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Module – 1
FOUNDATIONS FOR FINANCE
FINANCIAL PLANNING
Money meaning: “Money is a commodity which is used to denote anything which is widely
accepted in payment for goods, or in discharge of other kinds of business obligation.”
Need for money: Money is necessary for obtaining the goods and services needed for survival, an
understanding of personal finance are essential. People need to be responsible with the money
they earn and save enough for their future to ensure that they will still have enough leftover
when they can no longer earn.
The sooner people start saving money, the more likely they will never face a lack of
money or financial stress.
Properties of money
 It is the medium of exchange, which allows 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 exchanges.
 It is recognizable.

Types of money:
 Flat money: The form of money issued by a government and is not guaranteed by tangible
goods like gold and silver. Ex: INR, pounds.
 Crypto currencies: These are an electronic medium of exchange that exists virtually and has
opportunities for international exchanges.
 Fiduciary money: It will be used as a means of trade which determines its value.
 Commodity money: It is the oldest kind whose value is described by the actual value of the
commodity itself.
 Paper money: It refers to the bank notes and government notes which are used as money.

Financial Planning: It aims at ensuring that a household has adequate income or resources to
meet current and future expenses and needs. The regular income for a household may come
from sources such as profession, salary or business.
The normal activities of a household and the routine expenses are woven around the
regular income. However, there are other charges that may also have to be met out of the
available income. The current income of the household must also provide for a time when there
will be no or low income being generated, such as in the retirement period.

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 need for funds.
Need of financial plan:
 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.

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 To reduce debt: Cost of debt can harm long-term financial interest. If a person invests
according to financial plan, it helps in making debt free.
 Risk diversification: Financial plan protect one’s financial goals from the unexpected changes
of capital market. Otherwise, one may invest in assets that give higher returns in bull market
which increase risk in portfolio.
 Managing cash inflows: 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 in most 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 out finances such that our lifestyle is taken
care of. One can meet and take 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.

Objectives of financial planning:

 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.
 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 idle 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, prepares 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 prepare 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.

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Types of financial goals of an individual.

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 tuition 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 planning,
execution and patience. They require more than 10 years to accomplish. Ex: Retirement or
funding higher education.

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 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, discount,
brokerage etc. It should also ensure average cost of capital to be at its minimum.
 Liquidity: It should 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.

Factors influencing financial planning:

 Objectives: The objectives of financial planning should be consistent with the objectives of
organization. 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 plan depends on economic growth of a country. The stock
prices will be high, moderate interest rate during economic progress and vice versa
 Global issues: Rise in price of oil may cause inflation which causes ups and downs in our
stock market and impact on financial planning.

Life Goals: The income is primarily derived from two sources:

 Income from profession or business or employment undertaken.
 Income and earnings from assets or investments such as rent from property, interest
form bank deposits, dividends from shares and mutual funds, interest earned on
debentures.

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Income from business or profession will be the primary source of income in the period when the
individual is capable of being gainfully employed and generating an income. When this period is
over, the dependence for income from the assets and investments will increase. Assets and
investments as a source of income are typically built over a period of time from surplus income
after meeting expenses.
Current income is first assigned to meet current expenses. Surplus income available after
meeting expenses is called savings and it is used to create assets that will provide future income
or meet future expenses. Large ticket size assets, such as real estate, or purchases that are not
amenable to being met out of regular income, such as buying a car, may require surplus income
to be accumulated over a period of time.
Typically, such assets are acquired with a combination of own funds and loans. Loans
result in a liability that has to be met out of current and future income.
 Income is used to meet current expenses and create assets to meet future income needs
and expenses.
 Expenses have to be controlled to fit into available income and to be able to generate
savings.
 Savings are used to create assets that will generate income for the future needs.
 Borrowings or loans may be combined with savings to acquire assets of a large value or
meet expenses.
 Borrowings impose a liability to be met out of income of pay the cost and repay the loan.
Financial planning helps in understanding the relationship between the four elements of the
personal finance situation of an individual: income, expenses, assets and liabilities so that all the
current and future needs are met in the best way possible.

