FINANCIAL EDUCATION AND INVESTMENT AWARNESS

FINANCIAL EDUCATION AND INVESTMENT AWARENESS

CHAPTER 01
FOUNDATION FOR FINANCE

INTRODUCTION TO BASIC CONCEPTS OF FINANCE

FINANCIAL PLANNING
Financial planning is the long-term approach of carefully managing your funds to help you
reach your goals and dreams while overcoming the financial obstacles.
Financial planning can assist us in managing our money as well as the resources of an
individual or a family. It is critical that we plan for and manage our money at all stages of our
lives. Without good planning, we would be enslaved, unsure of how to pay off loans and credit,
as well as adequately pay our expenses. While we may have a job that covers our everyday
spending, large medical bills or any other disaster can devastate our finances. As a result,
financial planning can assist us in managing our money and ensuring a prosperous financial
future.
Financial planning is the process of defining different financial goals, quantifying these goals
and having an investment plan to meet these goals. In simple, financial planning refers to the
process of streamlining the income, expenses, assets and liabilities of the household to take
care of both current and future needs for funds.
FINANCIAL GOALS
Specific financial goals are vital to financial planning. Others can suggest financial goals for
you; however, you must decide which goals to pursue. Your financial goals can range from
spending all your current income to developing an extensive savings and investment program
for your future financial security. Such objectives may include short term goals including
savings for a deposit on a house or car, or savings for a holiday, and may be for periods of up
to three to four years. Longer term goals of beyond four years include mortgage reduction,
superannuation savings for retirement and general wealth accumulation.
Financial Goals are generally classified as:
a. Short-Term Financial Goals
Short-term goals are the more immediate expenses. Although timelines vary, these are the
things you will spend money on generally within a few months or years.
Short-term goal examples: Emergency fund, Payments toward rent, insurance, or student loans,
Credit card debt payments, Personal goods, Travel, Wedding, Minor repairs and home
improvements.

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b. Long-Term Financial Goals

Long-term goals are usually your big-picture costs. These goals may take several years or even
decades to reach. These distant goals typically involve more money and regular attention than
short-term goals.
Long-term goal examples: Retirement fund, paying off a mortgage, starting a business, Saving
for a child's college tuition.
ESSENTIAL FEATURES OF FINANCIAL GOALS
The first step toward achieving your financial goal is to create a savings plan. The objectives
are SMART.

Sl.no Attribute Description Example

1. Specific This involves describing I want to save Rs. 3 Lakhs to
exactly what you wish to buy a new car.
accomplish.
State exactly what is to be
done with the money
involved.
2. Measurable Essentially, you want to I need to save Rs.5,000 a
decide on a unit of month for the next 60 months
measurement for tracking in order to have 3 Lakhs in 5
your progress. years.
3. Achievable To accomplish your goals, This can be accomplished by
you'll need to plan out working overtime at my
specific actions to make them existing job or starting à side
a reality. business. Any incentives I
receive will be used to buy a
new car.
4. Realistic You'll also need to set To save money, I'm going to
realistic goals depending on cancel my cable TV
aspects such as your income, subscription, gym
time, and abilities. membership, and dine out less.
I plan to improve my income
by Rs.10,000 in a year.
5. Time-based
Finally, you should set a In 3 years, I want to get a new
deadline for when you intend car. I will be able to
to attain your objectives. accumulate 3 Lakhs to buy a
new car.
1. PLANNING RESOURCES FOR REACHING FINANCIAL GOALS
Savings are the prime source of reaching financial goals. However, more savings in the bank
won't be enough. Savings should be channelized to various avenues of investment in order to
achieve majority of the financial goals. To meet your various financial goals, we can invest in

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mutual funds, stocks, gold, land and other assets. In reality, risk and returns are closely
connected; the higher the returns, the greater the risk, and vice versa.
2. REVIEW AND PRIORITIZE
It's critical to examine the budget on a frequent basis to ensure that you're track. Remember
that the budget should work for you, not against you. Prioritizing your financial goals can mean
the difference between not paying off debt and getting rid of it forever. It can mean the
difference between paying off your mortgage or keeping it around forever.

STEPS IN THE FINANCIAL PLANNING

The financial planning process is highly personalized. All psychological and financial aspects
that may have an impact on your financial goals and objectives should be included in financial
planning. Personal financial planning is a long-term strategy for your financial future that takes
into account every aspect of your financial situation and how each influences your capacity to
reach your goals and objectives. Financial planning has six separate steps.

Examine
your current
financial
situation
Develop
Periodically
your
review your
financial
plan
goals

Implement
Identify
your
financial
financial
gaps
plan
Draft
financial
plan

STEPS IN FINANCIAL PLANNING

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 Examine your current financial situation:

Determine the present financial situation, including your income, expenses, debt,
savings, investments, risk attitude, and tolerance capacity. This is the first step in
financial planning because it provides you with a good understanding of the condition
of your finances and opportunities for improvement.
 Develop your financial goals:
Determine the various financial goals you intend to achieve in your life. Don't be afraid
to write down any goal because there is no such thing as a small or big goal. Make sure
the goals are clear. The established financial goals should be practical in nature and
feasible within the time limit set for each of the goals. It delivers satisfaction and acts
as a motivator. It serves as a financial planning directing function.
 Identify financial gaps:
A simple formula can help you figure out how much money you'll need. This is critical
since quantifying the income from your investments is required to determine the best
investments to offset the shortfall.
 Draft financial plan:
Following goal formulation, plans are developed in such a way that the goals can be
met as soon as possible. The financial plan outlines how to attain specific financial
goals. Whether to cut needless expenses or allocate savings to various investment
avenues. Examine various investment choices such as equities, mutual funds, debt
instruments such as PPF, bonds, fixed deposits, gilt funds, and so on, and determine
which instrument or mix of instruments best meets your needs. The time span for your
investment must match the time frame for your goals.
 Implement your financial plan:
A financial plan is carried out in accordance with the goals established. The plan should
be carried out in a systematic and consistent manner. The best investment option based
on characteristics such as your goals, age, risk tolerance, and investment amount.
Insurance, retirement planning, estate planning, and taxation should all be included in
the financial plan. Above all, begin investing and stick to your plan.
 Periodically review your plan:
The execution of a financial plan, the plans should be regularly checked and evaluated
against the intended goals to ensure successful financial planning. A successful plan
requires considerable dedication and regular assessment (once in six months, or at a
major event such as birth, death, inheritance). Based on the performance of your
investments, you should be prepared to make small or big changes to your present
financial position, goals, and investment time frame.
Thus, Personal Financial Planning is the process of accomplishing life goals through smart
financial management. It could be buying a home, saving for higher education, or other
ambitious goals set to enjoy a higher standard of living. It is not limited to a specific class, but
such behaviour should be adopted by all individuals in order to optimize savings.

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IMPORTANCE AND NEED FOR FINANCIAL PLANNING

Financial planning is a systematic strategy to maximizing one's existing financial resources
through sound financial planning in order to attain one's financial goals and objectives.
1. Income Management
A set plan can help you manage your income more successfully. This might be as simple as
making a budget for planning and monitoring that will assist you in prioritizing spending,
identifying wasteful expenditures, adapting quickly as the financial situation changes, and
achieving your financial objectives.
2. Wealth creation
The term "wealth creation" refers to the process of accumulating money through investments
in a various of ways. You obtain larger returns when you invest in financial products for a long
time. As a result, it is an important component of your financial journey in order to fulfil all of
your long-term financial goals, such as buying your dream home, funding your child's
education, and so on.
3. Retirement planning
Retirement planning involves ensuring a continuous flow of income after retirement. It means
putting money away and investing it particularly for that purpose. Your retirement plan will be
determined by your long-term objectives, income, and age. You must begin establish a
financial plan now if you want to live a happy and comfortable retirement life.
4. Family Security
Financial planning helps to provide peace of mind for you and your family if you have the
suitable insurance policy, have invested and save properly.
5. Managing Debts
A financial plan becomes even more important in order to avoid a financial disaster. You will
be able to focus on other financial goals once you have paid off your debts. Because a financial
plan allows you to track your money it also helps to prioritize your expenses so that you can
pay off your debt.
6. Choosing appropriate Investment Avenue
Investing in multiple products is one of the best financial planning ideas for asset allocation. It
will assist the individual in achieving his financial objectives while minimizing risk. During
times of market volatility, the financial plan will devise a strategy to protect you.
7. Insurance Planning
An appropriate insurance cover proves to be a blessing in the event of a family member's
unfortunate death or a health emergency. Your family member will be able to pay off the
remaining bills and keep a good standard of living if you have the right life insurance coverage.
A health insurance coverage, on the other hand, assures that you can provide necessary
treatment to your loved one in the event of an accident or medical emergency.

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8. Sound Financial Decision Making

Finding assets that aren't profitable is an important part of financial planning. It's possible that
the stock has little prospect of increasing in value. You should ge rid of any assets that are
under stress. In other circumstances, consumers end up purchasing multiple insurance plans,
none of which are beneficial to the policyholder. It is merely filling up the pockets of the
insurance agents. As a result you must exercise caution when choosing a life insurance policy
or other investment Plans.
9. Improved Standard of Living
Another benefit of financial planning is that it might assist you in raising your living standards.
The more you plan for your finances, the more money you'll save. This means that more money
will be conserved instead of going to unanticipated expenses. Higher savings can help you cope
with difficult situations when you're facing financial difficulties.
10. Saving tax
Some people end up paying a significant amount of tax each year. However, you can now
legally reduce your tax liability. The Indian Income Tax Act contains a number of measures
that allow persons to lower their tax liability. You can determine the best ways to invest your
money and lower your taxable income by preparing your taxes ahead of time. Mutual funds
are a tax-efficient way to invest for your long-term goals. Thus, financial planning helps
reduce tax liability.

PERSONAL FINANCIAL PLANNING

Financial planning is the process of meeting your life goals through the proper management of
your finances. Life goals can include buying a home, saving for your child's education, or
planning for retirement.
Personal financial planning is the process of managing your money to achieve personal
economic satisfaction. This planning process allows you to control your financial situation.
Every person, family, or household has a unique financial position, and any financial activity
therefore must also be carefully planned to meet specific needs and goals.
Personal Financial Planning also refers to short- and long-term financial planning by
somebody, either independently or with the assistance of a professional adviser.
MEANING OF PERSONAL FINANCIAL PLANNING
Financial planning is the process of developing a personal roadmap for your financial
wellbeing. The inputs to the financial planning process are:
(a) your finances, i.e., your income, assets, and liabilities.
(b) your goals, i.e., your current and future financial needs and
(c) your appetite for risk.

The output of the financial planning process is a personal financial plan that tells you how to
use your money to achieve your goals, keeping in mind inflation, real returns, and taxes. In
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short, financial planning is the process of systematically planning your finances towards
achieving your short-term and long-term life goals.

SAMPLE FINANCIAL PLAN FOR A YOUNG ADULT

Name: Miss/Mr. _ _ _ _ _ _ _ _ _ _ _ (Age 19 Years)

Goals Goal Name Target Amount Action plan required

Type Date in Rs.
Education Short Self 2023 3 Lakhs Financing my fees partly from my
(M.COM) term parents funds and partly by taking
loan.
Car Medium Self 2027 10 Lakhs By 2024 it is expected that I will
Term start earning money. So I can save
Rs. 1 lakh every year and I will
make down payment to buy a car.
Vacation Medium Parents 2028 1 lakh Also keeping in mind this goal i
Term can make suitable investments like
equity and mutual funds to earn
sufficient returns to fund the
vacation for my parents.

MEANING OF MONEY
In ordinary conversation, the word money to mean income ("makes a lot of money") or
wealth ("has a lot of money").
 Money (or money supply) refers to anything that is generally accepted in payment for
goods or services or in the repayment of debts.
 Money is a stock concept.
 It is a certain amount at a given point in time. Money is distinct from wealth or
income.
FUNCTIONS OF MONEY
 Money is a medium of exchange; it allows people and businesses to obtain what they
need to live and thrive.
 Bartering was one way that people exchanged goods for other goods before money
was created.
 Like gold and other precious metals, money has worth because for most people it
represents something valuable.
 Fiat money is government-issued currency that is not backed by a physical
commodity but by the stability of the issuing government.

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 Above all, money is a unit of account - a socially accepted standard unit with which
things are priced.
MONEY AND ITS NEED
Money can’t buy happiness, but it can buy security and safety for you and your loved ones.
Human beings need money to pay for all the things that make your life possible, such as
shelter, food, healthcare bills, and a good education.
 Money gives you freedom. When you have enough money, you can live where you
want, take care of your needs, and indulge in your hobbies. If you are able to become
financially independent and have the financial resources necessary to live on without
working, you’ll enjoy even more freedom since you will be able to do what you want
with your time.
 Money gives you the power to pursue your dreams. Having money makes it possible
for you to start a business, build a dream home, pay the costs associated with having a
family, or accomplish other goals you believe will help you live a better life.
 Money gives you security. When you have enough money in the bank, you’ll never
need to worry about having a roof over your head or about having enough to eat or
about being able to see a doctor when you’re sick. This doesn’t mean you’ll be able to
afford everything you want, but you’ll be able to enjoy a stable middle-class life.

ECONOMICS
Economics is that branch of social science which is concerned with the study of how
individuals, households, firms, industries, and government take decision relating to the
allocation of limited resources to productive uses, so as to derive maximum gain or satisfaction.
The word "economics" is derived from the ancient Greek word "oikonomikos" or "oikonomia."
Oikonomikos literally translates to "the task of managing a household."
Adam Smith, considered as the father of modern economics, defined economics as "an inquiry
into the nature and causes of the wealth of nations." British economist Alfred Marshall defined
economics as "the study of man in the ordinary business of life”.
SCOPE OF ECONOMICS
A) Micro Economics:
The part of economics whose subject matter of study is individual units, i.e., a
consumer, a household, a firm, an industry, etc. It analyses the way in which the
decisions are taken by the economic agents, concerning the allocation of the resources
that are limited in nature. It studies consumer behaviour product pricing, firm's
behaviour. Factor pricing, etc.

B) Macro Economics:
It is that branch of economics which studies the entire economy, instead of individual
units, i.e., level of output, total investment, total savings, total consumption, etc.
Basically, it is the study of aggregates and averages. It analyses the economic

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environment as a whole, wherein the firms, consumers, households, and governments

make decisions.

FACTORS INFLUENCING DECISION MAKING IN INVESTMENTS

Business environment factors impact how a business/industry operates and generates returns.
These factors have an impact on the investments and their returns. In broad terms, this
environment can be divided into two categories macro-environment and micro-environment.
Macro-environment affects the operation of all existing business entities out there, while micro-
environment influences the functionality of a particular business itself.
I. Macro-environment factors
The macro environment comprises a range of external factors. Neither businesses nor
governments can entirely control external factors. However, diligent decision-making and
strategies can reduce the impact that these external factors can have on the economy.
The external environment has an indirect impact on financial markets. This is not evident
immediately but can result in huge losses later on-in the absence of a strategic move. On the
other hand, a favorable environment presents a variety of profit- able opportunities. The
economic development of a country depends on these macro-environment factors. The factors
are as follows:

 Demographic factors: Demographics refers to age, language, lifestyle, income

distribution, cultural differences, etc. Financial literacy depends on demographics.

 Technology factors: Technological growth and advancement within a nation greatly

influences the production and sale of goods or services. Innovation, automation, and
internet facilities are some examples of technological factors.

 Natural and physical factors: Business performance depends on various geographical

and ecological forces-availability of natural resources, climate change, conditions,
biological balance, pollution, etc.

 Political and legal factors: The government imposes various regulations on

businesses-employment laws, import/export laws, copyright laws, labour laws, health
and safety laws, and discrimination laws. These are known as political and legal factors.

 Social and cultural factors: A business needs to be socially responsible and culturally
aware. Socio-cultural factors comprise education, population growth rate, life
expectancy rate, social status, buying habits, religion, etc.

 Economic factors: Consumer buying decisions are significantly impacted by macro-

economic factors demand-supply, inflation, interest rates, taxes, exchange rates, and
recession.

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II. Micro-environment factors

The microenvironment of the organization consists of those elements which are
controllable by the management.
However, the microenvironment does not affect all the companies in an industry in
the same way, because the size, capacity, capability, and strategies are different.
Some of the key micro-environment business factors are listed below:
 Customers
 Suppliers
 Competitors
 The general public

BANKING IN INDIA
A bank is a type of financial institution that is licensed to accept deposits and provide loans.
Financial services such as wealth management, currency exchange, and safe deposit boxes may
be offered by banks.
Banking Company: The Banking Regulation Act, 1949 defines "a banking company as a
company which transacts the business of banking in India (Section 5 (C)".
Banking: Section 5(b) defines banking "as accepting for the purpose of lending or investment
of deposits of money from the public, repayable on demand or otherwise and withdraw able by
cheque, draft, order or otherwise".
The term bank is derived from the French word "BANCO" which means a Bench or Money
exchange table.
FUNCTIONS OF BANKS
 Acceptance of Deposit: A bank accepts money from the people in the form of deposits
which are usually repayable on demand or after the expiry of a fixed period. It gives
safety to the deposits of its customers. It also acts as a custodian of funds of its
customers.
 Giving Advances/Loans: A bank lends out money in the form of loans to those who
require it for different purposes. These loans can be in the form of retail loans (loans
given to individuals) or corporate loans (loans given to businesses).
 Payment and Withdrawal: A bank provides easy payment and withdrawal facility to
its customers in the form of cheques, drafts, debit cards, Automated Teller Machines
(ATMs), etc. It also brings bank money in circulation. The new age banking focusses
on providing payment services using mobile technology to enable faster transfers, using
Unified Payment Interface (UPI), etc.
 Ever increasing Functions including agency and utility services: Banking is an
evolutionary concept. There is continuous expansion and diversification as regards the
functions, services and activities of a bank, which includes wealth portfolio
management services, utility services, agency services, insurance/mutual fund advisory
services, etc.

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NEED FOR BANKING

A sound banking system is necessary to achieve the following objectives:
 Savings and Capital Formation: Banks play a vital role in mobilizing the savings of
the people and promoting the capital formation for the economic development of a
country.
 Channelization of Savings: The mobilized savings are allocated by the banks for the
development of various fields such as agriculture, industry, communication, transport,
etc.
 Implementation of Monetary Policy: A structured banking system can easily
implement the monetary policy because development of the economy depends upon the
control of credit given by the banks. So, banks are necessary for the effective
implementation of monetary policies.
 Encouragement of Industries: Banks provide various types of financial services such
as granting cash credit loans, issuing letter of credit, bill discounting, etc., which
encourages the development of various industries in the country.
 Regional Development: By transferring surplus money from the developed regions to
the less developed regions, banks reduce regional imbalances.
 Development of Agriculture and Other Neglected Sectors: Banks are necessary for
the farmers. It also encourages the development of small-scale and cottage industries in
rural areas.
TYPES OF BANKS IN INDIA

Banks in India

Commercial Small Finance Payments Co-operative

Banks Banks Bank Bank

Public Sector Private Sector Urban Co-operative State Co-

Banks Banks Banks operative Banks

Regional
Foreign Banks
Rural Banks

1. Commercial Banks:
A commercial bank is a financial institution which accepts deposits from the public and gives
loans for the purposes of consumption and investment to make profit. Commercial banks are
governed by the Banking Regulation Act of 1949, and their business model is profit oriented.
Their primary function is to receive deposits and lending to individuals, businesses, and
governments. Commercial banks have typically maintained physical locations, but a growing

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number now operate exclusively online. Commercial banks are vital to the economy because
they provide the market with capital, credit, and liquidity. Commercial b can be divided into:

 Public Sector Banks:

These are the nationalized banks, which account for more than 75% of the country's overall
banking industry. Public Sector Undertakings (Banks) are a major type of government owned
banks in India, where a majority stake (i.e., more than 50%) is held by the Ministry of Finance
of the Government of India or State Ministry of Finance of various State Governments of India.
The main goals of public sector banks are to ensure accessibility of banking and financial
services, to ensure regulatory compliance to promote the needs of the underprivileged and
weaker sections of society to cater to the needs of agriculture and other priority sectors, and to
prevent the concentration of wealth and economic power. The number of public sector bank
has been reduced to 12 from 27.

 Private Sector Banks:

Private-sector banks are those in which private shareholders own the majority of the company
rather than the government. Private promoters own, manage, and govern private sector banks,
which are free to operate in accordance with market forces. Apart from the shareholding
structure, both public sector and private sector banks offer the same set of services. To ensure
their safety and smooth operation, entry hurdles and regulatory criteria such as the minimum
net worth are normally in place. This assures the protection of public deposits entrusted to such
organizations and they are also governed by rules provided from time to time by Reserve Bank
of India. At present, there are 21 private banks in India, as on 2021.

 Foreign Banks:
A Foreign Bank is a financial institution that provides financial services to international
consumers from outside of its native country. Foreign banks are registered and have their
headquarters in another country, yet they have branches in India. These banks can operate of
Finance through branches or wholly-owned subsidiaries, according to the RBI Most foreign
banks' primary business in India has been in the corporate sector.

 Regional Rural Banks:

On October 2, 1975, the Indian government established Regional Rural Banks (RRBs). They
were established to provide banking and financial services to remote communities and
therefore operate in several states in India. These banks help small and marginal farmers in
rural areas by providing finance. They help small and marginal farmers, agricultural labourers,
artists, and small business owners get finance. Scheduled banks, often a nationalized
commercial bank, sponsor RRBs.

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2. Small Finance Bank:

Small financing banks were established with the goal of reaching out to the unbanked
population in distant and underdeveloped locations. Small Finance Banks (SFBs) became
public in India on September 16, 2015, when the Reserve Bank of India authorized the
establishment of small financial institutions known as small finance banks in accordance with
the Union Budget of 2014-2015. The goal of India's Small Finance Banks is to give financial
inclusion to the less privileged sectors of the economy, who may be unable to access financial
institutions. Small Finance Banks serve small and micro businesses, marginal and small
farmers and the unorganized sector.

3. Payments Bank:
The Reserve Bank of India conceptualized Payments Banks as a new type of bank in India
(RBI). These banks can accept a limited deposit, which is now capped at 200,000 per person
but could be raised in the future. These banks are unable to provide loans or credit cards. Banks
of this type can handle both current and savings accounts. Payments banks can provide online
and mobile banking as well as ATM and debit cards. Bharti Airtel established Airtel Payments
Bank, India's first payments bank.
Examples of Payments bank in India are as follows: Airtel Payments Bank Ltd, India Post
Payments Bank Ltd, Paytm Payments Bank Ltd, Jio Payments Bank Ltd, NSDL Payments
Bank Ltd.

4. Co-operative Banks:
Cooperative banks are governed by an elected managing committee and are governed by the
Cooperative Societies Act of 1912. A cooperative bank is a voluntary that caters to its members'
financial requirements on a mutual basis. They take deposits and lend money to their members
in the form of mortgages and other sorts of loans. The Reserve Bank of India regulates and
inspects these banks as well, but they are normally governed by a distinct statute that is more
flexible and easier to comply with than central bank legislation. Cooperative banks are further
divided into the following categories:

 Urban Co-operative Banks:

The primary cooperative banks in urban and semi-urban areas are referred to as urban co-
operative banks. Small borrowers and enterprises oriented around towns, neighborhoods, and
workplace groupings were primarily lent to by these banks.
 State Co-operative Banks:
The short-term cooperative credit framework includes state co-operative banks. State
governments register and regulate these organizations under the relevant state co-operative
societies acts. They are also under the authority of the RBI because they are subject to the rules
of the Banking Regulation Act, 1949.

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TYPES OF BANK DEPOSITS

A commercial bank's most significant activity is to collect deposits from the general public.
People who have extra money and savings find it convenient to deposit it in a bank, Funds
deposited with a bank receive interest depending on the nature of the deposit. Banks typically
accept the following types of deposits:

Types of Bank
Deposit Account

Savings Current Fixed Recurring

Account Account Deposit Deposit

I. SAVINGS ACCOUNT
Individuals who want to deposit small sums of money from their present income should open
a savings account. It assists them in securing their future while also collecting income on their
investments. A savings account can be opened with or without the ability to use a cheque book.
Savings account customers can also deposit checks, draft, dividend warrants, and other
instruments made in their favour with the bank for collection.
Types of Savings Accounts
a) Basic Savings Account:
A basic savings account is a simple account that can be open with a bank or financial institution.
Its sole goal is to save your money in a safely manner. In exchange, you will receive interest
on the amount you have deposited. The interest rate varies from one bank to another. Basic
Savings Accounts often have a minimum balance requirement, and you must ensure that your
account balance does not go below a certain level.

b) Instant Savings Account:

An Instant Savings Account is quite similar to a Basic Savings Account in many ways. The
main distinction is that, regular savings account may need you to physically visit the bank to
open it, an Instant Savings Account may be started fast online with only a few clicks. Only
your Aadhaar details can be used to start an Instant Savings Account. It also has a variety of
other benefits, including as app-based access to banking services 24 hours a day, seven days a
week.

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c) Zero Balance Savings Account:

A zero balance savings account is one in which account holders are not required to maintain
any monthly average amount (AMB).
d) Family Savings Account:
Family Savings Accounts are accounts that allow all members of your family to manage their
varied financial needs on a single platform. It has a numerous benefit over a conventional
Individual Savings Account, including lower minimum balance requirements, expanded
banking privileges, and superior features such as Wealth Management and Private Banking.
II. CURRENT ACCOUNT
Current bank account is opened by businessmen who have a higher number of regular
transactions with the bank. It includes deposits, withdrawals, and contra transactions. It is also
known as Demand Deposit Account. The depositor can withdraw the balance of his or her
current account at any time using cheques. Business organisations or businessmen are allowed
to open current accounts. Current accounts do not pay interest because the money put in them
is repayable without restriction on demand.
FEATURES OF A CURRENT ACCOUNT
 A current account requires a higher minimum balance than a savings account.
 Designed to make frequent transactions easier - such as transferring funds, receiving
cheques & cash.
 Individuals, proprietary businesses, public and private companies, association, trusts,
and so on can generally operate current accounts.
 The primary goal of current account is to foster business transactions.
 Current accounts charge interest on short-term cash borrowed from the bank by the
account holder.

III. FIXED DEPOSIT

The word "fixed deposit” refers to a deposit that is repayable after a set duration of time. It is
also known as a time deposit since it is repayable only after a set duration of time, which is
chosen at the time the account is opened. Fixed deposits are the most beneficial to a banking
institution. Because they are only repayable after a set period of time, the back can invest these
funds more profitable by lending at higher interest rates and for longer periods.

IV. RECURRING DEPOSIT

Recurring deposit (RD) are a type of account in which the depositor is required to deposit
money at regular intervals such as monthly, quarterly, or weekly for a set duration of time.
Most banks and NBFCs in India offer recurring deposit accounts with terms ranging from 6
months to 10 years. The interest rate typically fluctuates between 5.00 percent and 7.85 percent.
After the prescribed period has expired, the customer receives all of his deposits, as well as the
cumulative interest accrued on the deposit.

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FD Vs. RD

Difference Fixed Deposit Recurring Deposit

1. Deposit Frequency Only once Periodically

2. Tenure 7 days to 10 years 6 months to 10 years

3. Interest Pay-out Perodically or on On maturity along with
maturity the capital amount

4. Minimum deposit Rs. 100 Rs. 1,000

5. Tax saving option Available with 5 years Not available
maturity

DEPOSIT INSURANCE (PMJDY)

Pradhan Mantri Jan-Dhan Yojana (PMJDY) is National Mission for Financial Inclusion to
ensure access to financial services, namely, a basic savings & deposit accounts, remittance,
credit, insurance, pension in an affordable manner. Under the scheme, a basic savings bank
deposit (BSBD) account can be opened in any bank branch or Business Correspondent (Bank
Mitra) outlet, by persons not having any other account.
Benefits under PMJDY
 One basic savings bank account is opened for unbanked person.
 There is no requirement to maintain any minimum balance in PMJDY accounts.
 Interest is earned on the deposit in PMJDY accounts.
 Rupay Debit card is provided to PMJDY account holder.
 Accident Insurance Cover of 1 lakh (enhanced to 2 lakh to new PMJDY accounts
opened after 28.8.2018) is available with RuPay card issued to the PMJDY
account holders.
 An overdraft (OD) facility up to 10,000 to eligible account holders is available.
 PMJDY accounts are eligible for Direct Benefit Transfer (DBT), Pradhan Mantri
Jeevan Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana
(PMSBY), Atal Pension Yojana (APY), Micro Units Development & Refinance
Agency Bank (MUDRA) scheme.

TRADITIONAL AND NEW BANKING MODELS

India has traditionally been a cash-based economy. The government's decision to implement
demonetisation, as well as the recent Covid epidemic, has mandated contactless payments and
increased cashless banking. Demonetization may have failed to attain its stated goals like
seizing all black money and undeclared assets, but it did disrupt life and economic activity.
The positive side of demonetization is that compelled people to conduct cashless transactions
because there was very little liquid currency available to the public as the government had
banned old currency notes. Many digital payment services emerged, assisting people to
transition to cashless purchases. The imposition of demonetisation in 2016 paved the way for
a cashless banking.
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METHODS OF NEW BANKING MODELS BANKING CARDS

A) BANKING CARDS
Banking cards, such as debit and credit cards, are among the most widely used cashless
payment systems worldwide. Banking cards provide numerous benefits such as secure
payments, convenience, and many others. One of the most significant benefits of banking cards
is that they may also be used to make digital payments. To perform cashless payments, a user
can store his card information in mobile wallets or digital payment apps. The types of bank
cards and their characteristics:
i. Debit card:
Debit cards are provided when an account is opened at a bank. Debit cards are linked to a bank
account and enable you to pay at both physical and online stores, as well as withdraw cash
from branches or ATMs. Upon using debit card the amount will be debited from your savings
or current account. As a result, if there were insufficient funds in the the transaction could not
be completed. The debit card normally has a daily limit connected with it for security concerns,
especially when withdrawing cash from an ATM.
ii. Credit card:
The primary distinction between a debit card and a credit card is that when we use the debit
card, the amount is deducted from the bank account. When we use a credit card, the amount is
deducted from the pre-approved credit limit rather than the bank account. The card's limit is
determined by the issuing institution based on the credit score and history. In general, a higher
credit score results in a greater credit limit.

B) MOBILE APPLICATION-BASED PAYMENT SYSTEM

Because of the rapid, safe, and easy payment options, mobile wallet applications are
increasingly gaining popularity. Mobile apps enable users to transfer, receive, and store money.
By simply integrating the bank account, a user can add or save money in his wallet. The
following are the types of Mobile Payment Apps [ e-Wallets ]

Digital Wallets

Open e- Semi-closed Closed e-

wallets e-wallets wallets

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1. Open e-wallets:
Banks are the only institutions authorised to issue & operate open wallets. Users with open
wallets can use them for any transactions, including the purchase of products and services, as
well as financial services such as money transfer at merchant locations or point-of-sale
terminals that accept cards, and cash withdrawal at ATMs . RBI authorization or Pre-paid
Payment Instruments (PPIs) license is not required for Banks for operating open-eWallets.
Examples: Yono – State Bank
Lime – Axis Bank
Pockets – ICICI Bank.

2. Semi closed e-wallets:

A semi-closed wallet is issued by a fintech or by any payments company (non-bank entity).
Using this type of app, a user can also transact with merchants that have a contract with the app
company. Merchants need to sign contracts with the app company for accepting payment from
the mobile wallets. Semi-closed wallets also do not permit cash withdrawal. Since semi closed
wallets are administered by non-bank entities, they are mandated to keep money in the escrow
account with a partner bank. RBI authorization or Pre-paid Payment Instruments (PPIs) license
is required for closed wallet companies.
Examples: Paytm, Phonepe, Google Pay.

3. Closed e-wallets:
A closed e-wallet is issued by a merchant to a consumer for buying goods and services
exclusively on its platform. Cash withdrawal or redemption are not possible with these wallets.
Typically, merchants create these wallets account for customer to refind money in the event
cancellation or return of a product or service RBI authorization or Pre-paid Payment
Instruments (PPIs) license is not a compulsion for closed wallet companies.
Examples: Flipkart, Makemytrip.

C) BHIM/UPI
Based on the Unified Payments Interface, BHIM is an Indian mobile payment app developed
by the National Payments Corporation of India BHIM (Bharat Interface for Money) is a UPI-
based platform that allows users to make secure, simple, and instant digital paymen using your
phone.
The Unified Payments Interface (UPI) is a real-time payment system designed by the National
Payments Corporation of India (NPCI) that allows for inter-bank peer-to-peer (P2P) and
person-to-merchant (P2M) transactions. The Reserve Bank of India (RBI) regulates the
interface, which works by immediately transferring payments between two bank accounts on a
mobile platform.

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D) QR CODES
QR is an abbreviation for Quick Response. It is a two-dimensional code that consists of a
pattern of black squares grouped on a square grid. Imaging devices, such as smartphone
cameras, can scan QR codes. QR codes are extensively used for conducting cashless payments,
in which a user just scans the merchant service QR code to complete the transaction.

E) CONTACTLESS PAYMENTS
Contactless payment is a simple and safe technology that allows users to buy products by just
tapping a card near a point-of-sale terminal. The card can simply be a debit, credit, or smart
card based on NFC (near field communication) or RFID technology. Because contactless
payments do not require a signature or a PIN, they are highly convenient. Furthermore,
contactless payments can be made using NFC-enabled phones that are directly linked to a
mobile wallet. To make the payment, the user merely needs to keep his NFC-enabled phone
close to the reader.

F) ECS
Electronic clearance service is extensively used for making bulk payments, equating monthly
instalments, paying off utility bills, and disbursing payments such as dividends, pensions, and
salaries. ECS can be used for credit as well as debit services. To begin the ECS, the bank must
obtain authorization to make periodic credits and debits. ECS is a secure technique since you
may specify the maximum amount of debit, the validity time, and the purpose of the
transaction.

G) ONLINE FUND TRANSFER

There are several methods for transferring funds from one bank account to another With the
advancement of technology, online money transfer has become the most convenient method of
sending funds from one bank to another. Here are the three most common methods of money
transfer:

1. NEFT:
The National Electronic Fund Transfer, or NEFT, is the most basic and widely used method of
transferring money from one bank to another. To complete a NEFT transaction, you just need
two pieces of information: the account number and the IFSC code of the destination account.
There is no limit to the amount of money that can be transmitted via NEFT Individual banks,
on the other hand, may impose a limit.

2. RTGS:
RTGS is an abbreviation for Real-Time Gross Settlement. RTGS is a real- time funds transfer
system based on the gross settlement principle, in which money is sent from one bank to
another in real time. RTGS is primarily intended for high-value As a result, while there is no

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maximum transfer amount, you must send a minimum of INR 2 lakhs at a time. When the
transaction amount is high and payment must be processed instantly, RTGS is extremely
important. A typical RTGS transfer, like NEFT, requires the beneficiary's name, account
number and type, the name of the bank, and the Indian Financial System Code (IFSC) of the
bank.
3. IMPS:
Immediate Payment Service (IMP) is a service that allows for instant financial transfers and
can be used at any time. IMPS is simply the combination of NEFT and RTGS. The transaction
limit is set quite low in order to avoid fraud complaints. You only need the destination account
holder's IMPS id (MMID) and mobile number to make an IMPS transfer.

H) GIFT CARDS OR VOUCHERS

Gift cards are also a convenient option to go cashless. It allows the recipient to use a voucher
to purchase anything. There are also a number of stores that provide discounts on gift cards.

I) ATM
ATMs, or Automated Teller Machines, are one of the most useful innovations in the banking
industry. ATMs enable banking customers to do self-service activities such as cash withdrawal,
deposit, and fund transfers in a timely manner. In 1967, ATMs were first used in London.
HSBC opened the first ATM in India in Mumbai in 1987. ATMs can be on-site or off-site.
ATMs on-site are found at banks. By using ATMs customers benefit from increased choice,
convenience, and availability, while banks increase transaction income, reduce operating and
maximise staff resources.

J) AEPS (Aadhar Enabled Payment System)

Aadhaar Enabled Payment System (AEPS) is a type of payment system that is based on the
Unique Identification Number and allows Aadhaar card holders to seamlessly make financial
transactions through Aadhaar-based authentication. The AEPS system aims to empower all
sections of the society by making financial and banking services available to all through
Aadhaar. AEPS is nothing but an Aadhaar- enabled payment system through which you can
transfer funds, make payments, deposit cash, make withdrawals, make enquiry about bank
balance, etc.
This is a simple, secure and user-friendly platform for financial transactions. This is another
initiative taken by the National Payments Corporation of India (NPCI) to encourage cashless
transactions in India.
Services Offered by AEPS: Cash Deposit, Payment Transactions (C2B, C2G Transactions),
Balance Enquiry, Cash Withdrawal, Aadhaar to Aadhaar funds transfer.

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FINANCIAL STATEMENTS: FINANCIAL TERMS AND OVERVIEW

1) There are two basic types of income
a) Revenue self-generated fees for service/sales.
b) Support-charitable contributions and grants.

2) Financial information is based on periods of time.

a) Past-Financial Statements (prepared monthly, quarterly, annually to reflect
historical activity)
b) Present Reality = Cash Flow Projections (include current and near-term cash
projections)
c) Future = Budget (prepared in anticipation of future activity)

TYPES AND USES OF FINANCIAL STATEMENTS

Financial statements are a compilation of financial data, collected and classified in a systematic
manner according to the accounting principles, to assess the financial position of an enterprise
as regards to its profitability, operational efficiency, long- and short-term solvency, and growth
potential. They are structured financial representation of the financial position, performance,
and cash flows of an enterprise.

