Category: Personal Finance

Top Economic Indicators: Overview & Importance
Have you ever imagined what makes the economy tick? Economists use a toolbox full of indicators to gauge the health of the economy. Learning about these indicators can help you understand the broader picture of the economy and make informed decisions about your finances.

Here is an analogy – your body has vital signs like temperature or heart rate. Economic indicators function similarly, providing important data points that signal the overall health of the economy.

In this blog, we will crack open the code on some of the most widely used economic indicators, explaining what they are and how they can help you see what is coming down the economic road.

Economic Indicators – An Overview

Economic indicators are statistical tools that provide information about an economy’s health. They are used by economists, businesses, investors, etc., to assess the current state of the economy and to make predictions of economic performance. There are many different economic indicators, but some of the most commonly followed include GDP, Unemployment Rate, Consumer Price Index, Interest rates, etc.

Generally, the Economic Indicators can be broadly classified into three categories:
- Leading Indicators
  These indicators tend to change before the overall economy does. They can provide advanced warning of future economic trends. For example, the number of building permits issued can be a leading indicator of future economic activity in the construction industry.
- Coincident Indicators
  These indicators change along with the overall economy and give a snapshot of the current state of the economy. For example, the unemployment rate is a coincident indicator of economic activity.
- Lagging Indicators
  These indicators change after the overall economy does. They can confirm trends that have already been identified by leading indicators. For example, the inflation rate is a lagging indicator of economic activity.
Top Economic Indicators

Let’s discuss some of the top economic indicators that economists and businesses track to gauge the health of the economy.

Gross Domestic Product

This is the total market value of all the final goods and services produced in a country in a given year. It is considered the broadest measure of an economy’s health. A rising GDP indicates economic growth, while a falling GDP indicates a recession. Generally, emerging economies such as India, Bangladesh, Indonesia, etc. have a higher GDP growth percentage as compared to developed nations such as the USA, England, etc.

Unemployment Rate

This is the percentage of the labour force that is unemployed and is actively seeking work. Low unemployment is generally considered to be a sign of a strong economy, as it indicates that economy is booming, businesses are hiring, and there are plenty of jobs available.

Consumer Price Index (CPI)

This is a measure of inflation. It tracks the average price of a basket of goods and services that are commonly purchased by consumers. A rising CPI indicates inflation, which can erode purchasing power and consumer confidence. A falling CPI indicates deflation, which can discourage spending and investment. A similar indicator used to measure inflation is the Wholesale Price Index (WPI), which tracks inflation at the producer level. Remember that CPI and WPI both are lagging indicators.

Interest Rates

These are the rates that banks charge from borrowers and pay to lenders. The central bank of every economy (RBI in India) uses interest rates such as Repo Rate, Reverse Repo Rate, etc. to influence the economic activity. Lower interest rates tend to stimulate the economy by making it cheaper for businesses and consumers to borrow money. Higher interest rates tend to slow down the economy by making it more expensive to borrow money.

Trade Balance

The trade balance measures the difference between a country’s exports and imports of goods and services. A positive balance (surplus) depicts that a country is exporting more and importing less, while a negative balance (deficit) indicates the opposite.

Performance of the Stock Market

The stock market performance can be an indicator of investor confidence in the economy. A rising stock market can indicate that investors are optimistic about the future of the economy, while a falling stock market can indicate that investors are pessimistic.

Importance of Economic Indicators
- Big Picture View
  Economic Indicators are like headlights, illuminating the road ahead. They provide insights into the current state of the economy and potential future trends, which is why they are widely used by Economists, Businesses, Governments, etc.
- Informed Choices
  Businesses use economic indicators to make strategic decisions. For example, a rising GDP might signal a good time for expansion, while high inflation might suggest rising prices. Further, Investors use them to analyse the investment risk.
- Policy Decisions
  Economic Indicators guide policymakers and central banks like the RBI. By analysing factors like unemployment or inflation. They can adjust interest rates or implement stimulus programs to promote economic stability.
- Individual Impact
  Even individuals benefit from understanding economic indicators. They can help you make personal financial decisions, like planning for retirement or navigating a recession. For example, a rising unemployment rate might encourage an individual to create an emergency fund.
- Transparency and Accountability
  Economic Indicators provide transparency into an economy’s health. This allows people to hold governments accountable for their economic policies.
Read Also: What is the Lipstick Effect? Economic Indicator, Application, Advantages, Limitations, and Criticisms

Conclusion

By keeping an eye on these indicators, you will be better equipped to understand the economic climate and make informed decisions.

Remember, the economy is a complex system, so no single indicator tells the whole story. Looking at the combination of leading, coincident, and lagging indicators can give you a more well-rounded view of what is going on and an overall picture of the economy.

Frequently Asked Questions (FAQs)
1. What are Economic Indicators?
  Economic indicators help in analysing the health of an economy.
2. How do interest rates affect the economy?
  Interest rates affect the borrowing cost. Lower rates stimulate the economy by making borrowing cheaper, while higher rates slow it down by making borrowing expensive.
3. Do lagging indicators tell us what has already happened?
  Exactly. The inflation rate, for instance, confirms a trend that leading indicators might have hinted.
4. Why are Economic Indicators important?
  The Economic Indicators are important because they guide businesses, investors, and policymakers in making informed decisions about investments, spending, and economic policies.
5. Can Economic Indicators be misleading?
  Yes, Economic Indicators can be misleading. Unexpected events or changes in how data is collected can impact interpretation.

April 30, 2024

Simple Interest vs Compound Interest? Definition, Formula, Pros, and Cons Explained

Understanding the difference between Simple and Compound interest is essential when making a financial decision. There are two ways to calculate interest when taking a loan or investing. Simple interest accumulates on the principal balance, whereas compound interest accumulates on the principal balance and the accumulated interest. Today’s blog will explain simple and compound interest definitions, formulas, pros, and cons.

Simple interest

Simple interest (SI) is a fundamental concept in the finance world. It is calculated on the principal amount and does not consider the interest previously accumulated.

It is an easy and direct method of calculating interest and is generally used for short-term loans or investments.

Formula

Simple interest calculates the amount that includes only the principal. The calculation involves the principal amount, interest rate, and duration of the loan or investment. The formula is:

Simple interest (SI) = (P x R x T) / 100,

Where,

P= Principal amount

R= Rate of interest

T= Time

Example

Assume that Mr. Khurana invested INR 2,00,000 in a fixed deposit for four years at a 7% simple interest rate p.a. Using the same formula, we can calculate the interest Mr. Khurana will earn from the investment.

By using the formula of Simple interest,

Simple interest= (2,00,000*0.07*4)/100

Then, SI = Rs 56,000.

At the end of 4 years, Mr Khurana will earn a total of Rs. 56,000 in simple interest.

Pros

Simple interest is easy to understand and implement since it does not provide interest on accumulated interest. Thus keeping the periodical interest constant.
SI allows for transparency to the borrower as the interest payments are easy to calculate and can be understood by all.
SI is very useful in short term investments as compound interest would anyway not be material on short term investments.

Cons

Simple interest leads to slower wealth accumulation, especially for long-term investments.
Simple interest may not be the most efficient option for people seeking high-return investments in the long term.
Simple interest doesn’t allow for the reinvestment of earned interest.

Compound interest

Compound interest involves calculating interests on both the principal amount and accumulated interest. It works on a snowball effect, causing your money to grow faster over time than Simple interest.

The bank or any financial institution allows for compounding daily, monthly, quarterly, half-yearly, or yearly.

