Top 4 benefits of investing through SIP

Why you should choose SIP mode ?
 

You cannot earn crores of rupees overnight unless you have won a huge lottery. Money is accumulated over a period of time and the best way to multiply your savings is through investing them in a Systematic Investment Plan (SIP). As the name implies, this program allows an individual to develop his portfolio by investing small amounts at fixed intervals. The benefits of this plan are as follows:

No restrictions on amount to be invested:
Investors can begin an SIP with an amount as low as Rs.500. This allows people of all financial backgrounds to take advantage of this plan. Moreover, it inculcates the habit of saving since you have to keep aside a fixed amount. It is a disciplined investment mode which brings you one step closer to achieving your financial goals.

Convenient process:
One can select from different investment vehicles for SIP such as equity, mutual funds or ETF’s (exchange traded funds). In addition, you can also choose if you want to invest on a monthly, quarterly or annual basis. All you have to do is instruct your bank to enable auto-debit option so that the fixed amount is debited from your account every month eliminating the need for you to check every time if the amount is invested or not. Investors also receive periodic statements mentioning the number of units purchased and current balance.

Ability to multiply:
SIPs possess the brilliant potential of compounding. For example, if you start an SIP at the age of 25 investing Rs.5000 each month, in 35 years’ time when you reach 60, your maturity amount would be approximately 1.1 crores considering 8% interest rate. However, if you begin 10 years later with the same amount, you would have around 47 lakhs by the time you are 60 years which is less than half. Thus, the earlier you begin investing, the more your money multiplies.

Flexibility in terms of termination or modifying amount:
Apart from convenience, an SIP offers tremendous flexibility. You can continue the plan till the chosen date or you can terminate it as per your desire by submitting a written request. In a month’s time, the SIP will be discontinued. Individuals who want to increase or decrease the sum being invested can easily do so by ending the present SIP and beginning a new one.

SIPs are a safe investment option since they protect you from market volatility. These plans ensure that you invest a fixed amount regularly and reward you with long-term financial gains.

Planning - A Must to Fulfill Your Child's Education Goal

Planning for your child’s education is one of the vital goals for every parent. It also forms a significant part of your cash outflows. However, as compared to other monetary objectives, it is relatively simpler to arrange finances for kids’ learning since the duration is fixed.

At the same time, the cost of higher education is presently quite high and estimated to grow at 10-12 per cent annually ( ET Research 2014) . Parents need to effectively plan their child’s education to avoid a financial crisis later. Given below are some valuable guidelines:

Determine a specific time-period and amount:
Parent must set a date for achieving education goals of their children so that they are ready with the funds. It can be 6-7 years when your kid begins school or 21-22 in case of higher education. In addition, it is vital to establish the amount of money which would be needed to fulfil your child’s aspirations. Fee structure varies for different courses hence you should carry out proper research and then take steps for financial planning.

Start saving early:
Don’t begin thinking about funding your child’s education when he takes his first step. Commence the saving process the day your baby is born. Delays will result in smaller corpus whereas saving over a long period of time will help to accumulate greater amount plus the money will multiply too. Start early so that you don’t have to compromise on the course/institution and your child gets the best education.

Select an appropriate investment route:
Investing in the right tools is important to ensure your child’s education is not hampered. Go through the Child Education Plans offered by various companies and check if it meets your requirements. You can also invest certain amount in the mutual funds and the rest can be put into fixed deposits and tax-free bonds. Take the help of an advisor to develop an efficient investment plan for your kid’s future.

Consider other financial aid such as scholarships:
If your kid is brilliant in studies or extracurricular activities, then you can opt for financial assistance in the form studentship, internships or grant. Such assistance largely helps in planning finances.
To conclude, make sure you stick to the financial plan you have developed so that there is no roadblock in your child’s desire to pursue his preferred course. Review the plan on a yearly basis to ensure that it is going exactly as per your goal.

So this Children's Day, take the first step in safeguarding their future........... 

Let’s start investing !

Now that you have understood why investing is important, here’s how you can actually go about doing it in 3 simple steps:

Step 1: Be sure that the investments that you plan to make suit you:

Investments and risks: Some investments carry more risk than others. For instance, buying and selling stocks on a daily basis is considered risky while keeping your money in a bank fixed deposit or better still, government bonds is considered safe. There are other investments such as gold and real estate which fall somewhere in between.

