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How to manage your money?

This guide is mainly written for young people. Boys and girls, who just start earning know little about tax, mutual funds,
PPF etc. However, it can still be used by people who already know about money management too. It covers all the
basics in an easy to understand, simplified way!

If you know someone who has just started earning and will find this information useful, please do recommend it to
them.

Introduction
This guide is a little sad! When you get your first salary, the last thing on your mind is “investing” and “tax” and other
such issues. You probably want to use your salary to buy yourself something or spend the money on entertainment,
watching movies, partying etc. However, this guide is going to tell you that you need to manage your money. You can
enjoy yourself, but you also need to save and invest and use your money properly. So I guess the obvious question
is...

Why should you invest?

Yo u w i l l n o t h a v e t o w o r k !
You probably have heard the phrase “Let your money work for you!”. Just incase you do not understand what exactly
this means, let us explain. The whole idea of investing is that you create or buy an “asset”.
What is an asset?
An “asset” is something that generates money. Just to give you an example, if you buy a flat for 4 lakh and then rent it
out for Rs.3000 a month then you have created an asset. An “asset” that generates Rs.3000 a month.

However, this is just one type of asset. Assets are of many kinds. If you have a “copyright” or patent in your name, for
which you get paid a certain amount when anybody uses it, then that too is called an asset. If you own a small pay
phone from which you make just Rs.20 each day, then that too is called an asset!

The above given explanation is very crude, but that is the basics of investing. You want to invest the money you make
in assets. Assets that generate money. The idea is that once you invest your money in enough assets, you can stop
working. All your assets will make money for you. You can then use this money to enjoy life. Or you can use this
money to invest in more assets that generate more money! So all this gives us the phrase, “Let your money work for
you!” This is the main aim of investing. However, there are many other smaller aims of investing and we have
explained them to you next...

Investing for making the "big buys!"

If you are not married yet, then sooner or later you are probably going to get married. After that you will probably going
to go in for a house. After that you will probably go in for a vehicle. Then you might want to go for a long vacation.
Then you might want to buy a buy a bigger house. Then you might fall sick and have a big operation.

Why are we saying all this? These are events that occur in almost everyone’s lives. All of them are “big buys”! They
take up a huge amount of money. If after a few years you randomly decide to do one of these things, then arranging
the money for this suddenly will be a problem. If you have a salary of Rs.10-20 thousand and you have to arrange for
Rs.2.5 lakh next month, then will you be able to do so? Probably not.

You might say, that now-a-days, loans are easily available. I will just take a loan! I will just buy on credit! BAAAAD
IDEAA!! BAD IDEA!!!!
Why is taking a loan a bad idea?
Obvious reason: Assume you have to make a “big buy” of Rs.15 lakh (Like a house etc.) Now, when you take a loan
for making the purchase, you will not only have to pay the Rs.15 lakh. You will also have to pay the interest. So you
might end up paying Rs.18 lakh for something that actually costs you Rs.15 lakh. 3 lakh more!!!!

If for some reason you think that 3 lakh is a small amount and it is okay to waste it, think not only about the 3 lakh.
Think about the earning power of the 3 lakh. The 3 lakh can be invested in an asset that makes around Rs.2,000 each
month!

If you told you, “Would you like an extra Rs.2,000 each month for free, for doing nothing?” what will you say? I bet
most people will not throw it away. Then why throw away 3 lakh?

Besides this, the other problem with credit is that once you buy something on credit, you get into to habit of taking a lot
of things on credit. Now, this point is a little hard to appreciate. However, there are a lot of people out there who get
into the habit of buying everything on credit because credit makes it so easy for you to buy things. People love the
“Buy now. Pay Later!” idea. They get hooked to it.

There are people who buy a big house, a big car, a big T.V. etc. all on credit. Because of this, they have to pay their
monthly installments for all these items and their monthly installments alone take up half of their salary. The rest of
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their salary, is taken away by basic things like food and other necessities. If any part of the salary remains it goes into
the maintenance of the big TV, big house or the fuel for the big car.

These people can forget about investing and creating assets. They live a hand-to-mouth existence. If for some reason
they loose their job, or fall ill and are unable to work, then they will not be in the position to pay their monthly
installments and all their big T.V., big car, big house etc. will be taken away from them. In case they expire, they leave
the credit burden for their family to bare!

So, do you want to live this way? If you do not then “good financial planning” and “good investing” is the key! In case
you forgot the original pint, you need to invest so that you can make the “big buys” that you need to make!

I n v e s t i n g f o r T A X S AV I N G !
The major reason why a large number of young people invest is to save tax! In fact, thank God for tax. If tax did not
exist, the youth would never even think about investing!

Incase you do not know how this whole “tax saving” and investing thing works, let us explain that first.

You see the Govt. wants us to invest in certain things. Some of the things that the Govt. wants us to invest in are for
our own good. The other things are for the good of the nation. So to encourage people to invest their money in the
“these things” the Govt. says that, “If you invest your money in these things, you do not have to pay ‘income tax’ for
earning that money!”

Incase you are confused, I will just give you are very basic and crude explanation on how income tax is calculated and
paid. You see, “income tax” is all about your “income” i.e. the money you earn! You have to basically pay a portion of
what you earn to the Govt.

Suppose you do a job and you earn Rs.20,000 every month you will have to pay a part or a “percentage” of that
money to the Govt. What is the percentage that you have to pay? That depends on the “tax bracket” you fall in.

What is a tax bracket? You see, the Govt. feels that rich people can afford to give more money towards the
development of the country and poor people cannot give much. Also the really poor people cannot give anything at all
since they are struggling financially. So the Govt. has decided whether you are “very poor” or “poor” or “rich” or “very
rich” depending on how much income you make. If you fall in the “very rich” category than you have to pay a big
percentage of your money towards the county. If you fall in the “very poor” category you do not have to pay anything to
the country.

This is basically what tax brackets are. The Govt. has decided what percentage of your income you must pay as
“income tax” depending on how much you make or which “tax bracket” you fall in.

Now there is a legal way of paying less tax than what you are supposed to pay. And this way is though “investments”.
If you invest part of your income into Govt. bonds, infrastructure bonds, life insurance etc. then your income will
reduce and you will have to pay less to the Govt though income tax!

However, this is not true for any type of investment. It is true only for certain types of investments as stated by the
Govt. Also, if you invest your money in these tax saving things, it does not just “go away”! You actually create an
asset. An asset that produces money for your self. So, instead of loosing the earning power of the money by giving it
to the Govt. though income tax, you could use the money to create an asset and also save tax in the process.

Again, incase you lost the original point in all the explanation, invest your money to save tax!
What we have told you above, are just the very basics of saving tax. There is a lot more to learn! If you are interested,
we suggest you read the book "How to save income tax though tax planning?". You can get yourself the book from
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Inflation..and how it eats your money!