Formula

A=P(1+r/n)^(n*t)

CI = A – P

Where,

“A” stands for Total Amount,

“P” stands for Principal Amount,

“r” stands for rate of interest,

“n” stands for the times of compounding in 1 period,

“T” stands for the number of periods

Example

Mrs. Chavi invested Rs 10,000 at the rate of 10% p.a. for five years.

Therefore, A = 10,000*(1+(.1/1))^(1*5)) = 16,105.1

& CI = A – P = 16,105.1 – 10,000 = Rs 6,105

Pros

It allows money to grow exponentially over time, as interest is earned on both the initial principal and the accumulated interest.
Compound interest can maximize your returns by allowing your money to grow multifold over time.
It can lead to substantial wealth accumulation, making it an ideal long-term investment strategy.

Cons

If borrowers are unable to make timely payments or only pay the minimum amount due, compound interest can lead to a debt spiral where the debt grows rapidly, making it increasingly challenging to repay.
Over time, compound interest can increase the total interest paid on a loan. As interest accumulates on both the principal amount and previously accrued interest, borrowers pay more in compound interest than simple interest.
Compound interest calculations can be complex and hard to understand compared to simple interest.

Conclusion

The concepts of simple and compound interest are essential for anyone dealing with investments, loans, and savings. Simple interest provides predictable interest amounts, making it suitable for those who prefer an easy technique, whereas compound interest comes with complexity but can multiply your money quickly. CI is best for long-term investors and has the potential for exponential growth over time. Simple interest is calculated only on the principal amount and does not include interest on interest. In contrast, compound interest includes interest on the total interest as well as on the principal amount.

Frequently Asked Questions (FAQs)

What is Simple interest?
Simple interest is calculated on the principal amount and does not consider the interest previously accumulated.
Which offers a higher return, Simple or Compound interest?
Compound interest provides higher returns than Simple interest in the long term due to its ability to provide interest on interest.
What are Compounding periods in Compounding interest?
Compounding periods in compound interest refer to the frequency at which interest is added to the principal amount, such as annually, semi-annually, quarterly, monthly, or daily.

April 24, 2024

Types of ITR: Which One Should You Choose?

Filing your taxes, a.k.a. Income Tax Return (ITR) in India, can be a tough task, especially with multiple forms to choose from. There are seven different types ITR forms available and each ITR form caters to a specific taxpayer category and income situation. Picking the wrong one can lead to delays, errors, and even penalties.

This blog is your one-stop guide to navigating the world of ITR forms as it breaks down the key features of each form and who should use them. By the end of this blog, you can confidently choose the correct ITR form and file your taxes smoothly.

Overview

ITR stands for Income Tax Return. It is a form you file with the Indian Income Tax Department to report your income earned during a financial year, i.e., April 1^st to March 31^st. There are two things: one is Financial Year (FY), and another is the Assessment Year (AY). The FY is the one in which you earn the income, and the AY is the one in which you have to pay taxes on the income earned in the FY. Confused? Let’s understand through an example:

Suppose, you are a salaried person and earned INR 10 lakhs in the Financial year 2023-24 (1 April 2023 – 31 March 2024). Now, you have to calculate your taxable income and pay taxes for FY 23-24 in the next year, i.e., FY 24-25. This next year is your Assessment Year (AY).

Coming back to the ITR form, it asks about your income sources, any deductions you claim, and the taxes you owe. The ITR lets the government know about your income from various sources like salary, businesses, property, investments, etc.

If you have paid excess tax during the year, you can claim a refund through the ITR.

Read Also: Types of Mutual Funds in India

Types of ITR

There are different ITR forms depending on your income sources and filing category.

Individual ITR (ITR 1)

ITR 1, also known as Sahaj, is the simplest income tax return form in India. It is designed for resident individuals with a specific income profile.

Eligibility

ITR 1 can be filed by a resident individual with income from salary or pension, one house property (excluding cases where loss is brought forward from previous years), other sources excluding lottery winnings and agricultural income up to INR 5,000. Your total income for the financial year must not exceed INR 50 lakhs.

Additionally, ITR 1 cannot be filed by an individual who is:

A Resident Not Ordinarily Resident (RNOR)
Non-Resident India (NRI)
Has a total income that exceeds INR 50 lakhs, along with the taxable capital gains
A director of the company
Owns and has income from more than one house property,

Also, it is mandatory to define the nature of employment while filing of return.

Individual ITR (ITR 2)

ITR 2 is another income tax return form used in India. Unlike ITR 1, it caters to a wider range of income sources.

Eligibility

ITR 2 can be filed by an individual or HUF who is not eligible to file ITR 1 and who:

Does not have income from profit and gains or profession and also does not have income from profits and gains of business or profession like interest, salary, bonus, commission by whatever name called, due to, or received by him from a partnership firm.
Have the income of another person like a spouse, minor child, etc., be clubbed with their income.

Additionally, any individual or HUF who receives income in the such as interest, salary, bonus, commission or remuneration from a partnership firm and whose total income for the year includes profit and earnings from a business or profession is not eligible to file an ITR-2.

From AY 2021-22, you can choose to opt for the new tax regime under section 115BAC in ITR-2.

Individual ITR (ITR 3)

ITR 3 Form relates to income earned via business or profession. It is used by an individual or a Hindu Undivided Family who has income under the head “profits or gains of business or profession” and who is not eligible to file Form ITR‐1 (Sahaj), ITR‐2 or ITR‐4 (Sugam).

Eligibility

Individuals and HUFs who have income from profits and gains of business or profession can file ITR 3.

This includes income from:

Sole proprietorship businesses like shops, consultancy firms, etc.
Professionals like doctors, lawyers, architects, etc.
Partnership firms.
Investments in unlisted shares.
Others such as Fees earned as a director in a company, House Property, Salary, etc.

ITR 3 is often called a master form because it allows reporting income from almost all sources, including business or profession, salary, capital gains, house property, etc.

Furthermore, if your turnover exceeds INR 2 crore or you claim certain deductions or exemptions, you are also required to maintain books of accounts and get them audited.

ITR 4

ITR 4, also known as Sugam, is an income tax return form designed for a specific category of taxpayers in India.

Eligibility

ITR-4 can be filed by a Resident Individual / HUF / Firm (other than LLP) who has:

– Income not exceeding INR 50 lakhs during the FY.
– Income from Business and Profession, which is computed on a presumptive basis u/s 44AD, 44ADA, or 44AE.
– Income from Salary/Pension, one House Property, Agricultural Income (up to INR 5,000)
– Other sources excluding winning from the Lottery and Income from racehorses.

What is the Presumptive Taxation scheme for filing ITR 4?

Section 44AA of the Income Tax Act (1961) mandates that, in certain situations and under certain conditions, an individual involved in business or the profession maintain proper books of accounts. To alleviate the difficulty of compliance for small taxpayers, the Income Tax Act has established a presumptive taxation structure under sections 44AD, 44ADA, and 44AE. A person using the presumptive taxation scheme may report their income at a set rate.

Additionally, a presumptive taxation scheme can be adopted by a resident in India carrying on a specified profession whose gross receipts do not exceed INR 50 akhs in a FY.

ITR 5

ITR 5 is designed for a specific set of entities distinct from individuals and HUFs.

Eligibility

This form is mandated for entities like firms, limited liability partnerships, associations of persons, bodies of individuals, artificial juridical persons, business trusts, corporate societies, etc.

ITR 5 requires detailed disclosure of financial information including income statement, balance sheet and other particulars related to the entity’s income and expenses, and consists of several schedules.

ITR 6

This form used in India by companies for filing their income tax returns.

Eligibility

Companies registered under the Companies Act, 2013 or 1956, are required to file ITR 6 if they do not claim an exemption under section 11 of the Income Tax Act, 1961.

