of Choice Investors have the freedom to research and select from managers with a variety of styles and management goals. For instance, a fund manager may focus on value investing, growth investing, developed markets, emerging markets, income, or macroeconomic investing, among many other styles. One manager may also oversee funds that employ several different styles. This variety allows investors to gain exposure to not only stocks and bonds but also commodities, foreign assets, and real estate through specialized mutual funds. Some mutual funds are even structured to profit from a falling market (known as bear funds). Mutual funds provide opportunities for foreign and domestic investment that may not otherwise be directly accessible to ordinary investors. Transparency Mutual funds are subject to industry regulation that ensures accountability and fairness to investors. Pros  Liquidity  Diversification  Minimal investment requirements  Professional management  Variety of offerings Cons  High fees, commissions, and other expenses  Large cash presence in portfolios  No FDIC coverage  Difficulty in comparing funds  Lack of transparency in holdings Mutual Funds: How Many is Too Many? Disadvantages of Mutual Funds Liquidity, diversification, and professional management all make mutual funds attractive options for younger, novice, and other individual investors who don't want to actively manage their money. However, no asset is perfect, and mutual funds have drawbacks too. 87

Sales Executive (BFSI) VILT Fluctuating Returns Like many other investments without a guaranteed return, there is always the possibility that the value of your mutual fund will depreciate. Equity mutual funds experience price fluctuations, along with the stocks that make up the fund. The Federal Deposit Insurance Corporation (FDIC) does not back up mutual fund investments, and there is no guarantee of performance with any fund. Of course, almost every investment carries risk. It is especially important for investors in money market funds to know that, unlike their bank counterparts, these will not be insured by the FDIC. Cash Drag Mutual funds pool money from thousands of investors, so every day people are putting money into the fund as well as withdrawing it. To maintain the capacity to accommodate withdrawals, funds typically have to keep a large portion of their portfolios in cash. Having ample cash is excellent for liquidity, but money that is sitting around as cash and not working for you is not very advantageous. Mutual funds require a significant amount of their portfolios to be held in cash in order to satisfy share redemptions each day. To maintain liquidity and the capacity to accommodate withdrawals, funds typically have to keep a larger portion of their portfolio as cash than a typical investor might. Because cash earns no return, it is often referred to as a \"cash drag.\" High Costs Mutual funds provide investors with professional management, but it comes at a cost—those expense ratios mentioned earlier. These fees reduce the fund's overall payout, and they're assessed to mutual fund investors regardless of the performance of the fund. As you can imagine, in years when the fund doesn't make money, these fees only magnify losses. Creating, distributing, and running a mutual fund is an expensive undertaking. Everything from the portfolio manager's salary to the investors' quarterly statements cost money. Those expenses are passed on to the investors. Since fees vary widely from fund to fund, failing to pay attention to the fees can have negative long-term consequences. Actively managed funds incur transaction costs that accumulate over each year. Remember, every dollar spent on fees is a dollar that is not invested to grow over time. \"Diworsification\" and Dilution \"Diworsification\"—a play on words—is an investment or portfolio strategy that implies too much complexity can lead to worse results. Many mutual fund investors tend to overcomplicate matters. That is, they acquire too many funds that are highly related and, as a result, don't get the risk- reducing benefits of diversification. These investors may have made their portfolio more exposed. At the other extreme, just because you own mutual funds doesn't mean you are automatically diversified. For example, a fund that invests only in a particular industry sector or region is still relatively risky. In other words, it's possible to have poor returns due to too much diversification. Because mutual funds can have small holdings in many different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund growing too big. When new money pours into funds that have had strong track records, the 88