Inflation is an economic concept. What the cause of inflation is, is not important to us from the point of view of this
article. What is important to us is the effect of inflation!
The effect of inflation is the prices of everything going up over the years. A movie ticket was for a few paise in my
dad’s time. Now it is worth Rs.50. My dads first salary for the month was Rs.400 and over he years it has now become
Rs.75,000. This is what inflation is, the price of everything goes up. Because the price goes up, the salaries go up.
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If you really think about it, inflation makes the worth of money reduce. What you could buy in my dad’s time for
Rs.10, now a days you will not be able to buy for Rs.400 also. The worth of money has reduced! If this is still not clear
consider this, when my father was a kid, he used to get 50paise pocket money. He used to use this money to go and
watch a movie (At that time you could watch a movie for 50paise!)

Now, just for the sake of understanding assume that my dad decided in his childhood to save 50paise thinking, that
one day when he becomes big, he will go for a movie. Many years pass. The year now is 2006. My dad goes to the
theater and asks for a ticket. He offers the ticket booth guy at the theater 50paise and asks for a ticket. The ticket
booth guy says, “I am sorry sir, the ticket is worth Rs.50. You will not be able to even buy a “paw wada” with the
50paise!!”

The moral of the story is that, the worth of the 50paise reduced dramatically. 50paise could buy a whole lot when my
dad was a kid. Now 50paise can buy nothing. This is inflation.
What does this tell us?
Do not keep your money stagnant. If you just save money by putting it your safe it will loose value over time. If you
have Rs.1000 in your safe today and you keep it there for 10years or so, it will be worth a lot less after 10 years. If you
can buy something for Rs.1000 today, you will probably require Rs.1500 to buy it 10 years from now. So do not keep
money locked up in your safe. Always invest money. Always make your money grow!

Whatever you do, do not just lock your money up in your safe and keep it stagnant. If you do this, you will be loosing
money without even knowing it. The more money you keep stagnant the more money you will be loosing.

"The power of compounding!"

Compounding is a very interesting and powerful thing. It has great rewards in store for people who invest when they
are young. If you invest later in life you will not be able to make use of the great “power of compounding”!

Just to give you an example…assume that there are two people. Ram and Sham.

Ram invests Rs.5000 each month for 10 years from the time he became 25.

Sham invests Rs.5000 each month for “25 years” from the time he became “35”.

Note that Ram invested Rs.5000 monthly for only 10 years. Sham invested Rs.5000 monthly for 25 years! Now, who
do you think will have more money when they are 60? Think about it a little! Who do you think will have more money at
age 60?

Assuming that their money grows at 15% per year, at age 60 Ram will have Rs.4.6crores!!

Sham will have Rs.1.5 crores!!

A difference of Rs.3.1 crores!! Ha!!

Think about how foolish Sham has been. When he was young and 25 years of age, he had not got married yet. His
expenses were low. He had a lot of money extra each month. He would generally blow it off on parties! Later he got
married. His expenses grew! He had very little money to invest. Finally at the age of 35 when he again started to have
some financial control, he decided to start investing. Since his friend had stared earlier than him, he tried to make up
for it but investing for 25 years. (15 years more than Ram!) However, still he ended up loosing 3.1 crore!!

Don’t be a Sham! Don’t make this mistake.

If you are wondering how this can happen, you need to understand how compounding works. Suppose you invest
Rs.100 today. It grows at 15% compounded rate every year, then next year you will get Rs.115 i.e. Rs.100 + Rs.15.
Why Rs.15? Rs.15 is 15% of Rs.100!

Okay so now one year is passed. You have Rs.115. The next year you will get Rs.132. Why Rs.132? Rs.115 + Rs.17.
Why Rs.17 ? Because Rs.17 is 15% of Rs.115!

Now, try to use your imagination. Initially your money will grow at a slow rate. But once the money grows to a big
amount the rate of growth will be very very very high! So, basically you need a lot of time to reach a very very high
rate of growth. But once you reach the high growth rate then money will just start flowing! And if there is one thing the
youth have, it is time!

In fact, you should invest as fast as possible. If you are not earning yet, invest your pocket money!

Just to give you an idea, if you invest Rs.1 now. You let it grow for 30 years at 15% rate, at the end of 30 years you will
have Rs.67! So think of it this way. If you want a good amount of money after 30 years, invest as much money as you
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can invest right now. For every one rupee you invest you will have Rs.67, 30 years from now! So if you invest
Rs.5000 now, you will get Rs.3,35,000 30 years from now! So what are you waiting for. Invest the money now when
your expenses are low and you have the chance. You have time on your side!

I guess you probably now understand the need for investing. So, let us get right into it…

How to invest? - The basics!

Before we get into specific things that you should invest in, let us take a look at the general procedure of investing.
How you should view investments, what are “risk-profiles” etc. These are the basic concepts of investing that will guide
you though all your investments.

Step I: Setting Investment Objectives!

As we mentioned earlier, there are many reasons why you should invest. Some of them are “short” or “medium-term”
things like the “big buys” that you want to make. Some of them are more “long-term” like “you want to retire at 45” or
“you want to become a crorepati at 45” etc. Setting the objectives for an investment before making a particular
investment is the first step!

Just to give you an idea, let us take an example. Suppose there is a Mr.Raju and he wants to take his wife for a trip 5
years from now. Now, Mr.Raju has a elaborate trip planned for his wife. He calculated his expenses and it has come to
Rs.400,000. Raju is wise and he knows all the bad effects of taking a loan from the bank so he has decided to invest
some money every month so that 5 years from now he has Rs.400,000 in hand.

This is Raju’s investment objective. This is what Raju keeps in mind while investing. So Raju finally does the required
calculations and figures out that: If he invests only Rs.6,800 every month then after five years, if the money grows at
15% then he will have Rs.587,000. Raju thinks that this is perfect since he can afford to invest Rs.6800 each month.

This is how investments are done. Before you make any investment, you must first decide “why are you making that
particular investment?”. Then you will know how much money you need to accumulate and in how much time. Once
this is known, you can calculate backwards and you will know how much you need to invest each month to reach your
aim.

Don’t just make random investments. This generally gives you the feeling that you are investing a lot but later on you
will realize that it was not much since you invested in an unorganized manner! Before making any investment, decide
your investment objective. This means that you have to basically decide two things:
1. How much money you want to accumulate?
2. In how much time?

Step 2: What is your “risk-profile”?

In investments there is a relationship between “risks” and “returns”. The higher the risks the higher the returns. The
lower the risks the lower the returns. There are some investments you can make which will “double” your money within
a very short time. However, these investments are really “dicy” or “risky”. If they do not go as planned, you may end up
losing the money you invested.

For example, a friend of yours comes to you and says, “I have a great business plan! I want Rs.40,000 from you and
within 6 months I will give you Rs.80,000! Please help me out…” This might work, or it might fail badly. The risk
involved is high. However, the return of the investment is also quite high! A 100% rate of return in 6 months!

There are other investments that are very secure. They have very little or no risk involved in them. For example, if you
invest your money in a bank that offers a 6% interest rate, then irrespective of what happens, your money will grow at
the small rate of 6% each year.

So, basically, before you invest, you first need to check out what is the risk associated with the investment. Is it a risky
investment? Can you end up losing all the money you invested? Or is a safe or “sure-shot” investment?