Generic (For Profit) Nonprofit Governmental

Balance Sheet Statement of Financial Statement of Net Assets
Position
Income Statement Statement of Activities and StatementofActivities
Changes in Net Assets

A) Income Statement (Profit and Loss Statement)

The profit and loss account (income statement) shows the financial performance of the
company/firm over a period. It indicates the revenues and expenses during that particular
period. The period is an accounting period/year, April-March.
The accounting report summarizes the revenue items, the expense items, and the difference
between them (net income) for an accounting period.

B) Balance Sheet
A balance sheet is a financial statement that reports a company's assets, liabilities, and
shareholder equity. The balance sheet is one of the three core financial statements that are used
to evaluate a business. The balance sheet adheres to the following formula:
Assets = Liabilities+ Shareholders' Equity

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A balance sheet contains the following:

 Assets: Assets in a balance sheet shows the amount of assets an entity holds on the date
of the balance sheet.
 Liabilities: Liabilities in balance sheet shows the amount of liability an entity is liable
to pay in future (determined on the date of balance sheet).
 Equity & Reserves: Equity and reserves is the amount of capital the entity has
including reserves balances, if any. Higher amount of equity and reserves indicates higher net
worth of the entity.

C) Cash Flow Statement

Cash flow statement (also known as statements of cash flow) shows the flow of cash and cash
equivalents during the period and breaks the analysis down to operating, investing. and
financing activities. It helps in assessing liquidity and solvency of a company and to check
efficient cash management.
There are three key components of Cash flow statements:
 Cash from operating activities: This includes all the cash inflows and outflows
generated by the revenue-generating activities of an enterprise like sale & purchase of
raw materials, goods, labour cost, building inventory, advertising, shipping the product,
etc.
 Cash from investing activities: These activities include all cash inflows and outflows
involving the investments that the company made in a specific time period such as the
purchase of new plant, property, equipment, improvements capital expenditures, cash
involved in purchasing other businesses or investments.
 Cash from financial activities: This activity includes inflow of cash from investors
such as banks and shareholders by getting loans, offering new shares etc, as well as the
outflow of cash to shareholders as dividends as the company generates income. They
reflect the change in capital & borrowings of the business.
FINANCIAL TERMS AND CONCEPTS
1. Assets: Anything a company owns with quantifiable value.
2. Liabilities: Money a company owes to a debtor, such as outstanding payroll expenses,
debt payments, rent and utility, bonds payable, and taxes.
3. Owners' equity refers to the net worth of a company.
4. Revenue: The amount of money a business takes in.
5. Expenses: The amount of money a business spends.
6. Costs of goods sold (COGS): The cost of component parts of what it takes to make
whatever a business sells.
7. Gross profit: Total revenue less COGS.
8. Operating income: Gross profit less operating expenses.
9. Income before taxes: Operating income less non-operating expenses.
10. Net income: Income before taxes less taxes.
11. Earnings per share (EPS): Division of net income by the total number of outstanding
shares.

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12. Depreciation: The extent to which assets (for example, aging equipment) have lost
value over time.
13. EBITDA: Earnings before interest, taxes, depreciation, and amortization.
Money a company owes to a debtor, such as outstanding payroll expenses, debt payments,
rent and utility, bonds payable, and taxes.
Reviewing and understanding these financial documents will provide to the prospective
investors with valuable insights about a company, including:
 Its debts and ability to repay them.
 Profits and/or losses for a given quarter or year.
 Whether profit has increased or decreased compared to similar past accounting periods.
 The level of investment required to maintain or grow the business Operational
expenses, especially compared to the revenue generated from those expenses.

IMPORTANT RATIOS / Basic ratio's for evaluating companies while investing

Ratio is a meaningful relationship between two financial parameters. Ratios are best interpreted
in comparison with : Historical data, Competition and Industry norms.
Measures for Understanding Financial Health
1) Current Ratio
This ratio is used to assess a firm's ability to meet its current liabilities. The relationship of
current assets to current liabilities is known as current ratio. The ratio is calculated as:
Current Ratio = Current Assets / Current Liabilities

2) Liquid Ratio
This ratio is used to assess the firm's short-term liquidity. The relationship of liquid assests to
current liabilities is known as Liquid ratio. It is also called the acid test ratio or quick ratio.
The ratio is calculated as:
Liquid Ratio = Liquid Assets / Current Liabilities

3) Debt Equity Ratio

This ratio helps to ascertain the soundness of the long-term financial position of the concern.
It indicates the proportion between total long-term debt and shareholders' funds. This also
indicates the extent to which firm depends upon outsiders for its existence. The ratio is
calculated as:
Debt-Equity Ratio = Total long term Debt /Shareholders Funds

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4) Return on Equity Ratio

It measures the returns of the company is generating on shareholders' equity.
Return on Equity = Profit After Tax/Equity share capital.
5) Return on Capital Employed (ROCE)
The comparison is between operating profit and total capital employed including debt.
ROCE = Profit before interest and tax/Total capital employed.
6) Inventory Turnover Ratio
The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is
managed by comparing cost of goods sold with average inventory for a period. This measures
how many times average inventory is “turned” or sold during a period.
Inventory Turnover Ratio = Cost of Goods Sold/Average lnventory.
7) Gross Margin Ratio
Gross margin ratio is a profitability ratio that compares the gross margin of a business with the
net sales. This ratio measures how profitably a company sells its inventory or merchandise.
This is the pure profit from the sale of inventory that can go to paying operating expenses.
Gross Margin Ratio = Gross Margin / Net Sales
a) Gross Margin = Net Sales - Cost of goods sold
b) Net Sales = Gross Sales - Returns/Refunds

8) Net Margin Ratio

It is the percentage of revenue left after all expenses have been deducted from sales. The
measurement reveals the amount of profit that a business can extract from its total sales.
Net Margin Ratio = Net Profit/Total Sales
9) Earnings per Share (EPS)
Earnings per share, or EPS, is one of the most common ratios used in the financial world.
This ratio tells how much a company earns in profit for each outstanding share of stock..EPS
is basically the net profit that a company has made in a given time period divided by the total
outstanding shares of the company. Generally, EPS can be calculated on an Annual basis or
Quarterly basis. Preferred shares are not included while calculating EPS.
Earnings Per Share (EPS) = (Net income - Dividends from preferred stock) / (Average
outstanding shares)
10) Price to Earnings (PE) Ratio
The Price to Earnings ratio is one of the most widely used financial ratio analysis among
investors for a very long time. A high PE ratio generally shows that the investor is paying more
for the share. The PE ratio is calculated using this formula:
Price to Earnings Ratio = (Price Per Share)/( Earnings Per Share)
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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

11) Price to Book (PBV) Ratio

Price to Book Ratio (PBV) is calculated by dividing the current price of the stock by the book
value per share. Here, Book value can be considered as the net asset value of a company and
is calculated as total assets minus intangible assets (patents, goodwill) and liabilities. Here's
the formula for PBV ratio:
Price to Book Ratio = (Price per Share)/( Book Value per Share)
PBV ratio is an indication of how much shareholders are paying for the net assets of a company.
Generally, a lower PBV ratio could mean that the stock is undervalued.
12) Price to Sales Ratio (P/S)
The stock's price/sales ratio (P/S) ratio measures the price of a company's stock against its
annual sales. P/S ratio is another stock valuation indicator similar to the P/E ratio.
Price to Sales Ratio = (Price per Share)/(Annual Sales Per Share)
The P/S ratio is a great tool because sales figures are considered to be relatively reliable
while other income statement items, like earnings, can be easily manipulated by using different
accounting rules.
13) Dividend Yield
A stock's dividend yield is calculated as the company's annual cash dividend per share divided
by the current price of the stock and is expressed in annual percentage. Mathematically, it can
be calculated as:
Dividend Yield = (Dividend per Share)/(Price per Share)*100
For Example, If the share price of a company is 100 and it is giving a dividend of 10, then the
dividend yield will be 10%.
A lot of growing companies do not give dividends, rather reinvest their income in their growth.
Therefore, it totally depends on the investor whether he wants to invest in a high or low
dividend yielding company. Anyways, as a thumb rule, consistent or growing dividend yield
is a good sign for dividend investors.

TIME VALUE OF MONEY

The concept of time value of money is based on the principle that 'a rupee today is more
valuable that a rupee receivable in future. This means money available at the present time is
worth more than the same amount in the future due to its potential earning capacity. This
happens because money received in future involves risk and uncertainty and money available
at present provides investment opportunities as it can earn interest; therefore any amount of
money is worth more the sooner it is received.

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

IMPORTANCE OF TIME VALUE OF MONEY

Money today is worth more than money in the future. This is called the time value of money.
There are three reasons for the time value of money: inflation, risk and liquidity
CALCULATION OF TIME VALUE OF MONEY
To calculate the time value of money following are the required terms:
 Present Value: This is the sum of money you have today.
 Future Value: This is the sum of money you will have at some later time.
 Discount rate is the percentage rate that is used to determine the present value of the future
amount. It can often be approximated at the interest rate.
Formula: Present Value = Future Value / (1+ Discount Rate)
PRESENT VALUE CALCULATION:
1) To have 2000 today, you would have needed to invest some money a year ago. Your
future value is now 2000, and you would use the discount rate of 7% . Calculate present
Value
Sol: Present Value = 2000 / 1.07 = Rs. 1869.16/-

FUTURE VALUE CALCULATION:

1) Mr Gupta deposits 2,000 at the end of every year for 45 years in his saving account,
paying 5% interest compounded annually. Determine the sum of money, he will have
at the end of the 5 year.
Sol:
End of Year Amount No. of Years Compounded Future Sum of
Deposited Compounded Interest Factor Money
From Table 3
1 2000 4 (1+ 5/100)4 = 2000*1.216 =
1.216 2432
2 2000 3 (1+ 5/100)3 = 2000*1.158 =
1.158 2316
3 2000 2 (1+ 5/100)2 = 2000*1.103 =
1.103 2206
4 2000 1 (1+ 5/100)1 = 2000*1.050 =
1.050 2100
5 2000 0 (1+ 5/100)0 = 2000*1 = 2000
1.000

Amount at the end of 5th year = 2432+2316+2206+2100+2000 = Rs. 11054/-

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

2) What is the compound interest (CI) on Rs.10,000 for 2 Years at 10% p.a compounded
annually ?
Sol: Formula : A = P [ 1 + (R/100)]N
=10,000 [1 + (10/100)]2 = 10,000 *1.21 = Rs. 12,100/-
Compound Interest = 12,100 – 10,000 = Rs. 2,100/-

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

CHAPTER 02
INVESTMENT MANAGEMENT

INVESTMENT

Meaning and Definition

Investment is an activity that is engaged in by people who have savings. Investment as a

generic idea means sacrificing something today in order to generate benefit in future. But as an
economic activity investment involves creation of assets or exchange of assets with profit
motive.
Thus, investment may be defined as 'a commitment of funds made in the expectation of
some positive rate of return ' since the return is expected to realize in future, there is a
possibility that the return actually realized is lower than the return expected to be realized. This
possibility of variation in the actual return from the expected return is known as investment
risk. Thus, every investment involves return and risk.

Aming defines investment as 'purchase of financial assets that produces a yield that is
proportionate to the risk assumed over some future investment period'.

According to Sharpe, 'Investment is sacrifice of certain present value for some uncertain
future value'.
KEY FACTORS OF INVESTMENT
Investing can be a rewarding activity which can help to meet our financial goals; however,
investing can be complex and often comes with risks. With appropriate knowledge, one can
choose the level of complexity and risk that are comfortable with Every Investors must know
at least three key factors about every investment, which are return, risk and liquidity.
1. Return
Return is the profit that an investor makes on an investment. It can come in two different
forms; income or capital gain.
2. Risk
Risk means uncertainty. We are not sure whether our investment will give high returns or
could also lose money. Risk and return both go hand-in-hand which means that to get
higher return on our investments we will be exposed to more risk. Higher the risk higher
the returns. Lower the risk low returns.
3. Liquidity
Liquidity is the ability to cash in or sell an investment quickly at or near the current market
price means how quickly we can convert our investment into cash. It affects the value of an
investment. Listed stocks and government bonds are liquid because we can usually sell
them easily.
4. Safety
Safety refers to the protection of investor principal amount and expected rate of return.

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INVESTMENT GOALS / OBJECTIVES

Investment goals depend on which life stage we are in (student, employee, retired, etc.).
Investment goals will be different from those of other people, and the goals will change as we
go through our life.
While the individual objectives of investment may vary from one investor to another, the
overall goals of investing money may be any one of the following reasons.
1. To Keep Money Safe:
Capital preservation is one of the primary objectives of investment for people. Some
investments help keep hard-earned money safe from being eroded with time. Fixed
deposits, government bonds, and even an ordinary savings account can help keep our
money safe.
2. To Help Money Grow:
Another one of the common objectives of investing money is to ensure that it grows
into a sizable corpus over time. Capital appreciation is generally a long-term goal that
helps people secure their financial future. To make the earned money grow into
wealth, we need to consider investment objectives and options that offer a significant
return on the initial amount invested.
3. To Earn a Steady Stream of Income:
Investments can also help to earn a steady source of secondary (or primary) Income.
Examples of such investments include fixed deposits that pay out regular interest or
stocks of companies that pay investors dividends consistently. Income-generating
investments can help to pay for our everyday expenses after we have retired.
4. To Minimize the Burden of Tax:
Aside from capital growth or preservation, investors also have other compelling
objectives for investment. This motivation comes in the form of tax benefits offered
by the Income Tax Act, 1961. Investing in options such as Unit Linked Insurance
Plans (ULIPS), Public Provident Fund (PPF), and Equity Linked Savings Schemes
(ELSS) can be deducted from total income. This has the effect of reducing total
taxable income, thereby bringing down tax liability.
5. To Save up for Retirement:
Saving up for retirement is a necessity. It is essential to have a retirement fund that
can fall back on our golden years, because we may not be able to continue working
forever. By investing the money earned during our working years in the right
investment options, we can allow our funds to grow enough to sustain after retired.
6. To Meet our Financial Goals:
Investing can also help to achieve short- term and long-term financial goals without
too much stress or trouble. Some investment options, for instance, come with short
lock-in periods and high liquidity. These investments are ideal instruments to park our
funds in if we wish to save up for short-term targets like funding home improvements
or creating an emergency fund.

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

FACTORS INFLUENCING INVESTMENT DECISION

Here are a few vital points one must keep in mind before you decide to invest.
1. Analyzing the Financial Needs
Firstly, analyze the financial situation concerning risk tolerance, investment bjectives
and other factors like family size, number of earning members and life goals. You
may even take help from a financial professional. It will help you to identify the
suitable options.
2. Investment Diversification
It is a way to according to your investment objectives by putting your funds in
different instruments reduce risk when you are making investments. Build a
diversified financial portfolio for maintaining the right balance between risk and
returns. Also, when thinking about 'investment' and 'where to invest, consider giving
priority to those instruments that offer security to your loved ones. It may include life
insurance policies like term plan, ULIP (ULIP full form: Unit Linked Insurance Pla
and other such instruments. You may consider the objectives for investment to gener
appropriate returns from it.
3. Time Period
You should also know that it is difficult to answer what is investment meaning for a
particular individual without considering the time period. That is why, while
considering what investment is, know what time you have before turning your
investments into cash. This is a crucial element that determines your investment
objectives. Depending on your requirements, you may choose short-term or long term
funds.
4. Periodical Reassessment
Since funds are influenced by market forces, it is imperative that you closely monitor
them periodically. You may also consider readjustment if your portfolio is ma
generating good returns.
5. Risk profile
A risk profile is important for determining a proper investment asset allocation for a
portfolio. Every single person has a different risk profile as the risk appetite depends
on psychological factors, loss bearing capacity, Investor's age, income & expenses
and many such other things.A risk profile is an evaluation of an individual's
willingness and ability to take risks.

ASSESSING RISK PROFILE

A Risk profile is an evaluation of an individual’s willingness and ability to take risks.It can
also refer to the threats to which an organization is exposed. A risk profile is important for
determining a proper investment asset allocation for a portfolio.

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

FACTORS THAT INFLUENCING THE INVESTORS RISK PROFILES

A) Depending upon Personal Information
1. Age: When a person is young, he/she can take more risk as they don't have much
to lose. Also they have a longer time frame available with them to reap profits
from their investments even if they suffer some losses along the way. Therefore,
lower the age, higher the risk that can be taken.
2. Employability: When a person has quality education and is skilled and qualified,
he/she can find job anywhere. Moreover, these professionals don't have to worry
as their education, skills and qualities will help them earn money in some or the
other way. They have a high employability level. Therefore, well qualified and
multi-skilled professionals can afford to take more risks.
3. Nature of Job: A person is stable when he/she has a stable source of income.
Having a stable job gives a sense of security. When people have a sense security
they can invest more freely. Thus, people with stable jobs can afford to take more
risk and can more profits.
4. Psyche: The psyche of a person that is their personality and characteristics also
influence risk taking decisions. The response of people to profit or loss from their
investments is critical. Some people are not good at accepting losses. The
mentality, i.e is the thinking of a person plays a key role in investing. Having a
positive outlook while investing helps earn more. Hence, adventurous and daring
people are better positioned mentally to accept downside risk.

B) Depending upon Family Information

1. Earning Members: If the number of members earning in a family is high, then
they have mon amount to invest. There is no need to worry about few losses. This
also means that their r appetite is also high. Therefore, risk appetite increases as
the number of earning memben increases.
2. Dependent Members: The number of members dependent on the earning
member is of grea influence. Fulfilling the needs and wants of all the members is a
difficult task. Moreover, a there are more members dependent on the same person
then there is not much scope to tai risk. Hence, risk appetite decreases as the
number of dependent members decreases.
3. Life Expectancy: Life expectancy means the number of years a person might
live. This number decides how to invest and when to reap the profits. If the life
expectancy is low the there is no point planning for time period more than that. If
the life expectancy is high the low risk is preferred. Thus, risk appetite is higher
when life expectancy is longer.

C) Depending upon Financial Information

1. Capital Base: A broad capital base means being financially sound. It provides a
lot of scope for taking risk in investments. A higher capital base helps absorbs the
losses incurred, if any Having a high capital base acts a backbone. Therefore,
higher the capital base, better the ability to financially take the downsides that
come with the risk.
2. Regularity of Income: Regular income indicates stability. A stable source of
income is beneficial while investing. Knowing that there is income in the future
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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

can help take risks now. People with seasonal income cannot take high risks.
Thus, people earning regular income can take more risk than those with
unpredictable income stream.

DIVERSIFICATION
It is a technique that reduces risk by allocating investments across various financial
instruments, industries and other categories. It aims to minimize losses by investing in
different areas that would each react differently to the same event.

SUCCESSFUL DIVERSIFICATION
1. Understand risk appetite: Depending on the investor, risk appetite can range from
high to low. An investor's risk appetite varies according to several factors, including
their income, age, lifestyle, and dependents.
2. Make an active asset allocation: Strategic asset allocation is the key to a successful
portfolio. To allocate your assets in a well-diversified portfolio, the investor must
carefully examine their finances.
3. Avoid over-diversification: Diversification is no different. The benefits of portfolio
diversification are numerous; however, over diversification can reduce overall returns.
Investing in too many assets can make it difficult to monitor, as well as to know when
to exit when necessary.
4. Research before investing: Successful investors conduct proper research and gain
knowledge about the stock or company before investing. This may include company
history, past performance, market reputation, future objectives, etc. If a company has
a longstanding track record, its returns are more likely to be stable.
5. Know when to exit: In the same way that research is crucial before investing, it is
crucial to do the same post-investment. In this way, the investor will know whether to
hold or sell a specific stock. Thus, it gives insight into the potential of the stock.
6. Avoid temptations: It is important to understand that these volatile instruments fall
as rapidly as they rise. Moreover, some popular instruments, while appearing glittery
from the outside, can be fraudulent.
7. Invest in instruments with different liquidity terms: When investing, it is
important to consider the possibility of needing emergency funds if an unfortunate
event occurs. Investing in a money market instrument with a maturity of around 3
months can be an example of the same. In addition, they carry low risk.

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

INVESTORS' ATTITUDE TOWARDS RISK

"Greater the risk, Greater the reward", not all people want to take great risks with their
money. Thus, financial professionals break investors into categories based on the investor
appetite for risk: risk averse, risk neutral and risk seeking.
RISK AVERSE
A risk-averse investor tends to align more with the safety of principal objective that a growth
objective. When an investor is risk-averse, they tend to seek low-risk investments which will
typically produce low but more stable returns.
Thus, risk aversion can be described as a priority or preference for an investor, rathe than an
absolute avoidance of risk.
RISK NEUTRAL
Risk neutral is a term used to describe the attitude of an individual who may be evaluating
investment alternatives. If the individual focuses solely on potential gains regardless of the
risk, they are said to be risk neutral.
RISK SEEKING
Risk-seeking is one's acceptance of greater risk, in price volatility and uncertainty while
investments or trading. Risk seekers are more interested in capital gains from speculative
assets than capital preservation from lower-risk assets. Risk-seeking individuals leverage the
trade-off between risk and return by accepting more risk in hopes of above-average returns.
In general, higher-risk investments demand higher expected return potential.

TYPES OF RISK PROFILES

1. Conservative:
Investor's top priority is safety of capital and he/she is willing to accept minimal risks and
hence, receive minimum or low returns.
2. Moderately Conservative
Investor is willing to accept small level of risk in exchange for some potential returns over
the medium to long term.
3. Moderate
Investor can tolerate moderate level of risk in exchange for relatively higher potential returns
over the medium to long term.
4. Moderately Aggressive
Investor is keen to accept high risk in order to maximize potential returns over the medium to
long term.

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

5. Aggressive
Investor is willing to accept significant risks to maximize potential returns over the long term
and is aware that he/she may lose a significant part of capital.

ELEMENTS OF RISK
Various components cause the variability in expected returns, which are known as elements
of risk. There are broadly two groups of elements classified as systematic risk and
unsystematic risk.
1. SYSTEMATIC RISK
Business organizations are part of society that is dynamic. Various changes occur in a
society like economic, political and social systems the have influence on the
performance of companies and thereby on their expected returns. These changes
affect all organizations to varying degrees. Hence the impac of these changes is
system-wide and the portion of total variability in returns caused by such across the
board factors is referred to as systematic risk.
A) Market Risk
It is the risk that value of investment will decrease due to moves in market factors.
The four standard market risk factors are:
i) Equity risk: The risk that stock prices will change.
ii) Interest rate risk: The risk that interest rate will change.
iii) Currency risk: The risk that foreign exchange rate will change.
iv) Commodity risk: The risk that commodity prices will change.
Commodity here means grains, metals etc.

B) Interest Rate Risk

It is the risk borne by interest bearing assets, such as, a loan or a bond, due to
variability of interest rates. It refers to the uncertainty of future market values and
of the size of future income, caused by fluctuations in general level of interest
rates.

C) Purchasing Power Risk

The risk refers to the impact of inflation and deflation on an investment. It is
common that price of goods and services are fluctuating due to variations in the
supply of and demand for same.

2. UNSYSTEMATIC RISK
Also known as Diversifiable or Non-systematic risk, it is the threat related to a
specific security or a portfolio of securities. Investors construct these diversified
portfolios for allocating risks over various classes of assets.

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

A) Business risk
Business risk can be defined as the risk that whether the owner/s of the company
would be able to run the business or not. We can call it a risk relating to
operations and whether the company would be able to make profits or not.
B) Financial risk
Financial risk, on the other hand, can be defined as the risk of not being able to
pay off the debt. When a firm wants to improve its financial leverage by allowing
debt to enter into their capital structure, they suffer from financial risk. Financial
risk is directly proportional to how much debt you allow into your capital
structure.
SYSTEMATIC RISK VS UNSYSTEMATIC RISK (COMPARISON TABLE)
Basis for Comparison Systematic Risk Unsystematic Risk
Meaning Risk/Threat associated with Hazard associated with
the market or the segment as specific security, firm or
a whole. industry.
Impact Large number of securities Restricted to the specific
in the market. company or industry.
Controllability Cannot be controlled Controllable
Hedging Allocation of the assets Diversification of the
Portfolio.
Types Interest Risk and Market Financial and Business
Risk specific risk.

Responsible Factors External Internal

Avoidance Cannot be avoided Can be avoided or resolved
at a quicker pace.

MEASUREMENT OF RISK
Quantification of risk is known as measurement of risk.
Two approaches are followed in measurement of risk:
(1) Mean-variance approach, and
(2) Correlation or regression approach
Mean-variance approach is used to measure the total risk, i.e. sum of systematic and
unsystematic risks. Under this approach the variance and standard deviation measure the
extent of variability of possible returns from the expected return and is calculated as:
σ² = Ʃ [(X₁ - 𝒙)² p(Xi)]
Where, Xi = Possible return,
P = Probability of return, and
n = Number of possible returns.

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

Correlation or regression method is used to measure the systematic risk. Systematic risk is
expressed by 𝛽 and is calculated by the following formula:
𝒓𝒊𝒎 𝛔 ̇ 𝝈 𝒎
𝜷=−
𝝈𝟐𝒎
Where, rim = Correlation coefficient between the returns of stock i and the return of the
market index
𝜎 = Standard deviation of returns of the market index, and
σi = Standard deviation of returns of stock i.

Using regression method we may measure the systematic risk.

The form of the regression equation is as follows:
It is used in the following form Y = a + 𝜷 X or a = 𝒀 - 𝜷 𝒙
and 𝜷 = nΣxy – (Σx) (Σy)
n𝜮x2 - (𝜮x)²
Where,
n = Number of items,
Y = Mean value of the company's return,
X = Mean value of return of the market index,
α = Estimated return of the security when the market is stationary, and
𝛽 = Change in the return of the individual security in response to unit change in the return of
the market index.

RISK MEASUREMENT TOOLS

Investors who are concerned about market volatility should examine the investment choices
from all angles when constructing a portfolio - evaluating not only by return, but risk, too.
There are a variety of risk measures that may come in handy. Of course, numbers don't tell
the whole story, but they may help to determine whether owning a particular investment is
consistent with our personal risk tolerance.
There are numerous ways our advisor can calculate risk tolerance, or the level of risk as an
investor are willing to take in order to achieve financial goals. Here are five common ways to
measure current risk and to calculate an appropriate risk tolerance.

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

1. Alpha
Alpha is a measure of investment performance that factors in the risk associated with the
specific security or portfolio, rather than the overall market (or correlated benchmark). It is a
way of calculating so-called "excess return" that portion of investment performance that
exceeds the expectations set by the market as well as the security's/portfolio's inherent price
sensitivity to the market.
Alpha is a common way to assess an active manager's performance it measures portfolio
return in excess of a benchmark index. In this regars a portfolio manager's added value is
his/her ability to generate “alpha”
2. Beta
Beta is the statistical measure of the relative volatility of a security (such as a stock or mutual
fund) compared to the market as a whole. The beta for the market (usually represented by the
S&P 500) is 1.06 A security with a beta above 1.0 is considered to be more volatile ( risky)
than the market. One with a beta of less than 1.0 is considered to be less volatile.
3. R-squared
R-squared (R2) quantifies how much of a fund's performanc can be attributed to the
performance of a benchmark index. The value of R2 ranges between 0 and 1 and measures
the proportion of a fund's variation that is due to variation in the benchmark. For example, for
a fund with an R2 of 0.70, 70% of the fund's variation can be attributed to variation in the
benchmark.
4. Sharpe ratio
The Sharpe ratio is a tool for measuring how well the return of an investment rewards the
investor given the amount of risk taken.
For example, a Sharpe ratio of 1 indicates one unit of return per unit of risk, 2 indicates two
units of return per unit of risk, and so on. A negative value indicates loss or that a
disproportionate amount of risk was taken to generate a positive return.
The Sharpe ratio is useful in examining risk and return, because although an investment may
earn higher returns than its peers, it is only a good investment if those higher returns do not
come with too much additional risk. The higher a portfolio's Sharpe ratio, the better its risk-
adjusted performance has been.
5. Standard deviation
Standard deviation is a measure of investment risk that looks at how much an investment's
return has fluctuated from its own longer-term average. Higher standard deviation typically
indicates greater volatility, but not necessarily greater risk. That is because while standard
deviation quantifies the variance of returns, it does not differentiate between gains and losses
consistency of returns is what matters most.

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

INVESTMENT AND SAVING ALTERNATIVES FOR A COMMON INVESTOR

INSURANCE
Insurance is defined as a contract, known as a policy, in which an individual or organisation
receives financial protection and compensation from the insurer or insurance company for the
loss suffered due to uncertain event, in return for payment of a specified premium.
TYPES OF INSURANCE COMPANIES IN INDIA
1. Life insurance companies:
Life insurance companies offer policies that protect you from the risk of death. Life insurance
policies are available in a variety of forms, including term plans, endowment plans, whole
life insurance plans, money back plans, and unit-linked investment plans, among others.
Many life insurance plans can also be a helpful tool for long-term savings because they
combine protection with savings.
2. General insurance companies:
General insurance companies offer productsthat protect financial losses caused by a variety of
risks excluding death Health insurance, motor insurance, marine insurance, liability
insurance, travel insurance, and commercial insurance are all examples of general insurance
products that cover a wide range of risks.

DIFFERENCE BETWEEN LIFE INSURANCE AND GENERAL INSURANCE

PARTICULARS LIFE INSURANCE GENERAL INSURANCE
Coverage In life insurance the General insurance protects
beneficiary is designated to against risks other than life.
receive certain monetary It could protect your health,
benefits in the event of the vehicle, home, property, and
insured person's death. other belongings against
accidents and disasters.
Duration A life insurance policy A general insurance policy
covers the insured for the is valid for one year. For
rest of his or her life or until policies like maritime
the insured reaches a certain insurance contract is for a
age, whichever comes first. specific time period or
voyage, or both.
Principle of subrogation Principle of subrogation Principle of subrogation
does not apply to life applies to general insurance.
insurance.
Certainty of event There is certainty as to the The event insured against
happening of event i.e., may or may not happen.
death.
Insurable interest In life insurance the In fire insurance, insurable
insurable interest must be interest must be present at

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

present at the time of both- time of contract and

contract. time of loss.
Principle of contribution Principle of contribution Principle of contribution
does not apply to life applies to general insurance.
insurance
Surrender value There is a surrender value of The provision of surrender
policy, in life insurance. value does not exist.

CLASSIFICATION OF LIFE INSURANCE POLICIES

A) PURE PROTECTION INSURANCE
A pure protection plan is a simple risk cover insurance product in which the sum insured
becomes payable if the risk event occurs within the policy term.
1. TERM INSURANCE PLAN
Term insurance is the most basic type of life insurance in the market. A term
insurance policy is a pure protection plan that provides extensive coverage at a low
price. It pays your nominee the sum assured if you die during the policy period.

a) Increasing Term Insurance: The life insurance coverage under this plan
increases
at a predetermined pace over the term.
b) Decreasing Term Insurance: The sum assured decreases as the policy term
grows.Typically, a declining term assurance plan is taken up for mortgage loan
protection, under which the outstanding loan amount, as well as the sum assured,
decreases with time.
c) Level Term Life Insurance: The sum assured remains constant during the
policy's term.
d) Convertible term assurance policy: A policyholder under this plan has the
option of exchanging the term policy for endowment insurance or a whole life
policy.
e) Renewable Term Life Insurance: With renewable term insurance, the insurance
provider will automatically renew your coverage after the policy's term expires
(generally 5 to 20 years).

B) PROTECTION CUM SAVINGS INSURANCE POLICIES

In Protection cum Savings insurance policies, the policyholder can utilise long-term
savings in addition to having a pure term insurance cover. Protection and savings life
insurance plans are a great way to cover your protection needs as well as long-term
aspirations like your children's education and marriage, retirement, and more.In these
plans, the premium is split into two parts:
1. Premium for life coverage - provides financial protection in case of death.
2. Premium for savings element - it is invested by the insurance company or of the
policyholders.

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

I. ENDOWMENT INSURANCE
Endowment plans are life insurance policies that serve two purposes. An endowment
policy can be utilised to generate a risk-free savings corpus while also providing
financial security to the family in the event of an unforeseen calamity. The simplicity
of an endowment plan makes it a profitable savings strategy for everyone.

TYPES OF ENDOWMENT POLICY

a. With-profit endowment: Endowment plans with a profit guarantee the sum
amount at the end of the policy period. In the event of a tragic event, the insurer
will pay this sum to your nominee. However, the maturity benefit you receive
after the insurance matures is often greater than the sum insured since the insurer
gives you extra money in the form of bonuses.
b. Non-profit endowment: This policy pays you a lump sum amount at maturity or
to your nominee in the event of an unfortunate death, whichever comes first.
Because the insurer does not offer bonuses with such plans, the payout amount
remains unchanged.
c. Low-cost endowment: This plan has a lower premium and allows you to save for
future payments that are due after a set period of time. In the case of an incident,
the insurance guarantees the amount your nominee will get.
d. Unit Linked endowment: This is appropriate for those with a high-risk tolerance
and those seeking larger investment returns. This is a fixed-term plan in which
the premium is used to purchase mutual fund units.
e. Unitized with profit endowment plan: It's a hybrid unit-linked endowment plan
that helps balance out the highs and lows of unit-linked plans. The value of units
is generated on an annual basis, and a minimum repayment amount is guaranteed.
This guaranteed amount is unaffected by market risks, making it a safe
investment option.

II. WHOLE LIFE INSURANCE POLICY

The Whole Life Plan is lasts for the entire duration of the insured's life, as long as the
premiums are paid. In the case that the insured passes away, the nominee receives the
specified sum. The policyholder can cancel or borrow against the coverage at any moment.
This policy has a 100-year maturity period. The policy will become matured endowment if
the insured survives past the maturity age.
There are several different kinds of Whole Life Insurance Policies in the market, each of
which is tailored to meet certain needs.
TYPES OF WHOLE LIFE INSURANCE POLICY
a. Non-participating whole life insurance: A non-participating insurance plan does not
pay out dividends nor does receive any bonus facility. In other words, the
policyholder is not a part of the life insurance company's profits.
b. Participating whole life insurance: Participating whole life insurance plans, in
contrast to non-participating whole life insurance plans, provide bonuses. The
premium paid by the insured is invested by the insurance company, and the profit
earned from the investment is paid to the insured as bonuses.

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

c. Pure whole life insurance: Premiums are paid constantly throughout the insured's
life till death under this plan type. The risk benefit is for the entire term of life, and the
sum promised is paid after the insured's death.
d. Limited payment whole life insurance: Policyholders are expected to pay the
insurance premium on a regular basis for the duration of the plan under this plan
option. The policy's premium remains consistent during the plan's duration. However
the insured pays a set number of premiums for a set number of years or until a certain
age is reached. But the risk coverage is provided for the entire durati of the insured's
life.
e. Single premium whole life insurance: The full policy premium is paid in one lump
sum under this plan option. A large sum assured amount is provided as a guaranteed
payment to the policy's beneficiary under this plan type.

III. UNIT LINKED INSURANCE PLAN [ULIP]

A ULIP is a type of insurance plan as well as an investment. The policy specifies a
death benefit, which is the amount paid to the nominee if the policyholder dies within
the term of the ULIP. Furthermore, if the policyholder survives the term of the ULIP,
he or she is entitled to the ULIP's maturity value.Furthermore, if the policyholder
survives the term of the ULIP, he or she is entitled to the ULIP's maturity value.
Maturity value is the sum generated by the ULIP's investment either shares or debt
investments. The policyholder is usually given the option of selecting ULIP funds
and asset classes (shares or debt investments) to generate these returns.

IV. MONEY-BACK INSURANCE PLAN

Money back policy is a type of life insurance policy in which the policyholder
receives a portion of the sum assured at regular intervals rather than a lump payment
at the conclusion of the policy period. As a result, a money back insurance policy is a
liquid endowment scheme. The sum received as payout with it is referred to as the
'Survival Benefits. These are reimbursed over the policy period, and the remaining
sum insured, along with any vested incentives, is paid at maturity.

Child money back plan: A child money back plan is a standard money back plan
that employs survival incentives to fulfil the demands and requirements of growing
children. Educational requirements, studying abroad, marriage, and other things can
vary from child to child. In essence, it is a combination of insurance and investment
that will aid in safeguarding the child's bright future. Based on the plan's results, this
participating plan is also qualified for the incentive.

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

POSTAL LIFE INSURANCE INSURANCE AND RURAL POSTAL LIFE

INSURANCE (PLI/RPLI)

A. POSTAL LIFE INSURANCE

Postal Life Insurance is an insurance policy provided by the Government of India to Central
and State Governments, public sector organisations, government-aided educational
institutions, nationalised banks, and others. The best aspect of PLI is the extremely low
premium rates.
SALIENT FEATURES OF PLI POLICIES
1. Whole Life Assurance (Suraksha):
This is a scheme where the assured amount with accrued bonus is payable to the
insured either on attaining the age of 80 years, or to his/her legal representatives or
assignees on death of the insured, whichever occurs earlier, provided the policy is in
force on the date of claim.
 Minimum & Maximum age at entry: 19-55 years.
 Minimum Sum Assured 20,000; Maximum 50 lac.
 Loan facility after 4 years.
 Surrender after 3 years. Last declared Bonus- 85/- per 1000 sum assured per
year.

