Investment Basics: Bank Deposits

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Questions and Answers

What is the minimum annual deposit required to maintain a Public Provident Fund (PPF) account?

Rs. 500 (correct)

Rs. 1,000

Rs. 2,000

Rs. 250

How many contributions are required during the 15-year period of a PPF account?

16 (correct)

What is the current interest rate for deposits in a PPF account?

8.0 percent

7.5 percent

9.0 percent

8.6 percent (correct)

From which year can a subscriber take a loan against their PPF account?

From the third year Signup and view all the answers

What is the maximum permissible deposit per year in a PPF account?

Rs. 1,00,000 Signup and view all the answers

What happens to the balance in a PPF account regarding wealth tax?

It is exempt from wealth tax. Signup and view all the answers

How often can a subscriber make a withdrawal from a PPF account after the sixth year?

One withdrawal every year Signup and view all the answers

What is the loan interest rate compared to the PPF interest rate?

1 percent higher Signup and view all the answers

What is a significant feature of bank deposits in scheduled banks?

They are insured up to Rs 100,000 per depositor. Signup and view all the answers

What is the minimum deposit required to open an ordinary post office savings account?

Rs 20 Signup and view all the answers

Which feature distinguishes a post office time deposit (POTD) from a typical bank fixed deposit?

No withdrawal is permitted for six months. Signup and view all the answers

What is the interest rate for post office savings accounts?

4 percent per annum Signup and view all the answers

How often is interest paid on fixed deposits at banks?

Quarterly Signup and view all the answers

What tax benefit does a tax savings fixed deposit offer according to the IT Act?

It has a tenure of 5 years or more with tax benefits. Signup and view all the answers

What type of account does not earn interest?

Current account Signup and view all the answers

What happens if you withdraw from a fixed deposit prematurely?

You incur a penalty and earn reduced interest. Signup and view all the answers

What do equity shareholders collectively represent in a company?

The ownership capital Signup and view all the answers

What is the par value of equity shares typically stated as?

Rs. 1 Signup and view all the answers

Which term describes the amount offered by the company to investors?

Issued capital Signup and view all the answers

How is the book value of an equity share calculated?

Paid-up equity capital plus reserves and surplus divided by the number of outstanding equity shares Signup and view all the answers

What occurs when the issue price of an equity share exceeds its par value?

Share premium Signup and view all the answers

What rights do equity shareholders have regarding the income of the firm?

They have a residual claim to the income of the firm. Signup and view all the answers

Which of the following statements regarding equity investment is true?

Equity investment involves potential rewards and penalties. Signup and view all the answers

Which capital is typically the same for issued, subscribed, and paid-up capital?

Issued capital Signup and view all the answers

What is a critical aspect to consider when choosing a life insurance policy?

The claim settlement record of the insurance company Signup and view all the answers

Which of the following is a reason you should not buy life insurance?

If you cannot afford the premium payments Signup and view all the answers

What percentage of basic wages and allowances must both employer and employee contribute to the Employees’ Provident Fund?

12 percent Signup and view all the answers

Which retirement scheme is mandatory for certain employers under the EPF & MP Act of 1952?

Employees’ Pension Scheme (EPS) Signup and view all the answers

What should be assessed before surrendering an insurance policy?

The surrender value and benefits of the new policy Signup and view all the answers

What is one of the benefits of the contributions made by the employer to the Employees’ Provident Fund?

They are fully tax exempt for the employee Signup and view all the answers

Which of the following best describes voluntary retirement schemes?

Optional plans that employees can choose to join Signup and view all the answers

Why is it advised to stick with a life insurance plan?

Quitting early incurs high costs Signup and view all the answers

Which of the following is a major type of precious object?

Precious Metals Signup and view all the answers

Which of the following is considered a con of investing in precious assets?

High spread and commissions Signup and view all the answers

What position does a party take when they agree to sell an asset in a futures contract?

Short position Signup and view all the answers

In a futures contract where the price of an asset increases, whom does it benefit?

The party with the long position Signup and view all the answers

What is the main purpose of financial derivatives such as futures and options?

