Unit 4: Personal risk and investment planning

Risk management process

• 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.

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.

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.

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.

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.

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.)

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.

• 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.

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.

• 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.

• 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).

• 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.