2. Endowment Assurance (Santosh):

Under this scheme the proponent is given an assurance to the extent of the sum
assured and accrued bonus till he/she attains the pre- determined age of maturity i.e.,
35,40,45,50,55,58& 60 years of age. In case of death of insurant, assignee, nominee
or legal heir is paid full amount of sum assured with accrued bonus.
 Minimum & maximum age at entry: 19-55 years.
 Minimum sum assured 20,000; Maximum 50 lac.
 Loan facility after 3 years.
 Surrender after 3 years.Last declared Bonus - 58/- per 1000 sum assured per
year.

3. Convertible Whole Life Assurance (Suvidha):

This is a Whole Life Assurance Policy with the added feature of an option to convert
to Endowment Assurance Policy at the end of five years of taking policy. Assurance
to the extent of sum assured with accrued bonus till attainment of maturity age. In
case of death, assignee, nominee or legal heir paid full amount of sum assured with
accrued bonus.
 Minimum age & Maximum age at entry: 19-50 years.
 Minimum sum assured 20,000; Maximum 50 lac.
 Loan facility after 4 years.
 Surrender after 3 years.
 Last declared Bonus- 85/- per 1000 per year (for WLA policy if not converted
to Endowment Assurance).

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

4. Anticipated Endowment Assurance (Sumangal):

It is a Money Back Policy with maximum sum assured of 50 lacs, best suited to those
who need periodical returns. Survival benefits are paid to the insurant periodically.
Such payments will not be taken into consideration in the event of unexpected death
of the insurant. In such cases, full sum assured with accrued bonus is payable to the
assignee, nominee of legal heir.
 Policy term: 15 years and 20 years.
 Minimum age 19 years; maximum age at entry 40 years for 20 years' term
policy & 45 years for 15 years' term policy
 Survival benefits paid periodically as under: -
 15 years Policy 20% each on completion of 6 years, 9 years & 12 years and
40% with accrued bonus on maturity.
 20 years Policy- 20% each on completion of 8 years, 12 years & 16 years and
40% with accrued bonus on maturity.
 Last declared bonus 53/- per 1000 sum assured per year.

5. Joint Life Assurance (YugalSuraksha):

It is a Joint Life Endowment Assurance in which one of the spouses should be eligible
for PLI policies.Life cover to both spouses to the extent of sum assured with accrued
bonus.
 Minimum sum assured 20,000; Maximum 50 lac.
 Minimum age & Maximum age at entry of spouses: 21-45 years.
 Maximum Age of the elder policy holder should not be more than 45 years &
the couple should be between 21 years to 45 years.
 Loan facility after 3 years.
 Loan after 3 years.
 Death benefits are paid to either of the survivors in the event of death of
spouse or main policy holder.
 Last declared Bonus- 58/- per 1000 sum assured per year.

6. Children Policy (BalJeevanBima):

The salient features of this scheme are as under:
 The scheme provides life insurance cover to children of policy holders.
 .Maximum two children of policy holder (parent) are eligible.
 Children between 5- 20 years of age are eligible.
 Maximum sum assured 3 lac or equal to the sum assured of the parent,
whichever is less.
 Policy holder(parent) should not be over 45 years of age.
 No premium to be paid on the Children Policy, on the death of policy holder
(parent). Full sum assured and bonus accrued shall be paid on completion of
term.
 Policy holder (parent) shall be responsible for payment of Children policy
Attract the rate of bonus applicable for Endowment policy (Santosh) i.e.,
last bonus rate is 58/- per 1000 sum assured per year.

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

B) RURAL POSTAL LIFE INSURANCE

As a result of the recommendation of the Official Committee for Reforms in the Insurance
Sector(Malhotra Committee), the Rural Postal Life Insurance (RPLI) scheme was introduced
in 1995. The government accepted the Malhotra Committee's recommendations and
permitted Postal Life Insurance to expand its coverage to rural areas to transact life insurance
business, owing to the huge network of Post Offices in rural areas and the low
cost of operations.
The theme's primary goal is to give insurance coverage to the rural public in general, and
benefit marginalised communities and women workers in rural regions in particular, as we to
raise insurance knowledge among the rural population.
Insurance Plans under RPLI
1. Whole Life Aurance (Gram Suraksha)
2. Endowment Assurance (Gram Santosh)
3. Convertible Whole Life Assurance (Gram Suvidha)
4. Anticipated Endowment Assurance (Gram Sumangal)
5. 10 Year RPLI (Gram Priya)
6. Children Policy (Bal Jeevan Bima)

POLICIES OFFERED BY VARIOUS GENERAL INSURANCE

General insurance protects us and the things we value, such as our homes, automobiles, and
belongings, against the financial impact of risks big and small, such as fire, flood, storm, and
earthquake, as well as theft, car accidents, and travel accidents, and even the costs of legal
action taken against us. And we may select the types of risks we want to cover by selecting
the correct type of policy with the features we require.
TYPES OF GENERAL INSURANCES IN INDIA
1. Health Insurance
The Health Insurance policy provides coverage for medical expenses incurred as a result of
hospitalisation due to an accident or disease.
Health insurance is a contract in which an insurance company agrees to pay for medical
expenses if the insured becomes ill or is involved in an event that causes the inured to be
hospitalised.
NEED & IMPORTANCE OF HEALTH INSURANCE
 The cost of healthcare is rapidly increasing
 Savings are insufficient to cover the cost of healthcare
 To combat diseases caused by lifestyle
 To keep your family safe

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

TYPES OF HEALTH INSURANCE

 Individual insurance plans
Individual insurance plans: In India, this is the most common type of health insurance
plan. A policy of this type only protects one person. It covers your medical expenses
if you are admitted to a hospital. In such circumstances, the premium will be
determined by personal criteria such as your age, medical history, and so on.
 Family floater insurance plans
This form of health insurance plan, as the name implies, covers the entire family. It
works similarly to an individual policy, except that the sum insured is typically
greater and shared among family members. One of the most significant benefits of
such an insurance plan is the elimination of the need to handle multiple policies.
Furthermore, such insurance is less expensive than purchasing individual coverage for
each family member.
 Senior citizen insurance plans
These health insurance policies are created specifically for senior citizens over the age
of 60. Because elderly persons are more likely to file a claim, the premium must be
higher. Furthermore, because old age is typically accompanied by health problems,
many insurers do not insist on a pre- medical screening or the exclusion of pre-
existing conditions before giving senior citizen insurance.
 Critical illness insurance plans
A critical illness insurance plan protects you against life-threatening illnesses like
kidney disease, heart attacks, cancer, paralysis, and more. When a policyholder is
diagnosed with a covered disease, the policyholder receives a lump-sum payment.
Unlike individual policies, the money can be claimed without the necessity for
hospitalisation. Those who have a family history of such illnesses should consider
such a plan
 Personal accident insurance plans
Accidents happen all the time, and the costs that come with them can quickly empty
your savings. Personal accident insurance pays for medical treatment that is required
following an accident. Typically, such an insurance covers three scenarios: partial
disability, entire disability, and death as a result of an accident.
 Maternity Insurance plans
These are health insurance plans designed specifically for women. Pre- and post-natal
expenses, as well as delivery and ambulance costs, are all covered under these plans.
A new born cover is also available, which covers expenses linked to the new-born
infant for a set period of time. Before most maternity plans become active, there is
usually a waiting period. As a result, it is essential to purchase such insurance as soon
as a woman marries. These can also be purchased as a supplement to a standard
policy.
 Unit Linked Insurance plans
ULIPS, or Unit Linked Insurance Plans, are insurance plans that also serve as
investments. When you pay your premium, a portion of it is used to provide you with
coverage, as is customary. The rest of the premium is split between equities and debt
investments. ULIPs not only protect your health, but they also help you grow wealth
for the future.

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Benefits of Health Insurance Plans

 Cashless Treatment.
 Hospitalization expenses re covered by insurance policies.
 Health insurance has waiting periods.
 The amount paid to an ambulance for the insured's transportation is also covered by
the insurance policy.
 Health check-ups are also covered by insurance policies.
 The insured receives tax benefits for paying the health insurance premium under
Section 80D of the Income Tax Act of 1961.
2. Travel Insurance:
A policy that protects you against financial risks when you travel for work, leisure, or study.
Both foreign and domestic trips are covered by travel insurance plans. When you travel and
experience losses due to lost luggage, trip cancellation, or flight delays, a travel insurance
coverage protects you. If you are hospitalised while travelling, you may be provided cashless
hospitalisation.
3. Motor Insurance
Motor insurance protects your vehicle from damage, accidents, vandalism, and theft, among
other things. To drive legally in India, you must have a motor insurance policy. In general,
motor insurance plan is of two types.
i. Comprehensive Package Policy: A Comprehensive Package Policy protects you and your
vehicle against third-party liability and damages. Accidents, theft, fire, natural disasters, and
other events can all result in losses.
ii. Third-Party Liability: A Third-Party Policy compensates you if your vehicle causes harm
to a third-party, such as a public property, a person, or a third-party vehicle. According to the
Motor Vehicles Act, this is the minimal requirement for driving legally in India.
4. Personal accident insurance
A policy that protects you in the event of an accidental death or disablement. If a person dies
or becomes disabled as a result of an accident, a lump sum payout is awarded.
5. Commercial Insurance
The purpose of commercial insurance is to safeguard enterprises. It is a term used to
categorise core business insurance that also covers public liability and employer's liability. It
protects the business against losses resulting from property damage, employee injury. The
following are the several types of commercial insurance:
a. Property insurance: Property insurance policies can cover any building or immovable
structure. This might be your home or a business location. If such a property is damaged, you
can seek finance aid from the insurance company. Keep in mind that such a plan also protects
the property contents financially. Most risks to property, such as fire, theft, and some weather
damage, are covered by property insurance.

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

b. Fire insurance: It's a type of insurance that covers losses or damages caused by a fire. A
fire insurance policy allows the insured to recover the costs of repairing or rebuilding
destroyed property.
c. Marine insurance: Marine insurance is a form of policy that protects from damage or loss
caused to cargo vessels, ships, terminals, and other structures used to transport cargo from
one point of origin to another. Marine insurance covers loss or damage to a
shipment/cargo/ship when it is aground, as well as risks such as sinking, collision, fire,
weather conditions, navigation mistakes, theft, jettison, incorrect carrier stowage, hook
damage, strikes, war, and natural disasters.
d. Workmen compensation: This coverage protects the employer in the event of a statutory
liability arising from the death or injury of employees while on the job. The policy primarily
covers bodily injury, death, or temporary disability, permanent total disability, and legal
expenses incurred with the company's approval.
e. Cyber insurance: Cyber insurance policies are intended to assist organisations in
overcoming the impacts of cybercrime such as ransomware, malware, distributed denial-of-
service (DDoS) attacks, and other forms of cybercrime that can be used to breach a network
and its confidential data.

OTHER INSURANCES
Examples of Insurance schemes of Government of India
1. Pradhan Mantri Suraksha Bima Yojana (PMSBY)
 Provides accidental insurance cover of upto 2 Lakh to bank in the age of 18 to 70
years account holders.
 A fixed annual premium of 12/- is deducted from the bank account through auto-debit
facility.
 Person would be eligible to join the scheme through one savings bank account only.
 Insurance covers permanent and partial disability due to accident.
 Pradhan Mantri Jan Arogya Yojana (PMJAY) - Ayushman Bharat.
 Provides health care facilities targeting poor, deprived rural families and identified
occupational category of urban worker's families.
 There is no restriction on family size, age or gender.
 No money needs to be paid by the family for treatment in case of hospitalization.
2. Pradhan Mantri Fasal Bima Yojana (PMFBY)
 Crop insurance scheme aimed at shielding farmers from the crop failure through
insurance.
 The scheme insures farmers against a wide range of external risks - droughts, dry
spells, floods, inundation, pests and diseases, landslides, natural fire and lightning,
hailstorms, cyclones, typhoons etc.
 Scheme covers post-harvest losses up to a period of 14 days.
3. Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)
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 Crops Provides life insurance cover of 2 Lakh to bank account holders (Savings Bank
A/c) in the age of 18 to 50 years.
 A fixed annual premium of 330/- is deducted from the bank account through auto-
debit facility.
4. Group Insurance
It covers a defined group of people, for example the members of a society or professional
association, or the employees of a particular employer.
5. Crop Insurance
It provides insurance cover to farmers in the event loss or damage to crops due to drought,
flood, other natural disasters and infestation of pests etc.
6. Making a claim
When a disaster happens, such as your bike is stolen or you have met with an accident, it's
time to make a claim. When you make a claim, you are officially asking the insurance
company to pay you for the loss you have suffered under the terms of your insurance policy.
Contact your Insurance broker, agent or company as soon as possible. Because most
companies have time limits within which you must submit your claim. Also remember to
provide all supporting documents needed when submitting your claim.

RETIREMENT AND PENSION PLANS

Retirement Planning
The transition into retirement is a very unique and dramatic step in life. Yet, the transition
into retirement is rarely given the planning or thought it deserves. Everyone wants to lead a
comfortable retirement life. Without adequate planning it probably won't happen.
Key Features of Retirement Planning
a. Start early and retire with financial security: If you start saving for retirement at age 25,
so that you wish to retire by 60, you can invest over 35 years.
b. Plan wisely: Set aside some money for medical expenditure and emergency needs after
retirement. Allocate your savings towards important financial goals such as children's
education and marriage.
c. Track and review your plan: The financial plan has to be reviewed at regular intervals to
make sure that the plan meets its objectives. Also, you need to understand and get
comfortable with the risks, costs and liquidity of your investments.
d. Don't dip into your retirement savings: Don't touch this pool of savings pre- retirement.
If you spend money from your retirement kitty to fulfil your present needs, you will lose out
big in the long run. The corpus for your retirement will be inadequate.
Pension Plans

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Pension may be described as a regular payment which one aspires to receive regularly, once
the person retires from his regular occupation/ job or attain a certain age from which he/ she
does not want to work.
Pension plans provide financial security and stability during old age when people don't have a
regular source of income. Retirement planning ensures that people live with pride and
without compromising on their standard of living, during later part of their life. Pension
schemes give an opportunity to invest and accumulate savings and get lump sum amount as
regular 53 income through annuity plan on retirement.
Being a Pensioner
 No need to open separate account for pension.
 Existing account can be used for receiving pension.
 Pension account can be transferred to another branch or different bank.
 Need to submit 'Life Certificate' to bank branch in November, every year.
 “Jeevan Pramaan” - Digital Life Certificate using Aadhaar and mobile at:
www.jeevanpramaan.gov.in.

NATIONAL PENSION SYSTEM (NPS)

NPS aims to institute pension reforms and to inculcate the habit of saving for retirement
amongst the citizens. With effect from 1st May, 2009, NPS has been provided for all citizens
of the country including the unorganized sector workers on voluntary basis. The subscriber
will be allotted a unique Permanent Retirement Account Number (PRAN). This unique
account number will remain the same for the rest of the subscriber's life. This unique PRAN
can be used from any location in India. NPS is a government approved pension scheme for
Indian citizens in the 18-60 age groups.
PRAN will provide access to two personal accounts Tier I and Tier II with features as
mentioned below:
Particulars Tier I (Mandatory Tier II (Voluntary Saving
Retirement Account) Account)
Eligibility All citizens of India Anyone withan active Tier I
Account.
Bank Account Not mandatory Mandatory
Liquidity Certain portion is allowed to Subscriber is free to
be with drawn from pension withdraw savings from this
account subject to account when ever the
prescribed conditions subscriber wants to.
Fund Transfer Not possible Funds can be transferred
from Tierll to Tier I account
Tax Benefit Investments in this account Investments in this account
are Eligible for tax benefits. are n't Eligible for tax
benefits.

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Investment Options under the NPS

The subscribers to the NPS choose the investment options in which their contributions have
to be invested. Following options are offered by the NPS:
 E (Equity): High Return, High Risk option- Fund invests predominantly in equity-
oriented investments.
 C (Corporate Bonds): Medium Return, Medium Risk option- Fund invests
predominantly in fixed income bearing securities other than government securities.
 G (Government Securities): Low Return, Low Risk option- Fund invests
predominantly in pure low risk government fixed income securities.
 A (Alternative Investments): High risk and High return option- Fund invests in
Alternative Investment Schemes including instruments like CMBS (Commercial
Mortgage-Backed Securities), MBS (Mortgage Backed Security), REITS (Real Estate
Investment Trusts), AIFS (Alternative Investment Funds), InvITs (Infrastructure
Investment Trusts), etc. This asset class is not available for investment of contribution
made under Tier II account.
 Active Choice Option - Subscriber can choose the proportion of their funds that may
be invested in each of the investment option. This is called the Active Choice. The
only restriction is that the proportion invested in asset class E cannot exceed 75
percent and that in asset class A is restricted to 5 percent.
 Auto Choice Option - Under this choice the subscriber's contribution will be
invested in the lifecycle fund. The lifecycle fund is a dynamic allocation of the
subscriber's wealth to the different asset classes in a defined proportion determined by
the age of the subscriber, with the exposure to equity decreasing and that to the safer
corporate bonds and government securities increasing with the age of the subscriber.

PENSION SCHEMES FOR VARIOUS TARGET GROUPS

Government of India has started pension schemes for various target groups such as
Unorganised Workers, Retailers and Traders (self-employed workers) and Land Holding
Small and Marginal farmers.
I. PRADHAN MANTRI SHRAM YOGI MAAN-DHAN (PM-SYM) YOJANA
 This is a voluntary and contributory pension scheme to ensure old age protection for
Unorganised Workers.
 The unorganised workers mostly engaged as home based workers, street vendors,
mid-day meal workers, head loaders, brick kiln workers, cobblers, rag pickers,
domestic workers, washer men, rickshaw pullers, landless labourers, own account
workers, agricultural workers, construction workers, beedi workers, handloom
workers, leather workers, audio- visual workers and similar other occupations whose
monthly income is 15,000/- per month or less and belong to the entry age group of 18-
40 years.

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Benefits to subscriber of PM-SYM are:

 Minimum Assured Pension: Each subscriber under the PM-SYM, shall receive
minimum assured pension of Rs 3000/- per month after attaining the age of 60 years.
 Family Pension: During the receipt of pension, if the subscriber dies, the spouse of
the beneficiary shall be entitled to receive 50% of the pension received by the
beneficiary as family pension. Family pension is applicable only to spouse.
 Exit and withdrawal: If a beneficiary has given regular contribution and 55 died due
to any cause (before age of 60 years), his/her spouse will be entitled to join and
continue the scheme subsequently by payment of regular contribution or exit the
scheme as per provisions of exit and withdrawal.
II. PMLVMY (PRADHAN MANTRI LAGHUVYAPARIMAAN-DHAN, YOJANA)
 This is pension scheme to ensure old age protection for retailers and traders (self-
employed workers).
 All shopkeepers and self-employed persons, as well as retail traders with GST
turnover below Rs 1.5 crore and aged between 18-40 years, can enroll for the scheme.
Under the scheme, 50% monthly contribution is payable by the beneficiary and equal
matching contribution is paid by the Central Government. Subscribers, after attaining
the age of 60 years, are eligible for a monthly minimum assured pension of Rs.
3,000/-
III. PRADHAN MANTRI KISANMAANDHAN YOJANA (PMKMDY)
This is pension scheme to ensure old age protection for all land holding Small and Marginal
Farmers (SMFS) in the country. The scheme aims at providing a minimum assured pension
of Rs 3000, to Small and Marginal Farmers (SMFs) in the country after attaining the age of
60 Years.
IV. ATAL PENSION YOJANA (APY)
 The Atal Pension Yojana (APY) was launched on 09.05.2015 to create a universal
social security system for all Indians, especially the poor, the under-privileged and the
workers in the unorganised sector. APY is administered by Pension Fund Regulatory
and Development Authority (PFRDA).
 APY is open to all bank account holders in the age group of 18 to 40 years and the
contributions differ, based on pension amount chosen.
 Provided that from 1st October, 2022, any citizen who is or has been an income-tax
payer, shall not be eligible to join APY.
 Subscribers would receive the guaranteed minimum monthly pension of 1000 or
2000 or 3000 or 4000 or 5000 at the age of 60 years.
 The monthly pension would be available to the subscriber, and after him to his spouse
and after their death, the pension corpus, as accumulated at age 60 of the subscriber,
would be returned to the nominee of the subscriber.
 In case of premature death of subscriber (death before 60 years of age),spouse of the
subscriber can continue contribution to APY account of the subscriber, for the
remaining vesting period, till the original subscriber would have attained the age of 60
years.

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 The minimum pension would be guaranteed by the Government; l.e., if the

accumulated corpus based on contributions earns a lower than estimated return on
investment and is inadequate to provide the minimum guaranteed pension, the Central
Government would fund such inadequacy. Alternatively, if the returns on investment
are higher, the subscribers would get enhanced pensionary benefits.
 Subscribers can make contributions to APY on monthly/quarterly / half- yearly basis.
 Subscribers can voluntarily exit from APY subject to certain conditions, on deduction
of Government co-contribution and return/interest thereon.
Other Pension Plans
In India, apart from the Government promoted pension schemes, there are pension plans
offered by some public sector and private sector entities as well. These pension plans along
with the retirement planning, provide investment opportunities and other additional benefits.
Some of these pension plans are as under:
I. Pension Plans with Life Insurance Cover like the ULIP (unit Linked Insurance Plan) are a
combination of life insurance and pension.
II. Penion Fund Oriented Hybrid Mutual Funds.
III. Immediate Annuity Plans provide annuity payment of a stated amount through out the life
time immediately after depositing the amount towards the annuity fund.
Role of PFRDA in Pension Segment
Pension Fund Regulatory and Development Authority (PFRDA) is a statutory regulatory
body established by an Act of Parliament of India with the charter to promote, develop and
regulate pension sector in India.

INVESTMENT IN SECURITIES MARKET

A security, in a financial context, is a certificate or other financial instrument that has
monetary value and can be traded. Securities are generally classified as either equity
securities, such as stocks or debt securities, such as bonds and debentures. Securities are sold
in the securities market or stock market.
A stock market, also known as a stock exchange, is a venue to trade securities, such as bonds
and shares. Sellers of securities are matched with their buyers in a stock market and they
trade with each other using rules imposed by the market's governing authority.
Financial Markets are of two types; namely, Capital Market and. Money Market.
Capital Market
A marketer including all institutions, organisations, and instruments providing medium and
long-term funds is known as a Capital Market. A capital market does include institutions and
instruments providing finance for a short term; i.e., up to one year.
Some of the common instruments of a capital market are debentures, shares, bonds, public
deposits, mutual funds, etc.

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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

A capital market is of two types; namely, Primary Market and Secondary Market.
Money market
Money market It is a market for the lending and borrowing of short-term funds. It deals with
trade bills, promissory notes and government papers drawn for a short period not exceeding
one year.
Primary Market
A market in which the securities are sold for the first time is known as a Primary Market. It
means that under the primary market, new securities are issued from the company. Another
name for the primary market is New Issue Market. This market contributes directly to the
capital formation of a company, as the company directly goes to investors and uses the funds
for investment in machines, land, building, equipment, etc.
Secondary market
Secondary market is a market for secondary sale of securities. In other words, securities
which have already passed through the new issue market are traded in this market. In this
market, a company does not directly issue its securities to the investors. Instead, the existing
investors of the company sell the securities to other investors. The investor who wants to sell
the securities and the one who wants to purchase meet each other in the secondary market and
exchange the securities for cash with the help of an intermediary, a broker, is done.

DIFFERENCE BETWEEN PRIMARY MARKET AND SECONDARY MARKET

BASIS PRIMARY MARKET SECONDARY MARKET
Meaning A market in which the A market in which the sale
securities are sold for the and purchase of newly
first time is known as a issued securities and second-
Primary Market. hand securities are made is
known as a Secondary
Market.

Types of Securities In the primary market, the In the secondary market, the
sale of new securities takes sale and purchase of existing
place. or second-hand securities
take place.
Issued by In the primary market, the In the secondary market, the
securities are directly issued securities are transferred
by companies. between the investors only.
Capital Formation A primary market directly A secondary market
contributes to the capital of Indirectly contributes to the
a company as it involves the capital of a company as it
transfer of funds from involves an exchange of
surplus units to deficit units. funds between surplus units
only.

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Entry The companies enter a The securities of listed

primary market for raising companies only are bought
capital for their operations. and sold in this market.
Geographical Location There is no fixed There is a fixed
geographical location of a geographical location of a
primary market. Every bank, secondary market, and it
institution, foreign investor, also has fixed working
etc., contribute to this hours.
market.
Price The price of securities in a The price of securities in a
primary market is fixed by secondary market is fixed by
the management of the the demand and supply of
company issuing them. the stock exchange market.

What are the pre-requisites to invest in securities?

In order to invest in equity shares, an investor should have three accounts:
• Savings Account - Saving bank account with a commercial bank.
• Trading Account - Trading account with a SEBI registered stockbroker of a
recognized stock exchange to buy or sell securities on the Stock Exchange.
• Demat Account - Demat account with a SEBI recognized Depository Participant
(DP) of Depository for holding securities in dematerialized/electronic form.
The Demat account can be opened with depository participant (DP) of any of the Depository.
National Securities Depository Ltd. (NSDL) and Central Depository Services (India) Ltd.
(CDSL) are two SEBI registered depositories in India.
The list of SEBI registered stockbrokers and depository participants may be obtained from
SEBI's official website (www.sebi.gov.in) or from the websites of the respective stock
exchanges & depositories.

STOCKS
A stock is a general term used to describe the ownership certificates of any company. A
share, on the other hand, refers to the stock certificate of a particular company. Holding a
particular company's share makes a shareholder. Stocks are of two types - Equity shares and
preference shares.
Equity shares - A company issues equity shares to raise capital at the cost of diluting its
ownership. Investors can purchase units of equity shares to get part ownership of the firm. By
purchasing the equity shares, investors will be contributing towards the total capital of the
company and becoming its shareholder.
Equity shareholders are the owners of the company to the tune of the shares held by them.
Through equity investing, investors benefit from capital appreciation and dividends. In
addition to the monetary benefits, equity holders also enjoy voting nights in critical matters of
the company
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 FINANCIAL EDUCATION AND INVESTMENT AWARNESS

Preference shares - Preference shares or preferred stock represent ownership in a company.

Preference shareholders enjoy the preference over common shareholders on the assets and
earnings. Also, in case of bankruptcy, preferred shareholders enjoy the priority to receive the
company's assets before common shareholders.
A company issues preference shares to raise capital. This becomes part of the preference
share capital. Preference shareholders receive dividends before the equity shareholders. A
specific type of preference share is eligible to receive arrears dividends.

DIFFERENCE BETWEEN EQUITY AND PREFERENCE SHARES

BASIS EQUITY SHARES PREFERENCE SHARES
Definition Equity shares represent the Preference shareholders
ownership of a company. have a preferential right or
claim over the company's
profits and assets.
Return Capital appreciation Regular dividend income
Dividend Pay-out Equity shareholders receive Preference shareholders
dividends only after the have the priority to receive
preference shareholders dividends.
receive their dividends.

Bonus Shares Equity shareholders are Preference shareholders do

eligible to receive bonus not receive any bonus shares
shares against their existing against their holdings.
holdings.

Capital Equity shareholders are paid Preference shareholders are

last paid before the equity
shareholder when the
company is winding up.
Voting Rights Equity shareholders enjoy Preference shareholders do
voting rights. not enjoy voting rights
Participation in Management Equity shareholders have Preference shareholders do
Decisions voting rights, and as a result, not participate in
they participate in the management operations.
management decisions.

Redemption Equity shares cannot be Preference shares can be

redeemed redeemed.
Convertibility Equity shares cannot be Preference shares can be
converted converted to equity shares.
Arrears of Dividend Equity shareholders do not Certain types of preference
receive arrears of dividends. shareholders are eligible for
arrears of dividends.
Capitalization High chance Low chance

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Types Ordinary shares, Bonus Convertible, Non-

shares, Rights shares and Convertible, Redeemable,
Employee stock options. Irredeemable, Participating,
Non-Participating,
Cumulative, Non-
Cumulative, Preference
Share with a Callable
Option, and Adjustable
Preference Shares.

Financing Source of long-term Source of medium to long

financing. term financing.

Mandate Companies must issue All companies don't have to

equity share capital. issue preference share
capital.

Investment Lower investment option High investment option

DEBT SECURITIES
Debt Securities are those instruments such as bond, debenture, promissory note etc. with a
fixed amount, a maturity date and usually with a specific rate of interest. These are often less
risky than equities. When a company or government agency decides to take out a loan.
Bonds and debentures are the major debt securities which are explained here under:
BONDS
Bonds are debt financial instruments that both public and private sector companies use to
raise funds for their operations. The government agencies, financial institutions as well as
private enterprises issue these instruments to investors. Bonds are secured by their physical
assets. The holder of these bonds is the lender, while the issuer of these bonds is the
borrower. The borrower can issue these bonds to the lender, only by promising to pay back
the loan at a specific maturity date with a fixed interest rate.
This interest rate is generally lower than debentures because the physical assets of a company
secure bonds whereas the debentures are unsecured Instruments.
Important Features of a Bond for Investor
When an Investor is buying bonds, there are a few things which may be given consideration
before investing in them. Given below are such important points to remember while investing
in any bond:
 Secured & Unsecured Bonds: Unsecured Bonds, also known as debentures are
mostly the bonds issued by companies with a good reputation, high credit rating and
the credibility of the company. The secured bonds offer some kind of security to the
investor. These bonds are mostly considered to be Government bonds.

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 Taxation: Looks for bonds which exempt tax. Few corporate bonds levy tax on their
bonds and bonds issued by Government, municipality bonds and few other do not
impose a tax on the profit earned.
 Preference of Liquidation: In case a Company gets in loss and is in debt, the money
gained by selling the assets of the company is given in a certain order of preference.
This is called preference of liquidation.
 Date of Maturity: Ensure that you check the maturity period of the bond and invest
in something where you can earn more with a shorter time duration.
 Coupon Rate: The rate of interest at which a bond is issued, and the Company is
liable to pay the Investor is called the coupon rate. Research and look for Bond
options which offer high coupon rate.
DIFFERENT TYPES OF BONDS
1. Traditional Bond: A bond in which the entire principal can be with drawn at a single time
after the bond's maturity date is over is called a Traditional Bond.
2. Callable Bond: When the issuer of the bond calls out his right to redeem the bond even
before it reaches its maturity is called a Callable Bond. Through this type of bonds, the issuer
can convert a high debt bond into a low debt bond.
3. Fixed-Rate Bonds: When the coupon rate remains the same through the course of the
investment, it is called Fixed-rate bonds. Floating Rate Bonds: When the coupon rate keeps
fluctuating during the course of an investment, it is called a floating rate bond.
4. Puttable Bond: When the investor decides to sell their bond and get their money back
before the maturity date, such type of bond is called a Puttable bond.
5. Mortgage Bond: The bonds which are backed up by the real estate companies and
equipment are called mortgage bonds.
6. Zero-Coupon Bond: When the coupon rate is zero and the issuer is only applicable to
repay the principal amount to the investor, such type of bonds are called zero-coupon bonds.
7. Serial Bond: When the issuer continues to pay back the loan amount to the investor every
year in small instalments to reduce the final debt, such type of bond is called a Serial Bond.
8.Extendable Bonds: The bonds which allow the Investor to extend the maturity period of
the bond are called Extendable Bonds.
9. Climate Bonds: Climate Bonds are issued by any government to raise funds when the
country concerned faces any adverse changes in climatic conditions.
10. War Bonds: War Bonds are issued by any government to raise funds in cases of war.
11. Inflation-Linked Bonds: Bonds linked to inflation are called inflation linked bonds. The
interest rate of Inflation linked bonds is generally lower than fixed rate bonds.

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DEBENTURES
Debentures are also debt financial instruments like bonds. Organizations use these
instruments to get funding for their daily needs. They are generally not secured by any
physical assets of the issuers, which makes them riskier than bonds. They also carry a fixed
or floating interest rate.
The debenture holders get first preference over shareholders of a company when it comes to
the payment of interests/dividends.
The interest rate on debentures is generally higher than bonds because they are not secured
by the physical assets of a company.
Types of Debentures
1. Types of Debentures on the basis of Security:
a. Secured Debentures: These debentures carry a charge on some assets of the issuing
company. In case the company fails to repay the debt, its assets will be sold off to pay
creditors.
b. Unsecured Debentures: These debentures are very risky for investors. This is because
they do not carry any security or charge on the company's assets.
2. Types of Debentures on the basis of Convertibility
a. Convertible Debentures: These debentures can be converted into equity or preference
shares after a specific period of time. This conversion may be either compulsory or optional
at the debenture holder's discretion. Further, it may be either fully convertible or partly
convertible.
b. Non-convertible Debentures: Non-convertible debentures are the debentures which
cannot be converted into equity or preference shares. In other words, they are not convertible
into shares.
3. Types of Debentures on the basis of Permanence
a. Redeemable Debentures: These debentures are redeemable on a specified date.
b. Irredeemable Debentures: Irredeemable debentures do not have a specific maturity date.
They last throughout a company's lifetime. Thus, the company redeems them only when it
faces liquidation.
4. Types of Debentures on the basis of Negotiability
a. Registered Debentures: As the name suggests, the details of these debenture holders are
registered in the company's records. Only the debenture holders can redeem these debentures.
Hence, they are not freely transferable.
b. Bearer Debentures: Companies do not register details of debenture in this case. They can
be redeemed by the person owning them, with out their identity being checked. This happens
because these debentures are freely transferable.

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5. Types of Debentures on the basis of their Priority

a) First Mortgage Debentures: As the name suggests, companies repay these debentures
first. Debenture-holders get their money before all others their category.
b) Second Mortgage Debentures: These debentures are repaid only after the first mortgage
debentures are satisfied.
DIFFERENCES BETWEEN BONDS AND DEBENTURES
BASIS BONDS DEBENTURES
Definition Bonds are debt financial Debentures are debt
instruments issued by large financial companies, but any
corporations, financial collaterals instruments
institutions and government issued by private or physical
agencies that are backed up assets do not back them up.
by collaterals or physical
assets.

Owner The owner of bond is called The owner of a debenture is

a bondholder. called a debenture holder.

Collateral Bonds get secured by the Debentures do not get

collateral or physical assets secured by the collateral or
of the issuing company. physical assets of the issuing
company. Lenders purchase
these instruments solely
based on the reputation of
the issuing company.

Tenure Bonds are long term Debentures are generally

Investments, and their tenure short to medium term
is generally higher than investments and their tenure
debentures. is usually lower than bonds.

Issuer Large corporations, financial Private companies genrally

institutions and government issue debentures for their
agencies issue these bonds immedite capital
for their long-term capital requirements.
requirements
Rate of Interest The bonds carry a fixed or The debentures carty fixed
floating interest rate that is or floating interest rate that
generally lower than is generally higher than
debentures because they are bonds because they are less
more stable in terms of stable in terms of
repayment, and they get repayment, and they are also
backed by collateral of the not backed by collateral.
issuing company.

Priority During Liquidation If the company is on the If the company is on the

verge of liquidation, the verge of liquidation, the
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bondholders are given debenture holders are given

priority over debenture second priority over
holders for repayment of bondholders for repayment
capital and interest amount. of capital and interest
amount.

Payment Structure The payment of interest for The payment of interest for
bonds is on an accrual basis, bonds is done on a
The issuing company pays periodical basis and depends
this amount on a monthly, on the company's
half-yearly or yearly basis performance.
and this payment is not
dependent on the
performance of a company.

Risk Bonds are less risky than Debentures are riskier than
debentures because they bonds because they do not
have the security of the have the security of the
physical assets of the issuing physical assets of the issuing
company. company.

MUTUAL FUNDS
A mutual fund pools money from many investors and invests in stocks, bonds, short-term
money-market instruments, other securities or assets, or some combination of these
investments. The combined holdings the mutual fund owns are known as its portfolio. Each
unit represents an investor's proportionate ownership of the fund's holdings and the income
those holdings generate.
Systematic Investment Plan (SIP)
When a fixed amount at a fixed interval of time is invested in a Mutual Fund, It is called SIP,
which is now becoming a trending future Investment plan.
Equity Linked Savings Schemes (ELSS)
These are Mutual Fund investment schemes that help you save income tax (allows taxpayers
to invest up to 1.5 lakh in specific securities and claim it as a deduction from their
taxable income).
Gold ETF
Gold ETF, or Exchange Traded Fund, is a commodity-based Mutual Fund the Invests in
assets like gold. These exchange-traded funds perform like individual stock and are traded
similarly on the stock exchange.
Sovereign Gold Bond (SGB)

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These are government securities denominated in grams of gold. They an substitutes for
holding physical gold. Investors have to pay the issue price in cash and the bonds will be
redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government
of India.
Real estate investment trust (REIT)
REITs are entities that own properties in the real estate sector and finance their development.
This enable the investors to earn dividends from real estate investments-without having to
buy, manage, or finance any properties themselves.
Other savings/insurance schemes run by Government of India
National Savings Certificate (NSC)
 A Government of India initiative, primarily to invest while saving on in come tax.
 Can be opened from any post office and NSCs will be issued in shape of Passbook.
 Joint account allowed, can be opened by an adult on behalf of a minor.
 Deposits qualify for tax rebate under Sec.80 C of IT Act.
Post office Recurring Deposits
Post office Recurring Deposits have become the most preferred Instruments when compared
to banks. One of the reasons behind its popularity is the attractive interest rate one can earn
on them and a great profit upon maturity.
The post office RD interest rates are revised in a proper interval and a usual interest rate is
5.80% p.a. The interest is compounded quarterly which enables the money deposited to
multiply till the maturity time.
Features of Post Office RD Scheme
 The interest rate provided by the Post Office on RD is 5.80% p.a. compounded
quarterly.
 The tenure of a post office RD is 5 years.
 The minimum deposit to be made in an RD account is 10 per month.
 There is a rebate provided on advanced deposits of at least 6 months.
 There is no cap on the upper limit, provided it should be in multiples of 5.
 The Post Office RD account can be transferred from one post office to another.
 A joint account can be opened by two persons.
 The penalty for missing a deposit is charged as 5 paise for every Rs. 5.
Kisan Vikas Patra

 Small saving certificate scheme from India Post designed to double the investment
after a predetermined time.
 Objective is to inculcate long term financial discipline in people.
 Minimum amount for opening is 1000/- and in multiples of 100/-,no maximum limit.
 Certificate can be purchased by adult and also minors above 10 years of age.
 Can be purchased from post office.