Sales Executive (BFSI) VILT manager often has trouble finding suitable investments for all the new capital to be put to good use. One thing that can lead to diworsification is the fact that a fund's purpose or makeup isn't always clear. Fund advertisements can guide investors down the wrong path. The Securities and Exchange Commission (SEC) requires that funds have at least 80% of assets in the particular type of investment implied in their names. How the remaining assets are invested is up to the fund manager.3 However, the different categories that qualify for the required 80% of the assets may be vague and wide-ranging. A fund can, therefore, manipulate prospective investors via its title. A fund that focuses narrowly on Congolese stocks, for example, could be sold with a far-ranging title like \"International High-Tech Fund.\" Active Fund Management Many investors debate whether or not the professionals are any better than you or I at picking stocks. Management is by no means infallible, and even if the fund loses money, the manager still gets paid. Actively managed funds incur higher fees, but increasingly passive index funds have gained popularity. These funds track an index such as the S&P 500 and are much less costly to hold. Actively managed funds over several time periods have failed to outperform their benchmark indices, especially after accounting for taxes and fees. Lack of Liquidity A mutual fund allows you to request that your shares be converted into cash at any time, however, unlike stock that trades throughout the day, many mutual fund redemptions take place only at the end of each trading day. Taxes When a fund manager sells a security, a capital-gains tax is triggered. Investors who are concerned about the impact of taxes need to keep those concerns in mind when investing in mutual funds. Taxes can be mitigated by investing in tax-sensitive funds or by holding non-tax sensitive mutual funds in a tax-deferred account, such as a 401(k) or IRA. Evaluating Funds Researching and comparing funds can be difficult. Unlike stocks, mutual funds do not offer investors the opportunity to juxtapose the price to earnings (P/E) ratio, sales growth, earnings per share (EPS), or other important data. A mutual fund's net asset value can offer some basis for comparison, but given the diversity of portfolios, comparing the proverbial apples to apples can be difficult, even among funds with similar names or stated objectives. Only index funds tracking the same markets tend to be genuinely comparable.  Benefits of Investing in Mutual Funds Benefits of Mutual Funds Mutual Funds 89

Sales Executive (BFSI) VILT You can be spoilt for choice when it comes to choosing an investment product. There is a large variety of options available, right from fixed deposits, stocks, gold or real estate, insurance, public provident fund and mutual funds. Each product has its pros & cons and risks & rewards. However, if you are looking at an investment option that is professionally managed, diversified and offers a good risk-return trade off, mutual funds can be the right choice for you. Let us look at the advantages mutual funds offer that make them a wise investor's choice. Why investing in a Mutual Fund is a wise choice?  Diversification One of the biggest advantages mutual funds give you is that of immediate diversification. You may not have enough money to spread your investments in varied stocks and sectors, but by pooling money from thousands of similar investors, a mutual fund spreads your investment and hence, risk. It is highly unlikely that all the stocks will go down by the same proportion on any particular day. This ensures that you have not kept all your eggs in one basket and are safe from incurring huge losses from a single bad investment.  Professional Management Another big benefit of investing in mutual funds is the professional expertise it provides for your investments. Asset Management Companies (AMCs) provide qualified fund managers who, with the help of strong research teams and their own expertise, pick the best options to meet the fund's objective. This saves you time and the stress of constantly monitoring your investments and wondering if you made the right buy or sell decision. With mutual funds, you do not have to worry about market swings.  Affordability You may want to buy shares of large companies or want to invest in big companies in a particular sector of choice. However, you may not have the money to make a big investment. Mutual funds trade in big volumes, giving their investors the advantage of lower trading costs. Anyone can start an investment in a mutual fund through a Systematic Investment Plan (SIP) with as little as Rs 500. For example, say Pooja has just started her career and wishes to put aside atleast Rs 48,000 annually to go on an overseas vacation after three years. Instead of waiting to collect a lump sum of Rs 48,000 to kick start the investment, mutual funds allow Pooja to invest a small sum of Rs 4,000 every month, in the form of a SIP. This makes it affordable for Pooja and at the same time keeps her goal on track.  Liquidity 90