People and risk: At the same time, there are some people who thrive on taking risks while others would prefer to avoid them. The level of risk which you are comfortable with may be determined by your circumstances. It is likely that people with greater accumulated wealth, fewer dependants, etc. are more open to taking risk. But that’s not necessarily true either. Some people are just natural risk takers while others naturally fear risk and still others are somewhere in between.

People, investments and risk: Ideally every investor should have some high risk and some low risk investments. This is because high risk investments typically offer a chance to gain higher returns while lower risk instruments offer moderate scope for returns but are more secure. Having a mix of both ensures that your money grows and has some stability as well. However, there is no ‘ideal’ mix of both that can be recommended for everyone. Your investment mix, also called your asset allocation in technical terms, should depend on how comfortable you are with risk or in technical terms, your risk taking ability.

Match-making: Irrespective of how much risk you are comfortable with, make sure that you have a mix of investments that you are comfortable with – no sleepless nights, fearing that you have taken on excessive risks and no restless feelings that your money is all too safe but not able to give you a chance to make good money. But having said that, there are some benchmark asset allocations that correspond to people with different risk taking abilities:

Step 2: Pick suitable investments within each asset class

There are two mainstream asset classes or types of investments – equity and debt.

Investing in equity - Investing in equity actually means that you have invested in a business which is being managed on a day-to-day basis by someone else. Accordingly, the returns that you can expect to receive will depend on how successful the company you have invested in is. If you choose good companies, you could benefit from profits and from an increase in your investment as the company grows in value. If, unfortunately, you choose a bad company, you could lose everything upto the amount that you have invested. So, how do you pick those winners? By doing your homework diligently – study potential companies and industries and how the economy is progressing. Alternatively, you could just invest in equity through a mutual fund. This way you pass on the chore of picking stocks to a professional fund manager who has a team of research analysts to support his decisions.

Investing in debt - Debt as an asset class includes investments which give you a fixed return. It is called debt because you are effectively lending your money to the government (in the case of government bonds) or a bank (in the case of bank deposits) or some other institution. As in the case of equity, you could invest directly in the debt instrument or you could invest in debt through a mutual fund.

1. Bank/company deposits, post office schemes and tax free bonds – When you investing directly in bank or company fixed deposits or in a post office savings scheme or in government or semi-government tax savings bonds, you are aware of the tenure of your investment (i.e., for how long you will be investing) and the rate of interest that you can expect, right from the time you make the investment.

2. Debt mutual funds – When you invest through a mutual fund, while you are still investing in secure, fixed income investments, there is a fund manager who tries to improve the returns on your investment. He does this by monitoring the markets for fixed income investments and making investment decisions in keeping with a stated objective. Another advantage of investing in debt through a mutual fund is that you gain access to some debt instruments

which you may not have been able to as an individual as the minimum investment limits are rather high. Being a fund that pools together the investments of many large and small investors, a mutual fund manages a large corpus of money and can invest in such instruments on your behalf.

Step 3: Make your investments!

This is perhaps the easiest step once you have short listed the investments that you plan to make. All it requires you to do is get your documents in place (all investments these days require some proof of identity and residence amongst other documents), obtain the necessary application forms, fill them in and submit them to your broker or agent or directly to the source of investment.

End note

Remember, investing is not rocket science but it does require you to dedicate a little time and effort if you hope to make it a success. To further facilitate your investment exercise, you could use the services of an investment advisor or wealth manager and benefit from their experience.

TERM INSURANCE A cost-effective form of Life Cover

Individuals take life insurance so that their dependents do not face any financial problems after their death. Premiums are paid on an annual basis and in the event of death, the sum insured is given to the dependents. Term insurance policy is the most basic form of life insurance which is considered an economical option. Let’s talk about its features and importance:

What is term insurance ?
A beneficial type of life cover, term insurance provides higher cover at low premiums when taken at an early age. The policy can be taken for a minimum period of 5 years. You can choose to pay premium annually, half-yearly, quarterly or even monthly. Term insurance provides coverage for a fixed duration. If anything happens to the policyholder in this period, claim is paid to the nominee. The amount can be given in lump sum or a certain amount can be paid monthly as per the family’s requirements. Thus, term insurance effectively takes care of all your liabilities and provides financial support to your family especially if you are the sole breadwinner.