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Provident Fund (PPF)

 Tax free savings scheme offered by the Government of India.

 PPF account can be opened with either a post office or with any nationalized or
private bank.
 Joint account cannot be opened and only one account can be opened by a citizen in
India along with nomination facility.
 Investments made in the PPF account during a particular financial year are available
to claim deduction under Section 80C of Income Tax Act up toa certain limit.
 Investors can also avail loans against a particular amount of their investments made in
PPF account subject to other conditions of the scheme.
Sukanya Samrudhi Yojana (SSY)
 SSY is a government-backed savings scheme for the benefit of the girl child.
 It can be opened by the parents of a girl child below the age of 10.
 Parents can open up to two such accounts for girls (they cannot open a third/fourth
account etc., if they have more than two girls).
 These accounts have tenure of 21 years or until the girl child marries after the age of
18.

STOCK MARKET / STOCK EXCHANGE

A stock exchange is an important factor in the capital market. It is a secure place where
trading is done in a systematic way. Here, the securities are bought and sold as per well-
structured rules and regulations. Securities mentioned here includes debenture and share
issued by a public company that is correctly listed at the stock exchange, debenture and bonds
issued by the government bodies, municipal and public bodies.
Functions of Stock Exchange
Following are some of the most important functions that are performed by stock exchange:
1. Role of an Economic Barometer: Stock exchange serves as an economic barometer that
is indicative of the state of the economy. It records all the major and minor changes in the
share prices. It is rightly said to be the pulse of the economy, which reflects the state of the
economy.
2. Valuation of Securities: Stock market helps in the valuation of securities based on the
factors of supply and demand. The securities offered by companies that are profitable and
growth-oriented tend to be valued higher.
3. Transactional Safety: Transactional safety is ensured as the securities that are traded in
the stock exchange are listed, and the listing of securities is done after verifying the
company's position.
4. Contributor to Economic Growth: Stock exchange offers a platform for trading of
securities of the various companies. This process of trading involves continuous
disinvestment and reinvestment, which offers opportunities for capital formation and
subsequently, growth of the economy.

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5. Making the public aware of equity investment: Stock exchange helps in providing
information about investing in equity markets and by rolling out new issues to encourage
people to invest in securities.
6. Offers scope for speculation: By permitting healthy speculation of the traded securities,
the stock exchange ensures demand and supply of securities and liquidity.
7. Facilitates liquidity: The most important role of the stock exchange is in ensuring a ready
platform for the sale and purchase of securities. This gives investors the confidence that the
existing Investments can be converted into cash.
8. Better Capital Allocation: Profit-making companies will have their shares traded
actively, and so such companies are able to raise fresh capital from the equity market. Stock
market helps in better allocation of capital for the investors so that maximum profit can be
earned.
9. Encourages investment and savings: Stock market serves as an important Source of
investment in various securities which offer greater returns. Investing in the stock market
makes for a better investment option than gold and silver.
Features of Stock Exchange
 A market for securities - It is a wholesome market where securities of government,
corporate companies, semi-government companies are bought and sold.
 Second-hand securities - It associates with bonds, shares that have already been
announced by the company once previously.
 Regulate trade in securities - The exchange does not sell and buy bonds and shares
on its own account. The broker or exchange members do the trade on the company's
behalf.
 Dealings only in registered securities - Only listed securities recorded in the
exchange office can be traded.
 Transaction - Only through authorised brokers and members the transaction for
securities can be made. Recognition- It requires to be recognised by the central
government.
 Measuring device - It develops and indicates the growth and security of a business in
the index of a stock exchange. Operates as per rules- All the security dealings at the
stock exchange are controlled by exchange rules and regulations and SEBI guidelines.

MAJOR STOCK EXCHANGES IN INDIA

National Stock Exchange
The National Stock Exchange was founded in 1992. It was recognized as a stock exchange by
SEBI under the Securities Contracts (Regulation) Act, 1956 and the operation commenced in
1994. VikramLimaye is the Managing Director & Chief Executive Officer of National Stock
Exchange of India Ltd (NSE).
It was the first exchange in India to provide fully computerized electronic trading. NSE is one
of the pioneers in technology and innovation which ensured the high- end performance of its

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systems. The exchange supports more than 3,000 VSAT terminals, making the NSE the
largest private wide-area network in the country. Its automated system makes it more reliable
and efficient in comparison to the Bombay Stock Exchange(BSE), Bombay Stock Exchange.
Bombay Stock Exchange
The Bombay Stock Exchange was founded on July 9, 1875. It is Asia's first stock exchange.
In 1875, eminent businessman PremchandRoychand officially founded the Native Share and
Stock Brokers Association which was later renamed the Bombay Stock Exchange.
It is also the world's fastest exchange with a median trade speed of six microseconds.
The Indian government recognized it officially as per the Securities Contracts Regulation Act
in August 1957.
The BSE joined the United Nations Sustainable Stock Exchange initiative in 2012 Shri
Ashishkumar Chauhan is the MD & CEO of BSE (Bombay Stock Exchange).
Approximately 5000 companies are listed in BSE. Further information on the Bombay Stock
Exchange BSE is available on the linked page.
Important Indices
Sensex (Based on 30 companies)
BSE-100 (Based on 100 companies)
BSE-200 (Based on 200 companies)
Dollex (Based on the dollar value of BSE-200 companies)
Bankex (Based on shares of banks only)
Reality Index (Based on shares of real estate companies)
Sensex (Sensitive Index) - Most important index of BSE - Index of a stock exchange
measures change in market capitalization

STOCK EXCHANGE OPERATIONS - TRADING AND SETTLEMENT

Before the companies start selling the securities through the stock exchange, they have to first
get their securities listed on the stock exchange. The name of the company is included in
listed securities only when the authorities of the stock exchange are satisfied with the
financial soundness and various other aspects of the company.
Earlier, the buying and selling of securities were done on the trading floor of the stock
exchange. However, in present times, it is done through computers and consists of the
following steps:
1. Selection of Broker
One can buy and sell securities only through the brokers registered under SEBI and who are
members of the stock exchange. A broker can be a partnership firm, an individual, or a

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corporate body. Hence, the first step of the trading procedure is the selection of a broker who
will buy/sell securities on the behalf of a speculator or investor.
Before placing an order to the registered broker, the investor has to provide some
information, including PAN Number, Date of Birth and Address, Educational Qualification
and Occupation, Residential Status (Indian/NRI), Bank Account Details, Depository A/c
details, Name of any other brokers with whom they have registered, and Client code number
in the client registration form.
After getting information regarding all the said things, the broker opens a trading account in
the name of the investor.
2. Opening Demat Account with Depository
An account that must be opened with the Depository Participant (including stock brokers or
banks) by an Indian citizen for trading in the listed securities in electronic forms known as
Demat (Dematerialised) Account or Beneficial Owner (BO)
The second step of the trading procedure is the opening of a Demat Account. The Depository
holds the securities in electronic form. A Depository is an organisation or institution, which
holds securities like bonds, shares, debentures, etc. At present there are two depositories:
namely, NSDL (National Securities Depository Ltd.) and CDSL (Central Depository
Securities Ltd.).
3. Placing the Order
The next step after the opening of a Demat Account is the placing of an order by the investor.
The investor can place the order to the broker either personally or through email, phone, etc.
The investor must make sure that the order placed clearly specifies the range or price at
which the securities can be sold or bought.
4. Match the Share and Best Price
The broker after receiving an order from the Investor will have to then go online and connect
to the main stock exchange to match the share and best price available.

5. Executing Order
When the shares can be bought or sold at the price mentioned by the investor, it will be
communicated to the broker terminal, and then the order will be executed electronically.
Once the order has been executed, the broker will issue a trade confirmation slip to the
investors.
6. Issue of Contract Note
Once the trade has been executed within 24 hours, the broker will issue a contract note. A
contract note consists of the details of the number of shares bought or sold, the date, time of
the deal, price of securities, and brokerage charges. A contract note is an essential legal
document.
7. Delivery of Share and making Payment

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In the next step, the investor has to deliver the shares sold or has to pay cash for the shares
bought. The investor has to do so immediately after receiving the contract note or before the
day when the broker shall make delivery of shares to the exchange or make payment. This is
known as Pay in Day.
8. Settlement Cycle
The payment of securities in cash or delivery of securities is done on Pay in Day, which is
before T+2 Day. It is because the settlement cycle is T+2 days on w.e.f April 2003 rolling
settlement basis.
9. Delivery of Shares or Making Payment
On the T+2 Day, the Stock Exchange will then deliver the share or make payment the other
broker. This is known as Pay out Day. Once the shares have been delivered of payment has
been made, the broker has to make payment to the investo within 24 hours of the pay out day,
as he/she has already received payment from the exchange.
10. Delivery of Shares in Demat Form
The last step of the trading procedure is making delivery or shares in Demat form by the
broker directly to the Demat Account of the investor. The investor obligated to give details of
his Demat Account and instruct his Depository Participart (DP) for taking delivery of
securities directly in his beneficial owner account.

DEMAT ACCOUNT
Demat account is also known as a Dematerialized account. The primary use of Demat
account is to hold shares and securities in an electronic format. It helps you in online trading
like buying or selling shares, or converting physical shares into electronic form. All the
shares, mutual funds, bonds, government securities, and other investments are saved in a
dematerialized account.
Dematerialization is the term used to define the process of transferring physical certificates
into electronic ones. The main motto of dematerialization is to avoid holding physical shares
and help you with seamless tracking and monitoring. It helps convert physical shares to
electronic form.
Importance of Demat Account
1. Digitally secure way of holding shares and securities
2. Eliminates theft, forgery, loss and damage to the physical certificates
3. Quick transfer of shares
Advantages of Demat Account
Here are some advantages of opening a Demat account:
 When the securities are being transferred, there is no stamp duty.
 There is a faster and more immediate transfer of securities

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 The elimination of wrong deliveries is seen

 The elimination of risk by loss, theft, damage, mutilation, etc. is seen
 They benefit us with the disbursement of corporate benefits like rights, dividends,
bonuses, etc. and faster settlement .
 Elimination of personal information mismatches like bank accounts and addresses.
 The nomination facilities are more convenient
 In the case of the death of a Demat account holder, the transmission formalities are
done more conveniently
Opening a Demat Account
Demat Account cannot open directly with the Central Depository Services Ltd (CDSL). Need
to approach an authorized Depository Participant (DP), who will open the account, and
facilitate further transactions.
 Firstly, choose a DP you want to open the Demat account with. You can find many
financial Institutions and brokerages offering this service.
 Fill up the account opening form and submit it along with the copies of all the
necessary documents and a passport size photo.
 Have original documents handy for verification.
 You will receive a copy of the terms and conditions agreement. Go through it.
 A member of DP will get in touch with you and verify the details you have submitted.
 If the application is processed, you will get a Demat account number along with a
client ID which you can use for the account online.
 You need to pay some account opening charges such as annual maintenance charge
and the transaction fee (monthly basis).
 There is no limit on the minimum number of securities to keep your account active.
 You don't need to compulsorily have shares to open a Demat Account. In fact, you
can have zero balance in the account.
 As there is no restriction on the number of Demat Accounts which can be opened by
any investor, you can have multiple Demat Accounts.
Know Your Client (KYC)
SEBI has prescribed KYC (Know Your Client) requirements for all security market investors.
SEBI has allowed the use of technological innovations which can facilitate KYC (e-KYC).
The use of technology would facilitate the investors to complete KYC without the
requirement of physically visiting the office of the intermediary.
Depositories and Depository Participants
A depository is an entity responsible for the maintenance of securities electronically and the
facilitation of trading of these securities. They empower investors to own, maintain and
exchange securities online.
Depository participants are the agents of depositories such as The National Securities
Depository Limited (NSDL) and The Central Depository Services Limited (CDSL). DP are
given license to operate by a tory, under the provisions of Depositories Act, 1996

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Depository Participants (DP), on the other hand, act as a link between depositories the
investors who hold securities.
DP earn income by charging fees to their clients for services such as account opening,
transfer of shares and pledging of shares. Some may also charge an annual maintenance
charge.
Role of a Depository Participant
 DPs convert physical shares into electronic format.
 DPS monitor and track trade transactions linked to securities.
 Act as a link between the Depositories and investors.
 Ensure Investments held electronically are safe and secure.
 Securely facilitate transactions and trade transfers.
 Maintain the record related to ownership and pledging of shares.

INVESTORS PROTECTION AND GRIEVANCE REDRESSAL

In India investment risks are very high due to dishonest practices, frauds and unethical
investment culture. Investors experience a sense of helplessness and insecurity they have
hardly any confidence in financial markets. Investors are cheated by companies, by lead
managers, by brokers and by everybody, who is capable of cheating them. The Government,
the Company Law Board and the SEBI, in recent years have made efforts to protect the
investors. "Investors protection is a wide term, it encompasses all the measures designed to
protect investors from malpractices of brokers, companies managers to issue, merchant
bankers, registrar to issues etc. The main complaints are against brokers of stock exchanges,
against listed companies and mutual funds.

Usual grievances of investors

1. Usual grievances against companies
a. Delay in registering transfer of securities: Registration of transfers should be done by
the companies within 30 days of receipt of share transfer Instrument but usually it takes many
months.
b. Non-payment or delay in payment of dividend: Dividends should be distributed within
30 days from the date of declaration but by manipulation of procedures dividends may not be
received for months.
c. Non-repayment or delayed repayment of public deposits: Thousands of depositors are
involved in litigation to get back their deposits from companies.
d. Non-receipt of rights issue offer: The letter of offer of rights shares should be sent to all
eligible shareholders by registered post but Shareholders quite often are not informed of
rights issue.

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e. Non-receipt of duplicate share certificate: A company is bound to issue duplicate share

certificates if the shares are lost or misplaced by the shareholder, after receiving a request
along with the requisite fee and on completion of formalities.
f. Transmission of shares: After the death of a shareholder the ownership of shares passes to
his legal heirs which is called transmission of shares. The company is bound to transfer the
shares in the name of legal heir of the deceased.
g. Non-receipt of notice of meeting: Every shareholder whose name e appears in the register
of members is entitled to receive 21 days advance notice of meeting of shareholders. Non-
dispatch of notice of meeting to shareholder is common but serious lapse.

2. Usual grievances against brokers

a. Delay or default in payment of securities sold: A broker has to make payment to client
who has sold securities through him within in 48 hours of payout of funds by clearing house
of stock exchange or the Clearing Corporation. But brokers, as a rule, retain the sale proceed
as long as they can.
b. Delay or default in delivery of purchased security to the client: A broker has to deliver
the purchased securities to his client within 48 hours of payout of securities by the stock
exchange. It never happens so, in practice.
c. Non-Issue of contract note: Brokers have to issue a contract note in prescribed form to all
their clients within 24 hours of the transaction but they avoid doing so to earn secret profits.
d. Excess brokerage: Brokers Charge excess brokerage from clients.
e. Non-passing of corporate benefits: A broker is duty bound to pass all the corporate
benefits like rights shares, bonus shares, dividends etc. to the client he is dealing with but,
many a times brokers play tricks in this regard.
f. Overcharging: The broker should charge or pay only that amount of sale or purchase of
securities. He should not overcharge for purchases or pay less for the sales. In practice, most
brokers play tricks about it.

3. Grievances against Depository Participant

Depository Participant is an institution which holds securities either in certificated or
uncertificated form, help in dematerialization of securities etc. of the holder. Various banks
and other institutions are doing this work. Every depository participant must forward all the
dematerialization or materialization requests of his clients to the concerned company within 7
days of the receipt of the request but delays are quite common.
Main Depositories are:
NSDL: National Securities Depositories Limited (1996)
CDSL: Central Depositories Services Limited (1999)

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METHODS OF REDRESSAL OF INVESTOR'S GRIEVANCES

An Investor can seek redressal of his grievances from, the following agencies:
1. Grievance cell/ investor service cell in stock exchanges
All the recognised stock exchanges have established Investors services cells to redress the
grievances of investors. These cells have played an important role in settlement of grievances
and have infused confidence among investor. approach these investors grievance cells to
lodge complaints against companies and members of the stock exchange acting as brokers.
Both BSE and NSE too have their grievance cells.
A. Method of redressal of grievance against companies in investor service cell.
B.Method of redressal investors grievances against stock broker by investor service cell.
C. Other measures taken by investor service cell
2. Redressal of grievances through SEBI
Complaints arising out of activities that are covered under SEBI Act, 1992; Securities
Contract Regulation Act, 1956; Depositories Act, 1996 and Rules and Regulations made
thereunder and provisions that are covered under Section 55A of Companies Act, 1956 are
handled by SEBI.
SEBI has a dedicated department viz., Office of Investor Assistance and Education (OIAE) to
receive investor grievances and to provide assistance to investors by way of education.
3. Redressal By Company Law Board
Company law Board which was constituted in May 1991 has been entrusted with many
powers which were previously exercised by high courts. Every bench of company Law Board
is deemed to be a civil court and every proceeding before is deemed as judicial proceeding.
To protect the interests of investors it has the power of inspection of records and documents
and enforcing attendance of witnesses. An aggrieved investor can apply to the Company Law
Board
a. To investigate the affairs of the company.
b. For relief in case of oppression of management and/or mismanagement.
Investors can also lodge complaints about delay and non-payment of fixed deposits and
interest thereon with the Company Law Board. Representations about desired changes in the
Companies Act for investors protection can also be made to the Company Law Board.
4. Redressal of investors grievances through courts
When an investor has tried all other ways of getting his grievance settled there no other way
left with him except to proceed against the company or the intermediary by way of civil and
criminal proceedings.

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Suits against companies can be filed in the high courts of the states. Every high court has
special designated benches about company affairs and all complaints against companies in
breach of Companies Act are heard there.
An aggrieved party can file cases in high courts against the companies to get Justice but the
process of law is quite time-consuming and costly and hence beyond the reach of small
investors.
5. Redressal of investors grievances through press
If an investor fails to get his grievance remedied from concerned company or authorities, he
thinks of bringing bad publicity to the company or to the authorities not listening to him, by
reporting the matter to the press.
Investors form unfavourable opinion about such company and think that this may happen to
them also. So, they avoid investing in this company. Such a situation can prove suicidal for
the company.
To avoid bad publicity, the concerned company or the stock exchange management or the
government agency like SEBI settle his grievance and report back to the newspaper as to
what they have done about the complaint.

MAJOR STOCK MARKET PARTICIPANTS

1. Stock Brokers
Stock brokers are licensed by the Securities and Exchange Board of India and are entitled to
trade at the stock exchange. They act as the middlemen or agents between the sellers and the
buyers of stocks in the stock market. For providing these broking services, they receive
buying or selling commission from their clients.
2. Investors
Investors are also called stockholders or shareholders. These are the people who own the
shares of companies that are listed on the stock exchange. They are entitled to receive
dividends and other benefits due to shareholders.
3. Depository
A depository refers to an organization or an institution that assists in the trading of securities.
This institution also holds securities in electronic form or in dematerialized form. One of the
major functions of the depositories is to transfer the ownership of shares from one investor's
account to another when a trade takes place.
4. Clearing House
Clearing Houses are wholly owned subsidiaries of Securities and Exchange Board of India.
They are formed to ensure the orderly settlement of trades executed on various stock
exchanges. Clearing Houses settle the funds and transfer shares based on everyday
transactions between sellers and buyers.
5. Stock Exchange
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A stock exchange is an organized marketplace that brings all the investors or traders together.
It facilitates the sale and purchase of stocks by different buyers and sellers. Most of the
trading in Indian stock market takes place on BSE and NSE. These stock exchanges enforce
strict rules and regulations that listed companies and trading participants must follow.
6. Listed Companies
Also known as issuers, these are the companies whose shares are traded on the stock
exchange. All the listed companies go through Initial Public Offering (IPO) and register
themselves with the stock exchange after abiding by all the prescribed regulations.
7. Transfer Agents
Transfer Agents record changes of ownership of shares. They provide the listed companies
with a list of its security holders. Transfer agents are also responsible for cancelling or issuing
of certificates and distribute dividends.
8. Settlement Banks
The settlement banks perform the function of accepting the deposit of funds for payment of
stocks bought by an investor or confirm payment of funds when due. These banks debit or
credit the investor's account during settlement and also report balances and other information
as may be required.

DO'S OF STOCK MARKET INVESTING

Here are a few of the do's of stock market investing that every investor should follow:
a. Education on investment
This is probably the most relevant do's of stock market investing. If you really want to
become a successful stock investor, start learning the market. Self-education is the best way
to learn or choose a right mentor.
b. Start with small investment
When beginning to start investing in the stock market, start small investment. Invest the
lowest possible amount and gradually increase your investments as you get more knowledge
and confidence.
c. Study before Investing
One of the key reasons why people do not make money from stocks is that they do not put in
the initial efforts before investing in the share. Every investor needs to research the company
before investing. Here you need to learn the company's fundamentals, financial statements,
ratios, management, and more. If you do not want to regret it later, research the company first
before investing.
d. Invest Surplus Money
The stock market gives an immense opportunity to invest in your favorite companies and
make money. However, there are always a few risks involved in the market, and no returns

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are guaranteed. Moreover, many times a bad (or bear market) may even last for years.
Therefore, you should only invest the surplus money which does not affect your lifestyle.
e. Have an Investment Goal
It's easier to plan your investments (and to monitor your progress) if you have an investment
goal/plan. Your goal may be to build a corpus of 1 Crores in the next ten years or to build a
retirement fund. Having a goal will keep you motivated and on track.
f. Build a Stock Portfolio
For making good consistent money from the stock market, investor need to build a successful
stock portfolio of 8 to 10 stocks which can give reliable returns. Although it's very less likely
that you can find all the fantastic stocks to invest in at once. However, year after year you can
keep adding/removing stocks to build a strong portfolio that can help you reach your goals.
g. Diversify
he risk involved while investing in just one stock is way higher compared to a portfolio of ten
stocks. Even if one or two of your stock starts performing poorly in the latter scenario, it may
not affect the entire portfolio too much. Your stock portfolio should be sufficiently
diversified.
h. Average Out
It's challenging to time the market and almost impossible to buy the stock at the exact bottom
and sell them at the highest point. If you've done it, you might be lucky. A better approach
here is to Buy/Sell simultaneously.
i. Invest for the Long-Term
It's a common fact that all the veterans of the stock market who made an incredible fortune
from stocks are long-term investors. But why does long-term investing helps to build wealth?
Because of the power of compounding, the eighth wonder of the world. If you want to build
massive wealth from the market, invest for the long term.
j. Maintain Patience
Most stocks take at least 1 or 2 years to give good returns to the investors. Moreover, the
performances get better when you give more time. Have patience while investing in the share
market and do not sell your stocks too soon for short, term gratification.

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DON'TS OF STOCK MARKET INVESTING

a. Don't Take stock market Investment as Gambling
In simple words- "Investing is Not Gambling!". Do not buy any random stock and expect it to
give you two times return in a month.
b. Don't Have Unrealistic Expectations
Have realistic expectations while investing in stocks. A return between 12-18% in a year is
considered good in the market. Moreover, when you compound this return over multiple
years, you will get way higher returns compared to 3.5% interest on your savings account.
c. Don't Over Trade
When you are trading frequently, you are repeatedly paying for the brokerage and other
charges. Don't buy/sell the stocks too often. Make confident decisions and make transactions
only when necessary.
d. Don't follow the peer investor blindly
Your colleague purchased a stock and made 75% returns from it within a year. Now, he's
boasting about it, and many of your office-mates are buying that stock. No investor can get
significant success from the market by following the herd. Do your own research, rather than
following the crowd.
e. Don't Take Unnecessary Risks
Investing all your money in a hot stock/industry to get a little higher return is never a wise
move. Safeguarding your money is equally important than getting high returns. You should
never take unnecessary risks while investing in stocks and your 'risk-reward' should always
be balanced.

f. Don't Make Emotional Decisions

The human mind is very complex, and there are many factors both internal and external that
can affect the choices we make. While investing in the stock market, do not take emotional
decisions. No matter how much you like a company, if it is not profitable and doesn't have a
bright future potential, it may not be the right investment decision. Do not get emotional
while making your investment decisions.

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A quick look on the Grievance Redressal Authorities

Nature of Complaints Whom to Approach
Bank deposits and Banking Banking Ombudsman
Non Banking Financial Companies Company Law Board/Consumer Forum/
(NBFC's) Civil court

Insurance related Insurance Regulatory and Development

Authority
Companies- mismanagement, Annual Ministry of Corporate Affairs
general meeting, Annual report, Non receipt
of preferential allotment of shares, corporate
actions, minority shareholders interest etc.,
Pension Funds Pension Funds Regulatory and
Development Authority of India
Commodities Forward Market Commission
Chit funds Civil courts Consumer forums
Monopoly and anticompetitive trade Competition Commission of India
practices
Securities market related queries Securities Exchange Board of India

STOCK SELECTION
Investment in stock is high risk and high returns. Aggressive risk profile investors would
want to have more investments in equity instruments like shares. But there are a number of
companies whose shares are listed on the stock exchange. So which company shares to buy is
difficult task to decide. So, the key question that arises is how to select the stocks to make
investment. The various analyses undertaken towards stock selection for investment can be
studied under two heads. They are
I. Fundamental analysis
This method aims to evaluate the value of the underlying company. It takes into account the
intrinsic value of the share keeping in mind the economic conditions and the industry along
with the company's financial condition and management performance. A fundamental analyst
would most definitely look at the balance sheet, the profit and loss statement, financial ratios
and other data that could be used to predict the future of a company. In other words,
fundamental share market analysis is about using real data to evaluate a stock's value.
Fundamental analysis comprises of Economic analysis, Industry analysis and Company
analysis.
A. Economic Analysis
Economic Analysis relates to the analysis of the economy. This related to study about the
economy in details and analysis whether economic conditions are favourable for the
companies to prosper or not. Analysts always try to find out whether economic development

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is conducive for the growth of the company. An investor a security market can give
prediction about the future of share price of a company on the basis of the study of forces
affecting economic environment of the country. The economy is studied to determine if
overall conditions are good for the stock market.
B. Industry Analysis
After the economic analysis, the next step is to analyse the industry environment which the
firm is operating in. one should analyse all the factors that give the firm a competitive
advantage in its sector, such as, management experience, history of performance, growth
potential, low cost of production, brand name etc., This step of the industry analysis entails
finding out as much as possible about the industry and the inter-relationship of the companies
operating in the industry.
C. Company analysis
The next step is to study the company and its products. The components that are analysed at
the company level are the following:
1. Business model: The term business model refers to a company's plan for making a profit.
It identifies the products or services the business plans to sell, its identified target market, and
any anticipated expenses. Analyzing these factors give an idea about the company.
2. Competitive advantage: A company's long-term success is driven largely by its ability to
maintain a competitive advantage. When a company can achieve a competitive advantage, its
shareholders can be well rewarded for decades.
3. Management and Corporate Governance: Corporate governance describes the policies
in place within an organisation denoting the relationships and responsibilities between
management, directors and stakeholders.
4. Financial analysis: Financial statements are the medium by which a company discloses
information concerning its financial performance. Financial statements provide financial
information of the company which helps to make investment decisions. The important
financial statements are income statements, balance sheets and cash flow statements.

II. TECHNICAL ANALYSIS

Technical analysis is the study of chart patterns, graphs, and diagrams on a screen, The idea
is to understand price and volume trends and pick stocks accordingly.
Technical Analysis is a method of evaluating securities by analyzing statistics generated by
Market activity. It does not attempt to measure intrinsic value. Instead look for patterns and
indicators on charts to determine future performance.
"Technical Analysis is the study of market action, primarily through the use of charts, for the
purpose of forecasting future price trends", - John J. Murphy
FEATURE OF TECHNICAL ANALYSIS

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 Technical Analysis is the process of forecasting the future price of the stocks based on
historical data.
 It is more like the quotation "History repeats itself".
 Technical Analysis Stocks, unlike the fundamental analysis, deals with the price and
volume of the stock traded in the previous days/week/month/years.
 This includes various charts, technical indicators, historical data, and many other
technical aspects/tools for predicting the future price movement of the stock.

BASIC ASSUMPTIONS OF TECHNICAL ANALYSIS

Technical Analysis in Stock Market is done based on some assumptions.
Primary assumption of technical analysis is the prices of the stocks are influenced only by
demand and supply for the stocks.
Note: On the basis of this primary assumption, there are three assumptions which every
technical analyst makes:
a. History repeats - A study of history shows that set patterns repeat themselves over long
periods. By relying on the past to predict the future, we can take advantage of these patterns.
b.The price change is not artificial - A stock price can have an artificial price change due to
various factors. Some of them are like dividends, stock split, and others of similar nature. It is
because the price charts are affected by the dramatic price change.
c. High liquidity shares may affect demand - For technical analysis, stocks which are
heavily traded are preferable. It is because heavily-traded shares are more liquid. The high
liquidity of the shares further increases its demand. The price of the high-liquidity shares
does not change drastically in general.
d. No announcement of individual company affect market - As the technical analysts like
to believe that prices of shares are only affected by demand and supply, so they chose to
ignore any extreme news about some of the stocks as well. Any news about the company
whose shares you are trading can change minutely or drastically if there are certain
announcements in the company like merger & acquisition or meeting of the CEO with some
big foreign company as investors expect new products and services and others.

BENEFITS OF TECHNICAL ANALYSIS

While the day-traders most trades using this form of analysis, they realize many benefits in it.
Following are the benefits using technical analysis:

 Direct Approach
The most important advantage of using technical analysis is the fact that it is purely based on
price - market price. The traders and the analysts only focus on the price of the stock. They
predict the future price based on the historical prices. It helps to keep away the noise.

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 Demand - Supply and Price Action

Since the analysis is done on the basis of price, the analysts consider demand- supply are the
two primary and also only forces affecting the prices. It becomes easy to understand the price
movements as no other factors are influencing the price as per the technical analysis. They
think that the demand and supply of the share incorporate all other information of the
company and the market.
 Support and Resistance
Technical analysis is nothing without the support and resistance level. These two levels help
the traders understand the price movements and if there is any hint of a trend reversal. This,
in turn, helps them act quickly and book profits and trade in the right direction.
 Everything is organized graphically.
Watching a graph and analyzing from the same can be easy in contrast to an endless list of
numbers, isn't it? Since technical analysis represents everything on graphs, it becomes easier
for the trader to look for the specific price and volume points and analyst them without
getting confused among all the noise. With graphical representation, few other things also
become visible

 Entry and Exit Points

The indicators are really helpful in suggesting the entry and exit points in the market. It helps
in saving your hard-earned money by giving early signals which are more or less accurate.
Even if you miss some price change or couldn't be able to track it, these indicators will pop
up on the charts to indicate the entry and exit points.

 Learning technical analysis is easy

If you want to learn technical analysis, you do not need to enroll in any university paying a
hefty fee. You can simply take up an online technical analysis course and learn.

LIMITATIONS OF TECHNICAL ANALYSIS

Though the daily traders and also many investors follow these analyses but technical analysis
charts have few drawbacks as well.
 The bias of the Analysts
Analysts are biased and they only focus on the price which seems a benefit to them and it is
obvious but at times, they need to look for the other factors as well which influence the price.
Moreover, the analysts can be biased in themselves as well.
 Different interpretation
A chart can be interpreted differently by two analysts. This is because of the above-
mentioned point that is bais. So, two individual analysts having their own personal biases will
end up interpreting the same chart in two different ways. This again can lead to confusion.

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 Technical Analysis is slow or late

As the analysis depends on the historical prices when the trend is identified, good portion of
the price has already moved up. So, a person loses on the same part of the profit. It also
changes the risk-reward ratio most of the time.
 Every stock is different
Technical analysis is not applicable for all the stocks in the same manner. As every stock is
different, you need to understand which indicator, oscillator, charts, and time-frame will be
right for the kind of stock you want to trade which is a difficul process.

CHARTS USED FOR TECHNICAL ANALYSIS

1. CANDLESTICKS
A Japanese candlestick is a type of price chart that shows the opening, closing, hig and low
price points for each given period. Today, Japanese candlestick charts are the most popular
way to quickly analyse price action, particularly with technical traders.
In order to understand Japanese candlestick patterns, trader or investor need to familiaris with
three elements on each candle: its colour, its body and its wick. Its colour tells you direction
of movement within the period, its body displays the market's opening and closing levels and
its wick shows the high/low range.
 On most charts today, green candlesticks indicate upward movement and red one a
move down. However, occasionally white (up) and black (down) is used instead .
 On a green candle, the top of the body is the close and the bottom is the open On a red
one, the opposite is true.
 On both red and green sticks, the top of the wick (sometimes called the shadow) is the
highest point that the market has hit within the period - and the bottom is the lowest.

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2. LINE CHARTS
As the name suggest, line charts are one of the most common forms of charting pattern In
this, you will find single lines starting from the left side of the graph and moves towards the
right.
These lines represent the closing prices of a stock/indices/any tradable instrument. Though,
instead of closing price other price variables like opening prices, high or low prices can be
used but for most accurate prediction, closing prices are graphed in this chart.
These line charts are required for understanding the general price movement in the curren
times linked to the historical data. Though it doesn't put much light on the insights of a
security's price movement, it is useful for the beginners to understand and track the price
movement.

3. BAR CHARTS
After line charts, Bar charts are very popular amongst the traders. It is a basic to for this
analysis and it presents all the four important prices of a stock. It includes the opening price,
high lows, and also the closing price of the securit Thus it is known as OHLC charts as well.
The chart is comprised of a vertical line serie These lines represent the prices mentioned as
per the time frame of the chart.

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To differentiate between the prices, different colors are used. Bar Charts are highly useful for
technical analysts as they provide all the prices on one single graph and make easy for the
analyst to track the changes and predict the future price movements.

4. POINT & FIGURE CHARTS

Another form of charts which were widely used as technical tools is this point and figure
charts. Though this chart pattern is not used recently earlier they were very famous amongst
the traders. This chart focuses on the price movements while cutting out all the other
information and thus one can get price specific information. Points and figure charts comprise
of rising and falling prices of a stock/index and others.
While the rising price is represented by the 'X' symbol, the falling price gets represented by
the 'O' symbol. These symbols are drawn on columns and each of the boxes representing the
prices has a specific value to it.

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5. TREND & TREND LINE

One of the most important components of a chart is the trend line. This is the line which helps
in indicating the price trend of the security or overall market for which the analysis is done.
So, these lines are drawn on different kinds of charts to get the trend of the price.
From this, either we get an uptrend or downtrend which is the most important technical
indicator for analysts. The analysts draw reference from the historical price trends as well.
Apart from the upward and downward trends, there is another trend which is known as the
horizontal trend.
6. VOLUME
Technical analysis is based on price and volume to put it in simple terms. So, the volume is
one of the crucial factors in this type of analysis. Volume is the number of shares that are
traded for a particular security in one single day (it can be any period though).
So, for instance, ABC Company's 4.5 lakhs shares are traded today, so the volume traded for
ABC Company's shares is 4.5 lakhs. The volume helps in understanding the strength of the
trend or price movement of a share.
7. MOMENTUM
The third factor that you need to understand in technical analysis is Momentum.
Momentum is the speed with which the price is changed or moved from one to another for a
stock in the market.It is the rate at which the price of the stock changes over a given period.
For example, XYZ's price change over 15 days its rate of price changed over these ten days is
the momentum of XYZ's shares price. It is mixed with the RSI Index which assigns value to
the stocks from 0 to 100. This is for the determination of overbought or oversold market
conditions. It is tracked regularly generally.
8. SUPPORT AND RESISTANCE
These two can be referred to as one of the most important concepts of technical analysis.
Support is a price level where the demand for the stock is so high that the price cannot drop
below that. It can be referred to as the previous highs. While the resistance level is the
previous lows and a price level where the supply of the stock is high and thus the price cannot
move upward from that level.
Now, if the support level is broken or if the price dips below the support level, the it indicates
a bearish trend and when the resistance level is broke, then an upward trend ar bullish trend is
suggested.

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9. OSCILLATORS AND INDICATORS

Finally, coming to the indicators and oscillators which are regarded as crucial tools for
technical analysis apart from the charts.
Indicators are nothing but mathematical calculation which are based on statistics. Price and
volume are the statistics in most cases. These indicators are created for signaling buy and sell
in the market. It is required for understanding the entry and the exit in and on of a
trade/position.
Multiple indicators help in understanding the overbought and oversold condition of th
market.
Oscillators are nothing but the indicators which can be used in a short time span fo indicating
the same factors and conditions.