Exemption under section 11 offers a tax exemption for income derived from property held for religious or charitable purposes. Companies claiming exemption would not use ITR 6.

ITR 6 caters specifically to the income reporting needs of companies, with relevant schedules to capture details like business income, expenses, and TDS.

The form consists of various schedules for different aspects of the company’s income.

ITR 7

ITR 7 is the form used for a specific set of entities different from individuals and regular businesses.

The form has been divided into Part A, Part B, and Schedules where Part A includes general information, and Part B includes a statement of the total income and tax computation for income chargeable to tax.

Eligibility

ITR 7 is used by entities that fall under specific sections of the Income Tax Act. These entities include:

Charitable and religious trusts created for charitable or religious purposes under Section 139(4A) of the Income Tax Act.
Political Parties with income exceeding the non-taxable limit come under Section 139(4B).
Research institutions claiming tax exemptions under section 139(4D) can use ITR 7.
Educational Institutions such as universities and colleges can file ITR 7 under section 139 (4D).

The entities mentioned above claim exemptions under several clauses and might not be subject to regular corporate tax filing.

Conclusion

The ITR forms in India report your income earned during a financial year to the Income tax department. There are seven different types ITR forms, each catering to a specific taxpayer category and income situation. Choosing the right ITR form depends on your income profile and the nature of your income sources.

It is suggested to consult with a tax advisor, especially in case of complex situations. Keep in mind that timely filing of ITRs is important to avoid penalties and avail benefits like claiming deductions. For most forms, you can easily file your ITR electronically through the Income Tax Department’s e-filing portal.

Further, if you’re having difficulty in calculating your taxable income, check our free to use Income Tax Calculator: https://www.pocketful.in/calculators/income-tax-calculator

Frequently Asked Questions (FAQs)

What are ITR forms?
ITR forms are used in India to report your income earned during a financial year to the Income Tax Department.
Which ITR form should I use?
The appropriate ITR form depends on your income profile. This includes sources of income and your total income amount.
What if I have income from capital gains or multiple house properties?
You will likely need to file ITR-2 or ITR-3 which caters to individuals and HUFs with these income sources. Further, it is advisable to consult your tax advisor to get a clear picture.
Can I file ITR forms online?
Yes, you can file most ITR forms electronically through the Income Tax Department e-filing portal.
How to calculate the taxable income?
One can use our free-to-use Income Tax Calculator

April 24, 2024

What is IEPF? Introduction, Reasons for Transfer, and Process of Claiming Explained

Shares are often bought, but many are never claimed or forgotten about. Money in these situations remains unclaimed for a long time. The Investor Education and Protection Fund (IEPF) was established by the Ministry of Corporate Affairs (MCA) to ensure that these unclaimed shares are transferred to and received by the appropriate individuals.

The purpose of this blog post is to explain why shares are transferred to the IEPF and how they can be claimed.

Introduction

The Investor Education and Protection Fund, or IEPF, was created on January 13, 2016, by the Central Government under Section 125 of the Companies Act 2013 to protect and educate investors. Contributions to the IEPF come from various sources, including unclaimed dividends, matured deposits, and other business assets. These funds are then used to support investors who have lost money due to dishonest business practices.

Why are shares transferred to IEPF?

Many businesses that turn a profit pay dividends to their owners. Shares that have not been claimed by the holder for seven years get transferred to the IEPF. Owing to this inactivity, the company’s legislation requires it to transfer the shares to the IEPF, along with any outstanding interest.

This transfer protects their interests by preventing the investor from losing shares due to inactivity in their account. The shareholder has full right to reclaim their share from the authorities.

Reasons why the holder may not claim dividends

1. It is not possible for you to receive the dividend if you misplace the shares you own or forget the details of your ownership.

2. Legal hires cannot claim assets in the event of a holder’s death if the nominees are unaware of them.

3. You will not be entitled to the dividend the firm declares if your investment records are incomplete.

4. The company will not be able to transfer the dividend to the shareholder if the shareholder’s registered bank account has changed over time and has not been updated with the firm.

Who can claim shares from IEPF?

Any shareholder whose unclaimed dividends and shares have been transferred to IEPF can claim their shares from IEPF. There is a limit of one consolidated claim per corporation per fiscal year. Before filing the claim with IEPF, the claimant must make sure the company has completed the share transmission procedure and issued an entitlement letter.

Amounts credited to IEPF

1. If not claimed by the holder, the unpaid dividend amount is transferred to IEPF.

2. The interest and other income received from investments are transferred to IEPF.

3. The redemption amount received from the preference shares remained unclaimed for more than 7 years.

4. The proceeds received by the IEPF from fractional shares sold as part of bonuses, mergers, and acquisitions.

Utilization of IEPF Amount

The IEPF authority can only utilize the amount lying with them for the below-mentioned purposes.

1. The fund can be utilized towards promoting investor awareness programs.

2. Making refunds regarding matured deposits, debentures, and unclaimed dividends to their holders.

3. The National Company Law Tribunal has sanctioned the reimbursement of legal expenses incurred in suits against debenture holders, members, or depositors.

4. Any other purpose incidental to the purpose mentioned above.

Process to get shares from IEPF

The process to claim the shares from IEPF authorities is as follows:

1. Online Application – First, you must fill out an online application form known as IEPF 5, which is available on the company’s official website, www.iepf.gov.in, under the head claimants. The form will ask you for your information, company details, etc.

2. After completing and submitting the form, you will receive acknowledgement slips and the reference number.

3. Physical Submission—Submit the acknowledgement slips along with essential documents such as the Indemnity Bond, Advance Stamped receipt, original shares, debt certificate, proof of entitlement, and Aadhaar card to the relevant authorities.

4. Send all the documents to the Nodal Officer of the company at their registered office.

5. The nodal officer will then verify your claim and send a verification report to IEPF within 15 days.

6. Your claim will be processed once IEPF receives the verification report.

7. After the company processes the claim, the stock will be transferred to the holder’s Demat account.

Conclusion

The Investor Education and Protection Fund (IEPF) is crucial for advancing financial literacy in India and protecting investors’ interests. In addition to distributing shares and unclaimed dividends to investor education and safety initiatives, the fund fosters a more transparent and accountable environment.

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Frequently Asked Questions (FAQs)

Why are shares transferred to IEPF?
Shares are transferred to IEPF because the shareholder failed to claim the company’s income and shares.
How can I check if I have any unclaimed dividends or shares lying with the IEPF?
You can search for unclaimed sums on the IEPF website by entering your name and PAN card information.
How long does it take to get the shares back from IEPF?
It generally takes 30 to 60 days after completing the verification claim.
What does IEPF stand for?
IEPF stands for “Investor Education and Protection Fund”.
Which form needs to be filled to claim shares from IEPF?
To claim shares from IEPF, you must first fill out the IEPF 5 form. Once completed, print the acknowledgement receipt and send it to the company’s nodal officer.

April 18, 2024

What is Insurance? Features, Terms, Benefits, Types, and Metrics Explained

There are always surprises in life. Some surprises are great, but some are nasty and will hurt your pocket. Imagine yourself driving on a highway when, all of a sudden, there is an accident and your vehicle breaks down. In such a situation, it is natural to be concerned about how to resolve the issue. This is where insurance comes in; if you have coverage for your vehicle, you can get repairs done without having to pay for them.

The blog will guide you through the world of insurance, helping you pick the best coverage for your needs and grasp the fundamentals.

Overview on Insurance

An insurance policy is a financial contract that shields you against unforeseen financial losses between two parties.

The insurance provider charges a premium to cover a person or entity against certain risks, such as mortality, accidents, medical emergencies, etc. This ensures that the insured party can avail of the provider’s insurance benefits in the case of a loss.

