Unit 4 of 4 · MBA Sem 4

Unit 4: Personal risk and investment planning

Taxation and Personal Financial Planning notes · PTU syllabus (MBA 916-18)

3 min read7 topics10 exam questions
On this page
  1. Unit summary
  2. Personal risk measurement and identification
  3. Insurance planning for individuals and families
  4. Investment planning: meaning and objectives
  5. Tax-saving instruments
  6. Mutual fund schemes
  7. Fixed income securities
  8. Capital and money market instruments; real assets
  9. Key terms
  10. Quick revision
  11. Important questions

Unit summary

Protecting against risks and investing wisely complete the financial plan. This unit covers personal risk management — identification and measurement — life and general insurance planning for individuals and families, investment planning objectives (retirement, tax saving, growth, liquidity, safety), tax-saving instruments (PF, PPF, ELSS, NPS), mutual funds, fixed-income securities, capital and money market instruments, and real assets.

After this unit you can

  • Identify and measure personal risks and plan insurance
  • Explain objectives of investment planning
  • Explain tax-saving instruments and mutual funds
  • Explain fixed-income, capital market, money market and real asset investments

PTU syllabus topics

  • Personal risk management — risk measurement and identification
  • life and general insurance
  • insurance planning for individuals and families
  • investment planning objectives (retirement, tax saving, capital growth, liquidity, safety)
  • tax-saving instruments (PF, PPF, ELSS, NPS)
  • mutual funds
  • fixed-income securities
  • capital and money market instruments
  • real assets
HierarchyPersonal financial planning pyramid
  1. Wealth creation

    Equity, real estate

  2. Goal investing

    Mutual funds, PPF, NPS

  3. Protection

    Life and health insurance

  4. Foundation

    Emergency fund: 6 months' expenses

1

Topic 1

Personal risk measurement and identification

ClassificationPersonal risks
Personal risks
  • Personal (life) risks

    Premature death, disability, illness, old age (outliving savings)

  • Property risks

    Fire, theft, flood, damage to home or vehicle

  • Liability risks

    Legal claims for harm caused to others

  • Income risks

    Job loss, business failure

Risk management process

ProcessRisk management process
  1. 1Identify risks
  2. 2Measure risk

    Probability × severity

  3. 3Choose method

    Avoid, reduce, retain, transfer

  4. 4Implement

    Buy insurance, build fund

  5. 5Review
  • Avoid: do not undertake the risky activity.
  • Reduce: safety measures (smoke detectors, healthy lifestyle).
  • Retain: bear small losses yourself (emergency fund).
  • Transfer: shift to an insurer by paying a premium — best for low-probability, high-severity risks.
2

Topic 2

Insurance planning for individuals and families

Life insurance

  • Human Life Value (HLV) method: cover = present value of future income the family would lose.
  • Need-based method: cover = future expenses + outstanding loans + goals − existing assets.
  • Rule of thumb: cover of 10–15 times annual income.
PolicyFeature
Term planPure protection, lowest premium, no maturity benefit
EndowmentInsurance + savings; maturity benefit
Whole lifeCover up to age 99/100
Money-backPeriodic payouts during the term
ULIPInsurance + market-linked investment

Exam tip

Financial planners usually recommend a term plan + separate investments for adequate cover at low cost.

General insurance

  • Health insurance: hospitalisation costs; family floater; deduction under Section 80D.
  • Motor insurance: third-party cover is compulsory under the Motor Vehicles Act; comprehensive covers own damage too.
  • Home insurance: structure and contents against fire, theft, natural disasters.
  • Travel and personal accident insurance.

Principles of insurance: utmost good faith, insurable interest, indemnity (not for life), contribution, subrogation, proximate cause.

3

Topic 3

Investment planning: meaning and objectives

Investment is committing money today to assets expected to provide a return in future. Investment planning matches financial goals with suitable investments considering return, risk, liquidity and tax.

FrameworkObjectives of investment
  • Safety

    Protect the principal

  • Return

    Income and capital appreciation

  • Liquidity

    Convert to cash when needed

  • Tax efficiency

    Maximise post-tax return

Other objectives: hedge against inflation, regular income, wealth creation.

Importance

  • Beats inflation and builds wealth through compounding.
  • Funds specific goals — education, home, retirement.
  • Provides financial independence and security.
  • Channels savings into the economy.
4

Topic 4

Tax-saving instruments

Under the old tax regime, Section 80C allows deductions up to ₹1.5 lakh a year. (The new default regime under Section 115BAC offers lower rates but few deductions.)

