Investor Education

How to prepare a Budget?

In this chapter we will consider the importance of budgeting.

A budget is an account of the necessary expenses incurred every month. This is a computation of the essential tasks and expenses. Keeping an accurate tally of monthly earnings or income is in fact budgeting. A budget is nothing but an estimate of income and expenditure. It is a plan that details our regular income and expenses.

A well prepared budget tells us about our main expenses, and helps us understand where our hard earned money is deployed. When we prepare our budget, we note down the expenses that are deemed essential from our point of view, such as monthly groceries, rent, phone, medicines, local transport etc. This exercise tells us what our needs really are, where money is being spent needlessly, and that if such spending is avoided, how much we will be able to save. Such an exercise tells us how much we could possibly be able to spend on other important areas, thus avoiding having to borrow money or seek help from others.

It is very easy to prepare a budget. The budget making process can be understood by means of a simple illustration. Take a notebook or a diary. Write the month at the top. Write your income at the top of the page and then prepare a list of all expenditure incurred- such as school fees for children, groceries, medicine, phone and electricity bills etc.

Total Income 10,000
Monthly grocery bill 1,000
Children’s school fees 750
Phone expenses 400
Local transport 300
Rent 3,500
Milk and vegetables 1,500
Medicines 200
Other Expenses 500
Total Expenditure 8,150
Savings 1,850

We note therefore that the monthly expenditure is 8,150 Rupees, even after inflating expenses somewhat, and we are left with at least 1,850 Rupees. This is the money that we can save if we really want to. This table represents the maximum amount that we can possibly spend. A monthly budget can be prepared in such a manner. Over time we can possibly change spending in certain areas. Perhaps we could spend more in some items and reduce expenditure in others.

How can you prepare budget through Savings

This chapter attempts to explain various aspects of savings such as: What are Savings, Why one should save and how one can save. The reasons for savings money and how one should go about it are also explained in this Chapter.

Chapter 1 gave us information about budgets and we understood how it is possible to save money through the budgeting process. Savings are nothing but the money left over after our essential monthly expenses are met. Many people are unhappy about the fact that they are unaware of how and why their money gets spent. As a result, they are left with no choice but to borrow money from friends and neighbours at the end of the month. They are rendered penniless when they have to meet occasional one-off expenses or it is time for special events such as weddings etc. Adequate savings ensure that such situations do not arise and that all the family’s essential needs are met.

Savings are essential for ensuring the safety and security of one’s family, to progress with the times, to hold one’s head high in society and so that the basic needs of the senior citizens as well as children in the family are met. Savings are that part of one’s income that one conserves after meeting expenses. Savings are generated only after taking care of our basic needs.

Let us go to Chapter 1 in which Table 1 explains how a monthly budget is prepared. You will notice that you have only noted the essential monthly expenses. After adding all such expenses you will be amazed that you seem to have some funds left, whereas if you hadn’t prepared such a budget, you might have had to borrow money from your neighbours. Preparing a budget encourages you to save money. If you observe the table carefully, you will notice that it is possible to save some money in each item listed there, because the listed expense is the maximum amount that one can spend. If you are able to save some money from the various expenses listed in the table, that is nothing but generating savings from the budget exercise.

How to use savings for investments

This chapter talks about the safety, income and growth of our money.

Investments are the deployment of our savings into activities that generate growth in capital and thus increasing wealth. Examples include buying a home or land, placing money in fixed deposits, buying gold or jewellery etc.

We do not get high returns or interest on money deposited in banks. Due to inflation and costs rising, the value of our rupees gets eroded. Our capacity to buy goods from the market for our needs is depleted as a result. It is essential to invest in order to ensure that our purchasing power remains intact in an inflationary environment so that rising costs do not affect us as much. In other words, our savings can be impacted by inflation but our investments will not be.

Deposits in banks give us a fixed return but investing money means that your funds are liquid and also can be deployed in several places. Investing is a modern and sound technique of saving.

Everybody can meet their basic needs using savings but if you have big aspirations and dreams then investing money is the only option.

The idea behind investing money is growth in capital. This means that while investments carry higher risks than savings, there is a chance of getting higher returns too. Investments are a good option especially for the long term horizon.

On the other hand savings are safe and secure, but the growth in capital is slow and low. Savings are a good avenue for keeping money safe and intact, which is useful in meeting your short term objectives.