Financial Goals: It is the term used to describe the future needs of an individual that require
funding. It specifies the sum of money required in order to meet the needs and when it is
required. Identifying financial goals help put in place a spending and saving plan so that current
and future demands on income are met efficiently.
Goals describe in terms of the money required to meet it at a point of time in future, is
called a financial goal.
Examples of financial goals:
 ₹ 30 lakhs required after five years for the college admission for a child is a financial goal.
 ₹ 3 lakhs required each month after 10 years to meet household expenses in retirement.
 ₹ 10 lakhs required after 5 years for a luxury cruise holiday.
 ₹ 20 lakhs required after three years as down payment for a house.
 ₹ 1 lakh required after 6 months to buy a car.
Converting a goal into a financial goal requires the definition of the amount of money required
and when it will be required. Financial goal contains 2 important components, namely:
a) Goal value; and
b) Time to goal or investment horizon.
Goal value: The goal value that is relevant to a financial plan is not the current cost of the goal
but the amount of money required for the goal at the time when it has to be met. The current

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cost of the goal has to be converted to the value in future. The amount of money required is a
function of:
 Current value of the goal or expense.
 Time period after which the goal will be achieved.
 Rate of inflation at which the cost of the expense is expected to increase.
The current cost of college admission may be ₹ 10 lakhs. But after 5 years, the cost would
typically be higher. This increase in the cost of goods and services is called inflation. While saving
for a goal, therefore, it is important to estimate the future value of the goal because that is the
amount that has to be accumulated.

Future Value of a goal = Current value of goal x (1 + rate of inflation) years of goal
Example: ₹ 30 lakhs required after five years for the college admission for a child is a financial
goal. How much is the future value of this goal? Assume rate of inflation is 8% p.a.
FV of the goal = 30 x (1+ 0.08) 5
FV of the goal = 44.08 lakhs.
This is the value of the goal which needs to be achieved by saving and investment.
Investment Horizon: Financial goals may be short-term, medium-term or long-term.
The Investment Horizon refers to the time remaining for the funds to be made available to meet
the goals. The investment horizon will determine the type of investment that will be selected for
investing funds for the goal. If the goal is short-term, low risk investments will be preferred even
though the returns will be low since the investor would not like a take a chance of losing the
principle and return on the amount invested. As the time available for the investment increases,
the investor will be able to take higher risks for better returns.
Sonu aged 24 is setting aside money to create an emergency fund and is also saving for his
retirement. She has the option of investing in a short-term debt fund or in an equity fund. What
will be the consequence of her decision?
A short-term debt fund may be ideal for Sonu to hold her emergency fund since it has the
twin features of relatively safe returns and ability to draw the funds out whenever she requires.
But her retirement goal may see inadequacy of funds because the returns from short-term debt
funds are low and the amount she is investing may not be earning as well as it could.
If Sonu invested in an equity fund, she may find that the value of the emergency fund has
gone down when he needs the money since the returns from equity will be volatile. This is a risk
she will be unwilling to take. On the other hand, her retirement corpus will benefit from the
higher returns from equity since she requires the funds only after a long period during which the
volatility in returns might be ironed out.
The appropriate investment for a goal will be one that aligns the risk and return
preferences of the investor to the investment horizon.
The investment horizon will keep reducing and the investments made for the goal has to
align to the new situation.

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As Sonu’s retirement comes closer she will need to move his investments from equity to
lower risk products.
SAMPLE FINANCIAL PLAN FOR A YOUNG ADULT:
Name: Mr. Arun
Goals Goal type Name Target Amount Action plan required
Date (lakhs)
Education Short term Self 2023 5 Finance your fees partly from your
(MBA) parents funds and partly by taking loan.
Car Medium term Self 2027 10 By 2024 it is expected you would begin to
earn money. So you can save 1 lakh every
year so in three years you can have
enough funds to make down payment to
buy a vehicle and fund the rest by bank
loan.
Vacation Medium term Parents 2028 1 Also keeping in mind this goal you can
make suitable investments like equity and
mutual funds to earn sufficient returns to
fund the vacation for your parents
provided you plan well in advance.
Marriage Long term Self 2030 20 Make investments in equities, debt and
mutual funds which will give you
sufficient returns to cover your expenses
House Long term Self 2032 60 You can make investments in fixed
deposits which will help you to lock away
funds for this goal, however as this would
not be enough you should look at other
options (like bank loans) as well.

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, assets and liabilities etc.
should be gathered in relation to finance.
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.

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Steps 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.
Financial goals of an individual:
 Retirement plan: It is a long term investment to accumulate wealth throughout ones career
which provides 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 necessitates creating budget that account for
expenses. 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.
 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.

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 ₹ 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 ₹ 24,500 p.m.
Help her to prepare and follow a financial plan to meet her short and long-term goals by
analysing her goals.
Facts of the case: Given data
Profile:
Instruments Corpus(₹)
PPF 50,000
FD 1,20,000
Cash 1,00,000
Jewellery 10,000
Total Asset 3,70,000

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Short-term and long-term goals of Ms ABC

Financial goals time horizon future cost
Purchase of house 5 6,75,000
Daughter’s education 12 30,00,000
Retirement 28 1,12,00,000

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% p.a. FD can be considered as small portion of her monthly income.