Then you need to see your situation and your “investment objectives”! Can you handle the risk of the investment? Is it
crucial that the investment pays off for your objectives to be accomplished? Is the time in which your objective must
completed so low that you NEED to take up a risky investment with high returns?

Think wisely about this and your situation and your objectives! If you do not, you may end up losing a lot of money!
Think practically and realistically! We are not able to give you more practical information about this because everyone
has a different situation and different objectives and can take up a different amounts of risk.

Generally young people can take up more risk. They have time on their side! Even if something bad happens and the
risk causes them to loose some money, they can always recover it since they are young. Since young people can take
more risks, they can enjoy higher returns also. One more benefit of investing when you are young!
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Older people cannot take up so much risk! They do not have time on their hands. If they loose too much money, they
do not have that much earning power and they may never recover from the loss.

Next, when we talk about all the possible ways in which you can invest your money, we will also talk about the risk and
returns involved in each kind of investment!

Investing in Mutual Funds!

What are Mutual Funds?
Mutual funds are one of the most convenient way to invest! Mutual funds allow you to invest your money like an expert
without being an expert!

Basically, mutual funds are a way for you to outsource the whole “investing” headache to people who are experts at
investing. Simply put, you give the money you want to invest to people who are experts at investing. They will invest
your money and make it grow & for this service they charge you a small fee!
Why invest in mutual funds?
Good investing generally requires a good knowledge about the market, economics, world politics and a lot of
experience etc. Most people who want to invest their money, do not have the time to follow and learn all these things.
For them “Mutual Funds” are the best option. You do not have to worry about anything when investing in Mutual
Funds. You just have take out the money for investing. The Mutual Fund managers are people who will do all the work
for you and make your money grow!

The actual process of investing in mutual funds is also quite easy. You do not have to do anything except for write a
cheque and give it to the mutual fund company. You do not have the hassles of using a “broker” or a “demat” account
or anything.

Besides this, there are certain mutual funds that will “really” help you in your financial planning. There are certain
mutual funds that are designed to help you invest and accumulate money for your “big buys”! All in all, we highly
recommend that you use mutual funds for investing, as you are probably a new investor.

Mutual funds have some risk associated with them. But the risk is not very high. It is generally considered to be a
moderately safe investment. However, mutual funds can produce pretty good returns!

One of the best things about mutual funds is that they are “liquid”! What is liquid? To understand what “liquid” means,
let us try to understand what non-liquid investments are.

There are some investments that take some time period to “mature”. This means that once you invest the money in
the investment, you cannot withdraw it until the time period is up. Once the time period is up, then only will you be able
to withdraw the money you invested and the returns produced. These investments are non-liquid. If on the other hand,
you can withdraw the money invested and the returns at any point of time, then the investment is considered to be a
liquid investment.
Generally, it is good to try and put your money in liquid investments. This is because in case there is a sudden need
for money like an operation, an accident etc. you should not have to borrow money. You should have the money
available.

Mutual funds are very liquid investments. The process of re-claiming your money in most mutual funds will take a
maximum time of 2-3 days.

How to invest in mutual funds?

There are many different kinds of mutual funds. Instead of trying to figure out what is good for you what is bad for you
etc, you should get yourself a good mutual fund agent! You just call one of these agents up and tell them you invest in
mutual funds. They will help you out with everything that you need to know. You just have to tell them what kind of
“financial aims” you have and they will come up with a whole plan for you to reach your “financial aims”!
In case you do not know any “mutual fund agents”, check out this site: Karvy

You can ask for a mutual fund agent from Karvy though this form.

Assured Return Investments!

These investments that are 0% risk investments. Because they are 0% risk investments, they also give low returns.
The retunes are fixed and not very high! However, for people who cannot take too big risks, these are good
investments. Below, we have explained all your choices of assured return investments.
The possible choices for assured return investments are:
1. Fixed Deposits (FD's)
2. Public Provident Fund (PPF)
3. Employees Provident Fund (EPF)
4. National Savings Certificate (NSC)
5. Kisan Vikas Patra
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6. Post Office - Monthly Income Scheme
7. Post Office - Time Deposits
We have explained all of these in the next few pages!

Fixed Deposits (FD's)

FD’s are one of the oldest and most common methods of investing. Incase you do not know how it works, you have to
give the financial institution a certain sum of money for a certain fixed period of time. After that time period is over you
will get the original amount with some interest that you have earned for the time period you invested your money.
Just to give you an idea about the time periods and the interest rates you can earn, you can check this out. It is a link
to the ICICI Bank FD interest rate chart. All the major banks and other financial institutions also have different FD
offers.
FD’s are not very “liquid” investments. If you invest your money in FD’s, you will not be able to withdraw it until the FD
matures. Generally, if you need to remove your money before the maturity of the investment, you will be able to do so
but you will loose the interest that you were supposed to earn. There are some FD’s that allow you to claim your
interest every month or every 6 months etc. There are many different schemes with many different offers!
Besides this, if a particular interest rate is decided at the time of investing and the interest rate goes up while your
money is invested, you will not be able to enjoy the higher interest rate.
However, now-a-days the banks and the financial market is becoming very competitive. You need to check up on the
different types of FD schemes available before making any FD investments.
There are FD’s offered by non-financial institutions like companies etc. also. These are generally FD’s that will give
good rate of returns. They are called Company FD’s.
However, the risk involved is also moderately high. However, the companies try to get themselves an AAA rating
according to the specifications of the RBI. If a company has an AAA rating, then it can be considered to be a safe
investment.

How do I buy a company fixed deposit?

Company Fixed Deposits forms are available through various broking agencies or directly with the companies.
What is the minimum investment for a company fixed deposit?
Minimum investment in a Company Fixed deposit varies from company to company. Normally, the minimum
investment is Rs.5,000. For individual investors, there is no upper limit. In case of recurring deposits, the minimum
amount is normally Rs.100 per month.

What is the duration of the Company FD scheme?

Company Fixed Deposits have varying duration; they may vary from a minimum of 6 months to 5 years or even more.
To check out some companies and the rates that they give, you could check out this link. You can also use Bajaj
Capital to invest in these Company FD’s.

Fixed Deposits (FD's)

FD’s are one of the oldest and most common methods of investing. Incase you do not know how it works, you have to
give the financial institution a certain sum of money for a certain fixed period of time. After that time period is over you
will get the original amount with some interest that you have earned for the time period you invested your money.
Just to give you an idea about the time periods and the interest rates you can earn, you can check this out. It is a link
to the ICICI Bank FD interest rate chart. All the major banks and other financial institutions also have different FD
offers.
FD’s are not very “liquid” investments. If you invest your money in FD’s, you will not be able to withdraw it until the FD
matures. Generally, if you need to remove your money before the maturity of the investment, you will be able to do so
but you will loose the interest that you were supposed to earn. There are some FD’s that allow you to claim your
interest every month or every 6 months etc. There are many different schemes with many different offers!
Besides this, if a particular interest rate is decided at the time of investing and the interest rate goes up while your
money is invested, you will not be able to enjoy the higher interest rate.
However, now-a-days the banks and the financial market is becoming very competitive. You need to check up on the
different types of FD schemes available before making any FD investments.
There are FD’s offered by non-financial institutions like companies etc. also. These are generally FD’s that will give
good rate of returns. They are called Company FD’s.
However, the risk involved is also moderately high. However, the companies try to get themselves an AAA rating
according to the specifications of the RBI. If a company has an AAA rating, then it can be considered to be a safe
investment.

