Everything You Need to Know About Derivatives

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Derivatives are a class of instruments that have held the investor’s interest over the years. This is a security with a price that depends on one or more underlying assets; they have no independent value. The value is determined by the fluctuations in the underlying asset. The underlying assets could be currencies, bonds, interest rates, market indexes, and commodities. So, whether you are a long-term investor or a short-term speculator, derivatives market is the best place for you. Therefore, before trading in derivatives, we need to understand them carefully and make the best use of them:

Types of Derivatives:

  1. Futures: Futures are contracts that represent an agreement to buy or sell a set of assets at a pre-defined time and price. In case of futures, conditions are standardized, such as price, quantity and time.
  2. Forward: The owner has the obligation to sell or buy a contract at a pre-defined time. Forwards are basically futures, which are not standardized.
  3. Option: These contracts are very much similar to futures and forwards. The owner has the option to buy or sell something at a pre-defined time. Although, there is one key difference. Once you buy the options contract, thereafter you are not obligated to hold the terms of the agreement.

Benefits of Derivatives:

  1. It acts as a very good hedging tool against the volatility of price.
  2. It is a big plus point for margin traders as it offers huge time leverage.
  3. You can take a high exposure on a share by paying a small margin. For example, if the stocks are priced at Rs. 8 Lakhs and you only have 2 Lakhs in hand, then this product will still help you to take a position.

Use of Derivatives:

  1. You can earn money on stocks that are lying idle: If you don’t want to sell the shares you bought for long term, but want to take benefits of price fluctuations in short term. Then you can use derivative as an instrument. It helps you to conduct transactions without even selling your shares.
  2. Risk Transfer: The most important use of these derivatives is the transfer of risk from risk-averse investors to risk-loving investors. Those with an appetite for risk conduct risky trades to improve profits while risk-averse investors use derivatives to enhance safety. So by this way, risk is transferred.
  3. Benefit from arbitrage trading: When we buy low in one market and sell high in another market, it is called as arbitrage trading. Thus, you are taking benefit of differences in prices in the two markets.

Henceforth, these above mentioned points will empower you with the knowledge of derivatives. Also, for those who want to trade in derivatives, get started with Reliance Securities.

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Should You Invest In A Balanced Fund?

A mutual fund uses invested money of various individuals and invests them into various pre-set allocations. These allocations are equity, debt or any other asset class as prescribed by the fund. A balanced fund is a type of mutual fund which invests a portion of the fund into equities and the rest into debt instruments. The equity debt allocation is often 65:35 or more depending upon the fund’s mandate.

balance-mutual-funds

This fund is an excellent choice for newcomers or risk-averse investors. Here are a few reasons.

One, this fund by design has a safety mechanism. While the major allocation of the fund may be in the equities, the 35% allocation into debt instruments acts as a safety valve during volatile market periods. Even if the equities generate poor returns at the time, the debt instruments ensure the invested money does not go to waste and returns are generated on a consistent basis.

Two, the debt allocation ensures stability during volatile market periods and the equity allocation during bull runs generate excellent returns. Since the fund’s major allocation is into equities, an investor has a good chance to see her or his investment into the fund deliver quite the returns.

Three, the fund’s major allocation into equities may cause apprehension into one or two investors who may feel the market volatility will deliver poor returns. However, like all mutual funds, a balanced fund comes with the expertise of a fund manager. He or she will decide whether to invest into mid-cap or large-cap funds, how much to invest, and when to invest. The invested money is in safe hands.

Four, mutual funds that invest at least 65% into equities qualify as equity funds. This means any capital gains after one year of holding are tax exempt. Therefore, fund managers always keep the 65:35 allocation ratio intact. If an investor held two different funds—equity and debt, a short-term capital gains tax would be levied on the debt fund for any holding less than three years.

A balanced fund was designed keeping the mix of capital appreciation and safety from market volatility in mind. It is recommended for newcomers to invest in them.

Basics of A Savings Account

Now a days, keeping hard-earned cash in a gunny sack is not the smartest or the safest way to manage your finances. Today, we safely store our money in banks, which has enabled us to track our transactions, balance, etc. So, when an person with some money approaches a bank and requests for a secure place to store that money, then the bank offers the individual its most basic product, a savings bank account.

savings account

Below-mentioned are the few different types of savings account available today:

  • Regular Savings Account: These accounts basically don’t see regular deposits nor do they see regular withdrawals. These facilitate the common form of virtual savings that are not touched, unless absolutely necessary.
  • Salary based savings account: These accounts are generally opened by banks on the request of large companies. Also, banks offer companies preferential rates for these accounts. Well, it should be noted that most of the salary accounts do not have a minimum balance requirement, but once your salary stops being credited for three consecutive months, then these accounts are changed into regular savings account.
  • Savings account for senior citizens: These accounts are specially created for senior citizens. Savings accounts for senior citizens work in the same way as regular savings account, but they offer a higher rate of interest as compared to other savings accounts and exclusive banking advantages.
  • How to apply for savings account?

In order to apply for a savings bank account in India, applicants should meet the following eligibility criteria:

  • A savings account can be opened by Indian residents, non-Indian residents, and foreign nationals.
  • Usually, banks allows only those to open an account who are 18+. Although, a savings bank account can be opened for minors by their guardian/parents.
  • Unlike other financial or banking products, there is almost no restriction on who can open a savings account.

Apart from this, here is the list of documents that a customer must submit along with his/her application in order to open a savings account:

  • Age and Identity Proof
  • Address proof
  • Photographs
  • Income proof
  • Senior Citizen Card
  • Step-by-step guide on how to open a savings account:

If you want to open a savings account, you need to follow these steps:

  • First of all, do a proper research of different banks and their interest rates. Then find the one that matches your specific requirements, and the type of bank account that you wish to open.
  • Take a copy of your photograph, identity proof, income/employment proof, and age proof and then head to the nearest branch of the bank.
  • Once at the bank, you need to fill an account opening form.
  • Fill out the form as required and submit it along with the copies of essential documents.
  • Thereafter, your application will be submitted for processing and your account will be opened.