Benefits of Investments Importance of savings
• Investments are long term in nature • Savings are short term in nature
• There is scope for higher returns in Investments • Savings that are deployed grow very slowly
• While Investments are riskier, there is a possibility of higher returns • Savings are less risky than investments
How to open a bank account and what are its importance

This chapter explains the stepwise procedure of opening a savings bank account and details the operation of the same.

A bank is an institution authorized by the Government, which accepts deposits from the public and companies, pays a certain interest rate on them, clears cheques and provides loan funds with certain terms and conditions. In addition banks are supposed to operate a transparent mechanism of monetary transactions and provide other financial services to its customers. Banks play an important role in the budgetary process and economy of the nation.

The first step in the investment process is to open an account with a bank. In addition to keeping our funds secure, banks also pay a certain rate of interest on them. One can also place one’s savings in a fixed deposit with a bank for a specified time so that a higher interest rate may be realized, which is beneficial to the account holder.

  • If you want to open an account with a bank, it is necessary to have identification documents, a document confirming your address as well as 2 passport sized photographs.
  • Banks identify individuals through documents such as – voter ID card, Aadhar card, PAN Card, passport, driving license, I-cards in the case of persons working in Government organizations and identification documents issued by certain approved or authorized schools.
  • Banks accept confirmation of address by considering the proof or documentation provided by the individual, such as – Aadhar card, ration card, certificate, original domicile certificate, electricity or water bills of the previous 3 months.
  • At the time of opening an account a guarantor who has been associated with the bank for more than 6 months is necessary. Such a person has to have been operating his account in a satisfactory manner.
  • Banks provide you with a free passbook, which contains details of funds deposited/withdrawn in the course of operation of the account.
  • Banks provide you with an ATM card and password, which enables you to withdraw specific sums of money from anywhere
  • Banks provide you with Mobile banking and internet banking facilities.
  • After you open an account with a Bank, you can take advantage of several social security schemes that are available.
  • When you open an account with a bank, you have the right to operate the account in the branch you have opened the account in.
  • After the bank account is opened, the bank is bound to honour your instructions in operating the account to the extent possible, and they cannot deny you your rights to do so.
  • You can issue as many cheques as you want on the funds in your account.
  • Banks must pay you interest on the funds in the account.
  • You can pay bills from the funds in the account.
Different Insurance and Pension Products

The objective of this chapter is to explain the various products available for insurance and pensions. This chapter also provides information to the consumers of these products.

An insurance policy is a contract that promises to pay the policy holder a specified amount in the future in the event of any accident, incident or damage.

Premium is the amount that the policy holder pays, either at one time or periodically, in order to insure himself against the risks and receive compensation. In return for this premium, the policy holder or their family or both are provided insurance coverage.

Types of Insurance

A. Life Insurance

This includes policies which are directly related to the life of a person. These policies provide for a specified amount to be paid to the insured person, or to their beneficiaries or family members in the event of a particular accident or occurrence taking place. This type of policy is the best way of ensuring financial security for the family of the deceased, so that the family can continue with their lives with self respect. There are several types of such policies:

One time payment policy:

This type of life insurance policy has a contract wherein one time premium amount has to be paid by the policy holder such that for the rest of the holder’s life or for a specified time period, the holder is under insurance cover without having to pay any additional amounts as premium.

Money back policy

This is a policy which pays back the premium amounts. In such a policy, instead of receiving a lump sum amount at a particular point in time, amounts can be received periodically. Such a policy is ideal for those who invest their funds for a smaller duration of time and in instruments that grow faster in return terms.

ULIP ( Unit Linked Insurance Policy)

  • ULIPs include both risk cover as well as investments.
  • The movement in capital markets has a direct impact on the performance of ULIPs.
  • Most insurance companies make different kinds of funds available on the basis of the policy holder’s investment objectives, risk profile and time horizon. These fund products have different kinds of risk profile. The prospective returns may vary from one fund to the other.
  • ULIP plans offered by insurance companies have risk profiles that are different from each other.


Pensions are a type of life insurance. Pensions are a periodic and regular payment made by states to officials who have crossed the age of retirement or to their widows, disabled or differently abled persons.