Hedging and speculation Signup and view all the answers

What defines a call option in financial derivatives?

Right to buy an asset Signup and view all the answers

What happens if the price of an asset falls below the predetermined price in a futures contract for the long position holder?

They lose money Signup and view all the answers

Which term describes the market condition where there is difficulty selling precious assets?

Illiquid markets Signup and view all the answers

Study Notes

Investment Types and Features

Equity shares in the stock market have anonymous sellers, focusing on the transaction rather than the seller's identity.
Bank deposits are simple investment options categorized into current accounts, savings accounts, and fixed deposit accounts.
Current accounts do not earn interest, while savings and fixed deposit accounts do.

Bank Deposits

Deposits in scheduled banks are safe due to Reserve Bank of India regulations and Deposit Insurance Corporation guarantees up to Rs 100,000 per depositor.
Interest rates on fixed deposits vary with term length, generally paid quarterly.
Bank deposits are highly liquid with options for premature withdrawals, which may incur penalties.
Loans can be secured against bank deposits.
Tax savings fixed deposits last for a minimum of 5 years and are eligible for tax benefits under Section 80C of the IT Act.

Post Office Savings Account

Similar to savings bank accounts, offering an interest rate of 4% per annum, with specific tax exemptions: Rs 3,500 for single accounts and Rs 4,000 for joint accounts.
Minimum deposit for an ordinary account is Rs 20, with withdrawal rules to maintain a certain balance.

Post Office Time Deposits (POTDs)

Deposits can be made in multiples of Rs 200 with no limit, calculated on a half-yearly basis, and paid annually.
Withdrawals are not permitted for the first six months, after which they are allowed.

Government Savings Schemes

Various small savings schemes are available, including the Public Provident Fund (PPF), Senior Citizens’ Saving Scheme, and National Savings Certificate.
Interest rates for these schemes can be linked to market benchmarks in the future.

Public Provident Fund (PPF)

Open to individuals and HUFs, available at State Bank of India branches, nationalized banks, and post offices.
Initial deposit of Rs 500, with a cap of Rs 1,00,000 per annum. Contributions can reduce taxable income under Section 80C.
Offers a compound interest of 8.6% per annum, exempt from taxes; interest accumulated, not paid out annually.
Fully exempt from wealth tax and protected from court decrees.
Loans available from the third to sixth year against PPF balance, with interest 1% over the PPF rate.
Withdrawals allowed from sixth year onwards.

Equity Shares

Represent ownership in a company, with shareholders bearing the risk and reward of ownership.
Authorized capital is the maximum capital a company can issue; issued capital is what is offered, and paid-up capital is what investors have subscribed to.
The par value typically ranges from Re 1 to Rs 10, with suggestions to standardize at Re 1.

Book value = (Paid-up equity capital + Reserves and surplus) / Number of outstanding equity shares.
Market value reflects trading price, shares have a residual claim on income after preference dividends.

Insurance Policy Considerations

Assess personal insurance needs thoroughly.
Choose policies that match situational requirements and ensure ability to handle premium payments over time.
Check claim settlement ratios before finalizing insurance coverage; consider surrender values if replacing existing policies.

Retirement Products

Divided into mandatory (e.g., EPF, EPS, New Pension Scheme) and voluntary schemes.
EPF involves employee and employer contributions of 12% monthly on basic wages and allowances, with tax exemptions outlined under Section 80C.

Precious Assets

Types include precious metals (gold, silver), precious stones (diamonds), and art objects (paintings, antiques).
Pros: Inflation hedge, diversification, enjoyment, safe haven.
Cons: Liquidity issues, high transaction costs, maintenance demand.

Financial Derivatives

Instruments with value linked to underlying assets; key types are futures and options.
Futures contracts obligate asset exchange at a set price and future date; parties involved take long or short positions.
Options grant the right, but not the obligation, to buy/sell an asset at a predetermined price before a specified date, including call and put options.

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Description

This quiz covers the fundamentals of investment, specifically focusing on bank deposits. It discusses various types of bank accounts, including current accounts, savings accounts, and fixed deposit accounts. Test your knowledge on how these investments work and their importance in personal finance.