How do I buy a company fixed deposit?

Company Fixed Deposits forms are available through various broking agencies or directly with the companies.
What is the minimum investment for a company fixed deposit?
Minimum investment in a Company Fixed deposit varies from company to company. Normally, the minimum
investment is Rs.5,000. For individual investors, there is no upper limit. In case of recurring deposits, the minimum
amount is normally Rs.100 per month.
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What is the duration of the Company FD scheme?
Company Fixed Deposits have varying duration; they may vary from a minimum of 6 months to 5 years or even more.
To check out some companies and the rates that they give, you could check out this link. You can also use Bajaj
Capital to invest in these Company FD’s.

Employees Provident Fund (EPF)

The EPF program is a fund, providing money upon retirement, resignation or death, based on the accumulated
contributions plus interest.
In this scheme both the employer and the employee contribute 12% of annual income towards the fund. Of this 24%
contribution, 8.33% is given towards a family pension plan. The remaining portion (15.67%) grows at a rate of 9.5%
per annum. This return is guaranteed. Also, investments up to a maximum of Rs 70,000 per annum are not taxed!
Withdrawals from EPF is allowed under certain special circumstances like buying a house, children's wedding, etc. If
you quit your job and provide a declaration that you do not intend to work for the next six months you can withdraw
your EPF.
How to invest in EPF?
This is generally done though your company if you are an employee. You need to find out from your company!

National Savings Certificate (NSC)!

NSC is an assured return scheme and provides for tax saving too! Returns are at 8% for a duration of only 6 years,
which is relatively smaller compared to other small saving schemes. Here, investors are required to make a single
deposit and the interest is returned along with the principal amount on maturity.
However, NSC is not at all liquid, as premature withdrawals can be done under specific circumstances only, such as
death of the holder, forfeit by the pledgee or under court's order.
NSC investors enjoy tax saving benefits. The interest earner is eligible for tax saving up to a maximum limit of Rs
12,000.
Thus, NSC is an ideal investment for those investors who are looking at tax benefits on a longer-term basis and are
not too bothered about liquidity.
How do I invest in National Savings Schemes?
NSC application forms are available at all post-offices.
What is the minimum investment and range of investment in NSC?
NSCs are issued in denominations of Rs.100, Rs.500, Rs.1,000, Rs.5,000 and Rs.10,000. There is no upper limit on
investment in NSCs.

Kisan Vikas Patra (KVP)

Want to double your investments in less than nine years? KVP is for you! But there's a catch. The scheme, which
offers to double your money in "eight years and seven months", offers NO Tax benefits!
One can exit the scheme any time after 2.5 years from the investment date, though investors will have to bear the loss
of interest for the invested time period.
Though KVP is not meant for regular income, it is a safe avenue of investment for those without pressing tax
concerns. Liquidity is also reasonably higher here.
How do I invest in Kisan Vikas Patra?
You can buy KVP by filling up the appropriate application form available at post offices across the country.

What is the minimum investment and range of investment in KVP?

The minimum investment in KVP is Rs.100. Certificates are available in denominations of Rs.100, Rs.500, Rs.1,000,
Rs.5,000, Rs.10,000 and Rs.50,000. The denomination of Rs.50,000 is sold through head post offices only. There is
no limit on holding of these certificates. Any number of certificates can be purchased. A KVP is sold at face value; the
maturity value is printed on the Certificate.

Post Office - Monthly Income Scheme (MIS)!

Post office monthly income schemes provide a monthly income at 8 per cent per annum. On completion of six years, a
10 per cent bonus on the principal sum is provided. The scheme offers better liquidity, with investors having an exit
option after one year from the investment date.
Unfortunately, an exit after one year would also lead to a loss of 5% of the amount invested. While there is no loss of
interest earnings, the loss of principal can be significant if the amount invested is high.
Investors have to wait for a three-year period to withdraw from the scheme without penalty. The minimum investment
for a single and joint account is Rs.6000, while the maximum limit is Rs.300,000 for a single account and Rs.600,000
for a joint account.
In short, it is suitable for people who wish to invest a lump-sum amount initially and earn interest on a monthly basis.
How do I invest in a Post Office Monthly Income Scheme?
You can buy a post office MIS at any post-office in India.
Post office - Time Deposits!
Post office time deposits are available for periods ranging from 1 year to 5 years. The current rate for a one-year
deposit is 6.25%.
 8
Interest payments are made annually. Investors have an exit option within six months without receiving any interest.
There is a one-year lock-in for exit with interest. A penalty of 2 per cent is deducted from the relevant rate in case of
premature withdrawals.
Interest income from this scheme is eligible for tax benefits. So if you are a short to medium-term investor looking for
an annual interest income along with flexible investment tenure, time deposits are suitable for you.
How do I invest in a Time Deposit?
A Time Deposit account can be opened at any post-office.

W hat is the minimum investment for a Time Deposit?

The minimum investment in a Time Deposit could be as low as Rs.50. There is no upper limit on investment.

Insurance..Why take LIFE insurance?

Life Insurance is bought by almost everyone. And most people buy it for one core reason – to save tax! But this should
not be the only reason to buy insurance! Here we have explained some of the reasons why life insurance is a VERY
important part of personal money management!
Passing away early
One is never sure about life. We often come across people claiming that nothing is going to happen to them; that they
are too young to pass away. But do they really know what the future holds for them? Just read newspaper headlines
about the recent Tsunami, the earthquake, bomb blasts etc. that took place and such calamities to understand how the
future can be unpredictable.
Individuals need to insure themselves to secure the future of those who are dependant on them; especially if they
happen to be to only earners in thire family. You wouldn’t want your family to go through hardships or rely on
others/relatives, etc. This, in fact, is the MAIN reason why one should buy an insurance policy!

Living too long

Advances in the field of medicine have grown by leaps and bounds over the past few decades. Due to this, life
expectancies have gone up. This causes another problem for individuals. It is generally observed that individuals who
tend to live way beyond their earning years like say, till the age of 85 or 90, usually face a problem coming to terms
with increasing costs of living. Also take into account the increase in medical expenses!
Insurance, if bought at the right time for the right amount provides the required money in such times. Individuals could
opt for a pension plan offered by insurance companies, which suits their needs in terms of income, retirement age
and expenses post-retirement. Such plans provide an "annuity", which means that individuals keep getting a fixed sum
every month/year after they have retired.