B. General Insurance

Such products include policies which are not directly related to the life of individuals. Such policies insure the policy holders against risks to their wealth and health. Such policies are of the following type:

  • Medical insurance: This is a type of insurance policy that covers the policy holder or their family against the risks of expenses incurred due to hospitalization or for surgery etc. Such policies are issued under health insurance schemes and provide immediate monetary relief to holders who suffer unexpected health related ailments. A specified insurance premium amount covers the policy holder for expenses incurred during hospitalization and other medical costs like medicines etc.
  • Accident insurance: Such policies are part of general insurance. Such policies are annual in duration and cover risks of critical illness, disability and accidental death and are not applicable for other situations. These policies are therefore somewhat different from medical, life and health insurance.
  • Crop Insurance: Such types of policies are intended to provide farmers insurance cover and financial assistance in the event of risks such as loss or damage to crops, drought, floods, unseasonal rains, infestation of pests or other diseases or other natural disasters. These policies are also intended to provide aid to farmers to plant crops for the next harvest even as compensation is paid for damage to crops from the risks enumerated above. National Crop Insurance Scheme (RKBY) is the scheme implemented at the national scale in India.

Points to note while purchasing an Insurance Policy:

  • Please be clear on your aims and objectives
  • Understand the details of your insurance coverage and review it carefully
  • Keep in mind the amount of insurance that you need and the premium that you can afford to pay
  • Carefully study and compare the various insurance policy options available
  • Choose the policy option that best suits your insurance needs and capacity to pay premium
  • Seek advice from professionals providing insurance options
  • Before finalizing your insurance policy, verify the various schemes, conditions and premium online in order to get the best deal
  • It is always better to choose policies with two single covers rather than one with joint coverage
  • Check your policy on a regular basis and update it
  • Pay your premium amounts on time

Things to avoid:

  • Don’t buy insurance policies without full understanding
  • Buy life insurance only if necessary
  • Don’t ignore the risks involved in an effort to buy the cheapest policies
  • Do not forget to periodically check the benefits payable in case of illness
  • Do not restrict yourself to only one agent when buying insurance policies
  • Don’t buy insurance policies with premiums that are beyond your capacity to pay
  • Don’t trust online information about insurance policies blindly
  • Be honest at the time of the medical examination, do not withhold information
What are different Government Schemes available for investment ?

This chapter aims to provide information about various government schemes and investments in capital markets. Additionally, this chapter will attempt to provide information about how the schemes can be accessed and the procedure thereof.

The Government organizes various schemes to promote savings and investments by the citizens of the country. The Government encourages savings and investments by promoting various schemes and products.

  • This is a popular savings scheme, and the relevant certificates are available at post offices all around the year
  • These are available in denominations of 100, 500, 1000, 5000 and 10,000 Rupees.
  • The interest rate on these certificates is 8.5%.
  • It is possible to borrow money against these certificates
  • Such accounts can be opened at any authorized post office or bank branch.
  • The interest rate on such accounts in banks is 8.7%
  • A minimum of 500 rupees and a maximum of 1,50,000 Rupees can be annually invested in this scheme.
  • The tenor for such investments is 15 years
  • Loan can be availed in the third year after opening such an account and 25% of the amount deposited till then can be withdrawn at the end of the 1st year. A loan taken against such an investment can be repaid in 36 installments.
  • The post office savings scheme is also known as the Small Savings Scheme
  • This is the best tax saving scheme available
  • This scheme is available all year round.
  • Post Office schemes vary by the type of investment and tenor. The types of such scheme are monthly deposit, savings deposit, time deposit and recurring deposit.
  • Your money is doubled in 8 years and 4 months (i.e. 100 months)
  • This scheme is available all year round in post offices and bank branches
  • This scheme is available in denominations of 100, 500, 1000, 5000 and 10,000 Rupees and there is no maximum limit on the investment.
  • It is possible to transfer these certificates from one holder to another or from one post office to another

This is a good scheme for farmers. Using this scheme, it is possible for farmers to easily borrow funds for agricultural purposes. This enables farmers to buy tools, seeds and other essential items in a timely manner. This scheme is the primary tool for providing credit to farmers in a timely and efficient manner. This scheme provides a simple and quick way for farmers to borrow money for agricultural needs.

Under this scheme, farmers are provided with a credit card and a passbook. This contains the borrowers name, address, land details, duration of the loan, tenor together with passport sized photographs of the borrower. This card can also be used as a identity document.

  • Illiterate or uneducated persons can also use this card
  • This card ensures that the farmer does not have to execute loan documentation and formalities every year, but the same is done on a one time basis. Thus the farmer is spared the time, effort and the stress involved.
  • The tenor of the loan granted under the Kisan Credit Card is until it is possible for the farmer to being repayments, i.e. until after the harvest is sold.
  • The farmer can draw a loan under the Kisan Credit Card from any bank branch.
What is Capital Markets?