Sales Executive (BFSI) VILT You can easily move your money in and out of mutual fund investments. Investments in open- ended funds can be redeemed in part or as a whole any time to receive the current value of the units.  Tax Benefits There are various tax benefits available on your investments in mutual funds. For example, investments in Equity Linked Savings Schemes (ELSS) qualify for tax deductions under Section 80C of the Income Tax Act. There is no tax on capital gains on units of equity schemes held for more than 12 months. Schemes other than equity-oriented schemes are treated in the debt category for tax purposes. Short term capital gain is applicable for redemption of debt mutual funds within 3 years. Long term capital gain (more than 3 years) from debt mutual funds is taxable after claiming the benefit of Indexation.  Well Regulated In India, all mutual funds are regulated by the Securities and Exchange Board of India (SEBI). All mutual funds are required to follow transparent processes, as laid down by SEBI, protecting the interest of investors. Further, SEBI makes it compulsory for all mutual funds to disclose their portfolios every month.  Regulatory Framework of Mutual Fund SEBI Guidelines for Investing in Mutual Funds Investors looking to invest in mutual funds must be aware of rules and regulations that govern the Indian mutual fund sector – SEBI guidelines for mutual funds. In India, the SEBI MF Regulations of 1996 govern the working of mutual funds. These guidelines treat mutual funds like Public Trusts that fall under the Indian Trust Act of 1982. For handling mutual funds and ensuring accountability on the trustees, the guidelines specify a three-tier set up comprising of the fund managers, the investors, and the representatives. 1. More about SEBI The Securities and Exchange Board (SEBI) is the designated regulatory body for securities markets in India. The primary function of the board is to protect the interest of the investors in securities, promote and regulate the securities market. SEBI has laid the ground rules for investors to become aware of the functioning of the mutual funds by providing necessary information. They serve to simplify the broad spectrum of mutual fund schemes that may often seem quite confusing to the investors. The guidelines on the merger and consolidation of mutual fund schemes issued by SEBI are aimed at simplifying the process of comparing various mutual fund schemes that are on offer by fund houses. 91

Sales Executive (BFSI) VILT 2. The structure of mutual funds as per SEBI guidelines The SEBI guidelines define the guarantor as one who, in his capacity as an individual or in partnership with a different entity or entities, launches a mutual fund. The role of the guarantor is to generate revenues by putting together a mutual fund and handing it to the fund manager. A sponsor sets up the mutual funds as per the guidelines of the Indian Trust Act, 1882, for Public Trust. They are responsible for listing with the SEBI, having provisions for resource management and ensuring the functioning of the fund takes place as per the SEBI guidelines. The Trustee or Trust is established through a trust deed that is implemented by the sponsors of the funds and is accountable to all the investors of the mutual fund. The trustee company is regulated by the Indian Companies Act 1956, while the firm and the board members are overseen by the Indian Trust Act 1882. The investment management of the trust is done through an Asset Management Company, which is to be listed as per the regulations of Companies Act of 1956. 3. Role of SEBI in Mutual Fund Regulations As far as mutual funds are concerned, SEBI is the policymaker and also regulates the industry. It lays guidelines for mutual funds to safeguard the investors’ interest. Mutual funds are very distinct in terms of their investment strategy and asset allocation activities. This requires bringing about uniformity in the functioning of the mutual funds that may be similar in schemes. This will assist the investors in making investment decisions more clearly. The mutual funds have been categorized as follows to facilitate this Standardisation and bringing about uniformity in similar schemes: a. Equity Schemes b. Debt Schemes c. Hybrid Schemes d. Solution Oriented Schemes e. Other Schemes The categorization and rationalization of mutual funds into these five broad categories ensures that the mutual fund houses are only able to have one scheme in each sub-category, with some exceptions. The categorization helps in simplifying the selection of funds and works in the best interest of the investors by allowing them to evaluate their risk options before making decisions about investing in any scheme. Following this consolidation of schemes, the investors can take a more informed decision without much hassle or confusion. To fulfil this purpose, SEBI has come up with some guidelines to help the retail investors in their mutual funds’ investment decisions. 4. Key Highlights of SEBI guidelines for Mutual Funds 92