InstrumentLock-in / tenureKey feature
PPF15 yearsGovernment-backed, interest tax-free (EEE)
ELSS mutual funds3 yearsShortest lock-in, equity-linked
Tax-saving FD5 yearsFixed return, interest taxable
NSC5 yearsPost office, fixed return
Sukanya Samriddhi YojanaTill girl child turns 21High rate, EEE
Life insurance premiumPolicy termProtection + deduction
EPF / VPFTill retirementEmployee contribution qualifies
SCSS5 yearsFor senior citizens

Other deductions: 80CCD(1B) extra ₹50,000 for NPS; 80D health insurance premium; 24(b) home-loan interest up to ₹2 lakh for self-occupied property.

Exam tip

Check the current Finance Act for limits — tax figures change with each Budget.

  • EPF: 12% employee + 12% employer contribution; interest tax-free within limits; partial withdrawals allowed for specified purposes.
  • NPS: 80CCD(1) within ₹1.5 lakh + 80CCD(1B) ₹50,000 extra; employer's contribution 80CCD(2) available in both regimes.
5

Topic 5

Mutual fund schemes

A mutual fund pools money from many investors and invests it in securities through a professional fund manager; units have a Net Asset Value (NAV). Regulated by SEBI.

ClassificationClassification of mutual fund schemes
Mutual funds
  • By structure

    Open-ended, close-ended, interval

  • By asset class

    Equity, debt, hybrid, solution-oriented (retirement, children)

  • Equity types

    Large-cap, mid-cap, small-cap, flexi-cap, ELSS, sectoral, index

  • Debt types

    Liquid, overnight, gilt, corporate bond, dynamic bond

  • Other

    ETFs, fund of funds, gold funds

  • SIP (systematic investment plan): fixed monthly investment; gives rupee cost averaging.
  • Direct vs regular plans: direct plans have a lower expense ratio.
  • Benefits: diversification, professional management, liquidity, small ticket sizes, transparency.
6

Topic 6

Fixed income securities

  • Government bonds (G-secs): issued by the central or state government through RBI; virtually no default risk; RBI Retail Direct allows individuals to buy them.
  • Treasury bills: short-term government securities (91, 182, 364 days) issued at a discount.
  • Corporate debt: debentures and bonds issued by companies; higher interest, credit risk — check ratings (AAA, AA).
  • Bank deposits: savings and fixed deposits; insured up to ₹5 lakh per depositor per bank by DICGC.
  • Post office schemes: PPF, NSC, Kisan Vikas Patra, Monthly Income Scheme, Senior Citizens' Savings Scheme, Recurring Deposit — government-backed.
  • Sovereign Gold Bonds: gold-linked with interest (new issues have been paused recently; existing ones trade on exchanges).
7

Topic 7

Capital and money market instruments; real assets

ComparisonCapital market vs money market
Capital market
Money market

Tenure

Long term (over 1 year)

Short term (up to 1 year)

Instruments

Equity shares, preference shares, debentures, bonds

T-bills, commercial paper, certificates of deposit, call money, repo

Risk and return

Higher

Lower

Regulator

SEBI

RBI

  • Real assets: tangible assets like real estate (house, land, REITs), gold (jewellery, coins, gold ETFs), art and collectibles.
  • Pros of real estate: rental income, appreciation, loan availability. Cons: illiquidity, large ticket size, legal risk, maintenance.
  • Pros of gold: hedge against inflation and currency fall. Cons: no regular income, making charges, storage risk.

Key terms

Human Life Value
PV of future income lost on the earner's death
Term insurance
Pure life cover without maturity benefit
ELSS
Equity-linked savings scheme with 3-year lock-in
NPS
National Pension System
Real assets
Tangible assets such as property and gold

Quick revision

  • Risk: identify, measure, avoid/reduce/retain/transfer.
  • Insurance: term cover (10–15× income or HLV), health cover, general insurance.
  • Investment objectives: retirement, tax saving, growth, liquidity, safety.
  • Tax savers: EPF, PPF, ELSS, NPS, NSC, SSY; 80C ₹1.5 lakh + 80CCD(1B) ₹50,000.
  • Mutual funds, fixed income, capital and money market, real assets.

Important exam questions

Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).

Short-answer questions

  1. Q1.How is life insurance need estimated?
  2. Q2.What is a family floater health policy?
  3. Q3.State the objectives of investment planning.
  4. Q4.Compare PPF and ELSS.
  5. Q5.What is a gilt fund?
  6. Q6.State two merits and two demerits of real estate investment.

Long-answer questions

  1. Q1.Explain personal risk management and insurance planning for families.
  2. Q2.Explain the objectives and process of investment planning.
  3. Q3.Explain tax-saving instruments and mutual funds as investment options.
  4. Q4.Explain fixed-income, capital market, money market and real asset investments.

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