For example – Mr. A is driving to work, and en route, he gets into an accident that damages his vehicle. If Mr. A had auto insurance, he would be entitled to a claim for the total amount of compensation from the insurance provider. In order to get this amount, Mr. A would have needed to pay a premium at the start of the policy’s term or length.

Read Also: Prize Indemnity Insurance

Features of Insurance

1. Having an insurance policy allows you to mitigate the risk.

2. You can transfer the financial losses to the provider by paying a small amount as a premium.

3. You can live a calm life and feel at ease knowing that you will be compensated in the event of an accident.

4. There are certain things, like cars, for which you are required to have insurance as it is made mandatory by authorities.

Terms of Insurance

1. Policy – The written agreement between the policyholder and insurer.

2. Insurer – The insurance company that will be covering your risks.

3. Policy Holder – The person who took the policy from the insurance company.

4. Premium – The amount that you are required to pay to the company to keep the policy effective.

5. Policy Term – This will be referred to as the effective period, expressed in terms of the number of years for which the insurance provider will offer coverage.

6. Sum Assured – The highest sum of money that you will receive in the event of unanticipated events.

7. Claim – This is regarded as a formal request for reimbursement/payment for expenses incurred after the event.

How does Insurance work?

The insurance firm takes premiums from several clients, covers them for particular risks, and divides the risk among them.

Let’s use home insurance as an example. In a given area, there are 100 houses with a value of 1 lakh each, of which 2 burn down every year. All of the homeowners obtained insurance from a company and had their homes covered; therefore, the insurance company collected a total of about 10 lakhs in premiums. Should two of the approximately 2 lakhs worth of houses burn down in a given year, the company would pay the homeowners 4 lakh and make a profit of 6 lakhs.

In a similar vein, the policyholder would have the assurance that should their home burn down; they would receive a settlement of two lakh rupees for a premium of just 10,000 INR.

Benefits of Insurance

There are lots of benefits to buying insurance, some of which are mentioned below-

1. Insurance shields you from life’s uncertainties and guards against financial losses brought on by many unforeseen circumstances.

2. Few insurance policies offer both life insurance and investment rewards, giving you the chance to achieve your most important life goals in addition to receiving insurance coverage.

3. Unpredictable events could result in large losses that you would have to pay out of pocket, which could negatively affect your financial situation. But insurance allows you to cushion yourself.

4. You can feel more at ease knowing that your insurance provider will provide support in the form of compensation in the event of a loss.

5. Insurance plans also come with tax benefits, as you can take a deduction for life insurance u/s 80(C) and for health insurance, you can claim a deduction u/s 80(D).

Types of Insurance

In India, insurance is divided into 2 different categories.

1. Life Insurance

2. General Insurance

Life Insurance

This kind of insurance safeguards your loved ones by providing either one-time or periodic payments after the event of your death. This insurance helps your family survive after your passing.

There are several types of life insurance. Some of them are:

1. Term Life Insurance – This insurance ensures that in the event of your death, the designated beneficiary receives an agreed-upon amount from the insurer.

2. Whole Life Insurance – The insurance covers an individual’s life to the age of 100 and is sometimes referred to as a standard life insurance coverage.

3. ULIP Plans – The Unit Linked Insurance Plan, or ULIP, offers both investing and insurance benefits. A portion of your contribution is used to cover your life insurance, while the remaining amount is invested in securities linked to the market.

General Insurance

All other forms of insurance, excluding life insurance, are categorized as general insurance since they shield your finances from losses brought on by events that involve home, car, health, or other property. They also go by the name of non-life insurance policies.

There are several types of general insurance. Some of them are:

1. Health Insurance – When a person purchases health insurance, the insurance company pays for their medical expenses up to the sum assured, which is determined at the time the policy is taken out.

2. Motor Insurance – This type of insurance offers cash support if your vehicle — a car, bike, etc.— is stolen or damaged.

3. Home Insurance – As the name implies, home insurance protects your home’s infrastructure and possessions from harm and devastation, including natural and man-made calamities.

4. Travel Insurance – If you have travel insurance, you will be protected against any mishaps that happen during your travel, like misplaced bags, cancelled flights, etc.

How to Choose an Insurance Provider?

1. The most important factors to consider when choosing an insurance company are the features and benefits that they are offering.

2. You must obtain estimates from multiple insurance providers and evaluate them; nevertheless, you shouldn’t choose the least expensive option without also considering the value proposition.

3. Customer service is another crucial component to take into account. When filing a claim, you should pay close attention to how quickly and responsively their team responds to your inquiry.

4. Before purchasing any insurance policy, you should research the company’s past claim settlement ratio; the greater the ratio, the more likely the insurer will pay the claim without being denied.

5. Although negative reviews or complaints filed to the insurance business are often disregarded, they may provide insight into which firms are worth considering.

6. When purchasing insurance policies, it is important to consider an insurance company’s size and financial standing. In the event of a larger claim, a company with weaker financial standing may be unable to reimburse the amount due.

Read Also: Concurrent Insurance

Key Comparison Metrics of Insurance Providers

1. Gross Written Premium – It shows the entire amount of the premium that the insurer wrote before commissions and reinsurance costs are subtracted.

2. Claim Settlement Ratio – This displays the percentage of claims that the insurance company has settled relative to the total number of claims that it has received.

3. Policy Renewal Rate – This indicates the percentage of policyholders who choose to renew their insurance with the same insurance company.

4. Average Time to Settle a Claim – The shorter the time taken to process the claim, the more advantageous it is to the insured.

Conclusion

One of the most essential advantages of insurance is that it protects your money after an unforeseen event in exchange for a nominal premium. However, you must take into account several aspects when choosing an insurance provider, including the claim process, customer service, and policy features.

Frequently Asked Questions (FAQs)

What is the purpose of insurance?
The primary goal of insurance is to lessen the burden of monetary loss in exchange for a minimal premium payment.
What are the types of insurance?
There are two primary categories of insurance: general insurance and life insurance.
Which organization manages the workings of the insurance industry?
The Insurance Regulatory and Development Authority of India, or IRDAI, is responsible for overseeing the general operations of the insurance sector.
What is IMF in Insurance?
IMF stands for Insurance Marketing Firm, which is a distribution channel established by IRDAI.
Is there any tax benefit available in insurance?
Yes, insurance plans offer several tax benefits. For example, you can deduct your life insurance payments under Section 80(C) and your health insurance premiums under Section 80(D).

April 16, 2024

What is FIRE in Finance? Full Form, Features, Types, and Formula Explained

Are you tired of your daily grind? Feeling trapped by your income? You are not alone. Millions crave financial freedom and the chance to break free from the traditional 9-5 job. But is early retirement possible?

This blog will dive deep into the world of FIRE and explore the sacrifices needed to achieve financial independence and early retirement.

Overview

FIRE stands for “Financial Independence Retire Early”. According to this theory, saving a bigger percentage of income and making prudent purchases throughout one’s earning years are the best ways for someone to retire early—typically in their 30s or 40s.

A person is typically expected to retire at age 60, but recently, people have a longing to retire early. The idea inspires many to save money to retire early and live a longer life.

Features

The major features of FIRE are as follows –

1. The concept focuses on retirement earlier than traditional retirement age.

2. Individuals should save a significant percentage of their income—more than 50%, on average.

3. It is recommended that savings are invested aggressively in high-yielding asset classes like bonds and stocks.

4. Implementation of the idea requires a minimalistic lifestyle, which means an individual is required to spend less and find cheaper alternatives to their habits.