This chapter explains about capital markets, their benefits and also the points that need to be borne in mind while investing money.

The capital market is a market where buyers and sellers or companies and Governments can raise long term funds. The markets work with financial security instruments like bonds and stocks. The duration of this market is for one year or longer. The capital market is the most important component of the Indian financial system.

Of all the avenues available for investments, the capital markets are considered to be the most challenging but also potentially highly profitable. The capital markets consist of equity and debt markets in which companies and Governments are participants. They raise capital from public investors for the long term and thereafter such investors can trade such equity securities amongst each other.

Equity shares

Equity shares in day to day use are also referred to as stocks or shares. They represent a fractional ownership of certain companies. Equity shareholders participate in the profits and losses incurred by a company to the extent of their shareholding in the company. Such shareholders are members of the company which gives them the right to express views on the company’s proposals and also to vote on the same.

Dividend payments are not guaranteed for equity shares. Shareholders are deemed to be the owners of the company. Companies pay dividends to common shareholders only after repaying creditors and servicing preferred shareholders. These shareholders are deemed to be the owners of the company and they have the right to express an opinion on the matters pertaining to the company. In case the company makes a loss, they get a lower or even zero dividend. In case the company makes profits, the highest gains are made by such shareholders as well.

Equity shares represent ownership in a company by its shareholders. When one buys shares in a company, a share certificate expressing that ownership is issued to the shareholder.

Mutual Fund

Mutual funds are a kind of collective investment. On a collective basis, investors deploy funds in stocks, short term investments or other securities. There is a fund manager in a mutual fund that determines the investments to be made by the fund and also maintains the records of gains and losses of the fund. The gains or losses thus generated are distributed to the investors in the fund. The mutual fund management company collects funds from investors and also charges them a fee for the service. After deducting the fees, the remaining funds are then invested on behalf of the investors in the market. The advantage of investing in such a manner is that the investor does not have to manage buying and selling of shares since the fund manager is performing the role instead.

Although Mutual funds are a convenient way of investing money for investors, there are several risks associated with them. The amount invested in the mutual funds can increase or decrease depending on the performance of the market. It is therefore essential that investors are fully aware of the risks before committing to invest in mutual funds.


A debenture or a bond is a contract. One party is a lender while the other party in the contract is the borrower. The contract contains details of the rate of interest, the dates on which the interest is to be paid as well as the date of repayment of the principal amount. Loan instruments issued by the Central or State Governments are called bonds while instruments issued by companies in the private corporate sector are called debentures. These are rated by credit rating agencies.

For Investors seeking a regular and steady income, debentures or bonds are ideal. Such instruments have higher rates of interest as compared to deposits in banks. Some bonds also offer tax savings.

Rights of shareholders

  • To receive shares on allocation or purchase
  • Annual reports to be made available
  • Timely receipt of dividends if declared by companies
  • Attendance at and voting on matters in general meetings
  • If the company is indulging in malafide activities which are not in the interests of the shareholders, shareholders have a right to complain against the same and receive a satisfactory response.
Points to be noted while investing

This chapter explains the points to be mindful of before and while engaging in investing activity. Additionally, knowledge of resolution of complaints and contact details for the same are also provided.

  • You can take higher risks at a younger age. As a result, that is the best time to undertake investments.
  • By the time you are 50 years old, risky instruments should be avoided
  • By the time you are 60 years old, avoid equity investments altogether because by then additional sources of income may have stopped.
  • Investing options and methods are available at www.iepf.gov.in
  • You can get information about companies at mca.gov.in
  • Please read offer documents carefully in case of IPOs. Do at the very least read Risk factors, litigation, promoters, company history, project, objects of the issue etc.
  • Only invest in companies with a solid foundation and which can withstand the pressures of the marketplace so that they can provide a better performance over a long time.
  • Beware of free information circulating on TV, print media, websites, emails, SMSs etc
  • Only invest according to your income
  • Only transact with authorized intermediaries or representatives.
  • Don’t invest based on free information without carefully considering the details
  • Do not be fooled by dubious advertisements
  • Do not be unduly taken in by impressive sounding data or numbers or claims
  • Do not lose your poise in sectors with rapidly climbing prices
  • Do not take loans in order to invest
  • While interest increases every day, it may not be necessary for the profit to go up every day as well
  • Profits are only realized when they reach your bank account (not when they are mainly on paper or on an Excel sheet)
  • You can demand honest behavior only when you remain honest yourselves and it is only then that you can legitimately fight for your rights.
What are Ponzi Schemes?