Painful existence
Maybe an individual has planned well during his earning years to secure himself financially. He has created assets in
such a way that he has a comfortable monthly income to support his family expenditure.
But what if an individual were to have a health problem afflicting him or his spouse? What if the treatment were to cost
him a sum beyond his financial capacity? Here again, life insurance can help you out in two ways. One, by way of a
"medical rider" that provides for money in case of any medical emergencies! These riders are taken along with the life
insurance plan and help cover the medical expenses.
And secondly by allowing the individual to surrender the insurance policy. Of course this should be done only in case
of an urgent need like a serious health problem. Surrendering the policy will help in the generation of a lumpsum
amount that can be used for covering the high cost of medical expenses.

Ta x b e n e f i t s
Life insurance has always been bought more for tax benefits than to insure human life. But the role of life insurance in
an individual’s "tax planning" cannot, in any way, be undermined.
Individuals can now invest upto Rs.100,000 in insurance premium to avail of a deduction from taxable income.
Now that the extreme need for Life Insurance is understood, you must get your self some life insurance. If you do not
do it for your self or if you do not even want to do it to save tax, do it for your family! If you have people who depend
financially on you, you MUST MUST MUST get life insurance!
There are many different Life Insurance Companies and many different life insurance plans. It is best to get your self a
life insurance agent instead of deciding which plan to go in for yourself!
In this article we have talked about all the basics of money management. We have not talked about more risky
investments like stocks etc. We have just talked about safe investment options that anyone can use. To know about
stocks and how to make money in the stock market, you could check out our article: How to make money in the stock
market?
Best Of Luck!
Jai Hind.
How to make money in the stock market?
Inroduction
 9
This article is a COMPLETE guide to the basics of making money in the stock market! If you are considering
investing in the stock market, you MUST read this article! We have explained all the concepts and talked about all the
"myths" that people have about the stock market!
What are stocks? Definition:
Plain and simple, a “stock” is a share in the ownership of a company.

A stock represents a claim on the company's assets and earnings. As you acquire more stocks, your ownership stake
in the company becomes greater.

Note: Some times different words like shares, equity, stocks etc. are used. All these words mean the same thing.

So what does ownership of a company give you?

Holding a company's stock means that you are one of the many owners (shareholders) of a company and, as such,
you have a claim to everything the company owns.

This means that technically you own a tiny little piece of all the furniture, every trademark, and every contract of the
company. As an owner, you are entitled to your share of the company's earnings as well.

These earnings will be given to you. These earnings are called “dividends” and are given to the shareholders from
time to time.

A stock is represented by a "stock certificate". This is a piece of paper that is proof of your ownership. However, now-
a-days you could also have a “demat” account. This means that there will be no “stock certificates”. Everything will be
done though the computer electronically. Selling and buying stocks can be done just by a few clicks.

Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business.
Instead, “one vote per share” to elect the board of directors of the company at annual meetings is all you can do. For
instance, being a Microsoft shareholder doesn't mean you can call up Bill Gates and tell him how you think the
company should be run.

The management of the company is supposed to increase the value of the firm for shareholders. If this doesn't
happen, the shareholders can vote to have the management removed. In reality, individual investors like you and I
don't own enough shares to have a material influence on the company. It's really the big boys like large institutional
investors and billionaire entrepreneurs who make the decisions.

For ordinary shareholders, not being able to manage the company isn't such a big deal. After all, the idea is that you
don't want to have to work to make money, right? The importance of being a shareholder is that you are entitled to a
portion of the company’s profits and have a claim on assets.

Profits are sometimes paid out in the form of dividends as mentioned earlier. The more shares you own, the larger the
portion of the profits you get. Your claim on assets is only relevant if a company goes bankrupt. In case of liquidation,
you'll receive what's left after all the creditors have been paid.

Another extremely important feature of stock is "limited liability", which means that, as an owner of a stock, you are
"not personally liable" if the company is not able to pay its debts.

In other legal structures such as partnerships, if the partnership firm goes bankrupt the creditors can come after the
partners “personally” and sell off their house, car, furniture, etc. To understand all this in more detail you could read our
“How to incorporate?” article.

Owning stock means that, no matter what happens to the company, the maximum value you can lose is the value of
your stocks. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal
assets.
Why would the founders share the profits with thousands of people when they could keep profits to themselves? This
is the obvious question that comes up next. This what the next section is all about!
Why does a company issue stocks?
Why would the founders share the profits with thousands of people when they could keep profits to themselves? The
reason is that at some point every company needs to "raise money". To do this, companies can either borrow it from
somebody or raise it by selling part of the company, which is known as issuing stock.

A company can borrow by taking a loan from a bank or by issuing bonds. Both methods come under "debt financing".
On the other hand, issuing stock is called “equity financing”. Issuing stock is advantageous for the company because it
does not require the company to pay back the money or make interest payments along the way.

All that the shareholders get in return for their money is the hope that the shares will someday be worth more than
what they paid for them. The first sale of a stock, which is issued by the private company itself, is called the initial
 10
public offering (IPO).

It is important that you understand the distinction between a company financing through debt and financing through
equity. When you buy a debt investment such as a bond, you are guaranteed the return of your money (the principal)
along with promised interest payments.

This isn't the case with an equity investment. By becoming an owner, you assume the risk of the company not being
successful - just as a small business owner isn't guaranteed a return, neither is a shareholder. Shareholders earn a lot
if a company is successful, but they also stand to lose their entire investment if the company isn't successful.

It’s a tricky game!

Note that: There are no guarantees when it comes to individual stocks. Some companies pay out dividends, but many
others do not. And there is no obligation to pay out dividends. Without dividends, an investor can make money on a
stock only through its appreciation of the stock price in the open market.

On the downside, any stock may go bankrupt, in which case your investment is worth nothing.
Having understood this, we now want to know what makes stock prices rise and fall? If we know this, we will know
which stocks to buy. In the next section we will try to understand what makes stock prices go up and down.
What makes stock prices go "up" and "down"?
Stock prices change every day because of market forces. By this we mean that stock prices change because of
“supply and demand”. If more people want to buy a stock (demand) than sell it (supply), then the price moves up!

Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the
price would fall. (Basics of economics!)

Understanding supply and demand is easy. What is difficult to understand is what makes people like a particular stock
and dislike another stock. If you understand this, you will know what people are buying and what people are selling. If
you know this you will know what prices go up and what prices go down!

To figure out the likes and dislikes of people, you have to figure out what news is positive for a company and what
news is negative and how any news about a company will be interpreted by the people.

The most important factor that affects the value of a company is its earnings. Earnings are the profit a company
makes, and in the long run no company can survive without them. It makes sense when you think about it. If a
company never makes money, it isn't going to stay in business. Public companies are required to report their earnings
four times a year (once each quarter).

Dalal Street watches with great attention at these times, which are referred to as earnings seasons. The reason
behind this is that analysts base their future value of a company on their earnings projection.
If a company's results are better than expected, the price jumps up. If a company's results disappoint and are worse
than expected, then the price will fall.

Of course, it's not just earnings that can change the feeling people have about a stock. It would be a rather simple
world if this were the case! During the “dotcom bubble”, for example, the stock price of dozens of internet companies
rose without ever making even the smallest profit. As we all know, these high stock prices did not hold, and most
internet companies saw their values shrink to a fraction of their highs. Still, this fact demonstrates that there are
factors other than current earnings that influence stocks.