5. Proper financial planning is required to achieve early retirement.

6. Discipline in saving funds is of paramount importance

Types of ‘FIRE’

The 3 major types of FIRE approaches are explained below-

1. Lean FIRE

Lean FIRE assumes a low spending rate after retirement. This means that you’ll have to sacrifice many of your aspirations and live within your means. If you’re willing to make those sacrifices, then Lean FIRE might be the right option for you because it is the fastest way to achieve your goals.

2. Fat FIRE

If you dream of international travel, lavish vacations, and shopping, Fat FIRE is the way for you. It allows users to save aggressively during their careers to have above-average retirement funds.

3. Barista FIRE

Individuals who follow the FIRE method are not interested in working a 9–5 job in the long term; instead, they engage in part-time work and live a modest lifestyle after retirement. To enjoy the freedom of work and the financial security of retiring early, many attempt to locate a less stressful job or work part-time after retirement.

Read Also: Military Wealth Management

How does ‘FIRE’ work?

If you intend to retire early, you must determine how much money you will need to continue living the way you do when you are retired. This will assist you in deciding when you can retire.

For example, a person with an annual income of 7 lakhs who intends to retire at 45 must have a different FIRE plan than someone with an annual income of 12 lakhs who wants to retire at 40.

FIRE strategy requires a unique approach, which typically includes cost-cutting and aggressive investing. One way to save costs is to purchase second-hand goods rather than brand-new ones or to spend on necessities only rather than wants. Individuals must set aside between 50 and 70 percent of their income for savings and use those funds to invest in various higher-yielding asset types, including bonds and stocks.

In addition to these two things, you must review your tax strategies to reduce the amount you pay for tax on your income.

To learn about your required retirement corpus, explore our Retirement Planning Calculator here.

Method of Calculating ‘FIRE’

1. To calculate FIRE, you need to determine your in-hand annual income first.

2. Next, you must determine your FIRE number using the widely accepted 4% thumb rule, which states that to maintain a 4% withdrawal rate, you must amass assets equal to 25 times your yearly expenses. For example – If your annual expenses are 5,00,000 INR, then your FIRE number would be 1,25,00,000, which is 25 times your annual expenses.

3. Then, you must adjust the FIRE number to include the impact of inflation.

4. The next step is to figure out how long it will take you to reach FIRE by factoring in your current savings rate, expenses, and investment return.

5. The next stage would be to decide which asset class to invest in.

6. Your portfolio must be periodically examined to assess investment performance and determine whether your FIRE objective is on track.

Advantages

FIRE offers several advantages to those who use it for their retirement planning, a few of which are mentioned below.

1. It gives someone the ability to feel adaptable and free to pursue the kind of life they desire.

2. An individual can have more time to follow their passions and hobbies when they retire early.

3. Individuals who are financially independent and have a solid financial plan lead stress-free lives free from financial uncertainty.

4. A person can leave a concentrated legacy through FIRE. Early retirement also enables one to spend more time with one’s loved ones.

Disadvantages

1. FIRE is vulnerable to uncertain and erratic returns on your investments; if the actual returns do not align with your retirement plan, you may not be able to secure enough money to retire.

2. It focuses heavily on giving up short-term needs in favor of early retirement and long-term financial security, which can cause mental dissatisfaction among users.

3. The growing cost of healthcare is not considered while accounting for retirement. This exposes the user to vulnerability during periods of a health crisis.

4. Inflation can erode purchasing power and reduce the value of your retirement savings. Hence, it is important to regularly modify the FIRE number in accordance with updated inflation figures.

Conclusion

The FIRE technique is a valuable strategy for early retirement and post-retirement financial independence. If you want to retire in your 40s, you should plan your retirement based on your lifestyle and income. You can apply any of the FIRE types to plan your financial future for yourself and your family. Furthermore, since retirement is a very personal choice, there is no one correct way to plan it; hence, you should do what is practical for you.

Frequently Asked Questions (FAQs)

What does FIRE stand for in financial terms?
FIRE refers to “Financial Independence Retire Early”.
What is the FIRE method?
It’s the process of making significant investments and savings during your formative years so that you can retire early.
How do you calculate your FIRE number?
To calculate your FIRE number, you must calculate your current annual expenses and multiply them by 25. This FIRE formula is derived using the 4% rule as a basis.
How can I plan my retirement by FIRE?
With the FIRE strategy, you can reduce your spending, save more money, and invest in high-yielding asset classes to prepare for retirement.
Is FIRE achievable for everyone?
Most people can achieve it because it just takes discipline, dedication, and smart financial planning. Your ability to achieve FIRE depends on your income level, your spending habits, and your ability to generate higher returns.

Disclaimer: The securities, funds, and strategies mentioned in this blog are purely for informational purposes and are not recommendations.

April 16, 2024

Explainer on UPI Scams: Latest Scams, Economic Data, Government Actions, and Prevention Tactics

Have you ever received a suspicious call about your UPI account? Or a message claiming an undelivered package requiring an urgent payment? If so, you are not alone. UPI scams are on the rise in India, and it is important to know the tricks scammers use to steal your hard-earned money.

Today’s blog will explore the latest UPI scams and provide essential tips for protecting yourself.

UPI Scams Overview

UPI scams are deceptive tactics that exploit the Unified Payments Interface (UPI) system to steal money from users. These scams can trick you into revealing sensitive information or initiating unauthorized transactions.

Scammers use several methods to manipulate you. They might pose as a trusted source like your bank, a seller, or even a friend. Their ultimate goal is to get your UPI PIN or OTP (one-time password). Once they get this, they can transfer funds from your account without your permission.

Latest Scams

Below are some of the latest tactics used by scammers:

Fake Customer Care Scams

This scam involves impersonation. Scammers pretend to be customer service representatives from your bank or a popular online retailer. They might call you, claiming suspicious activity on your account or undelivered products. The goal is to pressure you to share your UPI PIN or OTP.

QR Code Scams

Malicious QR codes can be placed strategically to trick you. These codes could be on posters, websites, or even physical receipts. Scanning such a code could lead you to a fake UPI payment page or download malware that can steal your credentials.

Fake Investment Schemes

Fraudulent investments offering promising high returns are a common trap. Scammers might reach out through social media or messaging apps. They can be very convincing, so be wary of unsolicited investment advice and always research thoroughly before transferring any funds.

SIM Cloning

While not entirely new, SIM cloning is a growing concern. Scammers can get a duplicate SIM card with your phone number. This could allow them to intercept UPI notifications and verification codes, enabling unauthorised transactions.

Fake Delivery OTP Scam

This is a common tactic used by fraudsters to steal money through UPI. In this scam, you will receive a call from the fraudster impersonating a delivery agent. They would then create a sense of urgency by stating a delivery attempt was unsuccessful due to your absence or an incorrect address. The scammer will then ask for the OTP to reschedule the delivery or verify your information. The OTP that you will receive is actually for a UPI transaction.

Phishing

It is an attempt to steal sensitive information, generally usernames and passwords, credit card details, or any other personal data, by pretending to be a legitimate source. Phishing scams can target you through various channels, including email, text messages, phone calls and even social media. This could be an email that looks like an email from your bank or even a fake website designed to mimic a popular online service.

UPI Scams Economic Data

In 2022-23, 95,000 cases of UPI fraud were reported, up from 84,000 in 2021-22.

55% of digital payment frauds in India are related to UPI transactions, and almost half of cybercrime cases since 2020 have been linked to UPI.

While UPI boasts built-in security features, a few users unfortunately fall victim to social engineering scams.

Year	Count of cases	Fraud-to-Sales Ratio (value terms)
2020-21	77,299	0.0017%
2021-22	84,274	0.0016%
2022-23	95,402	0.0015%

Note – The fraud-to-sales ratio is a metric used to measure the percentage of fraudulent transactions compared to the total volume of transactions in a given period.