When should I buy this policy ?
Although the minimum entry age for term insurance is 18 years, it is certainly too early. However, it is recommended that you take this cover in your mid 20s when one generally starts earning. Don’t wait too long because premiums increase as you get older. So the more you postpone, the more costly it becomes to obtain term insurance. Start with a small cover which is in line with your present income and gradually take more plans. Assess your policy once every 4-5 years to determine if you need a higher sum insured.

Are term plans available online ?
The answer is yes and in fact it is the best way to buy term insurance. There are various advantages of taking this policy online such as quick processing, complete transparency and reduced paperwork. Most importantly, you can analyse plans offered by different companies and select the one best-suited for you.

Term insurance has gained popularity among individuals wishing to secure financial stability for their families. It has been massively advertised by insurance firms and some have dropped premium amounts too making it the right time to take this policy. Have a detailed discussion with your financial planner and register for this policy in order to ensure your family has adequate funds to look after themselves in future.

How to articulate Financial Goals

Deciding how much you wish to earn over a particular period of time does not suggest materialism, pride, or greed. It encourages you to plan effectively other aspects of your life such as accomplishing social, family, intellectual and physical aims. Given below are some helpful tips to help individuals in articulating fiscal ambitions:

Implement the SMART principle:

The best way to begin articulating your goals is by following the SMART approach which is a vital part of setting goals. SMART stands for:

Specific: Objectives need to be specific, clear and not vague. For example, ‘I want to invest some money’ is ambiguous whereas ‘I want to invest in Axis mutual funds because of higher payout’ is precise.

Measurable: Any goal must be quantifiable in terms of ‘how much’. Taking the previous example, ‘I intend to invest in mutual funds’ gives a rough picture but ‘I want to invest 50,000 in mutual funds at the end of 6 months’ is measurable.

Achievable: As the word implies, aims need to be attainable. Don’t set goals which are unrealistic. Assess your current financial situation and then determine objectives.

Relevant: Are you investing in equity because your friend did the same although you know that it is not your preferred choice of investment? Then your goals are not in alignment with your aims in life. Ensure that the financial instrument you choose complements your personal desires.

Timely: Have a clear picture about the duration required to reach a particular target and always set a timeline.

Make a PLAN:

Planning is the key aspect when a person articulates fiscal targets and desires to achieve them. If you want to buy a new car for your father in a span of 6 months, you must plan your finances in such a manner that you save a certain amount of money every month and execute your goal. Moreover, don’t just create a plan, work towards it. Assess your plans on a monthly basis and check if you are sticking to the goal.

Get others involved:

You are too tempted to buy classy cuff links even though you don’t really need them. If your partner, friend or colleague is aware about your financial plans, they can discourage you from making such unwanted purchases and persuade you to save that money. Expressing your monetary goals to a trusted person will give you an extra push in reaching your goals.

Prioritize your financial objectives:

Once you have made a list of your monetary goals, the next step is to rank them in order of priority. For example, paying for your parent’s insurance is high-priority but buying the latest LED television is low-priority.

Successful financial plans are those which are achieved in the given time frame. If you don’t have lucidity about goals to be accomplished at different stages of your life, then it is less likely that you will achieve them. Plan your goals well and make sure they form a broader part of articulation in your life.

Mutual Fund vs Fixed Deposits - A Useful Comparison

Fixed deposits have been the preferred choice of investment for not just investors but also for individuals who want to put their funds in a safe place and get fixed returns. Having a pre-set rate of interest, fixed deposits are offered by several financial institutions. However, over the years mutual funds have gained popularity over fixed deposits owing to better returns. This has resulted in people thinking ‘Should I invest my money in secure bank deposits or mutual funds?’ We compare the key features of both products to help you make an informed decision.

Earnings on Investment:
Widely known as return on investment (ROI), profit is a crucial factor. Banks have a fixed ROI for certain income slabs and age groups. Interest can be calculated monthly or quarterly. In case of mutual funds, ROI is not fixed. It is largely controlled by market conditions.

Impact on Taxation:
After returns, this is another vital aspect that investors ask their financial advisors. Income gained from mutual funds and fixed deposits is taxed differently. Interest accrued from fixed deposits is charged in accordance with tax slabs of the individual and it is included while filing returns. Mutual funds generate dividend which are assessed as capital gains. If mutual fund units are redeemed in less than 3 years, they attract lower tax rates. If you don’t sell them for 3 years, tax charged is almost nil making your investment highly profitable.