STOCK RETURN AND RISK

1. Risk
Risk is usually understood as 'exposure to a danger or hazard'. In investment decisions, risk is
defined as the possibility that what is actually earned as return could be different from what is
expected to be earned. For example, consider an investor who buys equity shares after
hearing about the huge return made by other investors He expects to earn at least 50% return
within 2 years. But if equity markets dedine during that period, the investor could end up with
negative returns instead. This deviation between actual and expected returns is the risk in his
investment.
2. Return
A return, also known as a financial return, in its simplest terms, is the money made or lost on
an investment over some period of time.
Investment risk
Investment risk can be defined as the probability or likelihood of occurrence of losses relative
to the expected return on any particular investment. Stating simply. it is a measure of the
level of uncertainty of achieving the returns as per the expectations of the investor. It is the
extent of unexpected results to be realized.
3. Risk-Return Tradeoff
The risk-return tradeoff states that the potential return rises with an increase in risk. Using
this principle, individuals associate low levels of uncertainty with low potential returns, and
high levels of uncertainty or risk with high potential returns According to the risk-return
tradeoff, invested money can render higher profits only if the investor will accept a higher
possibility of losses.
4. Analyzing risk and return
In investing, risk and return are highly correlated. Increased potential returns on investment
usually go hand-in-hand with increased risk. Different types of risks include project-specific
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risk, industry-specific risk, competitive risk, international risk and market risk. Return refers
to either gains or losses made from trading a security.
The return on an investment is expressed as a percentage and considered a random variable
that takes any value within a given range. Several factors influence the type of returns that
investors can expect from trading in the markets. Diversification allows investors to reduce
the overall risk associated with their portfolio but may limit potential returns.

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CHAPTER 03
MUTUAL FUNDS AND FINANCIAL PLANNING

INTRODUCTION TO MUTUAL FUNDS

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and
investing funds in securities in accordance with objectives as disclosed in offer document.
Investments in securities are spread across a wide cross-section of industries and sectors and
thus the risk is reduced. Diversification reduces the risk because all stocks may not move in
the same direction in the same proportion at the same time.
Mutual fund issues units to the investors in accordance with quantum of money invested by
them. Investors of mutual funds are known as unitholders.
The profits or losses are shared by the investors in proportion to their investments.The mutual
funds normally come out with a number of schemes with different investment objectives
which are launched from time to time. A mutual fund is required to be registered with
Securities and Exchange Board of India (SEBI) which regulates securities the money in
securities such as stocks, bonds, and short-term debt. The combined markets before it can
collect funds from the public.
A Mutual Fund is a company that pools money from many investors and invests holdings of
the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share
represents an investor's part ownership in the fund and the income it generates.
A Mutual Fund is a professionally-managed investment scheme, usually run by an asset
management company that brings together a group of people and invests their money in
stocks, bonds and other securities.
Hence,
 A mutual fund is a professionally-managed investment scheme, made up of a pool of
money collected from many investors to invest in securities like stocks, bonds, money
market instruments, and other assets.
 Mutual funds are operated by professional money managers, who allocate the fund's
assets and attempt to produce capital gains or income for the fund's investors.
 A mutual fund's portfolio is structured and maintained to match the investment
objectives stated in its prospectus.
 Mutual funds give small or individual investors access to professionally managed
portfolios of equities, bonds, and other securities.

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FEATURES OF MUTUAL FUNDS

1. Liquidity
You can easily redeem the units of your mutual funds to meet any kind of financial
emergency. Based on the type of scheme, the redemption amount is usually credited to your
bank account within 3-4 business days from the date of redemption. In the case of liquid
funds, the amount is credited on the next business day.
2. Professional Management
Mutual funds are managed by professional fund managers who closely watch the markets and
make constant investment decisions based on the fund's stated objective. Therefore, you don't
have to worry about researching and individual stock picking once you invest in mutual
funds.
3. Portfolio Diversification
One of the key features of investing in mutual funds is that you get a diversified portfolio
containing different types of equities and other options. Based on the scheme's objective, a
mutual fund can have proportionate exposure to various financial instruments like equities,
debts, or other asset classes such as gold, real estate, etc.
Therefore, the risk is spread out over different asset classes. So, even if one asset class
performs poorly in adverse market conditions, the other classes can still aim to balance your
investment portfolio balance.
4. Income Tax Benefits
Both equity and debt funds carry their own unique tax benefits. For instance, while debt fund
investors benefit from indexation on long-term capital gains, equity funds allow you to earn
exempted returns up to Rs. 100,000 in a financial year as long as you stay invested for 12
months or more.
Apart from this, there are ELSS (Equity Linked Savings Scheme) funds, which allow you to
invest up to Rs 1,50,000 in a year and deduce the same from your taxable income.
5. Investment Flexibility
One of the key features of mutual funds is the flexibility they offer. You can either invest a
large lump sum amount in the beginning or regularly invest small amounts (as low as Rs 500
per month) in the form of a SIP (Systematic Investment Plan).
6. Low Cost
Mutual funds charge a small amount known as the expense ratio from investors. The expense
ratio is charged to cover operating expenses such as management, administration, etc., and
other charges.
7. Properly Regulated
The Securities and Exchange Board of India (SEBI) regulates the mutual fund market.
Mutual funds have to strictly comply with SEBI (Mutual Funds) Regulations, 1996, to ensure
transparency and protection of investors' wealth.
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8. Ease of Purchasing
While you can invest easily through offline modes, online buying and selling of mutual funds
has made the lives of investors much easier. You don't need to visit a mutual fund house's
office. Just visit the official website of the asset management company. Compare various
mutual fund products offered by the fund house and invest online. The entire process is easy.
convenient, and fast.

OBJECTIVES OF MUTUAL FUNDS

The objectives of mutual funds vary based on their type. Different funds have different
objectives. Here, we will look at some of the common kinds of mutual funds and their
objectives.
1. Growth Funds
As the term suggests, growth funds aim to achieve growth. All growth funds have the same
primary objective, which is to achieve capital appreciation between the medium and long
term. The corpus of these funds is usually invested in small to large-cap stocks.
2. Income Funds
Income funds aim at generating income at regular Intervals of time. They do not seek capital
appreciation in the long run, and are ideal for those who seek regular cash flow to meet their
financial requirements. The corpus of these funds is invested mainly in income instruments
such as bonds, fixed interest debentures, dividend paying stocks, preference stocks, etc.
3. Value Funds
The main objective of value funds is to make investments in undervalued stocks and achieve
profits when the inefficiencies are corrected.

BENEFITS OF MUTUAL FUNDS

1. Liquidity: Open-ended mutual funds are highly liquid. Units in these funds are easy to
purchase and it is equally easy to exit from the scheme.
2. Managed by experts: Investors require minimal knowledge about mutual funds to invest
in them. Professional fund managers do all the work on behalf of investors, and make
decisions regarding the kind of funds to invest in, how long to hold them, etc.
3. Diversification: Market movements determine the performance of mutual funds and the
risks associated with them. Therefore, investments are almost usually made in multiple asset
classes such as equities, money market securities, debt instruments, etc. so that the risk is
spread out. Doing this ensures that when one of the asset classes performs poorly, returns can
be generated from the other classes and compensate for the losses.
4. Meeting your financial targets: Investors have access to a wide variety of mutual funds
and can therefore, find schemes that are ideal to meet their financial targets, be it in the long
run or in the short term.
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5. Low cost for bulk purchases: The higher the number of mutual fund units purchased, the
lower the cost as there will be lower commission charges and processing fees.
6. Systematic Investment Plans: The average transactional costs that you funds. SIPs are
also a great option because most people may not have incur are lower if you choose the SIP
route to make investments in mutual a lump sum amount to invest in mutual funds.
7. Easy investment process: Investment in mutual funds is a very easy process. All you have
to do is identify your financial goals and decide how much money you want to invest in order
to achieve them and the fund manager will take care of the rest.
8. Tax-efficiency: Investment in tax-saving mutual funds such as Equity. Linked Savings
Scheme can help you avail tax benefits to the extent of 1.5 lakh. Although you will have to
pay tax on Long Term Capital Gains if the investment is held for more than a year, you can
still save a lot of money on tax under Section 80C of the Income Tax Act.
9. Safety: One of the most common things you hear about mutual funds is that they are
unsafe in comparison with bank products. However, if you assess the fund house from which
you purchase units of mutual funds in addition to an assessment of the fund manager, your
capital will be safe.
10. Automated payments: Sometimes, you may forget to pay your SIP amount on time, and
this would mean that you will have to pay two instalments in the following month. However,
fund houses encourage automated payments and you can have the SIP amount paid directly
on a certain date each month, thereby avoiding the failure to make timely payments.

HISTORY OF MUTUAL FUNDS IN INDIA

A strong financial market with broad participation is essential for a developed economy. With
this broad objective India's first mutual fund was establishment in 1963, namely, Unit Trust
of India (UTI), at the initiative of the Government of India and Reserve Bank of India
'with a view to encouraging saving and investment and participation in the income,
profits and gains accruing to the Corporation from the acquisition, holding,
management and disposal of securities'.
In the last few years the MF Industry has grown significantly. The history of Mutual Funds in
India can be broadly divided into five distinct phases as follows:
First Phase - 1964-1987
The Mutual Fund industry in India started in 1963 with formation of UTI in 1963 by an Act
of Parliament and functioned under the Regulatory and administrative control of the Reserve
Bank of India (RBI). In 1978, UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory and administrative control in
place of RBI. Unit Scheme 1964 (US '64) was the first scheme launched by UTI. At the end
of 1988, UTI had 6,700 crores of Assets Under Management (AUM).

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Second Phase - 1987-1993 - Entry of Public Sector Mutual Funds

The year 1987 marked the entry of public sector mutual funds set up by Public Sector banks
and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India
(GIC). SBI Mutual Fund was the first 'non-UTI' mutual fund established in June 1987,
followed by Canbank Mutual Fund (Dec. 1987), Punjab National Bank Mutual Fund (Aug.
1989) Indian Bank Mutual Fund (Nov 1989), Bank of India (Jun 1990), Bank of Baroda
Mutual Fund (Oct. 1992). LIC established its mutual fund in June 1989, while GIC had set
up its mutual fund in December 1990. At the end of 1993, the MF industry had assets under
management of 47,004 crores.
Third Phase - 1993-2003 Entry of Private Sector Mutual Funds
The Indian securities market gained greater importance with the establishment of SEBI in
April 1992 to protect the interests of the investors in securities market and to promote the
development of, and to regulate, the securities market.
In the year 1993, the first set of SEBI Mutual Fund Regulations came into being for all
mutual funds, except UTI. The erstwhile Kothari Pioneer (now merged with Franklin
Templeton MF) was the first private sector MF registered in July 1993.
With the entry of private sector funds in 1993, a new era began in the Indian MF industry,
giving the Indian investors a wider choice of MF products.
The initial SEBI MF Regulations were revised and replaced in 1996 with a comprehensive set
of regulations, viz., SEBI (Mutual Fund) Regulations, 1996 which is currently applicable.
The number of MFS increased over the years, with many foreign sponsors setting up mutual
funds in India. Also the MF industry witnessed several mergers and acquisitions during this
phase. As at the end of January 2003, there were 33 MFS with total AUM of 1,21,805 crores,
out of which UTI alone had AUM of 44,541 crores.
Fourth Phase since February 2003 April 2014
In February 2003, following the repeal of the Unit Trust of India Act 1963, UTI was
bifurcated into two separate entities, viz., the Specified Undertaking of the Unit Trust of India
(SUUTI) and UTI Mutual Fund which functions under the SEBI MF Regulations.
With the bifurcation of the erstwhile UTI and several mergers taking place among different
private sector funds, the MF industry entered its fourth phase of consolidation.
Fifth (Current) Phase - since May 2014
SEBI introduced several progressive measures in September 2012 to "re-energize" the Indian
Mutual Fund industry and increase MFS' penetration.
In due course, the measures did succeed in reversing the negative trend that had set in after
the global melt-down and improved significantly after the new Government was formed at
the Center.
Since May 2014, the Industry has witnessed steady inflows and increase in the AUM as well
as the number of investor folios (accounts).

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The Industry's AUM crossed the milestone of 10 Trillion (10 Lakh crore) for the first time as
on 31st May 2014 and in a short span of about three years the AUM size had increased more
than two folds and crossed trillion (20 Lakh Crore) for the first time in August 2017. The
AUM size crossed 30 trillion (30 Lakh Crore) for the first time in November 2020.
The overall size of the Indian MF Industry has grown from 7.20 trillion as on 30th September
2012 to 38.42 trillion as on 30th September 2022, more than 5 fold increase in a span of 10
years.
The MF Industry's AUM has grown from 20.40 trillion as on September 30, 2017 to 38.42
trillion as on September 30, 2022, around 2 fold increase in a span of 5 years.
The no. of investor folios has gone up from 6.20 crore folios as on 30- Sep-2017 to 13.81
crore as on 30-Sep-2022, more than 2 fold increase in a span of 5 years.
On an average 12.67 lakh new folios are added every month in the last 5 years since
September 2017.

MUTUAL FUND HOUSES IN INDIA

Mutual Funds have been gaining a lot of popularity in India since past few years. Its
profitable returns and affordability are attracting many people to invest. But, when planning
to invest in Mutual Funds, most people think that a good Mutual Fund company can give a
guaranteed return. This is not actually the fact. While a good brand name can be one of the
parameters to invest, but there are many other various factors that decide the Best Performing
Mutual Funds to invest in.
Keeping such parameters in mind, the following Mutual Fund houses in India have been the
best Mutual Fund schemes by the respective AMCs.
1. SBI Mutual Fund
SBI Mutual Fund is one of the well-recognised company in India. The company is present in
the Indian Mutual Fund industry for more than three decades now. The AMC offers schemes
across various categories of funds to cater the diverse requirements of the individuals.
SBI Mutual Fund was established on 29 June 1987 as a Trust with State Bank of India (SBI)
as the sponsor and SBI Mutual Fund Trustee Company Private Limited as the Trustee. It was
registered with SEBI on 23 December 1993. On 13 April 2011, an agreement was signed
between SBI and AMUNDI Asset Management, making the fund house a joint venture.
Today, the fund house offers a wide range of mutual fund schemes across equity, debt,
hybrid, and other categories. SBI Mutual Fund has 6,47,602 crore assets under management
(AUM) as of 31 May 2022. It holds 16.82% of the industry AUM.
SBI Mutual Fund offers 142 primary schemes.
Out of these, the AMC offers 36 equity funds, 81 debt schemes, 14 hybrid schemes, and 11
others, including Exchange Traded-Funds (ETFs), index funds, and gold funds.

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2. SBI Equity Mutual Funds

The SBI Equity Mutual fund has various schemes in terms of equity, debt, and short-term
mutual funds. The names of best performing schemes are:
 SBI Small Cap Fund
 SBI Contra Fund
 SBI Technology Opportunities Fund
 SBI Magnum Midcap Fund
 SBI Consumption Opportunities Fund
 SBI Large & Midcap Fund
3. ICICI Prudential Mutual Fund House in India
This mutual fund was founded in 1993 and has its headquarters in Mumbai.
ICICI Prudential Asset Management Company Limited is the 2nd largest AMCS in the
country.
They worked an instrumental part in introducing Indian investors with mutual funds in the
last 25 years.
Many investors have chosen their products to be safe and advanced.
There is a slew of products that cater to investors from different socioeconomic settings. For
example, one can begin investing with a SIP (Systematic Investment Plan) amount' as small
as 100 with no upper limit.
The ICICI Prudential Mutual fund has various schemes in terms of equity, debt, and short-
term mutual funds. The names of best performing schemes are:
ICICI Prudential Mutual Fund Schemes
 ICICI Prudential Midcap Fund
 ICICI Prudential Dividend Yield Equity Fund
 ICICI Prudential Banking and Financial Services Fund
 ICICI Prudential Multi-Asset Fund

4. HDFC Mutual Fund

One of India's largest mutual fund houses, HDFC Mutual Fund, has Rs 4,23,716 crore assets
under management. The company was started in 1999 as a joint venture between HDFC
Limited and Investment Management Limited and became a publicly listed entity in August
2018.
The fund house has a strong position in equity investments and holds 11% of the industry
AUM. It has a retail and institutional customer base of 9.9 million live accounts as of 31st
March 2022.
HDFC Mutual fund has various schemes in terms of equity, debt, and short- term mutual
funds.

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HDFC Mutual Fund Schemes

 HDFC Small Cap Fund

 HDFC Retirement Savings Fund Equity
 HDFC Flexi Cap Fund
 HDFC Large and Mid Cap Fund
 HDFC Focused 30 Fund
5. Reliance Mutual Fund
The rellance Mutual has been set up on June-30 1995.
It gives a big 1033 funds. Reliance Mutual Fund as an AMC has a good amount of popularity
in India. They are one of India's leading mutual funds,with Average Assets Under
Management (AAUM) of Rs 2,33,628.56 Crores.
Reliance Small Cap Fund started in 2010 has returned a very high since the beginning.
Being a small-cap fund, it is considered as a high-risk fund.
Additional notice worthy funds by this AMC are Reliance Index Fund - Nifty Plan, Reliance
Regular Savings Fund Balanced and many more.
It has a presence in 300 cities over the country.
The Reliance Prudential Mutual fund has various schemes in terms of equity, debt, and short-
term mutual funds. The names best performing schemes are:
Reliance Mutual Fund schemes
 Reliance Banking Fund
 Reliance Large Cap Fund
 Reliance Multi-Cap Fund
 Reliance Floating Rate Fund Reliance Growth Fund
 Reliance Vision
 Reliance Pharma Fund
6. Franklin Templeton Mutual Fund Houses in India
Franklin Templeton is really an American financial services company that was founded in
1947.
Its Indian office was established in 1996.
The company has been a general in the mutual fund domain ever since
The rate is viewed as very good as this fund is a large-cap fund.
Added very remarkable fund with others is Franklin India High Growth Companies Fund.
This multi-cap fund begun in 2007 has returned a rate not withstanding exposing the market
crash of 2008
The Franklin Templeton Mutual Fund has various schemes in terms of equity,debt, large-cap
funds and short-term mutual funds. The name of best performing schemes are:

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Franklin Templeton Mutual Fund

 Franklin India Feeder Franklin U.S. Opportunities Fund

 FT India Feeder Franklin European Growth Fund
 Franklin India Taxshield
 Franklin India Banking & PSU Debt Fund
 Franklin India Feeder - Franklin U.S. Opportunities Fund
 Franklin India Corporate Debt Fund
 Franklin India Dynamic Accrual Fund
 Franklin India Debt Hybrid Fund
7. Birla Sun Life Mutual Fund
This AMC is a joint venture among Birla Group of India and Sun Life Financial Inc. of
Canada.
Birla Sun Life Mutual Fund was begun in 1994.
Birla Sun Life Frontline Equity Fund has returned a striking since in 2002.
This rate of performance is really great for a large-cap mutual fund.
Added very useful fund by this AMC is Birla Sun Life Tax Relief 96.
This fund is an ELSS (Equity Linked Savings Schemes) fund and assists people to save tax
under Section 80C.
The Birla Sun Life Mutual Fund has various schemes in terms of equity, debt, large-cap and
short-term mutual funds. The name of best performing schemes are:
Birla Sun Life Mutual Fund
 Aditya Birla Sun Life Equity Fund
 Aditya Birla Sun Life Frontline Equity Fund
 Aditya Birla Sun Life Corporate Bond Fund
 Aditya Birla Sun Life Balanced 95 Fund
 Aditya Birla Sun Life Credit Risk Fund
 Aditya Birla Sun Life Balanced Advantage Fund
 Aditya Birla Sun Life Low Duration
 Aditya Birla Sun Life Medium Term Plan
 Aditya Birla Sun Life Arbitrage Fund
8. UTI Mutual Fund
UTI Mutual Fund was created out of the former Unit Trust of India as a SEBI listed mutual
fund from 1 February 2003.
The comes in at 6th position as mutual fund houses in India with an AU.
UTI was established in 1963 and was India's 1st asset management company.
This AMC offers a very great 1399 mutual funds As an AMC, UTI Mutual Fund has returned
a price great over 15% over to pick from the 3 decades it has been in continuation.
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It is very good for a large-cap fund.

The UTI Mutual Fund has various schemes in terms of equity, debt, large-cap and short-term
mutual funds. The name of best performing schemes are:
UT Mutual Fund
 UTI Mastershare Unit Scheme
 UTI Banking & Financial Services Fund
 UTI Hybrid Equity Fund
 UTI Bond Fund
 UTI Credit Risk Fund
9. Kotak Mahindra Mutual Fund
Kotak Mutual Fund is a wholly owned subsidiary of Kotak Mahindra Bank Limited. It was
registered with SEBI in June 1998. The fund house has a large investor base of over 8.1
million. Based on its quarterly AUM as of Mar 2022, the fund house ranked the 5th largest
amongst all fund houses.
Kotak Mutual Fund has over 101 mutual fund schemes for investors to choose from.
Out of these, 26 are equity schemes, 63 are debt schemes, and 5 are hybrid schemes. The
others, including commodity schemes, account for the remaining 7.
Kotak Mutual Fund holds 7.33% of the industry AUM.
Some of the schemes with the highest AUM from Kotak Mutual Fund are Kotak Liquid fund,
Kotak Flexicap fund and Kotak Equity Arbitrage fund of June 2022.
Kotak Mahindra Mutual Fund has various schemes in terms of equity, debt, large - cap and
short-term mutual funds. The names of best performing schemes are:
Equity Funds invest your money in Equity and Equity related instruments.
 Kotak Small Cap Fund
 Kotak Emerging Equity Fund
 Kotak Infrastructure and Economic Reform Fund
 Kotak Tax Saver Fund
 Kotak Equity Opportunities Fund
 Kotak India EQ Contra Fund
 Kotak Bluechip Fund
 Kotak Flexicap Fund

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DIFFERENT TYPES OF MUTUAL FUND SCHEMES

The different types of Mutual Fund Schemes are studied as follows:
Mutual funds come in many varieties, designed to meet different investor goals. Mutual funds
can be broadly classified based on:
1. Organisation Structure - Open ended, Close ended, Interval
2. Management of Portfolio - Actively or Passively
3. Investment Objective - Growth, Income, Liquidity
4. Underlying Portfolio Equity, Debt, Hybrid, Money market instruments, Multi Asset
5. Thematic / solution oriented - Tax saving, Retirement benefit, Child welfare,
Arbitrage
6. Exchange Traded Funds
7. Overseas funds
8. Fund of funds

1. Scheme Classification by Organization Structure

Open-ended schemes are perpetual, and open for subscription and repurchase on a
continuous basis on all business days at the current NAV.
Close-ended schemes have a fixed maturity date. The units are issued at the time of the
initial offer and redeemed only on maturity. The units of close-ended schemes are
mandatorily listed to provide exit route before maturity and can be sold/traded on the stock
exchanges.
Interval schemes allow purchase and redemption during specified transaction periods
(intervals). The transaction period has to be for a minimum of 2 days and there should be at
least a 15-day gap between two transaction periods. The units of interval schemes are also
mandatorily listed on the stock exchanges.
2. Scheme Classification by Portfolio Management
Active Funds
In an Active Fund, the Fund Manager is 'Active' in deciding whether to Buy, Hold, or Sell the
underlying securities and in stock selection. Active funds adopt different strategies and styles
to create and manage the portfolio.
The investment strategy and style are described upfront in the Scheme Information document
(offer document)
Active funds expect to generate better returns (alpha) than the benchmark index.
The risk and return in the fund will depend upon the strategy adopted.
Active funds implement strategies to 'select' the stocks for the portfolio.
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Passive Funds
Passive Funds hold a portfolio that replicates a stated Index or Benchmark
e.g. Index Funds, Exchange Traded Funds (ETFs)
In a Passive Fund, the fund manager has a passive role, as the stock selection / Buy, Hold,
Sell decision is driven by the Benchmark Index and the fund manager / dealer merely needs
to replicate the same with minimal tracking error.
3. Classification by Investment Objectives
Mutual funds offer products that cater to the different investment objectives of the investors
such as - Capital Appreciation (Growth), Capital Preservation, Regular Income, Liquidity and
Tax-Saving
Mutual funds also offer investment plans, such as Growth and Dividend options, to help tailor
the investment to the investors' needs.
 Growth funds
Growth Funds are schemes that are designed to provide capital appreciation.
Primarily invest in growth oriented assets, such as equity
Investment in growth-oriented funds requires a medium to long-term investment horizon.
Historically, Equity as an asset class has outperformed most other kind of investments held
over the long term. However, returns from Growth funds tend to be volatile over the short-
term since the prices of the underlying equity shares may change.
Hence investors must be able to take volatility in the returns in the short-term.
 Income funds
The objective of Income Funds is to provide regular and steady income to investors.
Income funds invest in fixed income securities such as Corporate Bonds, Debentures and
Government securities.
The fund's return is from the interest income earned on these investments as well as capital
gains from any change in the value of the securities.
The fund will distribute the income provided the portfolio generates the required returns.
There is no guarantee of income. The returns will depend upon the tenor and credit quality of
the securities held.
 Liquid/ Overnight /Money Market Mutual Funds
Liquid Schemes, Overnight Funds and Money market mutual fund are investment options for
investors seeking liquidity and principal protection, with commensurate returns.
The funds invest in money market instruments* with maturities not exceeding 91 days.
The return from the funds will depend upon the short-term interest rate
prevalent in the market.

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4. Classification by Investment Portfolio

Mutual fund products can be classified based on their underlying portfolio composition
The first level of categorization will be on the basis of the asset class the fund invests in, such
as equity / debt / money market instruments or gold..
The second level of categorization is on the basis of strategies and styles used to create the
portfolio, such as, Income fund, Dynamic Bond Fund, Infrastructure fund, Large-cap/Mid-
cap/Small- cap Equity fund, Value fund, etc. The portfolio composition flows out of the
investment objectives of the scheme.
5. Solution Oriented Mutual Funds
Solution Oriented Fund is a recently introduced category of mutual funds by SEBI. It has
created an easy path for the financial planning of complex long term objectives which may or
may not need alteration in the strategy with respect to time. The schemes under this category
have been operating long before the formation of the category.
The fund manager of a solution-oriented fund is free to furbish the portfolio with equity or
debt tools and can also change the strategy for investors of different age groups. Some of the
solution oriented mutual funds also provide tax deductions.
Types of Solution Oriented Funds
Based on the investment objective, SEBI has divided solution oriented funds into two sub-
categories:
A. Tax Saving Mutual Funds
Tax saving mutual funds is just like any other mutual funds with an added tax saving benefit.
The special feature of this type of mutual fund is that the investments made in the tax-saving
mutual funds are eligible for tax benefits under section 80C of the Indian Income Tax Act.
Most of the tax saving mutual funds are ELSS schemes and make investments in the growth-
oriented equity market. The investments made in these types of funds are eligible for tax
benefits of up to 1.5 lakh.
B. Retirement Funds
Retirement mutual funds aim to provide financial assistance to the retirees by gathering the
capital during the earning age of the investor. These funds follow an aggressive style of
investment by selecting high-risk stocks in the portfolio when the investor is in the young and
earning stage. As it retirement is mostly more than 15 years away from such investors, high-
yarisk stocks add significant value to the investment allowing more capital to be built for
retirement planning.
C. Children's Funds
The children's fund aims for the financial assistance of the young ones until their education is
completed.

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D. Arbitrage Funds
Arbitrage funds are hybrid mutual fund schemes which aim to generate arbitrage profits by
exploiting price differences of the same underlying assets in different capital market
segments. These funds can also invest in debt and money market instruments.
Arbitrage is simultaneous buying and selling the same underlying security in different market
segments to make risk free profits.
6. Exchange-Traded Fund (ETF)
An exchange-traded fund (ETF) is a type of pooled investment security that operates much
like a mutual fund. Typically, ETFS will track a particular index, sector, commodity, or other
assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same
way that a regular stock can. An ETF can be structured to track anything from the price of an
Individual commodity to a large and diverse collection of securities. ETFs can even be
structured to track specific investment strategies.
7. Overseas or Foreign Fund
A foreign fund refers to a fund that invests in businesses outside the country of origin of the
investor. They can be exchange-traded funds, closed- end funds, or mutual funds. They are
sometimes referred to as international funds.
Foreign funds provide private investors with access to overseas markets. Foreign Investment
introduces risks, but it may also help investors to diversify their investment portfolios.
Foreign funds are higher-risk investments, which are typically used as a substitute for central
investments of long- term portfolios.
8. Fund Of Funds (FOF)
A 'Fund Of Funds' (FOF) is an investment strategy of holding a portfolio of other investment
funds rather than investing directly in stocks, bonds or other securities. An FOF Scheme of a
primarily invests in the units of another Mutual Fund scheme. This type of investing is often
referred to as multi-manager investment.

TYPES OF MUTUAL FUND PLANS

Mutual funds are gaining popularity among Indian investors. The reason is that these
investment avenues provide a range of benefits to investors. Such benefits include a
diversified portfolio, expert portfolio management, flexibility in investments through SIPs,
and lump sum among others.
The mutual fund industry in India is regulated by the Securities and Exchange Board of India
(SEBI). Although SEBI has categorized mutual funds based on where they invest, there are
other ways mutual funds can be classified. The different types of mutual funds in India are:

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1. Types of mutual funds based on their Structure

a. Open-ended mutual funds schemes
In open-ended mutual fund schemes, you can invest and redeem your Investments whenever
you want. There is no maturity tenure or a specific time for investment into the scheme.
Open-ended mutual funds are, therefore, liquid in nature.
b. Close-ended mutual fund schemes
Close-ended mutual fund schemes have a stipulated investment period and a specified
maturity period.
c. Interval Mutual Funds schemes
Interval Mutual Funds allow you to invest or redeem from them at intervals.
2. Types of mutual funds based on Asset Classes
a. Equity mutual funds
Equity mutual funds are those that invest at least 65% of their portfolio in equity stocks or
equity-related securities. These funds have high market risks as well as the potential to
generate high returns.
b. Equity Fund Taxation
Equity/Hybrid Mutual Funds with a minimum of 65% exposure in any of the equity
instruments at all points of time qualify for equity taxation. Long Term Capital Gains for
Equity Mutual Funds are tax-free up to INR 1 lakh of capital gains in one financial year, after
which it is taxed at 10%.
c. Debt mutual funds
Debt mutual funds are those that invest their portfolio primarily in fixed income instruments,
l.e. avenues which offer a fixed rate of interest. Debt funds, therefore, are immune to stock
market risks and offer relatively stable returns when compared to equity funds.
d. Debt mutual funds taxation:
Debt/hybrid mutual funds with less than 65% of equity exposure at any point in time qualify
for debt taxation. Debt Mutual Funds with a holding period of minimum 36 months qualify
for indexation benefit.
e. Hybrid mutual funds:
Hybrid mutual funds are those that invest their portfolio in a mix of different asset classes
like equity, debt, etc. Hybrid funds, therefore, give you diversified exposure to different
classes of assets.
f. Hybrid fund taxation:
The taxation of hybrid mutual funds depends on the asset allocation of the fund. If the fund
has at least 65% equity exposure, it would be taxed as equity mutual funds. If equity exposure
is not a minimum of 65%, the fund would be taxed as debt mutual funds.

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g. Solution-oriented Mutual Fund Schemes:

Solution-oriented mutual fund schemes are those that invest to create funds for a specific
financial need like planning for a child's education or retirement.
h. Solutions-oriented mutual fund taxation:
Taxation of solutions-oriented mutual funds depends on the asset allocation of the fund. If the
fund has at least 65% equity exposure, it would be taxed as equity mutual funds. If equity
exposure is not a minimum of 65%, the fund would be taxed as debt mutual funds.
i. Other funds:
FoFs are mutual fund schemes that invest in another fund. These are open-ended funds that
invest at least 95% of their portfolio in the chosen underlying fund. FoFs can invest in
domestic funds or international funds.
3. Type of Mutual Fund based on Investment Objectives
There are two options of mutual funds which you can choose, namely:
a. Growth Option: If you choose the Growth Option of any mutual fund scheme, the profits
made by the scheme would be invested back into the scheme for which the NAV (net asset
value) or the price of each mutual fund unit goes up. Similarly, if there is a loss, the NAV
goes down. Thus, in order to get any profit from the growth option of any mutual fund
scheme. you would need to redeem the units.
b. Dividend Option: If you choose the Dividend Option of any mutual fund scheme, the
profits made by the scheme would be distributed to the investors at regular intervals
(monthly, quarterly, or annually). The profit is deducted from the NAV (net asset value),
from the price of each mutual fund unit.
4. Type of Mutual Fund based on Portfolio Management
Mutual Funds can be categorized based on how the portfolio is managed. The two types are
active and passive mutual fund schemes.
a. Active Mutual Funds or actively managed mutual funds are those wherein the fund
manager continuously keeps looking for ways to generate better returns. The fund manager
sells and buys stocks whenever he sees an opportunity.
b. Passive Mutual Funds or passively managed funds are those wherein the fund manager
does not actively manage the portfolio. The portfolio reflects a specific Index, l.e., the money
is allocated in the exact same way as It is done in the underlying index. Any change in the
portfolio is done only if there is a change in the index composition.

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Net Asset Value (NAV)

NAV stands for 'Net Asset Value.' NAV represents the price at which a mutual fund may be
bought by an investor or sold back to a fund house.
A mutual fund's NAV is an indicator of its market value. Therefore, NAV can be viewed to
assess the current performance of a mutual fund.
By determining the percentage increase or decrease in the NAV of a mutual fund, an investor
can calculate the increase or decrease in its value over time.
A mutual fund's NAV is usually calculated by a fund accounting firm hired by the mutual
fund or the mutual fund house itself.
It is mandatory, as per SEBI guidelines, that all mutual funds publicly display their NAV by
updating it on the AMC & AMFI website on every business day.
Calculation of NAV
Net Asset Value = [Total Asset Value - Expense Ratio] / Number of Outstanding units
NAV = Market Price of Securities + Other Assets - Total Liabilities + Units Outstanding as at
the NAV date
NAV = Net Assets of the Scheme + Number of units outstanding, that is, Market value of
investments + Receivables + Other Accrued Income +Other Assets - Accrued Expenses -
Other Payables - Other Liabilities + No. of units outstanding as at the NAV date

CRITERIA FOR SELECTION OF MUTUAL FUNDS

(FACTORS FOR SELECTING A MUTUAL FUND CATEGORY)
Mutual funds are a preferred choice among investors today owing to their attractive returns
and diversified portfolio. However, as an investor one must remember that no single scheme
or set of schemes is suitable for everyone. A suitable mutual fund scheme for an investor is
the one which suits his/her investment objective and risk appetite among other factors.
Selecting a mutual fund is a 2-step process: Selection of the mutual fund category and
selection of a scheme in that category.
The following are the factors which an investor should consider while selecting a mutual fund
scheme:
1) Investment Objective:
Investment objective refers to an investor's financial goal which he/she aims to accomplish
with the mutual fund investment. The investment objective can be any short-term or long-
term financial aspiration of the investor - buying a house/car, financing children's higher
education, going on a vacation, retirement, etc.

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2) Time Horizon:
Time horizon refers to the time period for which an investor wishes to keep his/her money
invested in a mutual fund scheme. It can be either as short as 1 day or as long as more than 5
years. Different fund categories work best for different time horizons. This is because some
funds invest in shorter dated debt and others invest in longer dated debt. Equity funds should
ideally be chosen if the investment horizon is more than 5 years.
3) Risk tolerance:
Risk tolerance refers to the amount of risk an investor is willing to take with his/her invested
money. SEBI in 2015 made it mandatory for all mutual fund houses to display a riskometer
which consists of 5 levels of risk associated with the invested principal amount. The 5 risk
levels are low, moderately low, moderate, moderately high, and high.

IMPORTANT FACTORS FOR CHOOSING BEST MUTUAL FUND SCHEME

After selecting the mutual fund category on the basis of investment objective, time horizon
and risk tolerance, choose a mutual fund scheme within that category on the basis of the
following factors:
1) Performance against Benchmark
A benchmark index of a mutual fund scheme is a standard against which its performance and
stock allocation are compared. The benchmark index guides the investment philosophy of the
scheme. Thus, the asset allocation of a benchmark index should match the investment
objective of the scheme. For instance, the benchmark index of a large cap
mutual fund should be an index of large cap stocks and the benchmark of a mutual fund
focussed on banking stocks should be a banking index.
2) Performance against Category
Another factor which is equally important to assess while selecting a mutual fund scheme is
its performance in comparison to its active peer group. This helps in getting a holistic
understanding of the fund's performance. This comparison should only be among the same
type of mutual fund schemes.
3) Consistency of Performance
A good mutual fund is one which is able to generate good returns for its investors
consistently over a period of time and not just whirlwind returns. The fund should be capable
of providing consistent returns in both bullish and bearish periods of the stock market.
4) Fund Manager's Experience
Another important factor to be considered while selecting a mutual fund is the performance
of its fund manager and how long he/she has been at its helm. For this, an investor should
look at the fund manager's experience with the fund in question and with other funds
currently managed or managed in the past by him/her.

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5) AMC Track Record

An Asset Management Company (AMC), also known as fund house, is the company which
manages a mutual fund scheme. For example, HDFC Mutual Fund is the name of the AMC
which manages schemes like HDFC Equity HDFC Top 100 or HDFC Small Cap Fund. Many
decisions are made at AMC level by the Chief Investment Officer (CIO) of the AMC. A
poorly selected stock is often present in several schemes owned by an AMC, because the
selection has been made at AMC level. Thus, it is important to check the track record of an
AMC while selecting a mutual fund scheme.