Sales Executive (BFSI) VILT a. The categorization of schemes into five groups – Equity, Debt, Hybrid, Solution-Oriented, and Others b. Large, mid and small-cap mutual funds have been defined clearly c. There is a lock-in period specified for solution-oriented schemes d. Permission of only one scheme in each category, except for Index Funds/Exchange-Traded Funds (ETF), Sectoral/Thematic Funds and Funds of Funds. 5. SEBI Guidelines to invest in Mutual Funds SEBI keeps in place the regulatory framework and guidelines that govern and regulate securities markets in the country. The guidelines for investors are listed below. Mutual funds present the most diversified form of investment options and therefore, may carry a certain amount of risk with it. Investors must be very clear in their assessment of their financial position and the risk-bearing capacity in the event of the poor performance of such schemes. Investors must, therefore, consider the risk appetite of an investment scheme. b) Before venturing into mutual fund investment, it is imperative for you as an investor to obtain detailed information about the mutual fund scheme option. Having the right information when required to make the necessary decision is the key to making suitable investments. This may help in choosing the right schemes, knowing the guidelines to follow and also be informed of the investors’ rights. c) Diversify your portfolios Diversification of portfolios allows investors to spread out their investments over various schemes, thereby increasing chances of maximizing profits or mitigating risk of potentially huge losses. Diversification is crucial to gaining a long-term and sustainable financial advantage. d) Avoid the clutter of portfolios Choosing the right portfolio of funds requires managing and monitoring these schemes individually with care. The investor must not clutter the portfolio and decide on the right number of schemes to hold so as to avoid overlap and be able to manage each one of them equally well. e) Assign a time dimension to the investment schemes The investors should assign a time frame to each scheme to encourage the financial growth of the plan. It may help in containing the volatility and fluctuations in the market if the plans are maintained stably over a period. 6. How will the new categorization Impact me as an investor This scheme is fashioned to help investors in the following ways: 93

Sales Executive (BFSI) VILT a. This may reduce the number of schemes on offer, thereby, making it comparatively easier to choose b. It may have some schemes get merged with the others c. It may cause your expense ratio to fall due to the higher AUM per scheme With the number of funds available and the changes brought about, it can get a little confusing for a new investor to keep up. This is where Clear Tax comes to your aid. Contact us for any queries you may have regarding the SEBI guidelines for investing in mutual funds.  Parties Involved in Mutual Fund What is a Mutual Fund? A Mutual Fund is an investment scheme that collects money from people and invests those funds in various assets. The money collected from various investors is usually invested in financial securities like shares and money-market instruments like certificate of deposit and bonds. Equity, debt and money-market instruments are broad classifications of asset classes. These investments may be made for the short term, medium term or long term. The kind of asset invested in also determines the risk factor of the funds. Structure of a Mutual Fund Mutual Funds in India are created as trusts. The parties involved are:  Sponsor – This is the one who sets up the Mutual Fund or trust. A sponsor is similar to a promoter of a company. The sponsor of a Mutual Fund appoints / sets up the board of trustees, the asset management company or fund house and appoints the custodian.  Board of trustees - The role of the trustees is to ensure that the interests of Mutual Fund holders are protected. The board of trustees also needs to ensure that the fund house complies with all the rules laid down by the Securities Exchange Board of India (SEBI). The board needs to have at least four independent directors. The trustees act according to the Trust Deed executed by the sponsor. The board sees to it that the fund house has established the required infrastructure and ensures that processes are in place to operate and manage the fund effectively. The board appoints the main members of the fund house including the board of directors and fund managers (scheme-wise). They also devise the fund house’s internal control and audit processes including the rules for enrolling and dealing with brokers / agents.  Asset Management Company (AMC)/Fund house - An AMC or fund house will act as the investment manager for the trust. It will be responsible for the day to day operations. This means that it is be taking care of all the money put in by investors. The AMC or fund house is appointed by the sponsor or the board of trustees. SEBI approval is required for setting up the AMC. 40% of its net worth should be contributed by the sponsor.  Custodian – A custodian is one who has custody of all the shares and securities invested in by the AMC. The custodian is responsible for the investment account of a fund house. Types of Mutual Fund schemes 94

