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Q11) Defined benefit pension plan is a plan in which the income to received in future is known and guranteed. They provide income until your death , when in retirement. In case of Defined benefit pension plan, the investment risk is borne by the employer, so the employee need not to worry about anything.

Where as Defined contribution plan is primiraly funded by employee and, employer can also contribute to a certain amount(only if he wants to invest). The investment risk in this case is borne by the employees themselves and have to do all the hard work.

I would recommend him to buy defined benefit plan, because it gurantees a lifetime income and to top it all he is just a graduate and does not have any experience of managing or investing the fund. So, it will be better to leave the fund to be managed by the experts and get guranteed income. This will also help him to focus more on his initial career.

Q12) Index funds are passively managed funds in which the managers try to mimic the return of an index by purchasing all the holdings of the index. These funds are cheaper than active funds.

For eg:- S&P 500, BSE NIFTY and so on. They are an index. If any person does not have time and want to make an investment, can just buy the holdings as in the index and earn the same return as the index. The main objective of these fund is to provide market return with less risk.

Where as Actively managed funds are funds which are managed by portfolio managers to beat the market. This fund requires lot of time and is more costly than index funds because the managers need to pick and choose stocks inorder to beat the market.

The main objective of this fund is to beat the market, and generate excess return.

Example:- Hedge funs, private equity funds and so on.

Answer 1

11) As discussed above, both the types of plans, let us see which is good for the mentioned employee.

As it is stated that the employee is a mere graduate and do not has much experience, so if he chooses the defined contribution plan, he has to be very wise regarding making decisions on where to invest and how to invest as his money is at risk.

But if we consider the he is utilising his money and investing at proper places, he is able to make a lot of profit which is not possible choosing the defined benefit pension plan as that plan a fixed amount to be received after retirement.

Also, with time, he would get to have a good knowledge of investment which would help him further in life while making investments. And all these would lead to earn huge profits by him.

And if there is question about focusing on career rather than giving time in understanding investments, then learning investment would also contribute to his career. And it would not take him much of time.

He could simultaneously focus on his career and make good investment plans as well.

So, it is good if he is interested in learning investments along with his career growth. And thus he should opt for defined contribution plan.

If he is not in favour of taking risks and is not interested in investment plans, it is better for him to go for defined benefit pension plan as all the risks would be bear by the employer in that case and he can fully focus on his career.