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FOUNDATION FOR FINANCE QUESTIONS

A. Two Marks Questions
1. What is Finance?
2. What is planning?
3. What are your life goals?
4. What are your financial goals?
5. Define Economics
6. What do you mean by the term Income?
7. What is meant by Bank?
8. State any two types of Bank Deposits?
9. What are the Primary functions of Bank?
10. Expand PMUDY& RTGS
11. What is meant by a Debit Card?
12. Give the meaning of Credit Card
13. What is Digital Payment?
14. What is Internet banking?
15. Expand NEFT & IMPS
16. Expand UPI & AEPS.
17. What is meant by Mobile Banking?
18. Give the meaning of Mobile Wallet
19. What do you mean by Present Value of Money?
20. What do you mean by EPS?
21. What is P/E Ratio?
22. State any two differences between Compounding and Discounting

B. Six Marks Questions

1. Briefly explain the need for financial planning.
2. Give a brief account of life goals and financial goals
3. Chart down a format a sample financial plan for a young adult.
4. What is the scope of Economics?

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5. Explain the types of Bank Deposits.

6. Give a brief note on PMIDY
7. Differentiate between traditional and new banking models.
8. Differentiate between Debit and Credit Cards
9. Distinguish between Internet Banking and Mobile Banking
10. Explain the model for reading financial statements
11. Explain the Concepts of Compounding and Discounting.

C. Ten Marks Questions

1. Explain the key influencing factors for decision making both micro & macro environment.
2. Explain a) NEFT, b) RTGC c) IMPS, d) UPI and e) AEPS.
3. Explain in brief the basic ratios for evaluating companies while investing.

INVESTMENT MANAGEMENT QUESTIONS

A. Two Marks Questions
1. Define the term Investment.
2. What is the meaning of Investment?
3. What do you mean by Liquidity?
4. Give the meaning of Risk Profile?
5. What is Insurance?
6. What is Life Insurance?
7. What is General Insurance?
8. Expand PMLVMY & PMKMDY.
9. What do you mean by Share?
10. What is Share Market?
11. What is equity?
12. What is debt security?
13. Give the meaning of Mutual Funds.
14. What is Stock Exchange?
15. What is Primary Market?

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16. What is Secondary Market?

17. What is Bond?
18. What is a Demat Account?
19. What do you mean by Depository Participant?
20. What do you mean by Risk and Return?

B. Six Marks Questions

1. Briefly explain goals of Investment.
2. Briefly explain the factors that influences the investors risk profile.
3.Explain in brief risk measurement tools.
4. Write a note on retirement planning.
5. Write a note on NPS.
6. Explain PMSYM.
7. Explain PMLVMY.
8. Explain in brief Atal Pension Yojana.
9. What are the features of Stock Exchange?
10. Write a note on NSE and BSE.
11. Differentiate between primary and secondary market.
12. Briefly explain the stock exchange operations.

C. Ten Marks Questions

1. Explain the factors influencing the investment decision.
2. What is Insurance? Explain the Various of Types of Insurance.
3. Explain the various investment options available for investors in securities market
4. Explain the functions of Stock Exchange.
5. Explain the Redressal Mechanism of Investors Grievances.
6. Explain the stock selection analysis.

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MUTUAL FUNDS AND FINANCIAL PLANNING QUESTIONS

A. Two Marks Questions
1. What is the meaning of Mutual Fund?
2. What do you mean by NPV?
3. Give the Mutual Fund Performance Measure indicators
4. What is Alpha measurement in Mutual Fund?
5. Give the meaning of R-squared measurement in Mutual Fund
6. What is a Financial Plan?
7. What is the meaning of Crowd Sourcing?

B. Six Marks Questions

1. Briefly explain features of Mutual Fund
2. Briefly explain Criteria for Selection of Mutual Funds
3. Briefly explain Steps in Financial Planning

C. Ten Marks Questions

1. Explain the History of Mutual Funds in India
2. Explain the Mutual Fund Houses in India
3. Briefly explain different types of Mutual Fund Schemes

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PRACTICAL MODULE
1. Spreadsheet Modeling

A) IF Function
The IF Function is a premade function in Excel, which returns values based on a
true or false condition, as it allows to make logical comparisons between a value
and what we expect.
= IF(logical_test, [value_if_true], [value_if_false])

B) SUM Function
The SUMFunction is a premade function in Excel, which adds numbers in a range.
= SUM(select the range)

C) AVERAGE Function
The AVERAGE Function is a premade function in excel, which calculates the
average (arithmetic mean).
= AVERAGE(select the range)

D) VLOOKUP Function
The VLOOKUP Function is a premade function in excel, which allows searches
across columns. It is used to find things in a table or a range by row.
= VLOOKUP(lookup_value, table_array, col_index_num, [range_lookup])

Lookup_value: Select the cell where search values will be entered.

Table_array: The table range, including all cells in the table.
Col_index_num: The data which is being looked up. The input is the number of
the column, counted from the left.
Range_lookup: 0 for Exact match, 1 for Approximate match.

E) MAX Function
The MAX Function is a premade function in excel, which finds the highest number
in a range.
= MAX(select the range)

F) MIN Function
The MIN Function is a premade function in Excel, which finds the lowest number
in a range.
= MIN(select the range)

G) NPV Function
NPV (Net Present Value) is a financial formula used to discount future cash flows.
=NPV(rate, value1, [value2],…)

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2. Statistical Functions in Excel

A) MEDIAN Function:
The Median function is a premade function in Excel, which returns the middle value
in the data.
=MEDIAN(select the range)

B) MODE Function:
The Mode function is a premade function in Excel, which is used to find the number
seen most times.
=MODE(select the (table) range)

C) STANDARD DEVIATION Function:

The STDEV.S Function is a premade function in Excel, which calculates the
Standard deviation (Std) for a sample. Standard deviation is a measure of the
amount of variation or dispersion of a set of values.
=STDEV.S(select the range)

Dividend Discount Model (DDM)

The Dividend Discount Model, also known as DDM, is in which stock price is calculated based
on the probable dividends that one will pay. They will be discounted at the expected yearly
rate. It is a way of valuing a company based on the theory that a stock is worth the discounted
sum of all of its future dividend payments. In other words, it is used to evaluate stocks based
on the net present value of future dividends.
Formula
Dividend Discount Model = Intrinsic Value = Sum of Present Value of Dividends +
Present

Dividend Discount Model Example

In this dividend discount model example, assume that you are considering the purchase of a
stock which will pay dividends of $20 (Dividend 1) next year and $21.6 (Dividend 2) the
following year. After receiving the second dividend, you plan on selling the stock for $333.3.
What is the intrinsic value of this stock if your required retur In 15%?
Solution:
One can solve this dividend discount model example in 3 Step: -
Step 1 - Find the present value of dividends for years 1 and 2.
 PV (year 1) = $20/((1.15)1)
 PV(year 2) = $20/((1.15)2)

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 In this example, they come out to be $17.4 and $163, respectively, for 1st and 2nd-year
dividends.
Step 2 - Find the present value of the future selling price after two years.
PV(Selling Price) = $333.3 / (1.15)2
Step 3 - Add the present value of dividends and the present value of the selling price.
$17.4+ $16.3+ $252.0 = $265.8

1. Zero-growth Dividend Discount Model

The zero-growth model assumes that the dividend always stays the same, i. e., there is no
growth in dividends. Therefore, the stock price would be equal to the Annual dividends divided
by the required rate of return.
Stock's Intrinsic Value = Annual Dividends / Required Rate of Return

Zero Growth Dividend Discount Model - Example

If a preferred share of stock pays dividends of $1.80 per year, and the required rate of return
for the stock is 8%, then what is its intrinsic value?
Solution:
Here, we use the dividend discount model formula for zero growth dividends
Dividend Discount Model Formula = Intrinsic Value = Annual Dividends/ Required Rate of
Return
Intrinsic Value = $1.80/0.08 = $22.50.
The shortcoming of the model above is that you would expect most companies to grow over
time.

2- Constant-Growth Rate DDM Model

The constant-growth dividend discount model or the Gordon Growth Model assumes dividends
grow by a specific percentage each year.
The constant-growth dividend discount model or DDM model gives us the present value of an
infinite stream of dividends growing at a constant rate.

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Constant-growth Dividend Discount Model- Example 1

If a stock pays a $4 dividend this year, and the dividend has been growing 6% annually, what
will be the stock's intrinsic value, assuming a required rate of return of 12%?
Solution:
D1 $4 x 1.06 = $4.24
Ke = 12%
Growth rate or g = 6%
Intrinsic stock price = $4.24 / (0.12 - 0.06) = $4/0.06 = $70.66

EXERCISES ON CALCULATION OF NET ASSETS VALUE

1. Find NAV per unit?
Name of the Scheme Money Plant
Size of the Scheme Rs. 100 Lacs

Face Value of the Share Rs. 10

Number of the outstanding shares Rs. 10 Lacs
Market value of the fund's investments Rs. 180 Lacs
Receivables
Accrued Income Rs. 1 Lakhs
Receivables Rs. 1 Lakhs
Liabilities Rs. 50000
Accrued expenses Rs. 50000

Solution:
NAV per unit = (Investment+Recoverable+Accrued Income-Liabilities-Accruedexp) / No of
units(mutualfund)
= (180 lacs+1 lacs+1 lacs - 0.50 lacs - 0.50 lacs) / 10 Lacs
= Rs. 18.10 per unit

2. A Mutual fund that had a NAV of 20 at the beginning of month made income and capital
gain distribution of Re.0.0375 and Re.0.03 per share respectively during the month, and then
ended the month with a NAV of Rs. 20.06. Calculate monthly return.
Solution:
Given, NAV0 = 20; NAV1 = 20.06; D1 = 0.0375; Capital Gain 1 = 0.03
% Monthly Return = (NAV1 + Dividend + Capital gain – NAV0) / NAV0
% Monthly Return = (20.06 + 0.0375 + 0.03 - 20) / 20
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= 0.006375 = 0.6375%
Annual Return = 0.6375*12 = 7.65% p

3. An investor bought units of a mutual fund for Rs. 20.425. At the end of the year, the worth
of his holding was Rs. 21.85 and he had received a dividend of 17.5%. Using the simple total
return method, compute his return.
Solution:
NAV0 = Rs. 20.425; NAV1 = Rs. 21.85; D1 = Rs. 10 * 17.5% = Rs. 1.75; Capital Gain 1 =
Rs.0
% Return = (NAV1 + Dividend + Capital gain – NAV0) / NAV0
% Return = (21.85 +1.75 +0 - 20.425) / 20.425 = 0.155447 = 15.54%

4. A has invested in three Mutual Fund Schemes as per details below:

Particulars MF-A MF-B MF-C
Date of Investment 01.12.03 01.01.04 01.03.04
Amount of investment 50,000 1,00,000 50,000
Net Asset Value (NAV) at entry date Rs. 10.50 Rs. 10 Rs. 10
Dividend received upto 31.03.04 Rs. 950 Rs. 1,500 Nil
NAV as at 31.03.04 Rs. 10.40 Rs. 10.10 Rs. 9.80
Required: What is the effective yield on schemes to Mr.A upto 31.03.04?
Solution:
MF-A MF-B MF-C
Amount Invested 50,000 100000 50,000
N.A.V. at entry Date 10.50 10 10
No of units purchased 4761.90 10,000 5,000
Total Dividend received 950 1500 Nil
Dividends per units 950/4761.90 1500/10,000 -
= 0.1995 = 0.15
N.A.V. at end of year = Re.10.40 Re.10.10 Re.9.80
% periodic return (10.40+0.1995- (10.10+0.15 - (9.80+0-10) / 10
10.50) / 10.5 10) / 10 =
= 0.9476% 2.5% = -2%

Period Dec – March Jan-March March

= 4 month = 3 month = one month

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Annualised Return 0.9476*12/4 2.5 * 12/3 (-2)*12%

= 2.8428% = 10% =(-) 24%

5. A Mutual Fund having 300 units have shown its NAV of Rs. 8.75 and Rs. 9.45 at the
beginning and at the end of the year respectively. The Mutual Fund has given two options:
(a) Pay Rs.0.75 per unit as dividend and Rs.0.60 per unit as a capital gain.
Or
(b) These distributions are to be reinvested at an average NAV of 8.65 per unit.
(c) What difference it would make interms of return available and which option is preferable?
Solution:
a) Option-1 if Dividend is paid
NAV0 = Rs. 8.75; NAV1 = Rs. 9.45; D1 = Rs. 0.75; Capital Gain1 = Rs.0.60
% Total return = (NAV1+ Dividend distribution + capital gain distribution- NAV0) / NAV0
= (9.45+0.75 + 0.60 - 8.75) / 8.75 = 0.2342 = 23.42%
b) When all dividends and capital gains distributions are re-invested into additional
units of the fund (Rs. 8.65 unit)
Dividend + Capital Gains per unit = Re. 0.75+ Re 0.60 = Rs. 1.35
Total Amt received from 300 units = Rs. 1.35 x 300 = 405/-
Additional Units Acquired = Rs. 405 / Rs. 8.65 = 46.82 Units.
Total No of Units at the end of the year = 300 units + 46.82 units = 346.82 units.
Closing Value of 346.82 units held at the end of the year = 346.82*9.45 = Rs. 3277.45
Price Paid for 300 Units at the beginning of the year = 300 * 8.75 = Rs. 2,625.00
%Return on units of MF = (Closing Investment - Opening Investment)/ Opening Investment
% of Return
= (3277.45 - 2625.00) / 2625 = 0.24855 = 24.855%
Conclusion: Since the holding period reward is more in terms of percentage in option two
i.e., reinvestment of distributions at an average NAV of Rs. 8.65 per unit, this option is
preferable.

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6. Orange purchased 200 units of Oxygen Mutual Fund at Rs.45 per unit on 31.12.2009. In
2010, he received Rs.1 as dividend per unit and a capital gains distribution of Rs.2 per unit.
(i) Calculate the return for the period of one year assuming that the NAV as on 31.12.2010 was
Rs.48 per unit.
(ii) Calculate the return for the period of one year assuming that the NAV as on 31.12.2010
was Rs.48 per unit and all dividends and capital gains distributions have been reinvested at an
average price of 46 per unit.
Ignore taxation.
Solution:
NAV0 = 45; NAV1= 48; D1 = 1; Capital Gain1 = Rs. 2
% Total return = (NAV1+Dividend distribution+capital gain distribution – NAV0)/ NAV0
= (48 +1+2 - 45) / 45 = 0.1333 =13.33%

(ii) Total Dividend and Capital gain = (1+2)*200 = Rs. 600

No of units purchase by investing dividend and capital gains = 600/46 = 13.04
Total no. of Units at the end of the year = 213.04
NAV at the end of the year = Rs. 48
Closing Value of Investment at the end of the year = 213.04 * 48 = Rs. 10225.92 Purchase
price of 200 units at the beginning of the year = 200*45 = Rs. 9000
%Return on units of MF = (Closing Investment - Opening Investment)/Opening Investment
% of Return
= (10225.92 - 9000) / 9000 = 13.62%
Closing Value of 10000 units = 115000 +100000 - 10000 = Rs.205000
NAV as on 31.03.2001 = Value of Investment No. of units = 205000/10000 = Rs. 20.05
If Dividend is reinvested on 31/03/2001 at NAV = Rs. 20.05
Therefore, no. of units as on 31.03.2001 = 215000/20.05 = 10487.80

For the year 2001-2002

Dividend as on 31.03.2002 = 20% =10,487.80*10x20%= Rs. 20,975.60
No. of Units sold on 31.3.2003 = 11296.11
Hence no. of units purchased during 2001-02 by reinvesting dividend of 2001-02 = 11296.11
- 10487.80 = 808.31 units

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Therefore, NAV as on 31.03.2002 = Amt of Dividend / No. of Units purchased = 20975.6 /

808.31 = Rs. 25.95

For the year 2002-2003

As per Suggested
Annualised Return = 73.52% [Assuming for the period 01/07/2000 to 31/03/ 2003]
Value of Investment as on 01/07/2000 = Rs. 100000
Value of Investment as on 31/03/2003 = ?
Return for the period 01/07/2000 to 31/03/2003 = 73.52 * 33 / 12 = 202.18
Return = (Value of Investment at end of period - Value of Investment at beginning of
period)/Investment at the beginning of period
Value of Investment at end of period - 100000/100000= 2.0218
Value of Investment at end of period = 2.0218*100000+100000 = 302180
NAV as on 31/03/2003 = Value of Investment at end of period / No of Units
= 302180 / 11296.11 = 26.75

7. A close ended MF is listed at BSE. Its market price is 50 per unit. The as sets under the
management of the MF are worth 480m and the liabilities are Rs.1m. The number of units
outstanding are 10m. What is NAV of the unit of MF? What is premium or discount over
NAV?
Solution:
Value of all Assets of MF = Rs. 480 m
Value of liabilities of MF = 1m
No. of Units of MF = 10m
NAV = Assets – Liabilities / No of Units = (480-1)/10 = Rs. 47.90
The market price = Rs. 50
Premium over NAV = Rs. 50 - 47.90 = 2.10
% of premium over NAV = 2.10/47.90 = 4.38%

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8. Mr A invested Rs. 1000 in close ended MF. NAV at the time of investment was Rs. 15 and
it was being traded in the stock exchange at a premium of 1%. During the year the fund paid
a dividend of Rs. 2 per unit. The investor sold the investment in the stock exchange after
receiving the dividend. His return is 20% p.a. Assume that at the time of sale in the stock
exchange i.e., six months after the date of investment, the units were being traded in the
market at 2% discount. What was the NAV at the time of sale.
Solution:
NAV on the date of Investment = Rs.15
Premium on NAV = 1%
Market price of Unit = 15*1.01 = Rs. 15.15
No of units purchased = Amt of Investment / Market Price
= 1000/15.15 = 66.0066 units
Return of Investor p.a. = 20% p.a.
His return for 6 months = 20/2 = 10%
The wealth would be at the end of six months period
= Investment*(1+Return)=1000*1.1
= 1100
Dividend per unit = Rs. 2
Dividend received by investor = 2*66.0066 = Rs.132
Sale proceeds of 66.0066 units = 1100-132 = Rs. 968
Sale proceeds of per units= 968/66.0066 = 14.67 = Market Price of Unit Discount on NAV
on the date of sale = 2%
NAV = Market price/(1-DR) = 14.67/(1-0.02) = 14.96

9. Mr. Deore invested Rs. 25,000/- to purchase 2,500 units of ICICI MF - B plan on 4th April
2007. He decided to sell the units on 14th Nov. 2007 at NAV of Rs. 16.4/-. The exit load was
2.5%. Find his profit (Calculations are upto 2 decimal points).
Solution:
No. of units = 2500, purchase cost = Rs.25,000/-
NAV on the date of sale = RS. 16.4/-,
Exit load = 2.5% = of 16.4 = 0.41
Selling price of 1 unit = 16.4 - 0.41 = 15.99
Sale value = 2500 x 15.99 = Rs. 39,975/-

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Profit = 39,975 - 25,000 = Rs. 14,975

10. Ragini invested Rs. 94,070/- in mutual Fund when NAV was Rs. 460/- with entry load of
2.25 %. She received a dividend of Rs. 5/- per unit. She, later sold all units of fund with an
exit load of 0.5 %. If her gain was Rs.1654/-, find NAV at which she sold the units.
(Calculations are upto 2 decimal points)
Solution:
Purchase price of one unit = 460 + 2.25% of 460
= 460 + 10.35 = 470.35
No. of units purchased = 94,070 = 200 470.35
Total dividend = 200 × 5 = 1000
Gain = Profit + Dividend
1654 = Profit + 1000
Profit = 1654-1000= 654 While selling let NAV of one unit be y
Sale price of one unit = NAV - exit load = y - 0.5% of y = 0.995 y
Sale price of 200 units = 200 x 0.995 y= 199 Y
Also, profit = Total sale - Total purchase 654 = 199 y - 94,070
199y = 654 + 94,070
199y = 94724
Y = 476
NAV at which she sold units = Rs. 476/-

11. If a mutual fund had NAV of Rs. 28/- at the beginning of the year and Rs. 38/- at the end
of the year, find the absolute change and the percentage change in NAV during the year.
NAV at the beginning = Rs. 28/-
NAV at the end = Rs. 38/-
Absolute change in NAV = in 38 - 28 = Rs. 10/-
% change = Absolute change x 100 = 10 x100 = 35.71
% NAV at the beginning 28 Example 14
If NAV was Rs. 72/- at the end of the year, with 12.5 % increase during the year, find NAV
at the beginning of the year.

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Solution:
Let 'x' be the NAV at the beginning of the year.
Absolute change in NAV = 12.5 % of x = 12.5x , x = 0.125 x 100
NAV at the end of the year = x + 0.125 x
= 1.125x
1.125 x = 72 / 4"
x = 72 / 1.125 = 64
NAV's initial value was Rs. 64/-

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MODEL QUESTIONS & ANSWERS

Module 1: Foundations for Finance
SECTION-A (2 Marks)
1. What is Finance?
It is the study of money and investment which explain the fundamentals of investment,
banking, capital market etc.
2. What is money?
It is anything that serves as a medium of exchange which is widely accepted as a means of
payment.
3. What do you mean by financial plan?
It refer to the evaluation of the current and future financial state of a person or entity which
gives picture to create strategies for achieving short and long term plans.
4. What is time value of money?
It is a fundamental financial concept which states that the value of money at present time is
greater than a reliable promise to receive the same amount of money at a future date.
5. Define Interest.
Interest is the charge on loan borrowed from financial institutions. It is expressed interms of
percentage per year.
6. What is simple interest?
It is the cost of borrowing money without accounting for the effects of compounding which
means that it is a tool that calculates the interest on loans or savings without compounding.
7. What is compound interest?
It is the addition of interest to the principal sum of a loan or deposit. This indicate the interest
calculated on the principal and interest accumulated over the previous.
8. What is discounting?
It is the act of estimating the present value of a payment that is to be received in the future
which takes into account the time value of money.
9. What is Annuity?
It is a fixed amount of money paid to someone every year until their death or insurance
agreement that provide the money that is paid.
10. What is perpetuity?
It is a stream of cash flows that never terminates. It is a security t pays for an infinite amount
of time.
11. What is cash inflow?

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It is the money going into the business which could be from sales, investments or financing.
12. What are securities?
These are financial instruments that hold some kind of monetary value. These can stocks or
bonds that can be bought, sold and traded.
13. Give the meaning of Fixed-income securities.
It is an investment that provides a return in the form of fixed periodic interest payments and
eventual return of principal at maturity.
14. What are debentures?
It is a debt instrument that may or may not be secured by any collateral which is issued by
govemment or Public company to finance. It is a long term capital investment projects.
15. What are preference shares?
These are also called as preferred stocks, which enable preference shareholders to receive
dividends before ordinary shareholders.
16. What are equity shares?
These are popular investment options among investors which represent a fractional
ownership in a company listed in the stock market.
17. What is dividend?
A dividend is a share of profit and retained earnings that a company pays out to its
shareholders and owners.
18. What is dividend capitalization?
These are dividends due on the preferred shares which are capitalized by adding them to the
stated price of the preferred shares.
19. What is capitalization of earnings?
It is the process of estimating the value of a company through its present earnings and cash
flow that help estimate the company's future earnings and profits.
20. Mention the types of money?
The types are
 Currency (bills and coins) issued by government.
 Fiat currency.
 Substitutes.
21. What is earnings capitalization?
It is a method used to value a business by deriving the net present value of its projected future
earning based on current earnings and expected future performance.
22. Give the meaning of financial goals of an individual?

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These are the targets set by an individual to achieve financial milestones or plans which they
try to achieve it within a time frame.
23. What is Discounting?
It is the current worth of cash which has to be received in future with one or more payment
this has been discounted at a market rate of interest.
24. What is compounding?
It is the process of determining the future value of present money. It involves investing
money, reinvesting the interest earned and finding value at the end of specified period.
25. What is the difference between ordinary annuity and annuity due?
Ordinary annuity: In this inflow or outflow of cash fall due for payment at the end of the
each period. Payment belongs to the period preceding its date. It is appropriate for payments
Ex: Issuer of coupon bonds usually pay interest at the end of every 6 months until the
maturity date.
Annuity due: It is the series of cash flows occurring at the beginning of each period.
Payment belongs to the period following its date. It is appropriate for receipts
Ex: Payment of rent, lease etc.
26. What is fixed income security?
Its an investment that provides a return in the form of fixed periodic interest payments
andeventual return of principal at maturity.
Ex: Bonds, money market, preference shares.
27. Name the types of bank deposits.
They are Fixed deposit, recurring deposit, Current account and Saving deposit.
28. What is present value of single cash inflow?
It refers to how much a single cash flow in the future will be worth today and is calculated by
discounting the future cash flow for given time at a specified discount rate.
29. What is security valuation?
It is the process of determining current worth of an asset or company in which regulators
evaluate the safety and risk associated with securities.

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SECTION-B (6 Marks)
1. Name the properties of money.
Ans. The properties of money are:
 It is the medium of exchange of which allow the people to satisfy their needs.
 It is portable and dividable so that a worthwhile quantity can be carried on one's
person.
 It is a unit of account-a socially accepted standard unit with which things are priced.
 It is durable to retain its usefulness for many future exchange.
 It is recognizable.

2. Explain the different types of money.

Ans: Following are types of money.
i) Fiat money: The form of money issued by a government and is not guaranteed by a
tangible goods like gold and silver.
Ex: INR. pounds etc
ii) Crypto currencies: These are an electronic medium of exchange that exists virtually and
has opportunities for international exchanges.
iii) Fiduciary money: It will be used as a means of trade determines its value.
iv) Commodity money: It is the oldest kind whose value is described by the actual value of
the commodity itself.
v) Paper money: It refer to the bank notes and government notes which are used as money.

3. Explain the need for money.

Ans: The money is required for the following purpose.
 It serves as a medium of exchange: It is acts as intermediary between the buyer and
seller to facilitate transactions. Regardless of whether they desire each others goods
and services.
 It serve as store of value: It is an easily transported store of value that is available in
a number of convenient denominations. To be a medium of exchange it must hold its
value over time.
 It serves as unit of account: Money can be measured based on goods and ser- vices
it can buy which means that it can be used to set price for goods that people want to
consume.
 It serves as a standard of deferred payment: It is usable today to make purchase
amd that will be paid in the future.

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4. Name the types of financial goals of an individual.

Ans. There are 3 types. Namely
i. Short term goals: These are the goals that an individual wants to achieve in less than 3
years which are required for immediate expenses. Ex: Student tution fee or buying a car.
ii. Medium term goals: These are the goals with an achievement target of 3-10 years which
are critical for evaluating your progress against long term goals. Ex: Buying a house or
investing in stocks.
iii. Long term financial goals: These goals require more deliberation, diligent plan- ning,
execution and patience. They require more than 10 years to accomplish. Ex: Retirement or
funding higher education.

5. What are the characteristics of sound financial plan?

Ans: Sound financial plan should be
 Simplicity: It should be simple and easy to understand and manage which should
consider technological changes, resources and other factors.
 Flexibility: It should be flexible to adapt changes with a minimum of delay to meet
changing condition in the future.
 Uniformity: It should be prepared by considering organization structure.
 Economy: It should reduce the expenses involved in underwriting commission, dis-
count, brokerage etc. It should also ensure average cost of capital should be minimum.
 Liquidity: It should be maintain necessary liquidity. This shows the capacity of the
business to pay its operating expenses and short term debts in time.
 Use of resources: It should be prepared to make best use of resources which is
possible when capital requirement are estimated correctly.

6. Name the factors influencing financial planning.

Ans. The factors are
 Objectives: The objectives of financial planning whether consistent with the
objectives of organization or not affect the business. If it is consistent it helps in
raising funds at reasonable cost.
 Inflation rate: Financial planning will be at risk and cause loss in the situation like
increase in interest rate, decrease in share price, less interest on saving account etc.
 Requirement of business: Financial requirement of the business for the present and
future days affect financial planning.
 Risk profile: The ability of a person or business in taking risk will influence
developing financial plan. Even risk investments are usually taken by youth which
represent age factor.
 Economic growth: The financial plans are depend on economic growth of a
country.The stock prices will be high, moderate interest rate during economic
progress and vice versa.
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 Global issues: Rise in price of oil may cause inflation which cause ups and down in
our stock market and impact financial planning.

7. Explain the importance of Time value of money.

Ans. Its importance are
 It is possible to take better financial decisions in uncertainty situation using time value
of money.
 It helps individual in choosing the best investment proposal .It helps to decide to
accept or reject the proposal for investment.
 Having money right now is more valuable than getting the same amount in future. In
business t money can be used for expansion which can generate more money.
 To find feasible time period to get back the original investment or to earn expected
rate of return.
 It helps in determining wage and price fixation.
 It helps in comparing projects which are similar in nature.
 It is possible to assess the debt position of a business.

8. A sum of Rs 10000 is borrowed by Anil for 2 years at an interest of 10% compounded

annually. Find the compound interest and amount he has to pay at the end of 2 years.
Ans: Given: Principal =10000, rate = 10%, Time = 2years
Amount (A2) = P (1+R/100)2
= 10000 (1+10/100)2
=10000(11/10)(11/10)
= Rs. 1
Compound Interest (for 2 year) = A2 – P
= 12100 – 10000
= Rs. 2100
9. Write a note on Annuity.
Ans: An annuity is a series of even cash flows. A series of payments or receipts of equal
amounts is known as annuity. That means it is a stream of cash flows (inflow or outflow)
over a specified period of time which exist from the beginning of a year.
Ex: Recurring deposit account, loan repayment in fixed EMIS.
Future value of annuity: It is the sum of future value of Re.I for the given period of time
duration at the given rate of interest.
Formula: Here.
FVra = Future value of a Regular Annuity

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FVad = Future value of Annuity Due

A = Amount of periodic payments or receipts
r = Interest rate or profit rate
n = Number of payments or receipts
Present value of an annuity: It is the sum of present value of Re. 1 for the given period of
time duration at the given rate of interest.

10. What are the types of annuity?

Ans: They are
 Immediate annuities: These are the payments or receipts which are made at the end
of each period. Here the premium is paid in a lump sum and not multiple number.
 Deferred annuity: These are the payments or receipts which starts after a certain
number of years. This happens when a person retire. In mean time investment grows
on a tax deferred basis.
 Fixed annuity: This type of annuity spreads out payments over a fixed period. With
this annuity the age, health of annuity holder do not affect the amount of the
payments.
 Variable annuity: It provides based on performance of sub accounts that fund the
annuities growth. Sub accounts work in a similar way to mutual funds .
 Immediate annuity: These are the receipts or payments which are made at the end of
the each period. re premium os paid in a lump sum and not multiple number of times.

11. Write a note on present value of single cash flow.

Ans: It is also called as annuity which represent a series of equal cash flows that occur at
regular intervals for a finite period of time. These are essentially a series of constant cash
flows that are received at a specified frequency over a fixed time period. The common
payment frequencies are yearly, semiannually, quarterly and monthly. There are 2 types of
annuities. (Ref question no 25, sec A)
The formula for calculating present value of single cash flow is,
PV=FV/(1+r)n
Where (1+r)n is present value interest factor which is known as discounting factor.

12. Write a note on present value of series of cash flow.

It is used to obtain the initial/current worth of a series of cash flow to be invested for some
years at a prevalent rate of interest.
Ex: Money to be invested today to meet rent payment liabilities for next 5 years.

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Formula: PV = A[[1- (1+r) - N] / r)

Where A is the amount paid per year for a period of N years.
It consists of Uniform and non-uniform series.
Annuity is divided into 3 types:
 Ordinary annuity
 Annuity due
 Perpetuity
Ex: Dividend paid by a company on its share for a lifetime
The formula for calculating present value of a single future cash flow maybe extended to
compute present value of series of equal cash flow as given below
Po = De / Ke
Po = Current price of shares.
De = Expected annual cash flow.
Ke=Capitalisation rate.
Present value of a series of unequal cash flows:
Cash flow are unequal because profit of a firm for instance which culminate into cash flows
are not constant year after year.
Po = Dn / (Ke-g)
Where, Po = Current price of shares.
Dn = Dividend for N number of years
Ke = Capitalisation rate
G = Growth rate

13. Find out the present value of Rs 3,000 received after 10 years if discount rate is
10%,r = 10%.
Solution: r =10%, n-10 years
PV = FV/(1+r)n
PV = 3000(1+10)10
PV = 3000(.386) = Rs 1,158

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14. Find out the present value of a 5years annuity of Rs 50,000 discounted at 8%.
Solution: r=8%, n=5years, PV=50,000
PV = A[(1+r)n-1/r(1+r)n]
= 50,000(1.08)5-1 / 0.8(1.08)5
= 50,000(3.993)
= Rs. 1,99,650

15. Why do we need to calculate valuation of securities?

Ans: Valuation of securities is needed for the following reasons .
 To ensure that we are paying a fair price for the investment.
 To determine the rate of return that we need to receive to break even on our
investment.
 To determine intrinsic value and to make investment decision.
 To value the fair market value of a financial instrument at a particular time.
 To determine profitability of the business and its future market value.

16. Apple stock on 28/03/2019, was trading $188.72 per share. The company's stock
buyback program has lowered the share outstanding from over 6 billion to
4715,280,000. Calculate market equity of capitalization.
Market value of equity = Stock price * share outstanding
= 188.72 * 4,715,280,000
= $889,867,641,600

17. Write a note on valuation of preference shares.

Ans. Preference shares pay a constant dividend which is the percentage of the face value of
the shares. Dividend on preference shares is assumed to be perpetual payments. To value a
perpetuity, take the annual return and divide it by an appropriate discount rate. If preferred
stocks have fixed dividend, then the value can be calculated by discounting each of these
payments to the present day It is calculated using the formula.
Value (Preference Share) = D/r
Where D is annual dividend
r = investors required rate of return.
Factors to be considered in valuation of preference shares

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 Ability of the company in paying the liquidation preference upon exit to the preferred
share holders.
 Existence of voting rights for the preference shares and control of the company over
it.
 If preferred shares have any redemption rights.
 Dividend rate and liquidation preferences.

18. ABC Ltd has issued Rs 100 preference share on without it pays a dividend of Rs 9.
Assume this share yielding dividend of 11%. What is the value of preference share.
Ans: The preference dividend of Rs 9 is perpetuity
P = D/r
= 9/0.11
P = Rs 81.82

19. If current price of a preference share of a company is Rs 60 and annual dividend is

Rs 4. What is the yield on preference share?
Ans: r =D / p
= 4 / 60
r = 6.67%
20. The dividends of a company are Rs 50, Rs 75, Rs 100 in the first 3 years and
required rate of return is & % per annum. What is the share value?
Ans: P = D/(1+r)1 +D/(1+r)² +D/(1+r)3
= 50/(1+0.07)1+75/(1+0.07)2+ 100/(1+0.07)3
= 50/1.07 +75/1.1449 + 100/1.225043
= 46.7289 +65.5079 +81.6297
= 194

21. Write a note on valuation of equity shares.

Valuation of equity shares can be made on the basis of the assets of the company, It is known
as asset-backing method. The shares are valued on the basis of real internal value of the
assets of the company. After reduction of preference share capital value from net worth of the
company we get value of company to the equity share holders This method may be made
either on a going concern basis or on. Break-up value basis.

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22. Amon 2 companies find which one has got high equity value
Particulars Company A Company B

Total shares outstanding 1000000 100000

Share price 50 5000

Solution: Equity value = Total shares outstanding*current share price

Company A
Equity value = 10,00,000 X 50
= 5,00,00,000
Company B
Equity value = 100,000 X 5000
= 50,00,00,000
Equity value for company B is higher than company A.

23. How is the value of a debenture calculated?

The value of debenture is computed using simple formula which is the sum of present value
of all the coupons Payments and the final redemption amount, discounted at the required rate
of return Important concepts: Loan amount The "Principal", "face amount” or “year value"
represent the amount that the debenture issuer Agrees to pay at the of the debenture. It
represent original cost of the stock, which helps in determining stock valuation at maturity
Coupon/interest rate: This amount of interest can be computed by multiplying the interest rate
with the loan amount Interest schedule.
The frequency of interest payments is usually in interval of 6 months Yield-to-maturity is
computed to determine performance of different securities and to make comparison of one
against other to make qualitative decision.
YTM = Face value/current value-1
Price of debentures coupon 1/(1+YTM)1 + Coupon 2/(1+YTM)2+...+Face value/ (1+YTM)1

24. XYZ Ltd issued $240000 debentures at 5% coupon rate. Determine the interest
paid.
Solution: Interest expense = Interest rate /100 X Debt amount
= 5/100 X 24000
= $12000

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25. Write a note on dividend capitalization.

Ans: The approach approximates a future dividend stream based on firms dividend history
and an assumed growth rate and computes market capitalization rate that equates it with the
current market price. This approach applies to companies that pay dividend and it assumes
that the dividend will grow at a constant rate
Re = (D1 / p0) +g
Where, Re = Cost of equity
D1 = dividends next year
P0 = current share price
G = dividend growth rate
Current share price: It is found by searching company name on the exchange that the stock
being traded on Dividend growth rate: It is obtained by calculating the growth of the
company's past dividends and taking average of the values.
The growth rate for each year can be found by using the formula
Dividend growth=(Dt/Dt-1)-1
Where,
Dt = dividend payment of year t
Dt-1-Dividend payment of year t-1 (one year before year t)

26. Company A trade on p&s 500 at a 10% rate of return. It has beta of 1.1, expressing
marginally more volatility than the market. Presently the T-bill (risk free rate) is 1%.
Using Capital Asset Pricing Model determine cost of equity
Solution:
Cost of equity = Risk free rate of return + Beta X (market rate of return-risk free rate
of return)
= 1+1.1 X (10-1)
= 10.9%

27. ABC Co. is currently being traded at $5 per share and just announced a dividend of
$0.50 per share which will be paid out next year. An analyst estimated the dividend
growth rate of this company to be 2%. What is the cost of equity?
Solution:
D1 = $0.50 , P0 = 5, g =2%
Re = (DI/Po)+g = (0.50/5)+2 = 12%

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28.Explain earning capitalization approach.