Sales Executive (BFSI) VILT There are different types of Mutual Fund schemes and they are generally classified based on how they invest. However, all schemes are broadly classified as open-ended and close-ended schemes. Open-ended - Open-ended Mutual Fund schemes are open for investment at any point of time. They offer liquidity to investors since units can be bought and sold freely. Close-ended - Close-ended Mutual Fund schemes remain open only for a short period of time. Once the scheme is closed, fresh investments cannot be made. In order to provide liquidity, these units are listed on stock exchanges and investors can trade in them. Interval - Interval schemes are a variation of close-ended schemes that are reopened for redemption for a limited period of time during the scheme’s tenure. Investors are given the option to sell their units back to the fund during this period. Mutual Funds are then further categorized depending on the investment goal the fund is trying to fulfill. While some investors seek capital protection and safe returns, others have a strong risk appetite and look for high returns.  Growth funds or capital protection funds  Income funds – These schemes aim to provide income for the investors.  Liquid funds – These funds invest in fixed-income securities such as bonds and government securities.  Balanced funds – These funds invest both in equity as well as fixed-income securities to provide returns while trying to keep the risks to a minimum. Mutual Funds based on geography  Domestic funds – These invest in securities traded within the country.  International or foreign funds  Global funds Examples: Emerging market funds, Regional funds These funds are further classified based on the investments made. Equity funds  Large-cap / Mid-cap / Small-cap funds  Aggressive / growth funds  Value funds  Dividend-yield funds  Index funds  Diversified equity funds  Sectoral funds Debt funds / Fixed-income funds 95

Sales Executive (BFSI) VILT  Income funds  Gilt funds  Dynamic bond funds  Money market funds or liquid funds  Ultra short-term funds or treasury management funds  Floating-rate funds  Short-term / Medium-term income funds  Corporate bond funds  Fixed Maturity Plans (FMPs) (they are close-ended) Hybrid funds / Balanced funds  Monthly Income Plans (MIPs)  Capital Protection Funds (these are close-ended) Other categories include  Tax-saving funds  Pension funds  Fund of funds  Exchange Traded Funds (ETFs)  Leverage funds  Offer Document What is an Offer Document in Mutual Fund? What is an Offer Document in Mutual Fund? ‘Mutual funds sahi hai!’ It would not be an exaggeration if we say there would be no one who has not heard of this advertisement of late. Along with this, in every literature or advertisement about Mutual funds we see this standard disclaimer “Mutual Fund Investments are subject to market risk. Please read the offer document carefully before investing.” Though there are a lot of benefits of mutual funds, this one liner gives discomfort to a lot of us. It is true that Mutual fund investments are subject to market risk, in fact all security market investments are subject to such risk. Even deposits of banks are also not completely secure to that matter. Each investment comes with its own return and risk. All that we can do while investing is to know the quantum of risk and it should be a calculative risk that is measurable and bearable to one’s own risk appetite or risk tolerance. How do you know the risk in a Mutual Fund? 96

Sales Executive (BFSI) VILT Now, to know this we should look at the other part of the disclaimer which says ‘please read the offer document carefully before investing’. Yes, we all have heard this statement but haven’t seen these offer documents or know what it is. Here let us look at what are these offer documents and how do they help us in understanding the mutual fund scheme better. A better understanding of the offer document will help any investor to know the suitability of such scheme to his/her requirements and also the risks involved in it. What is Offer document? The first and foremost document of a mutual fund is standard scheme offer document. The purpose of a scheme offer document is to provide essential information about the scheme in a way that will assist investors in making informed decisions about whether to purchase the units being offered. These Offer document consists of two parts: 1. Scheme Information Document (SID). SID carries important information about the scheme(s) such as their investment objective, asset allocation pattern, investment strategies, risk involved, benchmark indices for respective scheme(s), who will manage the scheme(s), fees & expenses; amongst a host of others for making an informed investment decision. 2. Statement of Additional Information (SAI). SAI contains all statutory information of the Mutual Fund house. Both SID and SAI are prepared in a format prescribed by the security market regulator SEBI and submitted to it. The content of the document needs to flow in the sequence prescribed in the format. In addition, the mutual fund is permitted to add any disclosure which it feels is material for the investor. The other information in SID are dividends and distributions, inter scheme transfers, Associate transactions, borrowing by the mutual fund, NAV and Valuation of assets of the scheme, Redemption or repurchase, Accounting policies, Tax treatment, and Investors rights and services are other important aspects, What is Key Information Memorandum? The Key Information Memorandum or KIM is the abridged form of the scheme information document serving the cause of investors by mentioning the key sections of the offer document. This document sets forth the information, which a prospective investor ought to know before investing. There is a standard format prescribed by the market regulator SEBI for KIM also as investors may not be sophisticated in legal or financial matters it is advised by the regulator that care should therefore be taken to present the information in the offer document in simple language and in a clear, concise and easily understandable manner. The KIM carries the information like Asset Allocation Pattern, Risk Profile, Plans and Options, Applicable NAV, Minimum Application Amount/ Number of Units, Dispatch of Repurchase (Redemption) Request, Benchmark Index, Dividend Policy, Fund Name, Manager, Trustee among 97

