Jargon demystified

Derivatives,as the name suggests derives its value from the underlying asset. This can be a stock,commodity or an exchange. Options and Futures are two types of derivatives. Both are used to speculate on the price movement of the underlying asset.

OPTIONS

Option is the right to buy or sell the underlying asset but without any obligation. A call option gives you right to buy the underlying asset while a put option gives you the right to sell. An option contract specifies the strike price,that is,the price at which you can buy or sell the underlying and the expiry date after which the option is no longer valid. Expiry is the last Thursday of every month after which the contract

expires.

FUTURES

It requires the delivery of the underlying asset at a specified price and specified future date. Unlike options,buying a futures contract gives you the obligation to buy the underlying and thus involves greater risk. Another difference is that commodities like gold,cotton,crude oil etc are especially prominent in futures markets. Futures transactions can be settled in three ways: squaring off,delivery and cash settlement. squaring off means taking a position opposite your initial one. Delivery means physically delivering the underlying asset on the agreed date. cash settlement involves paying the difference between the futures price and the spot price of the underlying asset.

CURRENCY FUTURES

The currency futures market in India is about two years old. Here you trade futures contracts as you trade in stocks and commodities. India has witnessed enhanced foreign investment inflows and trade flows in recent years. The Indian currency is now becoming an important international currency. Given volatility of the exchange rate,the exchange-traded currency market has become increasingly important. The brokerage requires individuals to put down 3 per cent of planned rupee-futures investments,known as a margin payment,compared with at least 10 per cent for equity derivatives. It gives you chance to make money during currency volatility.

TERM INSURANCE

It provides coverage at a fixed rate of payments for a limited period of time. After that period expires,coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments and/or conditions. Term insurance is the least expensive way to purchase a substantial death benefit. Mixing insurance with investment must be avoided and the two must be kept separate. If you are not insured already then you can opt for the online life insurance policy which is about 30 per cent cheaper than when you buy through an agent.

ASSET ALLOCATION

Asset allocation is based on the idea that in different years a different asset is the best-performing one. The asset allocation strategies are based on your investment goals,risk tolerance,time horizon and diversification.

Asset allocation,done well,is a plan to invest in assets or asset classes which will best meet the needs and objectives of the investor. Investors seeking high returns and willing to expose their investments to an elevated amount of risk will allocate to equity investments. Investors seeking stability and income will allocate to debt investments. Most investors will find that mixtures of equity and debt investments most nearly meets their needs.

DEBT FUNDS

Mutual Funds in which core holdings are fixed income investments are known as debt funds. A debt fund may invest in short-term or long-term bonds,securitized products,money market instruments or floating rate debt. The main investing objectives of a debt fund will usually be preservation of capital and generation of income. Debt funds are suitable for investors with a low risk appetite. While investing in them,one should expect lower returns than equity funds. They are a risk diversification tool for a portfolio.

ESTATE PLANNING

An estate is the total of all personal and real property owned by an individual. Real property is real estate and personal property is everything else such as cars,household items,shares,units,and bank accounts. Estate planning refers to the process by which an individual or his/her family arranges the transfer of assets to the legal heirs in the event of death or disability of the individual. It includes the distribution of the real and personal property of an individual to his/her heirs. Estate planning involves:

Every individual wishes that his/her accumulated wealth should reach the hands of the beneficiary of his/her choice

The transfer must be as tax effective as possible on transfer of wealth

In case of disability there is smooth functioning of asset management within the family

Time of distribution can be pre-decided: Individuals having minor children may wish to transfer the assets only after the children attain a certain age

REVERSE MOTGAGE

If you are a senior citizen,in need of money and own a house reverse mortgage is a good option. It is like a normal mortgage but the only difference is that here bank pays you till you live. The bank will not ask for any repayment,instead it sells the property on the owners death and recovers its amount with interest. Any surplus funds available are distributed to the legal heirs of the owner. It is a good option to unlock the value of your illiquid property and generate some returns out of it.

private WEALTH

Private wealth management services are expanding in India at a fast pace. Private wealth management relates to highly customized and sophisticated financial planning in general and investment planning in particular delivered to high net worth investors. Generally,this includes advice on the use of trusts and other estate planning vehicles,business succession or stock option planning. The process involves identifying your short and long-term goals and concerns,the structure of your holdings,and your risk appetite.

DEBT CONSOLIDATION

If you are tired of paying different EMIs to different lenders at different times of the month then Debt Consolidation can be an option for you. The debt consolidation loan will unify your debts that you owe to various lenders and pay all of them with a lump sum payment. You then have to repay only one loan which is the debt consolidation loan.

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