This method helps investors to understand and estimate future profit of a company to plan
their investment. This approach consider current earnings of the business, its cash and annual
rate of return for investors to determine future profit of the business. The method assist in
determining business valuation for investors and other stakeholders. Hence it estimate gross
income generated over a period that also applies to subsidiary holings of a business, its
product line etc. It is important for an investor to know business profile and its operations.
Investors may determine business value through its current earnings and anticipate future
profits.
Earning capitalization = Net present value/capitalization rate
For larger enterprise, the weighted average of earnings over time divided by capitalization
rate.

29.Consider a future cash flow of Rs 100, which is set to be received in 4 years. The
discount rate is given at 15%. What is the present value?
Solution: PV = FV/(1+r)n
PV = 100/(1+0.15)4
= Rs 57.18

30. What are the types of discount rates?

Ans: They are
 Weighted average cost of capital: It calculates NPV of a business
 Cost of equity: It is the rate of return a business provide to its investors to determine
company's equity value.
 Debt cost: It is the interest rate on its debt given by business which is utilized in the
appraisal of fixed income assets.
 Hurdle rate: It is the lowest allowable rate of return for a project investment.
 Risk free rate: The rate of return provided by an investment with no risk is known as
risk free rate.

31. A person X makes an initial investment of $3000. The future cash flow for 4 years is
given below
Particulars Value
Discount rate 10%
Initial investment $3000
Year 1 $500

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Year 2 $1000
Year 3 $1500
Year 4 $2000
Calculate the net present value
Solution: NPV = F/[1+r)n - Initial Investment
F = Projected cash flow of the year
R = Discount rate
N = no. of years of cash flow in future
=F/(1+r)n
= 500/[1+10]1 = 454.5455
=1000/(1+10)2 = 826.4463
= 1500/(1+10)3=1126.972
= 2000/[1+10]4 = 1366.027
NPV = (454.5455+826.4463+1126.972+1366.027) - 3000
= $773.9908

32. Rajini borrowed Rs 50,000 for 3 years at arate of 3.5% per annum. Find the Simple
Interest
Solution: P = 50,000
R = 3.5%
T=3
SI = (pXRXT)/100
= (50,000X3.5X3)/100
= Rs 5250

33. The count of a population of men was found to increase at the rate of 2% per hour.
Find the count at the end of 2 hours if the initial count was 600000.
Solution: A=P(1+R/100)n
Population = 600000(1+2/100)²
= 624240

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34. Calculate the present value of a payment of $500 to be received after 3 years
assuming a discount rate of 6% compounded semi annually.
Solution: PV=FV/(1+r/m)nx
= 500/(1+6/2)2*3
= $418.74

SECTION – C (10 Marks)

1. Explain the reasons why you need a financial plan.
Ans: Financial plans are needed for the following reasons
 Right asset location: It is wise to invest in more than one type of instrument to
achieve long term goals. Financial plans helps in protecting wealth during uncertain
economic condition.
 To reduce debt: Cost of debt can harm long term financial interest. If a person invest
according to financial plan it helps in making debt free.
 Risk diversification: Financial plan protect one's financial goals from the vagaries of
capital market. Otherwise one may invest in assets that give higher returns in bull
market which increase risk in portfolio.
 Managing cash flows: Maintaining budget is essential in tracking long term financial
goals which helps in realizing spending of income.
 Save taxes: It is required to save taxes and also invest inmost tax efficient investment
options according to our financial goals.
 Disciplined investing: A person will be more likely to be disciplined if he follow
financial plan. To be discipline he must adhere to asset allocation and re balancing
etc.
 Reduce debt: It helps to reduce burden of debt which affect savings of people and on
long term financial interest. Hence investing according to financial plan is essential.
 Future plans: It is possible to gain visibility into our finances in the future. It is
possible to plan how much money one can have in future and will be aware of returns
on investment
 Retirement: With the financial plan we can plan our finances such that our lifestyle is
taken care of. One can meet and taken care of medical expenses and emergencies
during their retirement.
 Savings: By recording income and expenses one can make savings. It gives idea
about money required to achieve objectives.
2. What are the objectives of financial planning?
Ans. The objectives are
 Estimating time and source of fund:
The main objective of financial planning is to estimate the availability and supply of fund at
the right time. This will enable for the smooth running of business.

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 Determine total capital required:

Depending on requirement of current and fixed assets and expenses, business will determine
total capital required with the help of financial planning.
 Avoid unnecessary excess fund:
Financial plan will prevent business from raising unnecessary funds which are ideal asset of
the business.
 Generating capital structure:
Capital structure of the company is considered based on financial planning which include
planning of debt equity ratio.
 Avoiding risk:
Financial planning identifies issues in business plan, prepare solution to eliminate those risk
or issues and thus saves lot of money.
It's objective is to raise the chance of success by making the business to pro against
shortcomings and risk
 Financial policies:
It helps in preparing financial policies with regard to lending, borrowings, cash control etc
 Optimum use:
It helps in maximum utilization of scarce financial resource in the best possible manner to get
maximum return on investment
 Balance:
Its objective is to ensure reasonable balance between outflow and inflow of cash to maintain
stability of the business.
 Survival
It is prepared with the intention of making growth and expansion program which helps in
long run survival of the company.

3. Explain the steps involved in financial planning.

Ans: Following are the steps in financial planning
Step 1: Defining financial objectives and goals:
Defining ones goals which should be clear, quantifiable and achievable is the first step in
planning. These goals may be short, medium or long term goals.
Step 2: Gathering information:
Information of income, expenditure, asset and liabilities etc should be gathered in relation to
finance.
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Step 3: Analysing information:

Identify challenges and opportunities as it pertains to cash flows and debts, retirement and
risk management. The following ratios can be used to understand financial circumstances.
Solvency ratio, saving ratio, liquidity ratio and debt service ratio.
Step 4: Developing financial plan:
Once if it Is felt good to proceed by considering above steps develop and present plan which
include a balance sheet, tax calculation and annual cash flow report.
Step 5: Implementation:
It is considered as an action plan where there will be way to achieve short, medium and long
term goals. Following through with this plan is where many people tend to fail. So one should
be diligent and disciplined with the money.
Step 6: As it is a dynamic process, one need to assess financial decisions periodically. This
may include income and expenditure adjustments, new investment strategy etc

4. Write a format of a sample financial plan for a young adult.

(Preparing a financial plan involves certain steps as mentioned in Question No.7) Here is the
format of financial planning with short term and long term goals.
Short Term Goals (Less Than One Year)
Priority Goal Total cost Duration Monthly Target
Cost Date

Buying 200000/- 5 months 20000/- 30 Jan

vehicle 2022

Pay off credit XXX XXX XXX XXX

bills
Marriage XXX XXX XXX XXX

Intermediate goals(1-10 years)

Priority Goal Total cost Duration Monthly Target
Cost Date

Education 500000/- 4 years 250000/- XXX

Insurance XXX XXX XXX XXX

Home XXX XXX XXX XXX
rennovation

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Long term goals (10 years)

Priority Goal Total cost Duration Monthly Target
Cost Date

Retirement XXX XXX XXX XXX

Plan
Higher XXX XXX XXX XXX
Education

5. What are the financial goals of an individual?

 Retirement plan:
It is a long term investment to accumulate wealth throughout ones career which provide
substantial savings to fund our lifestyle.
• Pay off debt:
It is possible to lead comfortable life if we make every month payment and to stop borrowing
which may increase burden of an individual.
 Homeownership:
It is a long term goal which necessitate creating budget that account for expenses. may
involve saving up a sizeable down payment is the best way to get a reasonable home loan.
 Settling credit card debt:
Settling credit card debt can make one free to concentrate on other expenses and also
establish a schedule for using the card in the future.
 Launching the business:
Many people at some point in their career plan to build and maintain business operations
which can be a expensive process.
 Reserving money for emergencies:
This involves saving money for unforeseen circumstances which can avoid accumulating
more debt.
 Financial freedom:
It is the use of financial resources without concerns about overspending.
 Plan for fun:
If one can plan for saving with financial plan, they can reward oneself with fun saving goals
like vacation, entertainment, purchasing etc

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 Create a multiple income stream:

Creating part time cash flow which enable early retirement, Starting own business are
possible if one follow financial plan. It helps to have many source of income.
 Financial freedom:
It is the ability to use your financial resource without concerns about overspending.

6. Case Analysis: Financial planning for a single women

The case analysis related to a client Ms. ABC, 32 years, who was divorced.She is
working as a principal with post-tax salary of 30,000 p.m.She had taken a car loan for 5
years @12%, EMI for this is Rs 8500 and a joint home loan with her Ex-husband for 20
years and EMI for this is 25,000.Her total monthly expenses is Rs 24,500 p.m
Help her to prepare and follow a financial plan to meet her short and long term goals by
analyzing her goals.
Facts of the case: Given data
Profile:
Instruments Corpus(Rs)
PPF 50000
FD 120,000
Cash 100000
Jewellary 10000
Total Asset 370,000

Short term and long term goals of Ms ABC

Financial goals Time horizon Future Cost
Purchase of house 5 675000
Daughters education 12 3000000
Retirement 28 11200000

Analysis:
 She is not having knowledge of making investment decision in different avenues.
 It is difficult for her to maintain same life style after divorce.
 Her loans are taking more than 50% of her salary.
 Return of 7% pa on FD can be considered as small potion of her monthly
income.

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Solution:

 Analyzing this case shows that her monthly income is more than 90% of her salary
which need to be cut down by reducing movie, shopping etc which can increased
debt.
 Her profile was missing insurance and hence it is better to opt for term insurance
policy for cover of Rs 50 lakhs for 20 years and premium for this is 14,000.
 It is better for her to be in a rented house of 8.000 p.m for few years and avail home
loan for 85% of the cost. Make a plan to accumulate corpus of Rs 675.000.The stamp
duty and registration charges of Rs. 150,000 can be made by FD which will mature
after 5 years.
 For her daughter's education it is advised to take education loan for 80% of estimated
cost.For the remaining amount it is advised to invest Rs 2,700 p.m.
 She can start her retirement planning at the age of 43
Summary of financial plan
Goals Horizon Future Start Horizon Required (%)
Cost investment per
at the age month
of
House 5 675,000 32 5 7,300 7%
purchasing
Education 12 32 12 2,700 7%
Retirement 28 1,12,00,000 43 13 44,200 7%

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Module 2:
Investment Avenues
SECTION-A (2 Marks)
1. What do you mean by investment?
It is a financial asset that will provide with higher returns in the future and help to grow
people's money. It is obtained with the intention of allowing it to appreciate in value over
time.
2. Mention few types of investment.
They are
 Stocks
 Bonds
 Mutual funds
 Public provident fund
3. What is speculation?
It is the act of conducting a financial transaction that has substantial risk of losing value and
also holds expectation of a significant gain.It involves buying of an asset or financial
instrument with the hope that price of asset will increase in future.
4. What is diversification?
It is a risk management strategy that spreads one's wealth across a variety os assets and assets
type in order to reduce the risk of financial loss in one particular asset Diversification mixes a
wide variety of investments within a portfolio.
5. What are bank deposits?
It is a placing of money into banking institution for safekeeping for some time, in return for
which the bank pays the depositor interest payments. It includes fixed deposits, current
deposits, saving deposit and recurring deposit.
6. What are corporate securities?
These are negotiable financial instrument which holds monetary value conferring the right to
receive property not currently in possession of holder.
7. What are equity shares?
It is also known as stock, which is a small portion of the company that an investor buys in
anticipation of future profits. It is issued to the public which forms main source of long term
financing.
8. What are preference shares?
These are also known as preferred stocks, which are owned by the people right to receive part
of the company's profit before the holders of ordinary shares are who have the paid.

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9. What is debenture?
It is a kind of bond or other debt instrument that is unsecured by collateral. It is a long term
debt instrument used by large companies to borrow money
10. What is bond?
It is a fixed income instrument that represent a loan from n investor to a borrower. It is a
contract between these two where borrower uses the money to fund its operation and investor
receives interest on investment.
11. What is a company deposit?
The deposit placed by investors with companies for a fixed term carrying a prescribed rate of
interest is called company deposit. These are governed by Companies Act.
12. Name few post office saving schemes.
They are post office savings account, National saving recurring deposit account, Senior
citizen saving schemes account, Public provident fund account, National saving certificates
etc
13. What is a government security?
It is a tradable instrument issued by the central or state government Which has range of
investment products with a promise of the full repayment of invested principal at maturity of
the security.
Ex: Treasury bills. Treasury notes, Treasury bonds,Savings bonds etc
14. What is real estate?
It refer to physical property which include land building or improvements attached land,
whether natural or manmade. This include activity of buying and selling of land and building.
15. What is chit fund company?
It is a type of saving schemes in India which is a part of the unorganized money market
industry like friends, relatives etc and may be organized by financial institution. It is a type of
rotating savings and credit association system.
16. What is a Nidhi company?
It is a type of Non- Banking financial Company formed to encouraging savings and receiving
deposits and lend money to its members for their mutual benefits.
17. What is life insurance?
It is a contract between insurance policy holder and insurance company, where the company
guarantees the insurer pay a sum of money to named beneficiaries upon the death of an
insured person.
18. What is NPS?
National Pension System is a voluntary defined contribution pension system and a long term
investment plan to facilitate a regular income post retirement to all the subscribers.
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19. What is Atal Pension Yojana?

It is formerly known as Swavalamban yojana is a government scheme aimed towards
unorganized sector to create a universal social security system for all Indians. It is based On
NPS providing a stream of income after the age of 60 to all citizens of India.
20. What is PMVVY?
It is pension scheme for senior citizens which provide social security and financial
independence to the people post retirement by offers from returns on investment.
21. What is VPBY?
It is government pension scheme for senior citizens that provide annuity to old aged in the
form of an immediate annuity plan. It is implemented through LIC, and individuals must pay
premium at the beginning of the policy.
22. What is IGNOAPS?
It is a pension scheme for senior citizens to provide social protection by offering pension to
its beneficiary which includes seniors, widows and disabled.
23. Expand NPS and APY.
NPS = National Pension System
APY=Atal Pension Yojana
24. Expand PMVVY, VPBY and IGNOAPS.
PMVVY = Pradhan Mantri Vaya Vandana Yojana
VPBY = Varishtha Pension Bima Yojana
IGNOAPS = Indira Gandhi National Old Age Pension Scheme
25. What is risk?
It is the probability that actual results will differ from expected results. It measures the
uncertainty that investor take to receive gain from an investment .
26. What is return?
It is the gain or loss of an investment over a certain period of time. It includes a change in
value of the investment and cash flows which the investor receives from that investment.
27. What is Nominal return?
It is the net profit or loss of an investment expressed in the amount of currency before any
adjustments for taxes, fees, dividends etc
28. What do you mean by Real return?
It is adjusted for changes in prices due to inflation or other external factors. These lower than
nominal returns which do not subtract taxes and inflation.

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29. What is stock market?

It is a place in which shares of a publicly held companies are brought and sold. It is asset of
exchanges where companies issues shares and other securities for trading.
30. Give the meaning of primary market?
It is the part of the capital market where securities are created for the first time for the
investors to purchase. As securities are sold for the first time here, these are also called as
New Issue market.
31. What is secondary market?
It is a place wher in shares of companies are traded among investors. Investors purchase
securities or assets from other investors rather than from issuing companies themselves.
32. What is a stock exchange?
It is a market where financial instruments like stocks, bonds and commodities are traded.
It allow companies to raise money and investors to make decision using real time price
information.
33 What is trading and settlement?
In securities industry, the trading and settlement refers to the time between the trade date that
an order is executed in the market and the settlement date when a trade is considered final.
34. What is DEMAT account?
It is a necessary account to hold financial securities in a digital form and to trade shares in
share market. It enable electronic transaction of securities to be bought and sold through
process of dematerialization.
35. What do you mean by depository in security industry?
It is an institution which holds the securities of an investor through the depository participant
and provide services in relation to these securities.
36. Who is a depository participant?
He is the agent or registered stock brokers of a depository who act as mediator between
traders and investors who can help in managing assets efficiently.
37. Give the meaning of investor protection.
The investor protection Act was established to prevent some of the problems that caused the
financial crisis and to protect investors 's interest and to promote confidence in market's
integrity.
38. What is maturity date?
It is the final date for the payment of any financial product when the principal along with the
interest needs to be paid to the investor by the issuer.

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SECTION-B
(6 Marks)
1. What are the objectives of investment?
Its objectives are
 To keep money safe: keeping money safe and secure is the main objective of
investment for people. So one can make investment that come with low or reduced
risk and returns will be low in such investments. Ex: investment in government bonds
 To help money grow: People want to secure money for future. It is long term goal
where they want money to grow into wealth. So one has to consider investment
objectives that can offer significant return.
 Income: Investing in fixed deposits and stocks of companies pay regular income
They come with high level of risk and low stability. Conservative investors tend to
include income objectives in their portfolios due to their attractive returns
 Tax saving: Tax saving is a common investment objective among many people. NPS
is an example of investment objective that promote tax saving, Actual return on
investment are the returns after taxes. Hence consider tax exemptions available before
choosing an investment.
 Liquidity: It is the ability to trade or convert assets into cash with minimal risk of
loss. Investors has to choose investing in securities that are easy to liquidate.
 To save for retirement
2. What are the essentials of investment?
These are the essentials of investment
 Investment objective: Individuals may be having short term or long term goals.
Based on goal setting one can decide on the type of asset suitable.
 Returns: It is related to the risks and prospects of the investment. (Ref Sec A qn no
26).
 Lock-in period: It is the period for which investments cannot be soid or redeemed.
Investment is locked for a fixed period during which one cannot access money.
 Net asset value: It is the value of fund's asset minus the value of its liabilities.It is
used to determine value of assets held. It is typically represented on a per-share basis.
 Risk: It is the ability of an individual to withstand market fluctuations Ref Sec A qn
no 25.

3. Name the types of risk faced by investors.

Investors mainly face 2 types of risk. They are
Un diversifiable risk: It is also known as market risk which are linked to every company
These risk arises due to exchange rate, inflation rate, interest rate, war etc. This kind of risk
cannot be eliminated through diversification. Hence it has to be accepted by investors. This
kind of risk is not specific to a particular company.

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Diversifiable risk: It is also called as unsystematic risk and is specific to a company. This
can be eliminated through diversification. Business risk and financial risk are common
unsystematic risk.

4. What are the disadvantages of diversification?

They are
 Different rules for different assets: Without understanding different structure and
working of different assets can lead to risk and lead to wrongful investments
 Tax implications: Different assets are taxed differently, without proper planning of
this, one may be in risk of additional tax compliance or higher consulting cost .
 Cost of investment: Diversifying portfolio require consideration of assets having
different fees and charges. If not it may dilute the value of your investment.
 It does not eliminate all types of risk within a portfolio.
 It may cause investing to feel burdensome requiring more management.

5. How to make diversification in investment successful?

Following points are to be considered for successful diversification
 Monitor portfolio regularly: Investor has to make sure that their investment is align
with their financial goals. If not some adjustments must be made at the right time.
This ensure that the chosen investment bring good return.
 Considering fees: Investor has to be careful while online stock broker on the charges
they make even though they provide fee-free trading services. Paying high fee can be
more than return on investment.
 Asset allocation: Investor must maintain balance between investments in stocks and
bonds. Stocks are having high risk with high returns and bonds are more stable with
lower returns.
 Factors that impact financial market: Investors has to understand stock exchange,
bond markets, foreign exchange, interbank markets of the financial market. Also
external factors like interest rate and inflation influence its dynamics.
 Invest in money market securities: Investing in money market securities like T-
bills. Culs lead to ease in liquidation and also have lower risk. It ensure safety of
investor's money for the short term.
 Assess qualitative risk: It is essential to evaluate the stocks through specific
parameters that indicate its stability to do well. The parameters used are brand value.
compliance with regulation, competitive advantage etc

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6. Give the meaning of current account deposit and explain its features.
It is also called as demand deposit account, which is meant for individulas who require a
higher number of transactions daily. It allows customers to deposit and with amount at any
time without giving any notice.
Features:
 It is continuous in nature as there is no fixed period to hold a current account.
 As long as account holder has fonds in his account, there is no restriction on the
number and amount of withdrawl made.
 These accounts allow account holder to withdraw money using bank cards, chek over
the counter withdrawal slips.
 It is non interest bearing bank account.
 Account holder has to maintain higher minimum balance as compared to saving
account.
 Penalty will be charged if the account holder do not maintain minimum balance.
 It do not promote saving habits among account holders.

7. What are the advantage of current account deposit?

They are
 There is no restriction on the number and amount of withdrawal made.
 It allows handling of large volumes of receipts and/or payments systematically.
 Helps businessmen to make a direct payment to their creditors by issuing cheks, Dd or
pay orders.
 The creditors of account holder can get credit worthiness information of the account
holder through inter-bank connection.
 Over draft facilities are available to the account holder
 There are no restrictions applied on the deposits made into this account opened at the
bank's home branch.
8. What are the disadvantages of current account deposits?
They are
 Account holder do not earn any interest on money deposited in this account.
 There is an operational burden with this deposit since most package accounts offer
services at additional cost.
 There is limit to issuance of free chequebooks or DD .Ex 25 numbers per month.
More than this account holder has to pay extra money.
 Higher fees due to corporate business transactions.
 Higher minimum balance has to be maintained, otherwise one has to pay penalty.
 Some banks charge transaction fees on current account transaction which may involve
online fund transfer, withdrawing money from other bank's ATM

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9. What is Fixed deposit. Name few characteristics.

These deposits are offered by bank or NBFCs where a person can deposit lump sum of
money to get higher rate of interest and in which money will be locked for a fixed period of
time.
Features:
 It provide higher rate of interest than savings account .
 The amount can be deposited once. If additional amount has to be deposited, then it
should be made in separate accounts.
 It assures the return that would be accrued to them at the end of each period.
 It can be renewed without any hassle.
 One cannot withdraw before the maturity period. In emergency it can be withdrawn
by paying penalty.
 This type of account meets the future cash flows of the individual

10. What are the advantages of fixed deposits?

They are
 The person requiring loan can also give fixed deposit account as security to the bank.
 It assures guaranteed returns which has zero risk compared to other forms of
investments.
 Compared to other forms of term deposit, it pays more interest to account holders.
 It is easy to open this kind of deposit and even online can be used.
 One can hold more than one Fd account when making a additional investment

11. What are the disadvantages of Fixed deposits?

They are
 Amount will be locked for a fixed duration and converting into cash is not easy. But
Premature withdraw of the fund can be made by paying penalty.
 Interest earned in this is added to the taxable income of the deposit holder unlike in
saving account.
 The returns received from FD account are very low compared to inflation rate of the
country.
 The rate of interest remains the same for the entire duration of the fixed deposit, even
there is change in rates.
 The benefit of diversification not available as they have invest all money in one
account only

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12. What is saving account. Name few characteristics.

It is a deposit account held with a bank to manage savings, expenses and investments of
people
Features:
 Bank offers payment facilities such as billpay with this account which enable account
holders to pay water bill, electricity bills and others directly from their account.
 Bank offers interest to depositors whose rate is determined by amount deposited and
policies of RBI.
 There is necessary to maintain minimum balance in some cases and in other cases like
zero balance account can be maintained.
 Provide easy withdrawal of money through ATM and some bank charge small fee for
this.
 Pass book and cheque books are provided for financial transactions.
 There is no age restriction for this kind of account.

13. What are the advantages of saving accounts deposits?

They are
 Account holder can get benefit of interest every quarter which helps to earn from idle
money in the account.
 It is easy to open this account and withdraw and deposit money anytime and allow
quickly transfer of money from one account to another.
 As it deals in cash account holder need not to worry about selling investment or
making other complicated moves to access money
 It is highly liquid as it allow to access and use money as per the wishes and there is no
lock-in period.
 Many financial institution allow bills to be paid automatically out of this account
without subjecting to withdrawal and transfer laws. Hence it avoid late-fees or
missed payments

14. What are the disadvantages of saving accounts deposits?

They are
 The interest rate of bank fluctuate with time and hence value of return from this is not
fixed.
 Interest rate is low compared to other forms of account or investment.
 Most of these accounts have minimum balance requirements or monthly maintenance
fees.
 Most credit unions compound your saving account interest monthly or even annually.
Hence full potential of money will not be realized.
 These accounts have federal limits when withdrawing funds which is 6 times per
month. The bank will charge fee if limit is exceeded.

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15. What is Recurring deposit. Name few characteristics.

It is a type of term deposit where a person need not to deposit a lump sum money saving
rather than he has to deposit a fixed sum of money every month.
Features:
 The minimum investment amount varies from one bank to another.
 It guarantees return on maturity and interest rate donot change during the deposit
period.
 The interest rate is higher than saving account and is similar to FD interest rate.
 A person can open this for a minimum of 6 months and can go upto 10 years. It gives
flexibility to choose the time period.
 These are a type of fixed income investment and interest rate is known before
investing the money

16. What are the advantages of recurring deposits?

They are
 Investor will deposit a fixed sum of money every month which will build up a saving
discipline.
 Eligibility criteria for investing in this is easy.
 Many banks provide loan against the RD account which is 80% of the balance in
account.
 It allow for low minimum investment amount which may be as low as Rs. 100.
 There is no limit on number of Rd accounts one can hold.

17. What are the disadvantages of Recurring deposits?

They are
 Changes cannot be made in investment amount once the Rd account is opened.
 Interest rate is low compared to other investment options.
 After depositing the money one cannot withdraw any part of the money until the term
of the deposit is over.
 If amount is withdrawn before maturity, penalty has to be paid

18. What are the features of equity shares?

They are
 These shares remain with the company and is given back when company is closed.
 Most of equity shares provide voting rights to investors to choose efficient managers.
 Equity shares already issued can be traded in secondary capital market
 The dividend rate depend on obtainability of the surfeit capital.
 These shareholders are eligible to gain additional profits generated by a company.
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19. Name few types of equity shares.

They are
i. Bonus share: these are issued from earnings of business, where profit is distributed in the
form of additional stake in a company. It do not increase total market capitalization value of a
company.
ii. Right share: It is issued to existing stockholders to preserve property rights of old
investors.
iii. Paid-up capital: It forms part of subscribed capital which the company invest in their
business.
iv. Ordinary shares: these are issued to avail fund to meet long term expenses of business
and ownership benefits is provided to business.
v. Sweat equity shares: As an appreciation for great job company reward employees with
shares.
vi. Preference equity shares: It is issued to an investor as guarantee of the payment of
cumulative dividend before returns are distributed among ordinary shareholders.

20. What are the features of preference shares?

They are
 These can be easily converted into common stock if shareholder wants to change its
holding position.
 These shareholders have the major advantage of receiving dividends first compared to
other shareholders
 These shareholders are having voting rights in case of extraordinary events.
 Dividends are paid to shareholders on specific dates
 It allow shareholders to receive dividend payouts when other stockholders may re-
ceive dividend slater.

21. Differentiate equity shares and preference shares.

Basis Equity shares Preference share

Defintion It represent extent of It come with preferential
ownership in a company rights when it comes to
receiving dividend.
Dividend rate Fluctuate as per earnings Fixed

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Voting rights Shareholders have voting No voting rights

rights to choose managers
Claim to assets Shareholders do not have Shareholders have right to
right to claim their assets claim
when decide to wind up
Capital repayment It is repaid at the end Repaid before equity shares
Redemption Cannot be redeemed Can be redeemed
Convertibility Shares cannot be converted Can be converted
into equity share.

22. What are the features of debentures?

They are
 Interest rate: Debenture owners will receive coupon rate as the interest which is
fixed or it can change over time.
 Credit rating: This will have impact on interest rate that the investor receive. Credit
rating firms determine the safety of purchasing corporate and government bonds.
 Maturity date: It is important for non-convertible debentures as it helps company to
dictate when it must pay back the debentures holders.
 Voting rights: Debenture holders do not have voting rights as they are not
instruments of equity.
 The interest payable to these holders is a charge against profit of the company hence
should be made even in case of loss.

23. What are the features of bond?

They are

 Bonds prices correlated with interest rate. If interest rate goes up, bond prices
decreases and vice versa.
 These have maturity dates at which point the principal amount must be paid back in
full or risk default.
 It is a form of debt which the investor pay to the issuer for a defined time frame.
 These are tradable in the secondary market and hence ownership shift among various
investors.
 Credit rating agencies classify bonds on the risk of a company defaulting on deb
payment .This determine the degree of confidence that investors have in an
organisation's bond

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24. Explain the different types of bonds.

They are
 Floating interest bonds: The bonds whose coupon rate are subject to market
fluctuation are called floating bonds. The return on investment depend on inflation,
condition of the economy etc.
 Fixed rate bonds: In this bond, the interest remain fixed throughout their tenure
which help investors to have predictable returns on investment irrespective of market
condition.
 Inflation linked bonds: These are linked to inflation whose interest rate is lower than
fixed rate bonds. These are designed to curb the impact of economic inflation on the
face value and interest return.
 Perpetual bond: The bonds which do not have maturity period and these are fixed
security investments wher issuer do not have to return the principal amount to the
purchaser.
 Bearer bond: They do not carry the name of the bond holder and anyone having
bond certificate can claim the amount

25. Differentiate bond and debentures.

Parameters Debentures bonds

Collateral These are secured or unsecured Secured by some kind of
collateral
Tenure The tenure is short term or long It is a long term investment
term based on fund requirement. and tenure is generally long.

Issued by Issued by private companies Issued by financial

institutions, government
agencies, large corporations.
Risk level Have high risk as they are not These are safe as they are
backed by collateral backed by some form of
collateral.
Rate of interest They offer high rate of interest as Offer low rate of interest as
they are unsecured the stability of repayment in
future is high.

Payment Payment is periodical as per the It is on accrual basis which

prospectus. is monthly, half yearly or
annually.
Convertibility It allow for converting debentures It cannot be converted into
into shares if they believe that the equity share.
company's stock will rise in future

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26. What are the feature of company deposit?

They are
 The capital in a company fixed deposit is not protected if the company is unable to
meet its financial obligation.
 Deposit earns no real returns when inflation is above the guaranteed interest rate
offered by deposit.
 The main objective of investing in this is to earn higher rate of interest compared to
hank deposit.
 It is suitable for conservative investors seeking assured returns from a lump sum
investment for goals upto 5 years.
 Interest depend on tenure of the deposit and the issuer.

27. What are the features of real estate?

They are
 One kind of real estate in not same as the other.
 Improvements made on land can increase its value which can generate more income.
 Once infrastructure are developed.it is difficult to replace or relocate.
 Real estate cannot be moved from one place to other.
 Supply and demand of this is affected by preference of users.
 Land is permanent and forever.

28. Name the kinds of real estate.

They are
 Residential: It is a property used for residential purpose and common type of estate It
consist of housing for individuals, families or group of people, Ex Family homes and
town hoses.
 Land: It is an undeveloped property and vacant land which is purchased for future
development, investing in this is a long term strategy as tax and maintenance cost is
minimum. Ex: farms and ranches.
 Commercial: It is a kind of real estate that are used by businesses for their operation.
Ex: hotels and hospitals
 Industrial real estate: These land and buildings are used for industry purpose for
manufacturing, distribution or storage etc.

29. Write a note on investment in gold.

The opportunities available to invest in gold are investing in bullion, mutual funds and
futures. With few exceptions direct investment in gold are provided and other derive part of
their value from other sources.

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Gold bullion: It is a form of direct gold ownership which is a form of pure or nearly pure,
gold that has been certifies for its weight and purity. This consists of coins, bars and other
forms of gold. It is necessary to stay updated on price and its is better to use a reputable
dealer.
Gold coins: These are commonly bought by investors from private dealers ata premium of
about 1% to 5% above gold value and now it is jumped to 10%.
Advantages:
 Their prices are mentioned in global financial publications.
 These are minted in small size than the large bars to make investment convenient.
 Many reputed dealers are available in many areas.
The problem lies in the change in dollar change its value and insurance cost is high
 Gold mutual funds: Direct purchase of gold can be made by investing in gold- based
exchange-traded fund. These funds are purchased or sold like stocks. It offers more
liquidity than physical gold and more diversification than individual gold stocks.
 The value of gold mutual funds and ETFs may not match with market price of gold,
and these investments may not perform same as physical gold.

30. What are the features of Nidhi company?

They are
 A Nidhi company can be registered as a public company and for this license is not
required from RBI.
 The liability of shareholders are extend only to their share capital.
 The ownership of the company is held in the form of shares. Ownership is not people
dependent and can be transferred easily.
 Members follow a limited liability policy where their goal is to foster the practice of
saving. Hence raising fund is easy.
 On incorporation Nidhi shall not issue preference shares, if it is issued already such
shares be redeemed as per the terms

31. What are the features of chit fund company?

They are
 It is a rotating saving scheme that facilitate borrowings and savings.
 Number of individuals make contributions towards the chit value at regular intervals.
 It work as micro finance institutions.
 It serves as a means of financial assistance for lower income house holds.
 They come with a predefined value

32. Differentiate Nidhi company or chit fund company.

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Chit fund Nidhi company

It is a committee where some people It is an NBFC where members can deposit
contribute fixed money for a decided period some amount of money or recurring deposit.
of time.
It is mandated to legalize under Registrar of These are liable to follow Nidhi rules and
Firms, societies and chits. public limited company Act 2013.
These are administered by an outsider who It is operated by its members only
is appointed by mutual agreement.
Members can withdraw money through Shareholders lend money to members in the
auction or lucky draw. form of loan.
Chit fund is kept for a certain duration. Saving deposit or loans have a fixed
duration, not the company.

33. What are the features of stock exchange?

They are
 Securities market: It is the capital market that deal with sale and purchase of
securities of companies, government organizations.
 Regulatory body: The exchange of securities are done through brokers on behalf of
companies.
 Registerds securities: Only listed securities are traded on stock exchange.
 Mode of operation: The members or brokers are to be authorized to carry out trading
activities.
 Measuring device: The trading activities directly impact the growth thr organization
or business.
 Obligatory: The functions of all stock exchange is regulated by SEBI.

34. What are the functions of primary market?

They are
 Underwriting services: Underwrintg is difficult for a company launching new issue
offer. Underwriter must purchase all unsold shares if the company cannot sell them to
the public.
 New issue offer: It organizes new issue offer which had not been traded on any other
exchange earkier which involve detail assessment of project viability.
 Distribution: A new issue is also distributed in this market which is initiated with a
new prospectus issue.
 Global investment: This helps in improving domestic and foreign companies and
enable risk diversifting.

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35. What are the functions of secondary market?

They are
 It provide a platform for trading of financial instruments like bonds, shares and
debentures.
 This market allow investors to easily sell their holdings and convert into cash when
they need and hence provide liquidity.
 It is an indication of nation's economy and act as link between saving and investment
he flow of investment capital reduces economic uncertainty.
 This market trade only authorized securities and also there is is strict oversight by
regulatory bodies
 Valuation data of this market provide information to investors to know how much
investments has to be made. Also it helps in tax calculation and other financial task.
Goverment also get benefit from tax accordingly Creditors can also assess valuation
to determine credit worthiness of a borrower and avoid risk.

36. What are the advantages of demat account?

They are
 Security: Eliminate risk of paper based share certificates It is safe to hold securities in
electronic form than holding it physically which can get lost, damage or stolen.
 Convenient storage: It allow to store any number of shares and can monitor details
of all shares holded in this account.
 Reduce time: Unlike in physical securities, it allow the transfer of shares quickly and
securely which reduces processing time.
 Reduce in cost: Physical shares require paperwork and stamp duty which increase
stock. But this account can be get at no time.
 Stores other investments: Apart from shares, this account can hold multiple assets
like mutual fund, government securities etc.

37. What are the features of Demat account?

They are
 Easy share transfer: Transfer of securities from one demat account to another is
done through delivery instruction slip or receipt instruction slip which allow smooth
transaction.
 Faster dematerialisation: If investor having certificates in physical form, they have
to provide detailed instructions to Depository Partcipant to convert them into
electronic form.If an investor is holding its certificates in electronic form, it can be
easily converted into physical form by requesting it.
 Freezing: Account holder can freeze their account for a certain period if they want to
prevent unexpected debit or credit into one's demat account.

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 Multiple accessing option: These are operated electronically using multiple modes
like smartphone, computer or other device.
 Availing loan: Many lenders provide loans against securities in this account which
can be used as collateral.

38. Name the types of depository participants in India.

There are 2 types
National Securities Depository Limited: It is promoted by National Stock
Exchange,UTI,and IDBI. The activities are carried out through service provider such as DP,
share transfer agents and clearing corporation of stock exchange.Dp's to provide services to
investors, has to register with NSDL and it will consider them as partners in NSDL. The
investors need to open depository account with the DP to avail depository services like
account maintenance, dematerialisation etc. These act as middlemen between investor and the
depository. For providing services they levy Dp charge to get services
Central Depository Services Limited: It is promoted by Bombay Stock Exchange, Bank of
India and SBI. The registered DP under CSDL provide services to investors who act as link
between investors and CSDL.DP's will provide investors their statement of account at regular
interval. This give investor details of their transaction and securities held by them.