Ease of Withdrawal/Liquidity:
If you have a fixed deposit of Rs. 2.5 lakh and need Rs. 30,000, you have no option but break your entire investment. Besides, there is a penalty charged in some cases and rate of interest falls too. Mutual funds offer the advantage of complete liquidity. Investors can take out any amount they want and it’ll be removed from the total value. Returns will be generated from the remaining amount.

Growth of Capital:
When it comes to capital appreciation, mutual funds score over traditional fixed deposits. There is a small amount of equity involved in these funds which leads to rise in capital. Moreover, escalation of interest rates and the brilliant professionalism displayed by fund managers these days, mutual funds offer superior capital appreciation as compared to fixed deposits.

Volatility Factor:
This is a no-brainer. In case of fixed deposits, the rate of return is predetermined hence the returns are also fixed making it a safe low-risk financial product. Mutual funds’ performance is based on market trends. Any kind of instability in the market can affect the mutual fund value and result in poor returns.

Fixed deposits have a pre-set rate of interest making it an ideal product for investors who want to play safe and believe in capital preservation. Mutual funds on the other hand attract lower taxation and offer easy liquidity. Ultimately, it depends on the investors financial goals. They have to closely determine whether it is mutual funds or fixed deposits which will best fulfil their future monetary needs.

4 Essential Reasons for having Life Insurance

When we start earning money, we invest our savings in mutual funds, fixed deposits, equities etc. However, many of us hesitate to buy an appropriate life insurance policy and keep postponing it. We need to realise that life insurance is the only tool which can help your immediate family in bad times and take care of their needs if something happens to you. We list the top 4 reasons why you need life insurance.


Fulfil your family’s monetary needs: 
If you are the sole breadwinner in the house, then it is crucial for you to be insured. If anything happens to you, there won’t be any source of income for your loved ones making it tough for them to fulfil even their basic requirements such as food and education. Taking life insurance will ensure your loved ones have adequate funds to survive.

Repay debts and clear other payments:
You have taken a home loan to buy your dream house or borrowed funds from a friend/colleague to begin your venture. In such cases, it becomes difficult for your partner or family to repay the money. Money obtained from your life insurance policy can help in clearing off these debts and take the burden off your family.

Tax deduction on premium: 
Life insurance not only offers financial protection but also acts as a useful tax saving tool. As per Section 80C of the Income Tax Act, premiums paid yearly for life insurance are entitled for tax benefits.

Enables you to Sleep Peacefully: 
Money can’t compensate the passing away of a loved one. However, once you have an effective life insurance policy in place, you are at peace because you know that if anything happens to you, your family can live comfortably without depending on anyone. 

Nobody lives for infinite years, death is certain. But no one knows when it will strike a person. Hence, it is always better to be prepared and plan in advance so that your loved ones don’t have to go through any financial turmoil. If you don’t have a life insurance policy yet, buy one right away. Premiums are low if you start young.

Loan EMI vs SIP

You all must be paying home loan EMI for your dream home. It pinches a lot. Ever thought of a way to get all the principal and interest back.
Is it possible. 

Home loan - EMI 

How?

If interested, read on...

Invest 10% extra of your Home Loan's EMI in mutual fund Equity SIP and all your home loan principal and interest will recovered with profit in 20 years.

Example: For Home Loan of 20 Lac for 20 Years with ROI 10.50%EMI will be Rs. 19,968.

In 20 Years one will pay total towards HL Rs. 47,92,930.
Interest: 27,92,930 &
Principal: 20 Lac

For SIP of 2000 for 20 Years with 20.4% expected return, Fund Value will be 67,18,375

(SENSEX has given avg return 20.4% in Last 36 years from 1979 to 2015)

Thus you get back all your principal and interest back and plus earn a cool profit of Rs. 19,25,455.

Risk & Return

At least 10 types of investment risk exist, and there's no way to eliminate all of them. Playing it safe can be risky too, however. So the question isn't whether to take a risk, but what kind to take.

Risk tolerance varies from person to person and can change over time with changes in your personal and financial circumstances. You need to assess your risk profile by evaluating whether you consider yourself to be conservative, moderate or aggressive in your approach to investing.

