Savings, Investment and Insurance
What the domain tests
Savings, Investment and Insurance tests the difference between saving and investing, matching products to goals, reading risk and return, and using insurance for protection rather than speculation.
Core rules and concepts
- Savings keeps money safe and liquid for short-term needs. Investment accepts risk for higher expected return over time. Compare return, risk, liquidity and lock-in together.
- Common savings products include savings accounts, fixed deposits, recurring deposits and PPF. A fixed deposit has a fixed term and rate but charges a penalty for premature withdrawal. PPF has a long lock-in and stated tax rules.
- Mutual funds and shares are market-linked; returns are not guaranteed. Diversification spreads risk but does not remove it. Inflation erodes purchasing power.
- Insurance transfers risk. Life insurance pays the sum assured as per policy; general insurance covers health, motor, fire and similar risks. Principles include insurable interest, indemnity in general insurance, utmost good faith and proximate cause. Premium buys cover; it is not a deposit.
- Read sum assured, premium, term, exclusions, waiting period, nomination and claim process before buying.
Worked example
₹50,000 is deposited at 7% per annum for 2 years. Simple interest = P × R × T divided by 100 = 50,000 × 7 × 2 divided by 100 = ₹7,000; maturity = ₹57,000. Compound interest annually: 50,000 × (1.07)^2 = 50,000 × 1.1449 = ₹57,245; interest = ₹7,245. The difference is ₹245 because the second year earns interest on the first year's interest. A higher advertised return is not automatically better if the product is riskier or locked in.
Traps that cost marks
Do not call insurance an investment that guarantees high returns. Do not compare an assured fixed-deposit return with a mutual fund's past return as if both were guaranteed. Do not ignore premature-withdrawal penalties or tax rules. Do not say all risks are insurable. In compound questions, apply the rate for each full year.