So, what are "all the factors" that affect the stocks price? The best answer is that nobody really knows for sure. Some
believe that it isn't possible to predict how stock prices will change, while others think that by drawing charts and
looking at past price movements, you can determine when to buy and sell. The only thing we do know is that stocks
are volatile and can change in price very very rapidly.

Just remember this: At the most fundamental level, supply and demand in the market determines stock price.

There are many types of techniques and methods that investors use to figure out whether a stock price will go up or
down! We will try to give you an introduction to these techniques in this article.
But before we go into the concepts of stocks picking, and the techiques of analysis, let us understand one last basic
thing....
What are the Sensex & the Nifty?
The Sensex is an "index". What is an index? An index is basically an indicator. It gives you a general idea about
whether most of the stocks have gone up or most of the stocks have gone down.

The Sensex is an indicator of all the major companies of the BSE.

The Nifty is an indicator of all the major companies of the NSE.

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If the Sensex goes up, it means that the prices of the stocks of most of the major companies on the BSE have gone
up. If the Sensex goes down, this tells you that the stock price of most of the major stocks on the BSE have gone
down.

Just like the Sensex represents the top stocks of the BSE, the Nifty represents the top stocks of the NSE.

Just in case you are confused, the BSE, is the Bombay Stock Exchange and the NSE is the National Stock Exchange.
The BSE is situated at Bombay and the NSE is situated at Delhi. These are the major stock exchanges in the country.
There are other stock exchanges like the Calcutta Stock Exchange etc. but they are not as popular as the BSE and
the NSE.Most of the stock trading in the country is done though the BSE & the NSE.

Besides Sensex and the Nifty there are many other indexes. There is an index that gives you an idea about whether
the mid-cap stocks go up and down. This is called the “BSE Mid-cap Index”. There are many other types of indexes.

There is an index for the metal stocks. There is an index for the FMCG stocks. There is an index for the automobile
stocks etc. If you are interested in knowing how the SENSEX is actually calculated...you must check-out our "How to
calculate BSE SENSEX?" article!
But, before we go ahead and try to understand "How to make money in the stock market?" you MUST read the next
page....
3 important things you must know and follow as an new investor!
You need to KNOW some “unforgettable basics” before you enter the world of investing in stocks. The stock market is
a field dominated by savvy investors who know the ins-and-outs of the market. For people who are not “on the inside”,
the stock market can be a VERY dangerous place. :

Don't even consider "tips" that tell you about "hot stocks". Consider the source: There are many people in the market
who put in all their time and effort in promoting certain stocks. They do this because they have their money invested in
those stocks. If they can get enough people to buy the stock and they can get the stock price to rise, they will sell the
stock for a huge price, the stock price will crash and they will walk off to promote another stock.

Always use your own brain: It's extremely important. You must always use your own brain. Relying on the advice of
others, no matter how well intentioned it may be, is almost always a complete disaster. Make sure you dig in and really
examine the "facts about the companies" before you invest. Ignore press releases which have very little substance,
and rely on "hype" to tell the company's story.

And finally the most important tip!!!

Only invest money you can afford to lose!! Sure this is a basic point, but many many people miss it. You should only
invest money that you can honestly afford to lose!! Everyone enters into investments with the idea of earning big
profits, but in many cases, this never works. (Especially if you are new to investing in the stock market!)

Please understand that the above tips are tips for beginners. Once you really get into the stock market you do not
need to follow these rules anymore. But if you are a new investor, you MUST follow these rules. They are for your own
safety.

But then again, nothing comes free. Everything has a price. You will have to loose some money, make some bad
decisions and then only will you really understand the market. You cannot understand the market by just looking at it
from far. By following these rules, you will basically not loose too much!
Stock Picking - Which stocks to buy?
Having understood all the basics of the stock market and the risk involved, now we will go into stock picking and how
to pick the right stock. Before picking the right stock you need to do some analysis.

There are two major types of analysis:

1. Fundamental Analysis
2. Technical Analysis

Fundamental analysis is the analysis of a stock on the basis of core financial and economic analysis to predict the
movement of stocks price.

On the other hand, technical analysis is the study of prices and volume, for forecasting of future stock price or financial
price movements.

Simply put, fundamental analysis looks at the actual company and tries to figure out what the company price is going
to be like in the future. On the other hand technical analysis look at the stocks chart, peoples buying behavior etc. to
try and figure out what the stock price is going to be like in the future.

In this article we will go into the basics of “fundamental analysis”. Technical analysis is a little more complicated. It is
 12
much more of an "art" than a science. It depends more on experience and involves some statistics and
mathematics, so explaining technical analysis is out of the scope of this article.
The Basics of Fundamental Analysis
Fundamental Analysis Definition
Fundamental analysis is a stock valuation method that uses financial and economic analysis to predict the movement
of stock prices.

The fundamental information that is analyzed can include a company's financial reports, and non-financial information
such as estimates of the growth of demand for products sold by the company, industry comparisons, and economy-
wide changes, changes in government policies etc..
General Strategy
To a fundamentalist, the market price of a stock tends to move towards it's “real value” or “intrinsic value”. If the
“intrinsic/real value” of a stock is above the current market price, the investor would purchase the stock because he
knows that the stock price would rise and move towards its “intrinsic or real value”

If the intrinsic value of a stock was below the market price, the investor would sell the stock because he knows that
the stock price is going to fall and come closer to its intrinsic value.

All this seems simple. Now the next obvious question is how do you find out what the intrinsic value of a company is?
Once you know this, you will be able to compare this price to the market price of the company and decide whether you
want to buy it (or sell it if you already own that stock).

To start finding out the intrinsic value, the fundamentalist analyzer makes an examination of the current and future
overall health of the economy as a whole.

After you analyzed the overall economy, you have to analyze firm you are interested in. You should analyze factors
that give the firm a competitive advantage in it’s sector such as management experience, history of performance,
growth potential, low cost producer, brand name etc. Find out as much as possible about the company and their
products.

Do they have any “core competency” or “fundamental strength” that puts them ahead of all the other competing firms?

What advantage do they have over their competing firms?

Do they have a strong market presence and market share?

Or do they constantly have to employ a large part of their profits and resources in marketing and finding new
customers and fighting for market share?

After you understand the company & what they do, how they relate to the market and their customers, you will be in a
much better position to decide whether the price of the companies stock is going to go up or down.

Having understood the basics of fundamental analysis, let us go into some more details.

When investing in the stocks, we want the price of our stock to rise. Not only do we want our stock price to rise, we
want it to rise FAST! So the challenge is to figure out: which stock prices are going to rise fast?

Some stocks are cheap and some are costly. Some are worth Rs.500 and some are even worth 50paise. But the price
of the stock is not important. The price of the stock does not make a stock good to buy. What is important is how much
the price of the stock is likely to rise.