Types of investment risk

Of the many kinds of investment risk, most investors only worry about one: the risk of losing money. With all the media hype about financial markets and the ease of checking on your returns, it's easy to see why investors can become fixated on market swings.

Market risk.Market risk is the risk of losing money when the financial markets go down. When investors think of losing money, they're thinking about volatility. Volatility can be especially uncomfortable when prices fall steeply or remain down for a long time.

There are 3 strategies for combatting market risk: diversification, asset allocation and rupee-cost averaging.

Inflation risk. Inflation is a loss in the value of what a rupee will buy. And the fact that you can't see inflation eroding your principal makes it all the more dangerous.

For long-term goals such as retirement or your child's college education, your biggest risk may be inflation. If your money doesn't grow enough, you won t be able to stay ahead of inflation. If you are conservative and solely select investments whose primary objective is to preserve rather than grow capital, you are especially at risk.

The main strategy for combatting inflation risk is to include stocks in your portfolio, which means accepting some volatility. Growth and volatility go hand in hand—you can't have one without the other. Falling short of your target for a long-term goal can be worse than living through market ups and downs.

Financial professionals see risk differently

Mutual fund managers, on the other hand, look at risk more broadly. To them, risk is more about the factors that contribute to volatility, such as:

Business risk. Anything that can harm a company's profitability, from poor management to obsolete products, can be called a business risk.

Credit risk. When bond issuers fail to make their promised interest payments or don't repay principal when it comes due, investors are experiencing credit risk.

Interest rate risk. Rising interest rates are bad news for fixed-income investments. Interest rate risk measures how sensitive an investment's price is to interest rate fluctuations.

Currency risk. The possibility that international investments will suffer because the rupee (or dollar depending on the fund) gains strength against the currencies of other countries is known as currency risk.

Country risk. Political instability, financial woes and other problems that weaken a country's economy can spell trouble for money managers who invest there.

Why do people take investment risks?

Often called the risk-return tradeoff, investors accept greater investment risk because they are seeking higher returns. If you wish to reduce risk, you must be willing to accept lower returns. You just can't get a high return from a low-risk investment.

How much risk can you accept?

The amount of investment risk you can tolerate is a personal matter. If investment risk worries won't let you get a good night's sleep, you may have taken on more risk than you can live with.

Your investment advisor can help you develop realistic expectations of risk-adjusted returns by discussing with you the risks and rewards of each of your investments while matching your goals and objectives with appropriate mutual funds.

Mutual funds can help you reduce risk

Mutual funds have experienced and skilled professionals who determine and monitor risks on an ongoing basis. In addition, various bodies evaluate mutual fund returns by the risks they carry.

Diversification is one of the risk-reducing strategies mentioned above. Mutual funds are an excellent way to diversify your portfolio. Each fund invests in more companies and industries than you could probably own by yourself. The fund managers carefully research the individual companies and industries before adding them to the fund's holdings.

Investment Strategy

Finding the right investment has become quite a challenge. Most of us fall prey to buying the latest top performers and accumulating a few shares of this and that without really considering our financial goals, time frame and tolerance for risk.

Whether you are planning for your individual retirement, investing to meet the expenses of your child's higher education, or simply building cash reserves, it is important to match your financial goals with a mix of assets that may help you meet those goals.

To build a successful investment strategy you should carefully structure your plan to achieve your goals without taking more risk than you can afford or are comfortable with. You also need to consider how much time you have to reach your various goals.

What financial goals do you want to achieve?

The first step is to define your financial goals. Your choice of investments should always be driven by what you want your money to do for you, and when. You may want your investments to fill specific needs such as buying a house or a car, paying children's education costs or simply building a comfortable retirement nest egg. Your goals may be more general—like building cash reserves or accumulating wealth. Either way, spending time to determine your financial goals will help you choose the most appropriate investments.

When do you hope to reach them?

The next step is to identify the approximate time frame within which you wish to achieve the goals you have listed. For example, do you aim to buy a house in five years, or retire in the next twenty years? Setting time frames for your goals is critical.

Different time frames require different investment strategies. The sooner you need to spend the money now invested, the greater is the need to invest for principal stability and liquidity. Conversely, the longer you can leave your money invested, the less you need to worry about short-term price fluctuations and the more you can focus on earning a high return over time.