This chapter intends to caution citizens about various schemes floated by fraudulent companies/persons and to take preventive measures to avoid losing their hard earned money. This chapter attempts to make investors aware about various fraudulent schemes floated and features through which such schemes can be identified.

The common forms of fraudulent financial schemes which rely on doubtful/unviable business models are:

  • (i) Pyramid schemes - referred to as multilevel marketing schemes. In a typical pyramid scheme, each member is promised a reward for recruiting more members. Such schemes, however, collapse when defaults occur and promoters abscond with invested money.
  • (ii) Ponzi schemes - The basic operation of a Ponzi scheme is commonly described as "robbing Peter to pay Paul". In Ponzi schemes the mastermind gathers all the funds from new investors and then distributes them.
  • A Ponzi scheme is an investment fraud where clients are promised a large profit in short term at little risk.
  • Companies engaged in Ponzi schemes focus all of their energies into attracting new clients to make investments.
  • This new investments (income) are used to pay original investors their returns, marked as a profit from a legitimate transaction.
  • Ponzi schemes mainly rely on a constant flow of new investments to continue to provide returns to older investors.
  • Funds from new investors are used to pay purported returns to earlier investors.
  • Promise of much higher return than prevailing in the market with little or no risk.
  • Initial clients paid off.
  • Deliberately communicated success stories.
  • Unregistered investments and unlicensed sellers.
  • Secretive, complex strategies, issues with paperwork and difficulty in receiving payments.
  • The emphasis is on enrollment of members rather than sale of products.

The answer can be:

  • Greed
  • Use of celebrity and fake advertisement.
  • Lack of knowledge among uninformed investors
  • Regulatory vacuum
  • Blind faith and inducement through free samples

The answer can be:

  • Beware of promise of higher returns:
    Any scheme promising abnormally high returns should be considered with caution. At the very basic level, abnormally high returns promised by the fraudsters should serve as a red flag for investors. Beware of promises of unrealistic returns.
  • Unknown Company:
    You might have heard about a scheme promising higher returns, but are you also aware about the company and its credibility? If not, how can you put your hard-earned money into a company or organisation which is unknown to you?
    Don’t rely on reputation or word of mouth alone. One of the best ways to know about a company is doing your own research on internet or social media. If you do not find any reliable information on the net, it is better to steer clear.
  • Track Record of Promoters:
    They should have clean image in terms of delivering promises. If you are unable to find any information, then do a search on the internet.
  • Registration Requirements:
    If a person is planning to invest in a non-banking finance company (NBFC), then he/she should be well aware that every NBFC is required to be registered with the Reserve Bank of India (RBI).
    NBFCs are not allowed to use the name of the RBI in any manner.
  • Ratings Assigned:
    NBFCs which accept deposits should have minimum investment grade credit rating granted by an approved credit rating agency for deposit collection.
  • Terms & Conditions:
    The charges should be considered well before taking the final call. Understand your investments; keep copies of all the investment and communications.
  • Take Informed Decision:
    One should check for the past record of the schemes, management team, corresponding regulations & financial information. Your decision should never be guided by greed. Check registration and background of individuals selling the investment. Do not trust anyone blindly in financial matters.
    Remember that even if the promoters of an NBFC are of impeccable repute and the credit rating is good, there is risk on these deposits as they are unsecured and the risk of insolvency is there.
  • Union Government model guidelines for states to curb Ponzi schemes:
    The Union Government has issued model guidelines titled as "Direct Selling Guidelines 2016" framework for states to regulate direct selling and multi-level marketing businesses to protect consumers from Ponzi frauds.
    Ponzi schemes are banned under the Prize Chit and Money Circulation (Banning) Act, 1978. Though it is a Central Act, the respective State Governments are the enforcement agency of this law. These newly issued guidelines will allow states to make some change in their guidelines as per their localised requirements.
  • Lottery email from foreign countries
  • Fake email from financial regulators
  • Employment emails using the name of reputed companies.
  • Credit Card Limit updation calls posing as bank officials
  • Hacking of internet banking password
  • Prize winning pop-up while working on Internet