39. Name the grievances of investor against brokers.

They are
 Delay in payment of securities sold: A broker fail to make payment to client who has
sold securities within 48 hours of pay out of funds by clearing house of stock
exchange.
 Delay in delivery of purchased security to the client: Broker will fail to deliver yje
purchased security to his clients within 48 hours of payout of securities.
 Charging high brokerage from clients.
 Non-passing of corporate benefits: Broker play tricks in passing corporate benefits
like bonus share, right share etc to the clients.
 To earn secret profit they do not issue contract note to the clients.

40. What are the method of redressal of grievance against companies in Investor Service
Cell?
It is as follows
 The cell receive the complaint from investor and forwarded to company to solve this
within 15 days.
 If company fails to do and number of pending complaints against company exceeds
25, the cell issue show cause notice of 7 days to the company.

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 If the company again fais to resolve the complaint within 7 days of issue of show ause
notice, the scrip of the company is suspended from the trading.
 IY can also transfer scripts of defaulting company to Z category for non redressing
investor complaints.
 Companies having non resolved complaints more are instructed to employ special
personnel to clear pending complaints on a priority basis.

41. What are the measures taken by SEBI for investor protection?

 SEBI has Office of Investor Assistance and Education to receive complaints of

investors with respective stock exchange and depository for redressal.
 Grievances related to other intermediaries are also taken and are continuously
monitored.
 It has established Web based redressal system "SCORES" where complaints can be
lodged online any time.
 The Ombudsman will be appointed who has power to receive complaints from
investor and facilitate resolution through mutual agreement or mediation.
 SEBI has also provided guidelines SEBI (Disclosure and investor protection)
Guidelines.2000 and SEBI(Investor Protection and Education) Regulation 2009 to
investor protection.

SECTION-C (10 Marks)

1. Differentiate investment and speculation.

Basis Investment Speculation

Meaning Purchase an asset/security to Conducting a risky financial
get stable returns transaction with hope of
getting substantial profit
Time horizon Long term Short term
Risk levels Moderate high
Intent to profit income Changes in value stable Changes in price uncertain
Return Modest but continuous high
Fund Investor's own fund Borrowed fund
Decision making Depends on financial Technical charts, market
performance of the company psychology and individual
opinion
Investor attitude Cautious and conservative Aggressive and carelessness
Similitude Purpose is to get benefit To acquire high benefits
later

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2. Explain the factors influencing investment decision.

They are
 Objectives: It involves decision making where investment depend on objectives of
the individual. It may be short term or long term fund allocation.
 Returns: An investors always try to invest in that asset which yield him good return
and involving less risk. They prioritize positive returns and employ limited funds in a
profitable asset.
 Risk involved: Many risk factors are involved which influence investment decisions.
They are
- Interest risk: The price of the bond is influenced by interest rate. If interest rate
rises, it rises price of the bond also and vice versa
-Inflation risk: Rise in inflation can reduce purchasing power of investors. For
instance if rate of return is 5% and inflation rate is 3%, investors will receive a return
of 2% only.
-Currency risk: If exchange rate reduces, investment returns will be lowered
- Volatility risk: It involves micro economic factors like SEBI rules, RBI policies etc
have impact on how well a business perform and this in turn influence value of funds
 Tax benefits: Tax associated with assets or security is also one of the factor to be
considered by an investor. Investors who want to take less risk, they choose
investment opportunities that are taxed less.
 Safety: Investor consider their investment is safe if the company maintains
transparency in financial disclosure and adhere to regulatory framework.
 Liquidity: Sometimes investors need emergency funds and to withdraw money
before maturity. Hence they opt those security which has high degree of liquidity.
 Tenure: The investment decision also depènd son maturity period and payback
period as many funds are blocked for a certain period.

3. Explain the need for diversification?

Diversification is needed for the following reasons
 Protect against loss: It helps investors to preserve their wealth towards the end of
their professional career and protect against loss. It helps them to consider risk over
return.
 Risk adjusted return: It helps in increasing the risk adjusted returns of a portfolio.
Investors can make more money through riskier investment and it is a measurement of
efficiency to know how well an investors capital is being deployed.
 Align with financial goals: Diversifying portfolios helps to invest in different
investment instruments for different time.Investment allocation is based on when one
need to redeem investment for a goal to come fruition.
 Growth opportunity: To have growth opportunity in different sectors investing in
different asset class is essential.One can benefit from growth opportunities in stocks
that fall into various categories based on market capitalisation.

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 Risk management: Investing in different asset classes,can mitigate the risk of a

person. Diversifying portfolio helps in optimizing returns and protects one's downside
in case markets are volatile.
 Advantage of different investment instruments: It helps in balancing risk and
returns in different funds and helps to enjoy benefits in different instruments Ex:
investing in fixed deposit, helps to take advantage of returns and low risk.
 Compounding interest: Investing in mutual fund helps to gain compound interest
which implies that each investment generate interest on both principal amount and cu
mulative interest over the previous invested year.
 Safety: Different types of investment is nothing but safety of capital. However some
of them are high risk and some are low risk investment.
 Shuffle among investment: Diversification is practical approach to shuffle and take
advantage of the market movement.

4. Explain in detail various types of bank deposits.

(Ref Sec B Qn no 6,9,12,15)
Call Deposit Account: It is called as interest-bearing checking accounts, checking plus or
advantage accounts. It combine the features of checking and saving accounts, allowing
consumers to easily access their money and also to earn interest on their deposits.

5. Explain different types of preference shares.

They are
i. Cumulative preference shares: It allow shareholders the right to enjoy cumulative
dividend payout by the company even it is not earning profit.
ii. Non-cumulative preference share: In this dividend payout takes place from the profit
made by the company and they do not collect dividends in the form of arrears.
iii. Redeemable preference share: These shares can be repurchased or redeemed by the
issuing company at a fixed rate and date
iv. Irredeemable Preference shares: These shares cannot be repurchased or re deemed by
the issuing company at a fixed rate and date. These help companies by acting as lifesaver
during inflation.
v. Convertible preference shares: These are converted into common equity shares at a
specific price and time depending on terms of issue.
vi. Non-Convertible preference shares: These cannot be converted into common equity
shares at a specific price and time but retain preferential rights towards payment of capital
over common shareholders in case of winding up.
vii.Paritcipating preference share: These shareholders have chance of earning more than
stated rate of fixed dividends. They earn fixed dividend and opportunity to share in
company's extra carning.
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viii.Non-Participating preference share: These shareholders are entitled to pre-fixed

dividends. They cannot participate in surplus profit of the company.

6. Mention the different types of debentures.

They are
 Secured debentures: These are also called as mortgage debentures in which
debentures are secured against assets of the concerned company. A charge is created
on such asset in case of default in repayment of such debentures.
 Unsecured debentures: The debentures which are created out of the credibility and
do not carry securities against any assets of the company are called unsecured
debentures.
 Redeemable debentures: The debentures which are payable at the expiry of their
term either in lump sum or in installment over a time period are called redeemable
debentures.
 Irredeemable debentures: They don't acrry along a redemption date with it. They
are redeemable when company goes into liquidation or redeemable after an
unspecified long time interval.
 Convertible debentures: These can be converted into equity shares after a specific
period at the option of debenture holder on the terms and condition of the contract.
 Non-convertible debentures: These are traditional debentures which cannot be
converted into equity of the issuing company. Hence investors are paid with higher
interest
 Registered debentures: These debt tools are registered where holders details are
legally enrolled with the issuing authority.
 Bearer debentures: These debentures are not registered with the issuer. The holder is
entitled to interest simply by holding the bond

7. Explain various types of corporate securities.

They are
 Debt securities:It is any debt that can be bought and sold between the parties prior to
maturity in the market. These are negotiable instrument where ownership is readily
transferable from owner to another. Ex:Bonds and certificate of deposit.

 Equity securities: It represent ownership claims on a company's net asset. The

different types of equity securities have different ownership claims on a company's
net assets, which affect their risk and return characteristics in different ways.

 Derivative securities: It is a kind of financial contract whose value is dependent on

an underlying asset, or benchmark or group of asset. The m main purpose is to
minimize risk. There are 4 types.

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a. Futures: It is an agreement between two parties for the purchase and delivery of an
asset at an agreed upon price at a future date. The parties involved are obligated to
fulfill a commitment to buy or sell the asset..

b. Forwards: These are not standardized- the terms of each contract are negotiated
and determined by the parties involved. These are similar to futures but do not trade
on an exchange, only retailing.

c. Options: These contracts grant their owners the right to sell or purchase a specific,
security for a specific price on or before a specific expiration date.

d. Swaps: It is an agreement between two counterparties to exchange financial

instruments, cashflows or payments for a certain time.

 Hybrid securities: It is a single financial product that combines different financial

securities or has features of multiple kinds of securities Ex: convertible bonds

8. Explain different saving schemes under post office investments.

a) Post office saving account:
 One account can be opened with one post office and can be transferred from one post
office to other.
 It can be opened in the name of minor.
 Minimum balance required to be maintained is Rs 50.
 Interest rate of 4% p.a. is applicable on the deposits

b) Post office recurring deposit account:

 The tenure of this is fixed for 5 years.
 It allow small investors to invest even Rs 100 per month and no limit on upper limit.
 It can be transferred from one post office to other.
 It allow flexibility by allowing a partial withdrawal upto 50% of balance after a year.

c) Post office monthly income scheme:

 It offers guaranteed fixed monthly income on investment.
 Accounts are transferrable from one post office to other.
 Investors can hold multiple accounts with maximum investment of Rs. 4.5 lakh by
combining all account.
 Account cannot be closed before completing one year.

d) Senior citizen saving schemes:

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 The minimum age of entry is 60 years to open this account.

 It is government backed retirement scheme which allow to make lump sum deposit.
 It can be opened individually or jointly.
 It offers interest arte of 7.4% p.a.
 It qualifies for deduction under section 80c of Income Tax Act.

9. What are the different types of Government securities?

They are
a) Traesury bills: These are short term securities with a maturity period of less than one year
issued by central government of India. These are also called as zero coupon securities as they
do not pay interest. It can be purchased for a reduced rate once T- bills mature, government
pays the entire amount of bill.
These are issued in 3 different tenors-
 91 days
 182 days
 364 days
b) Cash management bill: These are also short term securities and it will be issued at variety
of terms. These term only last a few days. Thus making this security an ultra short investment
option. It is used by the government to fulfill the temporary cash flow requirements
c) Treasury notes: These can be purchased in terms of 2,3,5,7 or 10 years. Interest will be
paid every 6 months until they each maturity date Once it reach maturity, individuals can
redeem the entire face value.
d) Floating rate notes: These are the debt instrument with an interest rate that change based
on external benchmark which is equal to money market reference rate.It can be a good
investment for risk averse investors who want to protect their portfolio from rising interest
rates.
e) Treasury inflation protected securities: These are available based on 5,10 or 30 years
term period which pay interest to all users every 6 months. If inflation increases, there will be
an increase in security value. The users enjoy interest payment every 6 months through these
securities.
f) State development loans: These are dated government securities issued by state
government to meet their budget requirements. It features variety of investment tenures. It
holds slightly higher rate.
g) Dated government securities: These are issued by state government which have either
fixed or floating rate of interest, also known as a coupon rate. These are long term
instruments as they deliver broad range of tenure starting from 5 years to 40 years.

10. Explain different types of life insurance plans in India?

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I. Term insurance: It is a insurance that provide death benefit to beneficiary only if the
insured dies during the specified period. The premium paid provide tax exemption and it
provides 100% risk cover.
II. Whole life policy: It is a insurance policy which covers a policy holder against death
throughout his life and individual enjoy the life cover. The policyholder has to pay regular
premium until his death upon this corpus is paid to the family. Premium paid is tax exempt
and these are combined with other insurance products to address various needs.
III. Endowment policy: It is payable to insured if insured party is still living on the policy's
maturity date or to beneficiary. If the insured survives the policy tenure he gets back the
premium paid with other investment returns and benefits like bonus
IV. Money back policy: It is a policy that gives a percentage of the sum assured regular
intervals during the policy term. In case of unfortunate event before the full term of policy,
beneficiaries can receive entire sum assured regardless of installmen paid. It offers new ULIP
versions of money-back policies.
V. Unit linked Insurance plans: It is one policy that provides dual advantage of protection
and flexibility in investment. Part of amount invested provides life cover and remaining is
invested in the equity and debt instrument for maximizing returns.
VI. Child insurance plans: It is an important financial planning tools for parents which
helps to build a significant sum for child's education and marriage expenses. It provides
maturity benefits either in the form of annual installments or one time payout after child turns
18.
VII. Retirement insurance plans: It helps to develop financial independence in non-
working years. It allow to save and invest for the long term which ensure financial security
and to accumulate significant amount.
VIII. Group insurance plan: It is a policy that covers group of people under a single
insurance policy which cover minimum 10 members. Employers, banks, corporates and other
homogeneous group of persons can buy this policy.
IX. Saving and investment plan: It channel regular saving into long term investment goals
but helps in protecting one's financial goals with a premium protection option which allow
planned investment to continue even after demise.

11. What are the features/benefits of National Pension System?

They are
 Returns: it offers returns higher than other traditional tax saving investments.
 Subscribers can also switch their investment option and change their fund manager.
 Risk assessment: There is a cap in the range of 75% to 50% on equity exposure for
the NPS. There is different range for different categories which stabilize risk- return
in the interest of investors, which means the corpus is safe from the equity market
volatility.

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 Tax efficiency: It provide tax deduction up to Rs1.5 lakh to be claimed for NPS for
one's contribution as well as from employer. It allow a tax deduction of up to 2 lakh in
total.
 Withdrawal rules: It is required to keep aside at least 40% of the corpus to receive
regular pension from a PFRDA-registered insurance firm. Remaining 60% is tax free.
 It provide flexibility in investment through auto choice and active choice.
 Auto choice is available as default option and fund investment is managed
automatically.
 Under active choice individuals are free to decide available asset classes in which to
invest their fund.
 Subscribers can also switch their investment option and change their fund manager It
allow subscriber to withdraw their contributions partially.
 It allow to withdraw up to 25% for children's wedding, studies, building houses etc.
and allow to meet financial needs before retirement during emergencies
 It allow individual to make investment through
 Tier-1 account: It function as pension account and subject to specific restrictions.
 Tier-2 account: These are voluntary account providing liquidity of funds via
investment and withdrawal
 Acess and portability: It is ensured through online acess of the pension account to
the NPS subscriber through web portal and mobile app, across all geographical
location and portability of employments.

12. What are the features/ benefits of Atal Pension Yojana?

They are

 Withdrawal policies: The contributions cannot be withdrawn before the scheme is

over, But in exceptional case such as illness, contribution and interest earned will be
allowed to withdraw.
 Age restrictions: Individuals above 18 years and below 40 years can invest as
Contribution to this shall be made for at least 20 years.
 Guaranteed pension: There are 5 options, Rs 1,000 to Rs 5000 and contribution
increases as monthly pension amount increases.
 Automatic debit: The bank account of beneficiary is linked with his pension account
and monthly contributions are directly debited
 Facility to increase contribution: The government provide an opportunity to
increase or decrease one's contribution once a year to change the corpus amount.
There are different contributions which tantamount to different pension amount
 Penalty: If beneficiary delays in the payment of contribution penalty will be charged
If default continues for 12 consecutive months,account shall be deactivated and
amount thus accumulated along with interest would be returned to respective
individual .
 Guaranteed benefits: Benefits will be available to spouse/nominee/next of kin as per
the rules in case of demise of the subscriber.

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 Flexible: It is flexible as pension amount can be upgraded or downgraded based on

choice of subscriber.
 Tax benefits: Contributions to this scheme qualify for tax benefits under section 80
CCD of the Income Tax Act, 1961.
 Low risk: It is one of the low risk retirement option as benefits guaranteed by the
government of India.
 This subscription is open to both organized and unorganized sector workers.

13. Write a note on risk-return relationship.

Generally higher investment return can be ensured by taking higher investment risk. But by
diversifying portfolio of investment asset, good return can be generated with less risk.
Different investments like money,market securities, bonds, private equity, real estate etc have
varying risk-return profiles.
i.Risk-free bonds
ii.Investment-grade bonds
iii.High-yield bonds
iv.Equities
v.private assets
In the above risk-free bonds, which are issued by government and consider as risk free and
have lowest investment return. Moving up each asset class get riskier. However investment
return with each asset class also increase. Private Asset is private equity involves investments
in private companies that are not publicly traded on an exchange. These investments include
additional risks like liquidity risk, but offers highest potential investment returns.
Risk tolerance:
While constructing a portfolio of assets, an investor needs to understand his individual risk
tolerance. It varies among investors. Factors that impact risk tolerance are
 Size of the portfolio
 Future earning potential
 Presence of other types of assets
 Amount of time remaining until retirement
 Ability to replace lost funds

14. Explain the different types of risk?

a) Based on occurrence:
 Pure risk: It is beyond the control of human and can result in a loss if it occurs. Ex:
fire, flood etc.

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 Speculative risk: These are controllable risk and is risk taken on voluntarily and can
result in either profit or loss. EX: betting on sports
b) Based on flexibility:
 Static risk: These are pure risk which are predictable and are present in an economy
that is not changing Ex: theft and bad weather.
 Dynamic risk: It is brought by changes in economy. Changes in price level, income
etc can cause financial loss Ex: technological change.
c) Based on measurement:
 Subjective risk: It is the psychological doubt of investor about uncertainty.
 Objective risk: It is a precise variation of the risk concerning investment.
d) Based on coverage:
 Real risk: It affects a larger population or all market sector.
 Particular risk: This will affect only particular firm or industry.
 Diversifiable risk: Also called as unsystematic risk are the risk of price change
because of unique features of particular security.
 Non-diversifiable risk: It is applicable to entire class of assets where value of
investment declines over the period due to any change that affect market.

15. Differentiate primary and secondary market.

Basis Primary market Secondary market
Meaning It is a market in which A market in which sale and
securities are sold for the purchase of newly issued
first time securities are made.
Issued by Companies Securities are transferred
between investors
Capital formation It directly contribute to Indirectly contribute to
capital of the company as capital as those is exchange
there is transfer of fund from of funds between surplus
surplus to deficit units. only.
Price The price of the securities Price is fixed by demand
are fixed by management of and supply stock exchange
the company market
Entry Companies enter into this to Listed companies only can
raise capital for their enter
activities
Types of securities Sale of new securities take Existing or second hand
place securities are sold
Organised These are not organized It has organized setup
Geographical location There is no fixed place It has fixed location and
Every bank, institution etc working hours
contribute to this market

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Products IPO and FPO Shares and debentures,

warrants etc.
Purchasing Direct indirect
Parties Trading takes place between It take place
company and investors between investors

16. What are the functions of stock exchange?

They are
Economic growth: It is a platform for trading of securities which lead to reinvestment and
disinvestment process. This lead to capital formation and growth of economy
Pricing of securities: Based on demand and supply, it helps to value securities which is
useful for investors, government and creditors.
Transaction safety: Company names are listed only after verifying the soundness of the
company. These has to be operated in the prescribed rules. Hence securities traded in stock
exchange are safe.
Facilitate liquidity: This gives assurance to investors that their investment can be converted
into cash whenever they wishlt offers liquidity in terms of investment
Better allocation of capital: Profit making companies can quote their shares for higher price
and traded in stock exchange to raise their capital.This facilitate allocation of investor's fund
to profitable channels
Promote saving and investment: It offers attractive opportunities of investment in various
securities which encourage people to save and invest in securities of companies
Economic barometer: It helps in measuring economic condition of a country. The economy
of each country is reflected in the price of shares which indicate boom or recession cycle of
the economy
Spreading equity cult: By ensuring better trading practices,educating public about
investment and regulating new issues, ie encourage people to invest in ownership securities
Speculation: It permits healthy speculation of securities to ensure liquidity and to reap rich
profits from fluctuations in security prices
Mobility of fund: It enable investors and companies to sell or buy securities and enable
availability of funds. The banks also provide funds for dealing in stock exchange

17. Explain the trading and settlement procedure of stock exchange operation.
Procedure:
I. Selecting a broker: As trading of securities in stock exchange cannot be done by
themselves, a broker has tpo be selected based on their requirement. This broker may be an
individual or partnership or a financial institution which must be registered under SEBI.

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II.Opening a demat account: All securities are traded electronically and hence investor
must open dematerialised account to hold and trade in electronic securities. There are 2
depository participant CDSL and NDSL.
III. Placing order: The investor then place the order to buy or sell share with his broker. The
broker will act according place order for share at the price mentioned. He will provide order
confirmation slip to investor.
IV. Execution of the order: When broker receives the order from investor, he executes it.
Within 24 hour, he must issue a contract note which contain all information about transaction.
This contract note is an important evidence in case of any legal dispute.
V. Settlement: It is an actual transfer of securities from buyer to seller aling with the fund.
There are 2 types of settlement.
i. On spot settlement: Funds will be exchanges immediately and settlement follows the T+2
pattern. That is transaction occurring on Tuesday will be settled on Thursday
ii. Forward settlement: It happens when both the parties decided to settle on some future
date. It can be T+% or T+9.
18. Write a note on opening a demat account.
Step 1: Choosing depository participant: By considering the reputation of DP and required
services he can provide, select a DP with whom you can open demat account
Step 2: Provide basic detail: On DP's website, fill the online account opening form by
providing basic details like name, phone number etc and PAN card details
Step 3: Add bank details: Adding bank detais is necessary as it is used for crediting any
amount (dividend, interest) payable to you by the issuer company
Step 4: Uploading document Upload document related to address proof, proof of identity
Step 5: In-person verification: To comfirm the identity one can do verification by
themselves and no need to wait for an agent from DP as it is digitized
Step 6: E-sign Using Aadhar linked mobile number,DP will provide the option to sign
application digitally
Step 7: Form submission After all this process formm has to be submitted and account will
be created shortly. You will receive details of account like account number, login credentials
to access account.

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19. What are the functions of a Depository Participant?

They are
 They help investors to open account which is necessary prerequisite to trade on stock
exchange.
 They help in remat process which is temporarily transferring of shares from seller's
account t to broker's account when investor places a sell order. The broker then
delivers the shares to buyer.
 They help in dematerialisation also which involves when buyer pays for shares, they
are transferred back to the seller's account. Also when investor place a buy order. the
shares are temporarily transferred from broker's account to seller's account
 A DP act as intermediary to avail loans for a shareholder and ensure borrower's shares
are transferred to the lender in case of default.
 Changing the beneficial ownership of securities is done through DP
 They also involve in corporate action benefits like transferring securities to the demat
and bank account of customers.
 The setting of transactions using stock exchange is done in connection with
depositories.
 They offer corporate action benefits to their customers, like transferring securities into
demat account or bank account of customers which eliminate need to deposit the
securities in physical form with the company.
 They also facilitate other functions like recertification, de-stamping, transfer of shares
to an heir when shareholder dies etc

20. Write a note on grievances of investor against companies and method of redressal
The common grievances are
 Delay in dematerialisation of securities
 Non-receipt of dividend
 Delay in transfer of securities
 Non-receipt t of bonus share certificates
 Delay in registering transfer of securities
 Non-receipt of right issue offer: Eligible shareholders must receive letter of offer of
rights shares by registered post and it should be advertised in all India newspaper.
Shareholder are not informed of right issue
 Non-receipt of duplicate share certificate: A company has to issue duplicate share
certificate if shares are lost or misplaced after receiving a request.
 Transmission of shares: The company is bound to transfer the ownership of the
shareholder to his legal heirs on the death of shareholder.
 Non-receipt of notice of meeting: Every shareholder who are registered have right to
receive notice of meeting 21 day in advance.

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21. What are the method of redressal of grievance against broker in Investor Service
Cell?
It is as follows
a. When complaint is made with stock exchange authorities, it will be forwarded to investor
cell which will be forwarded to broker which ask him to resolve and reply within 7 days.
b. If there is no reply or if it is not satisfactory, it will be placed before Investor Grievance
Redressal Committee
c. On hearing from birth the side and effort made by broker to solve the matter failing which,
it is referred for arbitration which is a quasi judicial process
d. A sole arbitrator is in charge of this if the sum is less than 25 lakhs and for above 25 lakhs,
a penal of 3 arbitrators is appointed.
e. Appeal against arbitrator can be made in Appropriate court

Redressal of investors grievance against Companies:

a. The complaints from investors will be forwarded to the concerned company which has to
settle within 15 days
b. If company fails to resolve the complaint and pending cases against company causes to 25,
the cell issue show cause notice of 7 days to the company.
c. If company fails further to resolve within 7 days, the scrip of the company is suspended
from trading
d. Investor cell can also transfer scrips of this company to Z.category.
e. The company instructed to employ special personnel to clear pending complaints on a
priority basis

22. Explain the agencies available to seek redressal of Investor’s grievances (Or)

What are the steps taken to provide protection to investors?

An investor has protection against any grievances can seek redressal from the following
agencies
 Grievance cell in stock exchange:
 SEBI
 Company Law Board
 Courts
 Press

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 Grievance cell: ( Ref Sec C)

 SEBI: ( Ref Sec B)

 Redressal by company law board:

a. Every bench of company law board is consider to be a civil court and every proceedings as
judicial proceedings
b. It has the power to inspect records and documents and enforce attendance of witnesses
c. An investor can complain
d.To investigate the activities of the company
e. For relief in case of mismanagement
f. About non-payment or delay of fixed deposit and interest

 Redressal of investors grievances through courts:

a. This is the option for investors when he tried in all the above mentioned redessal methods
b. Complaint against companies can be filed with high court which has special designated
benches about company affairs
c. The time taken for processing in this much longer and costly and hence beyond the reach
of small investors
Module 3:
Mutual Fund

SECTION-A (2 Marks)
1. What are Mutual Funds?
It is pool of money collected from a number of investors who share a common investment
objective and invest in equities, bonds, or other securities. It is managed by professional Fund
Manager.
2. What is open ended mutual funds?
The funds in which units are open for purchase or redemption through the year and allow
investor to keep invest as long as they want are called open ended mutual funds
3. What is close ended mutual funds?
If investors can purchase units only during initial offer period and units can be redeemed after
the completion of the specified maturity period are called close ended mutual fund

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4. What are interval fund?

These are opened for repurchase of shares at different intervals during the fund tenure and
thus fill the gap between open and close ended funds.
5. What are Equity funds?
These are high risk funds that invest in equity stocks/shares of companies But they pro vide
high returns.
6. What are growth fund?
These are risky fund under which money is invested primarily in equity stocks with the
purpose of providing capital appreciation.
7. Give the meaning of fund of fund?
These are multi manager and safe fund that invest in other mutual fund and returns de pend
on performance of the target fund
8. Expand SIP, STP and SWP.
SIP Systematic Investment Plan
STP Systematic Transfer Plan
SWP-Systematic Withdrawal Plan
9. What is SIP?
It is a plan of Mutual fund where a person instead of making lump-sum investment, can
invest in a fixed amount in this scheme at regular intervals.
10. What is STP?
It is a mutual fund investment strategy in which a predetermined amount can be trans ferred
from one scheme of mutual fund to another scheme at predetermined intervals
11. What is SWP?
It is a opposite of SIP which allow to create a series of receivables from the mutual fund
investment regularly on a pre-decided date. This allow investors to customise withdrawal
from the corpus in a phased way
12. What is Net Asset Value?
NAV of an investment company is the value of fund assets minus the value of its liabilities
which represent market value per share for a particular mutual fund.

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SECTION-B (6 Marks)

1. What are the features of Mutual fund?

Its features are

Low cost: These are available at low price compared to independent investments and they
charge a small amount as expense ratio from investors. It is charged to cover only
administration, management and other expenses.

Professional management: Professional managers manage mutual fund who do complete

research and analysis and monitor portfolio and its performances.

Diversification: there is opportunity for diversified portfolio containing different types of

equities and other options.

Properly regulated: This market is regulated by SEBI to ensure transparency and protection
of investor's health.

Easy purchasing: There is options of offline and onlinr purchasing of funds where the entire
process is easy and in online its convenient and fast.

2. What are the benefits of investing in mutual fund?

They are

Liquidity: Mutual fund are having high liquidity which can be easily bought and sold in
short term except ELSS having specified lock-in period.

Less risk: The fund managers spreads investment across stock of companies and in different
sectors and manage mutual fund. This diversification can make risk less.
Expert management: Fund managers are appointed who manage this and identify best stock
to generate maximum profit. Hence investors need not to make research and asset allocation

Low cost: Buying multiple mutual funds at time, the processing and commission charges will
be paid less. Management fee charged is 1% -2.5% only

Tax benefits: One can invest in tax saving fund like ELSS which qualifies for tax deduction
up to Rs 1.5 lakhs

Safe and transparent: Its operations comes under SEBI and necessary disclosure has to be
made which makes trading safe and transparent

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3. What are the drawbacks of mutual fund?

They are
 Penalty: In some mutual fund if investor want to exit before the stipulated time, they
have to incur exit charge.
 Cost: The salary of market analyst and fund manager comes from investor along with
operational cost which may increase overall cost although it has even cost advantage.
 Fluctuating returns: According to market conditions mutual fund returns keep
fluctuating and investor has to be aware of risk profile of fund before investing.
 Diversification: Even it can reduce loss, It can prevent from gaining significant prof-
its.
 No intra-day trading: Unlike ETFS mutual funds are traded once per day which
happens after the market closes at 4 p.m.

4. Name and explain major mutual fund houses in India.

Mutual fund houses provide different schemes that investor can choose according to their
goals
They are
I. SBI Mutual fund: It is one of the well recognised company founded in 1987, which offer
various scheme and it is second fund house after UTI, having 143 funds.
II. HDFC mutual fund: It rank 3" in the list, founded in 1999 and having 86 number of
funds. It has won trust of many investors and placed among top performer.
III. ICICI Prudential Mutual Fund: It was established in 1993 and one of the oldes and
largest AMCs in India. It offer solution for both corporate and retail investment by providing
innovative schemes. Number of funds is 142.
IV. Aditya Birla Sun Life Mutual Fund: It was set up in 1994, a joint venture be tween
Aditya Birla Capital Ltd and Sun Life AMC investments, Canada.It provide for tax saving,
debt, hybrid, liquid funds Etc.and number of funds is 121
V. Kotak Mahindra Mutual fund: Launched in 1998, which offer services like ELSS
hybrid, liquid equity etc .It was first AMC to offer a dedicated gilt fund for govern ment
securities and number of funds are 80.

5. Explain the benefits of Systematic Investment Plan.

They are
 It is best option for the people who do not have knowledge of finance and the way
market moves.
 The fixed amount a person invest averages out the value of each unit and individual
can buy more units when the market is low and buy less when markets high.

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 The small amount invested can grow daily upto a large corpus due as a sum of your
contribution.
 One can start investing with an amount as low as Rs 100 per month
 Removes the need to time the market.

6. Explain the benefits of Systematic Transfer Plan.

They are

 High return: It benefit investor to earn higher returns by shifting to profitable

venture when market swings. It also assure better performance.
 Optimal balance: In allotting investments from debt to equity and vice versa, it helps
to rebalance the portfolio with a mixture of equity and debt instrument. This provide
an optimal combination of risk and return.
 Averaging of cost: It allow investors to lower their average cost incurred on invest
ment. It involves investing in fund when their 'average price is low and sell them
when market value increases
 Taxability: Each transfer under this is subjected to tax deduction provided capital
gains are incurred
 Stability: Investors can transfer their fund through this into safe investment schemes
when there is high degree of volatility in stock market which ensure safekeeping of
investor's finance.

7. Differentiate SIP and STP of mutual fund.

Parameters SIP STP
Process A fixed sum of money Money gets transferred from
invested in this scheme debt fund.
deducted fom bank account.
Return Less as bank offer less Higher returns as debt
interest rate. generate decent returns
around 10%
Time As these are open ended, no The amount and transfer
defined time for investment period are fixed.

Taxation Investor has to pay long Subject to short term capital

term and short term capital gains
gains tax depending on
tenure of holding funds
Advantage Compounding, disciplined Consistent return and rupee
investment approach cost averaging

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8. What are the benefits of SWP?

 If SWP withdrawal rate is less than fund return, the investors can get capital
appreciation in long term.
 According to needs of investor, he can choose amount, date and frequency.
 It ensure regular income to investors for meeting regular expenses.
 There is no TDS on SWP amount for resident individual investors.
 Allow to customise the cash flow as per investor requirements.

9. What is the Net Value of Assets for mutual fund.

Mutual funds do not trade in real time. They are calculated based on trading method and
depend on various assets and liabilities.
Assets:
It consist of cash, cash equivalent, and other accrued income. Based on closing price of
various securities included in fund's portfolio, market value is calculated. These fund include
a percentage of capital in the form of liquid assets and cash. The sum of all these assets or
their variants fall under the category of assets
Liabilities:
It include outstanding payment, money owed to lenders, and other charges that are owed to
associated entities.. It may also include foreign liabilities,various accrued expenses, including
utilities, staff salaries,operating expenses etc. Hence for net asset value calculation the
quantum of above mentioned liabilities and assets as of the end of a particular day are taken
into consideration

10. If the market value of the securities of a mutual fund scheme is Rs 500 lakh. The
mutual fund issues Rs 10 lakh units of Rs 10 each to its investors. Calculate Net asset
value.
Solution: NAV = (Assets-debits)/no. of outstanding units
= 50

11. An investment company manages a mutual fund and like to calculate NAV for a
single share. The information provided is as follows
Value of securities=$75 million
Cash equivalents = $15 million
Income of the day =$24 million
Short term liabilities=41 million
Long term liabilities = $12million
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Expenses of the day = $5000

Solution: NAV = (75,000,000+15,000,000+24,000,000-1,000,000-12,000,000-5,000,000) /

20,000,000
= $5.05

12. Raju invested in mutual fund with 30,000 units. Value of find asset is worth $20
million, Short term and long term liabilities are $2 million and $1million along with
other expenses of $2 million. He wants to know NAV of mutual fund for 2000 shares
after the tenure ends

NAV per share = (20,000,000-(2,000,000+1,000,000+2,000,000)1/30,000

= (20,000,000-5,000,000)/30,000
=15,000,000/30,000 = $500
The per unit price of the fund share is $500
NAV = 500 x 2000
= $1,000,000

SECTION – C
(10 marks)

1. Explain in detail History of mutual fund in India.

It is classified into
a. First phase (Phase of inception) 1964-1987:
 UTI was established in 1963 by the act of parliament, established by RBI.
 First scheme was Unit Scheme 1964.
 RBI de-linked UTI and IDBI look over the regulatory and administrative control in
place of RBI
b. Second phase (Entry of public sector)1987-1993:
 Non-UTI mutual funds from public sector entered the market, It was established by
Public sector banks, LIC and GIC.
 SBI mutual fund was first non-uti followed by canbank mutual fund, Punjab national
bank mutual fund, Bank of India and bank of mutual fund.
 At the end mutual fund had asset of Rs 47,004 crores.

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c. Third phase (Entry of private sector) 1993-2003:

 A new era started with entry of privare sector, giving investors wide choice of funds.
 All mutual funds were registered under SEBI to protect interest of investors.
 In 1996, regulations are replaced by new rules.
 Leads to merger and acquisition of many industries which lead to growth of mutual
funds.
 At the end of 2003, there were 33 mutual funds with total asset of 1,21,805 crores
fund.
d. Fourth phase (Phase of consolidation) 2003-2014:
 UTI was split into 2 separate entities, UTI Mutual Fund(under SEBI) and Specified
Undertaking of UTI(SUUTI) (under Indian government).
 The fund house mentioned above was sponsored by SBI.LIC.PNB and BOB
 With the bifurcation of UTI, setting up of UTI mutual fund and with mergers and
acquisition, the mutual industry has entered its current phase of consolidation and
growth.

2. Explain the different mutual fund schemes in India.

A. Schemes based on maturity period:

i. Open ended scheme: Ref Sec A qn no 2. These schemes do not have fixed maturity period
and having high liquidity
ii. Close ended fund scheme: Ref Sec A qn no 3. It is having maturity period of 5-7 years.
Some of this fund provide an exit route to the investor by giving an option of selling back the
units to mutual fund at NAV related price.
iii. Interval fund: Ref Sec A qn no 4

B. Based on asset class:

i. Equity Fund: The objective of this is to provide capital appreciation over the medium to
long term which provide different option to investors like dividend option capital
appreciation etc. It has 10 categories.
Large cap: Top 100 companies in terms of market capitalization
Mid cap: 101 st -250 th companies in term of market capitalization
Small cap: 251 st company onwards in terms of market capitalization
ii. Debt schemes: To provide regular and steady income to investors this scheme was started
which generally invest in fixed income securities like bonds, debentures

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iii. Hybrid mutual fund: These fund invest their portfolio in a mix of different as classes
like equity, debt etc

C. Based on portfolio management:

i. Active funds: In this fund manager is active in deciding whether to buy, hold or sell the
securities.
ii. Passive fund: It hold a portfolio that replicate a stated index where fund manager having
passive role

D. Based on Investment objective:

i. Growth fund: Which invest in growth oriented assets and investment require dium to long
term investment horizon.
ii. Income funds: Objective is to provided regular and steady income to investors and these
invest in fixed income securities like corporate debentures, bond etc
iii. Money market fund: These are the options for investors seeking liquidity and protection
and commercial returns

**************************************

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