If you invest Rs.500 in one stock of Rs.500 and the price goes up to Rs.540 you will make Rs.40. However, if you
invest Rs.500 in a 50paise stock, you will have 1000 stocks. If the price of the stock goes up from 50paise to Rs.1,
then the Rs.500 you invested is now Rs.1000. You made a profit of Rs.500.

If you understand this, you can see that the price of the stock is not important. What is important is the rise in the
stock’s price. More specifically the “percentage” rise in the stock price is important.

If the Rs.500 stock becomes worth Rs.540, then that is a 8% rise. This 8% rise only makes us Rs.40. On the other
hand when we invest the same Rs.500 in the 50paise stock and the stock price goes up to Rs.1, it is a 100% rise as
the stock price has doubled. This 100% rise makes us Rs.500.

The point is that when picking a company, we are interested in a company whose stock price will rise by a large
percentage.

Please note: Looking at the above paragraphs, it may seem like a good idea to buy all the really cheap 50paise and
Rs.1 stocks hoping that their price will rise by 100% or more. This sounds good, but it can also be really really bad
 13
some times! These really small stocks are very volatile and unless you know what you are doing, do NOT get into
them.

However, the point to be noted is that we are interested in stocks that will have the highest % rise in the stock price.
Now the question is, how do you compare stocks. How do you compare a stock worth Rs.500 to a stock worth
50paise and figure out which one will have a higher percentage rise.
How do you compare two companies that are in different fields and different industries? How do you know which one
is fundamentally strong and which one is week?

If you try to compare two companies in different industries and different customers it is like comparing apples and
elephants. There is no way to compare them!
So fundamental analysts use different tools and ratios to compare all sorts of companies no matter what business they
are in or what they do!

Next let us get into the tools and ratios that tell us about the companies and their comparison....
Earnings per share (EPS) ratio & what it means!
Even comparing the earnings of one company to another really doesn’t make any sense, if you think about it. Earnings
will tell you nothing about how many shares the company has. Because you do not know how many shares a
company has, you do not know how many parts that companies earnings have to be divided into. If the company has
more shares, the earnings will be divided into more parts.

For example, companies A and B both earn Rs.100, but company A has 10 shares outstanding, so each share holder
has in effect earned Rs.10.

On the other hand, if company B has 50 shares outstanding and they too have earned Rs.100 then each shareholder
has earned Rs.2. So you see it is important to know what is the total number of outstanding shares are as well as the
earnings.

Thus it makes more sense to look at earnings per share (EPS), as a comparison tool. You calculate earnings per
share by taking the net earnings and divide by the outstanding shares.

EPS = Net Earnings / Outstanding Shares

So looking at the EPS ratio, you should go buy Company A with an EPS of 10, right? EPS is not the only basis of
comparing two companies, but it is one of the methods used.

Note that there are three types of EPS numbers:

• Trailing EPS – last year’s numbers and the only actual EPS
• Current EPS – this year’s numbers, which are still projections
• Forward EPS – future numbers, which are obviously projections
EPS doesn’t tell you whether it’s a good stock to buy or what the market thinks of it. For that information, we need to
look at some other ratios next....
Price to earning (P/E) ratio & what it means?
If there is one number that people look at than more any other number, it is the “Price to Earning Ratio (P/E)”. The P/E
is a ratio that investors throw around with confidence as if it told the complete story. Of course, it doesn’t tell the whole
story (if it did, we wouldn’t need all the other numbers.)

The P/E looks at the relationship between the stock price and the company’s earnings. The P/E is the most popular
stock analysis ratio, although it is not the only one you should consider.

You calculate the P/E by taking the share price and dividing it by the company’s EPS (Earnings Per Share that we saw
above)

P/E = Stock Price / EPS

For example: A company with a share price of Rs.40 and an EPS of 8 would have a P/E of: (40 / 8) = 5

What does P/E tell you?

Some investors read a high P/E as an “overpriced stock”.

However, it can also indicate the market has high hopes for this stock’s future and has bid up the price.

Conversely, a low P/E may indicate a “vote of no confidence” by the market or it could mean that the market has just
overlooked the stock. Many investors made their fortunes spotting these overlooked but fundamentally strong stocks
before the rest of the market discovered their true worth.
 14
In conclusion, the P/E tells you what the market thinks of a stock. It tells you whether the market likes or dislikes the
stock. If things are vague and unclear to you, do not worry. The next ratio will make everything you read till now make
sense..
Price to earning (P/E) ratio & what it means?
If there is one number that people look at than more any other number, it is the “Price to Earning Ratio (P/E)”. The P/E
is a ratio that investors throw around with confidence as if it told the complete story. Of course, it doesn’t tell the whole
story (if it did, we wouldn’t need all the other numbers.)

The P/E looks at the relationship between the stock price and the company’s earnings. The P/E is the most popular
stock analysis ratio, although it is not the only one you should consider.

You calculate the P/E by taking the share price and dividing it by the company’s EPS (Earnings Per Share that we saw
above)

P/E = Stock Price / EPS

For example: A company with a share price of Rs.40 and an EPS of 8 would have a P/E of: (40 / 8) = 5

What does P/E tell you?

Some investors read a high P/E as an “overpriced stock”.

However, it can also indicate the market has high hopes for this stock’s future and has bid up the price.

Conversely, a low P/E may indicate a “vote of no confidence” by the market or it could mean that the market has just
overlooked the stock. Many investors made their fortunes spotting these overlooked but fundamentally strong stocks
before the rest of the market discovered their true worth.

In conclusion, the P/E tells you what the market thinks of a stock. It tells you whether the market likes or dislikes the
stock. If things are vague and unclear to you, do not worry. The next ratio will make everything you read till now make
sense..
PEG (Price to future growth ratio!) and what it tells you!
The market is usually more concerned about the future than the present, it is always looking for some way to figure
out what is going to happen in the companies future.

A ratio that will help you look at future earnings growth is called the PEG ratio.

You calculate the PEG by taking the P/E and dividing it by the projected growth in earnings.

PEG = (P/E) / (projected growth in earnings)

For example, a stock with a P/E of 30 and projected earning growth next year of 15% would have a PEG of 30 / 15 =
2.

What does the “2” mean?

Technically speaking: The lower the PEG number, the less you pay for each unit of future earnings growth. So even a
stock with a high P/E, but high projected earning growth may be a good value.
So, to put it very simply, we are interested in stocks with a low PEG value.

Just for the sake of understanding, consider this situation, you have a stock with a low P/E. Since the stock is has a
low P/E, you start do wonder why the stock has a low P/E. Is it that the stock market does not like the stock? Or is it
that the stock market has overlooked a stock that is actually fundamentally very strong and of good value?

To figure this out, you look at the PEG ratio. Now, if the PEG ratio is big (or close to the P/E ratio), you can understand
that this is probably because the “projected growth earnings” are low. This is the kind of stock that the stock market
thinks is of not much value.

On the other hand, if the PEG ratio is small (or very small as compared to the P/E ratio, then you know that it is a
valuable stock) you know that the projected earnings must be high. You know that this is the kind of fundamentally
strong stock that the market has overlooked for some reason.