Risk, return and timing are all related. Generally, the riskier an investment, the higher its potential return over time and the more suitable it is for an investor with a long time frame.

How much money will you need to invest to achieve your goal?

Most of us fail to take into account inflation and taxes. Therefore, it would be advisable to spend some time and take into consideration, the future cost of the goal. Can you achieve your goals with amounts that you have already invested?

How much risk can you afford to take?

Each and every individual has a personal tolerance for risk and in order to set an investment course that you will be comfortable with—and will not abandon prematurely—you need to think about your willingness to accept fluctuations in the value of your investments.

As you assess your risk tolerance, you will need to consider how soon you need to reach every investment goal. Longer-term goals allow you to pursue more aggressive and potentially more rewarding strategies because the investment has time to recover from market setbacks.

Financial goals that need to be met sooner rather than later call for lower or moderate risk approaches. Whatever the investment profile may be, one of the best ways to reduce overall risk is to diversify your investments.

Do you need to rethink your investments periodically?

No single asset class (stocks, bonds, or money market instruments) is appropriate for all of your goals. At any given point in your life, you will probably want to keep part of your money secure and accessible, part invested for income and part invested for growth. But the proportions will change as you prepare for and achieve successive investment objectives.

It is a good idea to review your goals and investments once a year, keeping in mind the objectives each time a new investment is made. As your circumstances change, so will your investing strategy.

Choosing Investments

Before you choose your investments, consider your financial goals. You may have a long-term goal in mind like retirement, or you may have something near-term in mind, like buying a new car.

What are your investment options?

Mutual funds invest primarily in three types of securities: stocks, bonds and cash-like securities. Each has a place in your investment portfolio. You'll use more of one and less of another depending on your financial goal and your answers to 3 questions:

• Is the date you need the money flexible or fixed?
• Will you invest a lump sum or save periodically?
• How much volatility can you handle?

Let's look at what stocks, bonds and cash-like securities are, and how they can fit into your portfolio,

Stocks and stock funds

When a company needs to grow or expand, it may sell part of its ownership to the public in the form of shares (stock). In exchange for the money received from the sale, the company gives shareholders a portion of its future profits, as well as a measure of its decision-making power. When a mutual fund buys stocks, the fund's shareholders become part owners of the companies that issued those stocks.

Stock prices can change greatly from day to day, depending on the supply and demand for the stock. If many investors want to buy the stock, the price may go up. If fewer investors are interested in buying the stock, the price may go down.

Not all stock funds are alike. A stock fund's risk and return depend on the types of companies it buys. Pure growth funds buy companies that are expected to grow rapidly. These companies tend to use their profits to finance future growth rather than paying them out as dividends. Other stock funds invest more conservatively, favouring large, established companies that pay reliable dividends which provide income that can reduce the fund's volatility.

Benefits of investing for growth. People invest in stock funds because they hope their investment will have grown substantially when they finally sell it. Over the long term, stock funds have outperformed bond funds and money market funds and have been the best hedge against inflation.

In order to enjoy the benefits of investing in stock funds, you should maintain a long-term view. While stocks have produced the greatest returns over time, stock prices fluctuate, sometimes widely.

Do stock funds make sense for you? That depends on your answers to the 3 questions we posed before. If your time frame is flexible, you might be able to wait out any temporary downward price movements in the value of your stock fund. On the other hand, if your time frame is fixed, and especially if it's short, volatile investments such as stock funds can be risky.

While volatility is not of great concern to the average long term, buy-and-hold investor, it can be worrisome to people who check fund prices daily and can't get a good night's sleep when a stock fund is losing value. Using rupee-cost averaging rather than a lump-sum approach to buying and selling investments helps ameliorate the average person's discomfort.

Bonds and fixed-income funds

A bond is a negotiable IOU, or debt security, issued by a corporation, government or government agency. When investors buy a bond, they're lending a certain sum of money (principal) to the bond issuer for a specified time period (term).

In return, the issuer promises to:

• Make regular interest payments during the term at a rate set when the bond is issued.
• Repay the face value of the bond on the maturity date.