Sales Executive (BFSI) VILT others. More over KIM needs to be updated at least once a year and as per SEBI regulations, every application form needs to be accompanied by the KIM. One should note that the regulator does not certify the accuracy or adequacy of this KIM. What is Rosko Meter in a Mutual Fund? The level of risk in mutual fund schemes is represented by a pictorial meter named “Risk meter” and this meter would appropriately depict the level of risk in any specific scheme. This has five different labels namely Low- principal at low risk, Moderately Low – principal at moderately low risk; Moderate – principal at moderate risk; Moderately High- principal at moderately high risk; High – principal at high risk. For enumeration, a scheme having moderate risk would be depicted as under: Takeaways It is in investors’ own interest to read these offer documents before investing. These documents are provided free of cost to all investors on request and also available on mutual fund websites. One can seek the advice of Investment adviser for more information on these and also to assess their risk appetite, tolerance and suitability of the mutual fund to their financial goals. Note: Some parts of this document are extracted from the regulations and guidelines of SEBI for the purpose of creating general awareness. What is a Mutual Fund Offer Document? It is a prospectus that details the investment objectives and strategies of a particular fund or group of funds, as well as the finer points of the fund's past performance, managers and financial information. You can obtain these documents from fund companies directly, through mail, e-mail or phone. You can also get them from a financial planner or advisor. All fund companies also provide copies of their ODs on their websites. 10 Most Important Things to Read in an Offer Document: 98

Sales Executive (BFSI) VILT Date of issue First, verify that you have received an up-to-date edition of the OD. An OD must be updated at least annually. Minimum investments Mutual funds differ both in the minimum initial investment required, and the minimum for subsequent investments. For example, equity funds may stipulate Rs 5000 while Institutional Premium Liquid Plans may stipulate Rs 10 crore as the minimum balance. Investment objectives The goal of each fund should be clearly defined from income, to long -term capital appreciation. The investors need to be sure the fund's objective matches their objective. Investment policies An OD will outline the general strategies the fund managers will implement. You'll learn what types of investments will be included, such as government bonds or common stock. The prospectus may also include information on minimum bond ratings and types of companies considered appropriate for a fund. Be sure to consider whether the fund offers adequate diversification. Risk factors Every investment involves some level of risk. In an OD, investors will find descriptions of the risks associated with investments in the fund. These help investors to refer to their own objectives and decide if the risk associated with the fund's investments matches their own risk appetite and tolerance. Since investors have varying degrees of risk tolerance, understanding the various types of risks in this section (eg credit risk, market risk, interest-rate risk etc.) is crucial. Investors must raw be familiar with what distinguishes the different kinds of risk, why they are associated with particular funds, and how they fit into the balance of risk in their overall portfolio. For example, a Post Office Monthly income plan assures an 8% monthly income payment for its 6 years tenure. A Mutual Fund MIP invests in a portfolio of 80% to 90% bonds and gilts and 10% to 20% of equities, to generate capital appreciation, which is passed on to customers as monthly income, subject to availability of distributable surplus. In 2004, a lot of mutual fund customers underestimated this market risk and were caught by surprise when the MIPs gave low/negative returns. Past Performance data ODs contain selected per-share data, including net asset value and total return for different time periods since the fund's inception. Performance data listed in an OD are based on standard formulas established by Sebi and enable investors to make comparisons with other funds. Investors should keep in mind the common disclaimer, \"past performance is not an indication of future performance\". They must read the historical performance of the fund critically, looking at both the 99