Important note: You must understand that the PEG ratio relies on the projected % earnings. These earnings are not
always accurate and so the PEG ratio is not always accurate.

Having understood these basic three ratios, you probably have started to understand how these ratios help you
understand a stock and what is valuable and what is not.
 15
In the next section we shall look at some of the things that every investor must know about. Something that
SILENTLY eats into the profits of each and every investor and how to beat it...
"Inflation" & how it eats your money silently & affects your investments!
Inflation, is an economic concept. What the cause of inflation is, is not important to us from the point of view of this
article. What is important to us is the effect of inflation! The effect of inflation is the prices of everything going up over
the years.
A movie ticket was for a few paise in my dad’s time. Now it is worth Rs.50. My dads first salary for the month was
Rs.400 and over he years it has now become Rs.75,000. This is what inflation is, the price of everything goes up.
Because the price goes up, the salaries go up.

If you really thing about it, inflation makes the worth of money reduce. What you could buy in my dad’s time for Rs.10,
now a days you will not be able to buy for Rs.400 also. The worth of money has reduced! If this is still not clear
consider this, when my father was a kid, he used to get 50paise pocket money. He used to use this money to go and
watch a movie (At that time you could watch a movie for 50paise!)

Now, just for the sake of understanding assume that my dad decided in his childhood to save 50paise thinking, that
one day when he becomes big, he will go for a movie. Many years pass. The year now is 2006. My dad goes to the
theater and asks for a ticket. He offers the ticket-booth-guy at the theater 50paise and asks for a ticket. The ticket
booth guy says, “I am sorry sir, the ticket is worth Rs.50. You will not be able to even buy a “paan” with the 50paise!!”

The moral of the story is that, the worth of the 50paise reduced dramatically. 50paise could buy a whole lot when my
dad was a kid. Now, 50paise can buy nothing. This is inflation. This tells us two important things.

Firstly: Do not keep your money stagnant. If you just save money by putting it your safe it will loose value over time. If
you have Rs.1000 in your safe today and you keep it there for 10years or so, it will be worth a lot less after 10 years. If
you can buy something for Rs.1000 today, you will probably require Rs.1500 to buy it 10 years from now. So do not
keep money locked up in your safe.
Always invest money.
If you can’t think where to invest your money, then put it in a bank. Let it grow by gaining interest. But whatever you
do, do not just lock your money up in your safe and keep it stagnant. If you do this, you will be loosing money without
even knowing it. The more money you keep stagnant the more money you will be loosing.

Secondly: When investing, you have to make sure that the rate of return on your investment is higher than the rate of
inflation.

What is the rate of inflation?

As we said earlier, the prices of everything goes up over time and this phenomenon is called inflation. The question is:
By how much do the prices go up? At what rate do the prices do up?

The rate at which the prices of everything go up is called the "rate of inflation". For example, if the price of something
is Rs.100 this year and next year the price becomes approximately Rs.104 then the rate of inflation is 4%. If the price
of something is Rs.80 then after a year with a rate of inflation of 4% the price go up to (80 x 1.04) = 83.2

So, when you make an investment, make sure that your rate of return on the investment is higher than the rate of
inflation in your country. In our county India, for the year 2005-2006 the rate of inflation was 4% (Which is really low
and amazing!). This rate keeps changing every year. The finance minister generally gives the official statement on the
inflation rate of the country for a particular year.

What is the rate of return?

The rate of return is how much you make on an investment. Suppose you invest Rs.100 in the market and over a year,
you make Rs.120, then you rate of return is 20%.

If you invest Rs.100 in the market today and you make money at a 3% "rate of return" in one year you will have
Rs.103. But now, since the rate of inflation is at 4%, an item costing Rs.100 today will cost Rs.104 a year from now.
So what you can buy with today’s Rs.100, you will only be able to buy with Rs.104 a year from now.

But the Rs.100 that you invested has grown only at a 3% rate of return and so it is worth Rs.103. In effect, you are
loosing money!

So in conclusion, the rate of return on your investments, have to be higher than the rate of inflation.

From the above paragraphs you can note how silently, inflation eats into your money. You would not even know about
it an your money would sit loosing value for no fault of yours. But inflation is not the only thing you should be
considering, there are other things too that eat into you money. The first thing is “brokerage” and the second thing is
“taxation”.
Investors beware of: Brokerage and taxation!
 16
You probably know the concept that all your transactions in the stock market are done though a "stockbroker". A
stockbroker earns a commission on whatever transaction you make. Suppose you make a transaction of Rs.2000, and
the stockbroker charges you a 3% commission, then you have to pay the stockbroker Rs.60 (3% of Rs.2000) for the
transaction. So your total investment in the transaction in “not Rs.2000”. The total investment in the transaction is
Rs.2060/-

So after sometime, if the price of the stocks you invested in goes up to Rs.2060 then you have not made any money
because the total amount you invested was Rs.2060/-

What is more, even when you sell the stocks, you have to pay the broker brokerage of 3%. This means that, when you
sell the stocks for Rs.2060, you have to pay the broker Rs.61.6 so the profit of Rs.60 you made on the transaction is
gone, in fact you actually make a loss of Rs.1.6!!

So in effect even though you made a profit of Rs.60 because your stock price went up, you have actually made a loss.

If combine this with the fact that inflation reduces the value of money over time, you are just loosing money if you do
not invest wisely without understanding brokerage and inflation.

Important note about brokerage: Brokers make money on whatever transaction you make. Whether you buy or sell,
brokers will make money. Because brokers basically make money on transactions. Because of this, brokers tend to
encourage you to trade. They don’t really care about whether you make a profit or loss. They just care about whether
you are trading. The more money you are using for trading, the more they will make. Because of this, it would be wise
to not blindly follow your brokers advise. The broker will give you “hot tips” etc. not because they are looking out for
you and your profit, but because they are thinking about their own personal profit!

There is even one more factor that eats into your money. Tax!!!

Please note: We are not in any way encouraging you to not pay tax! We are just educating you about it.

There is a “short term capital gain tax” in our country. For a short term (less than one year) you have to pay tax on any
capital gain you make though the stock market trading. How much % tax you have to pay, depends on which "tax
bracket" you fall in.

Just to give you an idea. If I make Rs.100 though a transaction in the stock market, since I fall in the 33% tax bracket.
It have to pay Rs.33 of that to the government!!

Please note: The government encourages you to be a long term-investor by having no long term capital gain tax. If
you make a capital gain by investing for a period greater than one year, the you do not have to pay any tax on the
money you make.

Now combine this short term capital gain tax with brokerage and inflation! Think about it for some time. You will almost
make nothing on a small profit gains! If you want to make money out of the stock market, you must make large profit
gains.

Conclusion: As a general rule, just for the sake of simplicity, your investments must grow at a minimum rate of 15%
per year to stay ahead of inflation, tax and brokerage!! Remember this when making all your investments.

This concludes our basics of the stock market guide. There is lot more to learn! And the best way to do it is to start
investing! (Don’t invest too much in the beginning but do start!) Once you have your money in the market, you will start
to understand things a whole lot better!

Best of luck!

Jai Hind.