About maturity. A bond's maturity indicates when its issuer is required to repay the principal. Bonds are classified in 3 general maturity ranges:

• Short-term—usually less than 3 years
• Intermediate-term—between 3 and 10 years
• Long-term—greater than 10 years

In general, the longer the maturity, the higher the bond's interest rate. This is to compensate you for the risk of tying up your money at a fixed-interest rate for a longer period of time.

How interest rates affect prices. Between the time you buy a bond or bond fund and the time you sell it the value of your principal will fluctuate. Generally, when interest rates go up, bond prices move lower-and when they move down, bond prices move higher. As you might expect, the best time to invest in bonds generally is when interest rates are declining. Typically, the longer a bond's maturity, the higher the interest-rate risk, or the more sensitive its price will be to interest rate changes.

Can you lose money investing in bonds? People mistakenly assume that the word "fixed-income" means they can't lose money owning a bond. But, the interest rate that the issuer pays is the only part of the investment that is "fixed." The value of your principal, on the other hand, has the ability to increase or decrease depending on whether interests rates move up or down.

It's different with bond funds. The fund typically doesn't hold all the bonds until they mature. When you buy a bond fund, you get diversification because the fund owns many bonds, not just one. This diversification helps protect you from credit risk—the risk that the issuer fails to make timely interest payments or to repay principal. However, this means that the income you receive from the fund fluctuates along with your principal, as the fund buys and sells bonds paying different rates of interest.

Types of bonds. There are many types of fixed-income securities to choose from. Funds will often emphasize one type or another to help investors meet their investment objectives.

• Government securities issued by the Indian government are considered the most credit worthy of all debt instruments-since they are backed by the full faith and credit of the government. Treasury bonds, bills and notes have a wide range of maturities.
• Corporate bonds are issued by companies in order to finance projects ranging from building a new plant to modernising at a current location. Risk and return vary, depending on the financial strength of a corporation. Bonds issued by corporations with lower credit quality generally pay a higher rate of interest to compensate investors for the higher repayment risk.
• State government bonds are issued by local governments in order to finance a variety of projects, ranging from water systems and public schools, to hospitals and police protection. State government bonds are generally considered to be relatively low risk investments, second only to securities issued by the federal government and its agencies. However, within state government bonds themselves, there is a wide range of credit quality.

These bonds are exempt from federal taxes and, in the state of issue, often free of state and local income tax as well. Before choosing a tax-free fund, you should consider the equivalent taxable yield-what a taxable investment would have to yield before taxes to equal the tax-free yield of a particular tax-free bond investment.

Do bond funds make sense for you. Nearly all investors can benefit from having a portion of their portfolio allocated to bonds. Even for investors whose primary objective is long-term growth, bonds can play an important role in building a well-diversified portfolio.

Let's go back to the questions we posed earlier. First is your time frame. Bond funds offer greater potential return than cash-equivalent investments such as money market funds, But they can be riskier than money market funds for people with very short time frames and for those who need to withdraw all their money on a fixed date.

Bond funds provide diversification and can be a key element in your asset allocation strategy to combat the volatility of stocks, While bond prices and returns can fluctuate, over the long haul bond funds have been less volatile than stock funds, For people who are very risk averse, while bond funds lag behind stock funds as an inflation fighter, they are better than cash-equivalent investments are at preserving your purchasing power.

Cash-equivalent investments and money market funds

In many respects, most money market instruments are just short-term versions of bonds. They are short-term, high-quality, fixed-income securities, such as Treasury bills, short-term bank certificates of deposit (CDs), and commercial paper issued by corporations. The average maturity of a money fund's portfolio must be 90 days or less to help protect against interest rate risk. The income money funds provide is generally determined by short-term interest rates.

Do money market funds make sense for you? Money funds provide you with current income and seek to preserve your principal. Because of their stability, money funds are often used for emergency cash reserves or for a very short-term financial goal.

Cash-equivalent investments and money market funds are the least volatile of the investment types we discussed and are therefore ideal for people with extremely low risk tolerance. However, the income from this type of investment is only slightly higher than interest rates offered by banks on savings accounts making them poor choices to combat the damage inflation inflicts on your purchasing power.

Risk and reward go hand-in-hand

When choosing investments, remember the tradeoff between risk and return. The higher the return you seek, the more risk you'll need to accept. There's no such thing as a low risk-high return investment.

As always, you will want to consult your financial advisor about how fixed income funds could play a role your investment strategy.