Even though the number of UPI fraud cases has increased, the fraud-to-sales ratio remains very low, indicating that most UPI transactions are safe. However, this does not eliminate the importance of being aware of scammers’ social engineering tactics.

UPI Scams Government Actions

The Indian government is aware of the rising problem of UPI scams and is taking steps to combat them. Let us have an overview:

The RBI issues guidelines and regulations for UPI transactions to strengthen security measures and improve fraud detection.
The government has formed an Inter-Ministerial Committee on phone frauds, which brings together various stakeholders like the Ministry of Electronics and Information Technology, the Department of Financial Services, and law enforcement agencies to work collaboratively on preventing online financial frauds, including UPI scams.
RBI and NPCI run public awareness campaigns to educate users about UPI scams. These campaigns include informative videos, posters and social media messages.
The Central Government has also launched the National Cyber Crime Reporting Portal, www.cybercrime.gov.in, to enable victims to report complaints about all cybercrimes, including net and online frauds.

To sum it up, the government is consistently addressing UPI scams, but it is a continuous battle. So, you need to be vigilant and follow safe UPI practices.

Prevention Tactics

Treat your UPI PIN and OTP with the same care you would for your ATM PIN. Never, ever share them with anyone. Banks and legitimate businesses will never ask for this information.
Before approving any UPI transaction, meticulously analyse the recipient’s details. Verify the name and UPI ID; do not rely solely on nicknames or familiar-sounding names.
Scammers often impersonate customer service representatives or sellers. If you receive a call or message requesting urgent UPI payments or claiming suspicious activity on your account, verify the sender’s identity directly with the bank or the company they claim to represent.
Some messages often contain links that lead to fake websites designed to steal your money through UPI credentials. Therefore, do not click on links from unknown senders.
Only download UPI apps from trusted sources like Google Play store or Apple App Store. Avoid downloading apps from untrusted websites or clicking on ads that promote them.
Enable strong passwords or PINs for your phone as well as the UPI app. Consider two-factor authentication for additional security.
Regularly monitor your UPI transaction history, look for any unauthorized transactions and report them to the bank immediately.

Read Also: Explainer on Imitation Investing

Conclusion

In today’s digital world, staying safe from UPI scams requires constant vigilance. Remember, knowledge is power; you can keep yourself safe by educating yourself and following safe practices. Do not hesitate to report suspicious activity to your bank and the authorities. Together, we can create a safer digital payment environment for everyone.

Frequently Asked Questions (FAQs)

What are UPI Scams?
UPI Scams are deceptive tricks that exploit UPI to steal money from users through fake transactions or extracting sensitive information.
What are some common UPI Scams?
Phishing messages, fake money requests, and unauthorized transactions are all common scams.
How can I protect myself from a UPI Scam?
Be cautious of unknown messages, double-check the recipient details, and download apps carefully to protect yourself.
Is using UPI safe?
UPI has built-in security features, but user awareness is important. Following safe practices minimise your risk.
What should I do if I suspect a UPI scam?
Do not respond to the scammer; immediately report the incident to your bank and change your UPI PIN if needed.

April 5, 2024

NEFT vs RTGS vs UPI vs IMPS: A Comparative Study

In today’s digital era, electronic fund transfers have become the norm, revolutionizing how we transact money. Multiple options, such as RTGS, NEFT, UPI, and IMPS, are available. Let us delve into the blog better to understand these options.

NEFT: An Overview

It stands for National Electronic Funds Transfers and is a RBI-governed funds transfer method. NEFT started in November 2005 and is a safe and secure method of transferring small amounts of money.

Features

Fees and Charges: Online NEFT transactions are free of charge and offline transfers cost up to ₹50 in charges.
Processing Time: Processing time is in under 2 hours. In some cases, it may also take up to 12 hours.
Maximum Limit: There is no maximum limit per day for NEFT transactions.

RTGS: An Overview

It stands for Real-time Gross Settlement and is used to transfer higher amounts. RTGS ensures that the funds are transferred securely and without dependence on other transactions, thus minimizing risk.

Features

Fees and Charges: RTGS online transfers do not have any levied charges.
Processing Time: RTGS is the fastest method to transfer higher-value amounts, and the transaction is settled in real-time, under 30 minutes.
Maximum Limit: The Reserve Bank of India (RBI) has not set any maximum transaction limit.

UPI: An Overview

It was launched in 2016 by the National Payments Corporation of India (NPCI) and stands for Unified Payments Interface. The unique feature of UPI is the ease of transferring money, this lets you send money from your bank account to another by simply entering someone’s phone number, UPI ID, or scanning a QR code. This fund transfer facility is available through your mobile 24*7.

Features

Fees & Charges: UPI payments service is free and does not charge any transaction fees.
Processing time: UPI is an instant payment and transfer method.
Maximum Limit: UPI’s maximum transaction limit per day is 1 Lakh.

IMPS: An Overview

It stands for Immediate Payments Service and was first established by NPCI in 2010. An IMPS funds transfer is a better fit for you than UPI as it allows immediate transfer of amounts up to 5 Lakhs.

Features

Fees & Charges: IMPS transfer fees can range from ₹2.5 to ₹25 + GST depending on the amount value and choice of bank.
Processing time: IMPS transfers amount usually within 30 minutes.
Maximum Limit per day: The transaction limit of IMPS is 5 Lakhs.

Comparison Chart

Basis	NEFT	RTGS	UPI	IMPS
Minimum Transfer Limit	No minimum limit	₹2 Lakh	No minimum limit	No minimum limit
Maximum Transfer Limit	No upper limits (max. ₹50,000 per transaction)	No limit	₹1 Lakh	₹5 Lakhs
Time Taken	Up to 12 hours (usually within 2 hours)	Real-time (within 30 Minutes)	Instant	Real-time (within 30 Minutes)
Service Availability	Online + Offline	Online + Offline	Online + Offline	Online + Offline (chargeable)
Security	Safe, backed by RBI	Safe, backed by RBI	Safe, backed by NPCI	Safe, backed by NPCI
Service Fees	No charges on online NEFT transactionsOffline NEFT transactions are charging between ₹2.5 to ₹50	No charges for online transactionsFor offline: ₹2L to 5L transaction: up to ₹25 applicable₹5L & above transaction: ₹25 to ₹50 applicable	Free of cost	₹2.5 to ₹25 (varies from bank to bank)
GST charges	GST charges are applicable	No GST charges for online RTGS transaction₹15 + GST is charged for offline RTGS transaction	No charges	GST charges are levied
Service Availability during Bank Holidays	Available	Available	Available	Available
Suitability	Suitable for loan repayment and credit card payments	Suitable for transactions exceeding ₹2 lakhs.	Suitable for instant transfers upto ₹1 lakh	Suitable for transactions ranging between ₹1 lakhs to ₹2 lakhs
Operated by	RBI	RBI	NPCI	NPCI

Charges

Let’s have a look at which one is cheaper NEFT vs RTGS vs UPI vs IMPS:

Amount	NEFT	RTGS	UPI	IMPS
Below 2 Lakhs	Free	Not Applicable	Free	₹2.5 to ₹15 + GST charges
2 Lakhs to 5 Lakhs	₹25 to ₹30 + GST charges if applicable	Free of cost	Not Applicable	₹2.5 to ₹15 + GST charges
5 Lakhs & above	₹25 to ₹50 + GST charges if applicable	maximum ₹50 + GST charges	Not Applicable	Not applicable

Conclusion

In conclusion, NEFT, RTGS, UPI, and IMPS are distinct electronic fund transfer systems with varying features and benefits. NEFT is suitable for small transactions, RTGS for higher amounts, IMPS for instant transfers up to 5 Lakhs, and UPI for quick transfers up to 1 Lakh without charges. Each method caters to different needs and preferences in online transactions.

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Frequently Asked Questions (FAQs)

What is the minimum amount for an IMPS transfer?
The amount transferable through an IMPS can be as low as Re.1.
What is the limit of IMPS in Indian bank?
Account holders can transfer up to Rs. 2 lakh through IMPS in a day.
Is RTGS mode of payment safe?
RTGS is a highly safe and secure mode of payment which is monitored by the RBI. It is even more secure as it is used majorly for money transfers of higher amounts.
Which is better, NEFT or UPI?
It depends on the user’s preferences and amount of transfer. While UPI transactions are processed instantly, NEFT transactions may take upto 2 hours to process.
Is IMPS a better mode of transfer than NEFT and RTGS?
IMPS allows immediate transfer of funds and this service can be accessed even on bank/public holidays. That is why this service is often considered better than NEFT and RTGS.

March 13, 2024

Explainer on Green Bonds: History, Process, Pros, Cons, and Future Outlook

Ever wondered how your investments can benefit both your wallet and the environment? That is the power of Green Bonds! These innovative financial instruments are shaking up the investing world, offering investors a chance to earn great returns while supporting sustainable projects that promote environmental well-being.

In our today’s blog, we will discuss green bonds – regular bonds with an eco-friendly twist.

Green Bonds Overview

Green bonds are a type of debt security used to finance projects with environmental benefits. These projects can include renewable energy, energy efficiency, clean water, sustainable agriculture and conservation. The government, corporations, and non-profit organisations issue these bonds. The average maturity is comparatively longer for green bonds, i.e., 17 years.

Did you Know?

The Swedish Environment Protection Agency issued the first-ever environmental bond in 1993.

Green Bonds History

It took decades for green bonds to evolve from a niche concept to a major sustainable finance topic.

The Story

In 2007, the Intergovernmental Panel for Climate Change, a UN agency, focused on providing scientific data about climate change and its economic implications.

A report was released that established the connection between human activities and global warming. This revelation, coupled with the rising frequency of natural disasters, provoked Swedish pension funds to ponder how they could leverage the funds that they managed to resolve the aforementioned problem.

Seeking guidance, they approached their bank, SEB (Skandinaviska Enskilda Banken AB). The bank then recognised the synergy and fostered a unique solution bridging the financial needs with environmental expertise. SEB then facilitated the connection between these financial endeavours and the World Bank and provided its extensive expertise in investing in environmental projects globally.

The solution was obvious in observation. But despite the World Bank’s promising environmental projects and proven issuance record of bonds, a critical question remained: how could investors gain absolute confidence that their contributions directly managed climate issues?

This sparked another collaboration with CICERO, the Centre for International Climate and Environmental Research – an interdisciplinary research centre for climate research in Oslo. CICERO scientists were leading experts on climate issues who could provide a sound and reliable view of whether a project would positively impact the environment.

In 2008, this initiative led to the discovery of the first ‘labelled green bond’ by the World Bank and catalyzed the entire green bond market.

Did you Know?

The global green bond market has surpassed the threshold of INR 134 trillion in cumulative issuance.

Green Bonds in India

To reduce the carbon intensity of the economy, the Union Budget 2022-23 announced the issue of green bonds.

The categories of green bonds include renewable energy, energy efficiency, sustainable management of natural resources, clean transportation, sustainable water, green building etc.

For the same, a framework known as Green Bond Principles was designed by the International Capital Market Association (ICMA).

The four core components as outlined by ICMA green bond principles are as follows

1. Use of Proceeds

The government of India will use the proceeds raised from Sovereign Green Bonds (SGrB) to finance and refinance expenditure either partially or wholly for eligible green projects and it will be made sure that proceeds get allocated to projects within 24 months after the issuance.

2. Project Evaluation and Selection

The Ministry of Finance has constituted a “Green Finance Working Committee” (GFWC) headed by the Chief Economic Advisor and GFWC. They will meet twice a year to support the Ministry of Finance with the selection and evaluation of projects. However, the initial evaluation of the project will be done by the concerned Ministry with the help of experts.

3. Management of Proceeds

The proceeds will be deposited to the Consolidated Fund of India (CFI) and then the funds from CFI will be withdrawn as and when needed for eligible green projects.

A separate account will also be created by the Ministry of Finance (GOI) to monitor the proceeds allocation and avoid any malpractice. Additionally, the Public Debt Management Cell (PDMC) will keep track of proceeds within the existing guidelines

4. Reporting

The Indian Government has pledged to offer investors transparent reporting about the allocation of the proceeds from green bonds and the environmental impact of projects funded.

Read Also: What are Bond Yields?

The Process of Issuance of Green Bonds

The concerned Ministry will conduct an initial evaluation to identify the list of eligible green projects depending on the framework and submit it to GFWC.
Members of the GFWC under the guidance of a climate specialist from Niti Aayog as well as the Representative from the Ministry of Environment, Forest and Climate Change, will evaluate and analyse the complete list of the submitted projects.
Once the Finance Bill is passed, the Ministry of Finance will notify the Reserve Bank of India (RBI) about the amount of eligible green expenditures for which proceeds from green bonds can be used.

India’s First Green Bond

India issued the first tranche of its Sovereign Green Bonds worth INR 8000 crore on January 25, 2023, and the proceeds were used for green projects such as solar power, wind and small hydro projects and other public sector projects that help reduce the economy’s carbon footprint.

This offering was sold in 5-year and 10-year tenors through a uniform price auction on January 25, 2023. A similar offering was scheduled for February 9, 2023.

Also, driven by the shared goal of sustainable development, the World Bank Group and the Indian Government joined forces. The World Bank Sustainable Finance and ESG Advisory Services provided technical assistance and expertise to launch the sovereign green bond program, a key initiative to maximise finance for India’s climate transition and green growth.

Did You Know?

In 2015, Yes Bank, a private sector bank in India, successfully issued India’s first-ever green infrastructure bond, raising INR 1,000 crores.

Green Bonds Future Outlook

India has set an ambitious target of achieving net zero carbon emissions by 2070. Green Bonds are expected to play an essential role in mobilising the massive investments needed for this transition.

The Indian Government plans to issue more sovereign green bonds and encourage more involvement from private companies and municipalities.

Are green bonds good for long-term investing?

Green Bonds can be a good option for both long-term investing and ethical investing, but it depends on your individual goals and preferences.

Pros

Green bonds can offer similar returns as traditional bonds, depending on the creditworthiness of the issuer and the conditions prevailing in the market. These bonds may even outperform conventional bonds in some situations.
These bonds can diversify your portfolio, potentially spreading the risk and enhancing its resilience.
By choosing green bonds, you can contribute to financing environment-friendly projects that best align with your values.

Cons

The green bond market is relatively young in India, so long-term history data might be scarce.
The bonds may have lower trading volumes compared to traditional bonds, which will impact the bond’s liquidity.
The extremely long tenure of these bonds may make them undesirable.

Remember – Prioritizing ethical choices may affect your returns as compared to a purely profit-driven investment strategy.

Read Also: CAT Bonds: An Easy Explainer

Conclusion

To sum it up, whether green bonds are a good choice depends entirely on your financial goals, risk tolerance and ethical values. Analyse carefully what matters most and do proper research before investing because not all green bonds are perfect.

Frequently Asked Questions (FAQs)

What are green bonds?
Green bonds are a type of fixed-income security issued by the Government, municipalities, and corporations.
Why should I invest in green bonds?
You should invest in green bonds to make a positive impact, diversify your portfolio, and align your values with your investments.
Are green bonds risky?
Green bonds are riskier than traditional ones because of the limited availability of past data and lack of liquidity.
Are green bonds only for ethical investors?
No, anyone can invest in green bonds. But research well to ensure they meet your specific goals.
When was the first tranche of sovereign green bonds launched in India?
The first green bond in India was launched on January 25, 2023

March 13, 2024

Non-Convertible Debenture (NCD) vs Fixed Deposit (FD): Meaning, Features, and Differences Explained

Are you unable to choose between putting your money into Non-Convertible Debentures (NCDs) and Fixed Deposits (FDs)? You’re not alone! Both options are popular among investors looking for safety and consistent returns, but they both come with their own sets of pros and cons. In today’s blog, we’re comparing NCDs with FDs.

Fixed Deposits – An Overview

It’s a well-known conventional investing choice for risk-averse investors. Fixed deposits are financial instruments offered to the general public by banks and non-banking financial organizations (NBFCs) that allow them to deposit money for a predetermined amount of time and receive a guaranteed fixed return. Both cumulative and non-cumulative options are available with the fixed deposit, giving investors the choice of receiving interest payments periodically or all at once when the fixed deposit matures.

Features of Fixed Deposits

1. The length of a fixed deposit may usually be chosen with flexibility; it can be anywhere from seven days to ten years.

2. Many banks provide an automatic renewal option that lets investors reinvest their money without having to go through any extra steps.

3. Fixed deposits often provide flexibility in the amount invested, with most banks allowing a minimum investment of INR 5000.

4. Fixed deposits are extremely low-risk investing options since they provide a guaranteed return.

5. Senior citizens benefit further from fixed deposit investments by earning interest rates higher than standard rates.

Non-Convertible Debentures (NCDs) – An Overview

Debt instruments, known as NCDs, are issued by corporate entities to raise long-term capital from the general public. Investing in debentures entails lending money to corporate entities in exchange for a fixed interest rate for a predetermined length of time. The principal amount of the loan is repaid by the company on the maturity date.

Two forms of debentures exist: convertible debentures, which can be converted into equity shares of the company after a specific length of time, and non-convertible debentures, which cannot be converted into equity shares. NCDs are issued in the primary market initially, but they can also be traded in the secondary market, offering investors greater liquidity.

Features of NCDs

1. NCDs have a fixed interest rate that is set at the time of issue by the issuing firm.

2. An investor will get consistent, recurring income from NCDs.

3. NCDs are issued for a particular period, after which the principal amount is repaid.

4. Purchasing NCDs entitles you to become a creditor of the business, allowing you to make claims against its assets in the event of its insolvency.

5. Due to the high risk associated with investment in corporate houses, these NCDs are rated by the credit rating agencies based on the creditworthiness of the issuing company.

Difference between NCD and Fixed Deposit

We’ll now explain the distinction between a fixed deposit and an NCD.

Interest Rate – Fixed deposit interest rates typically range from 4 to 7% annually, whereas NCD interest rates often range from 8 to 10%.

Issuer – Corporations issue NCDs to generate capital, whereas banks or other financial organizations issue fixed deposits.

Risk – NCDs possess higher risk as private business houses issue them. As some business houses have low credibility, investing in their NCDs can put your money at higher risk. On the other hand, FDs are issued by banks and other financial institutions that the Reserve Bank of India regulates.

Liquidity – Investment in NCDs offers higher liquidity than Fixed Deposits as they can be traded in the secondary market. Still, no such benefit is available in fixed deposits, although a premature withdrawal option comes with a penalty.

Taxation – NCDs held by an investor in demat are exempted from tax deducted at source while keeping the NCD in physical form attracts TDS if the annual payout is more than 5000 INR. Interest earned from a fixed deposit is fully taxable as per your tax slab if it is above 40000 INR (50000 INR in case of a senior citizen) in a financial year.

Credit Rating – The rating of NCDs by credit rating agencies is mandatory, while the fixed deposits issued by the banks are not required to get rated by any agency; however, corporate fixed deposits issued by non-banking financial companies are required to get the rating from any credit rating agency.

Interest Rate Risk – As NCDs are tradable in the secondary market, their price may vary based on interest rates prevailing in the economy, while fixed deposits don’t have any such kind of risk.

Safety – Assets of the company generally back the issuance of NCDs while the fixed deposit issued by the bank is insured against the bank’s insolvency up to 5 lakh INR.

Conclusion

Investment in fixed deposit is suitable for the investor with lower risk-taking ability and is happy with a lesser return on their investment. At the same time, NCDs can be opted for by investors looking to earn some extra return and can take additional risk for that. Overall, the above comparison shows the features of both fixed deposits and NCDs.

On a short note, investors must consider their risk profile, investment goal & objective before deciding between fixed deposits and NCDs.

Frequently Asked Questions (FAQs)

Can I withdraw my investment from a fixed deposit before maturity?
Yes, you can withdraw your investment before maturity, but you need to pay some penalty to the issuing authority.
Can I sell NCDs in the secondary market?
Yes, after NCDs are issued in the primary market, they are listed in the secondary market like any other securities.
What is the shortest and longest duration for which an NCD can be issued?
NCDs cannot be issued for less than 90 days and more than 20 years.
What is the minimum and maximum duration for which a fixed deposit can be issued?
The fixed deposit can be issued for a period ranging from 7 days to 10 years.
Is investment in NCD better than investment in fixed deposits?
NCDs generally carry higher risk as compared to bank fixed deposits but offer higher returns; hence, it is suitable for only those investors who can take risks for higher returns.

March 11, 2024

Category: Personal Finance

Economic Indicators – An Overview

Top Economic Indicators

Gross Domestic Product

Unemployment Rate

Consumer Price Index (CPI)

Interest Rates

Trade Balance

Performance of the Stock Market

Importance of Economic Indicators

Conclusion

Frequently Asked Questions (FAQs)

What are Economic Indicators?

How do interest rates affect the economy?

Do lagging indicators tell us what has already happened?

Why are Economic Indicators important?

Can Economic Indicators be misleading?

Simple interest

Formula

Example

Pros

Cons

Compound interest

Formula

Example

Pros

Cons

Conclusion

Frequently Asked Questions (FAQs)

What is Simple interest?

Which offers a higher return, Simple or Compound interest?

What are Compounding periods in Compounding interest?

Overview

Types of ITR

Individual ITR (ITR 1)

Eligibility

Individual ITR (ITR 2)

Eligibility

Individual ITR (ITR 3)

Eligibility

ITR 4

Eligibility

What is the Presumptive Taxation scheme for filing ITR 4?

ITR 5

Eligibility

ITR 6

Eligibility

ITR 7

Eligibility

Conclusion

Frequently Asked Questions (FAQs)

What are ITR forms?

Which ITR form should I use?

What if I have income from capital gains or multiple house properties?

Can I file ITR forms online?

How to calculate the taxable income?

Introduction

Why are shares transferred to IEPF?

Reasons why the holder may not claim dividends

Who can claim shares from IEPF?

Amounts credited to IEPF

Utilization of IEPF Amount

Process to get shares from IEPF

Conclusion

Frequently Asked Questions (FAQs)

Why are shares transferred to IEPF?

How can I check if I have any unclaimed dividends or shares lying with the IEPF?

How long does it take to get the shares back from IEPF?

What does IEPF stand for?

Which form needs to be filled to claim shares from IEPF?

Overview on Insurance

Features of Insurance

Terms of Insurance

How does Insurance work?

Benefits of Insurance

Types of Insurance

Life Insurance

General Insurance

How to Choose an Insurance Provider?

Key Comparison Metrics of Insurance Providers