Solution:
 Analysing 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 increase debt.
 Her profile was missing insurance and hence it is better to opt for term insurance policy for
cover of ₹ 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 ₹ 6,75,000. The stamp duty and
registration charges of ₹ 1,50,000 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 ₹2,700 p.m.
 She can start her retirement planning at the age of 43.

Summary of financial plan

Goals Horizon Future cost Start investment Horizon Required (%)
(age) p.m.
House 5 6,75,000 32 5 7,300 7%
Education 12 30,00,000 32 12 2,700 7%
Retirement 28 1,12,00,000 43 13 44,200 7%

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TIME VALUE OF MONEY

The concept of time value is that the value of money received today is more than the value of
the same amount received after a certain period of time.
In simple terms, money received in the future is not as valuable as money received today.
Time preference of money:
If you are given the choice of receiving ₹ today or after one year, you will definitely opt to receive
it today than after one year. This is because the value of current receipt of money is higher than
the future receipt of the same money. This concept is referred to as time preference of money.
Importance of time value of money:
 It is possible to take better financial decisions in uncertain situation using time value of
money.
 It helps individual in choosing the best investment proposal. It helps to decide whether to
accept or reject the proposal for investment.
 Having money right now is more valuable than getting the same amount in future. In business
money can be used for expansion which can generate more money.
 To find feasible time period to get back the original 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.

REASONS FOR TIME PREFERENCE OF MONEY:

 Present needs are considered as more important: People consider present needs as more
important than their future needs. Purchase of clothes, television, car and luxurious
articles for their present use feels more urgent than saving for tomorrow.
 Investment opportunities available: If you pay ₹ 10,000 to a person today, and if he
invests it at 12% p.a, he would receive ₹ 11,200 (10,000 plus ₹ 10,000 x 12%) at the end
of the year. Whereas, if he is to receive the same amount after one year, he would
receive only ₹ 10,000. Sometimes, by investing in shares, one can even double the money
in a short period. So, a person prefers to receive a certain sum of money today rather
than receiving it after a certain period of time.
 Uncertainty and loss: Future is uncertain. If you expect to receive a certain amount in
future, there is always an uncertainty with regard to its receipt in future. The future is
subject to risks. A person may incur loss due to not getting the expected amount in
future. So, a person prefers to receive the money today.
TECHNIQUES OF TIME VALUE OF MONEY: There are two techniques for adjusting the time value
of money.
a. Compounding technique or Future value technique.
b. Discounting technique or Present value technique.

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Types of annuity:
 Immediate annuities: These are the payments or receipts which are made at the end of each
period. Here the premium is paid in lump sum and not multiple number of times.
 Deferred annuity: These are the payments or receipts which start 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 is provided based on performance of sub accounts that fund the annuities
growth. Sub accounts work in a similar way to mutual funds.
 Immediate annuity: This allows you to convert a lump sum of money into an annuity so that
you can immediately receive income. Payments generally start about a month after you
purchase the annuity.

Types of discount rates:

 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.

Problems solved.

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VALUATION OF SECURITIES
Valuation of Debentures: A debenture may be defined as ‘a formal document constituting
acknowledgement of a debt by an enterprise usually given under its common seal.’ Debenture or
Bond also contains details regarding security, payment of interest and repayment of principal.
Terms used in valuation of Debentures:
Face value: It is the amount which the firm borrows at the time of issue. It is stated on face of the
Debenture or Bond.
Interest rate: The debentures carry a fixed interest rate. It is also known as the coupon rate.
Interest is payable at this rate on the face value or paid up value of debentures.
Maturity period: The period after which the money raised on debentures will be repaid to the
debenture holders is known as maturity period.
Valuation of Preference shares: Preference shares carry a fixed dividend rate and hence their
valuation can be done on the same basis as that of debentures or Bonds. Preference shares can
be classified into two types namely:
 Redeemable Preference Shares
 Irredeemable Preference Shares
Valuation of Equity Shares: The valuation of Equity shares is difficult as compared to the valuation
of debentures and preference shares. This is because of the following reasons:
 Equity shares do not carry a fixed dividend or Fixed interest as in the case of preference
shares or debentures. The equity share holders may or may not get dividend.
 Dividend on Equity shares are expected to grow unlike preference dividend.
Methods of Valuation of Equity Shares: There are two methods for valuation of Equity Shares
they are:
1. Dividend Capitalization Approach
2. Earning Capitalization Approach.
Dividend Capitalization Approach: According to this approach the value of an equity share is
equivalent to the present value of future dividends plus the present value of the price expected
to the realized on its sale. This approach is based on the following assumptions:
 Dividends are paid annually.
 The dividend is received after the expiry of a year of purchase of equity share.
Interest is the charge on loan borrowed from financial institutions. It is expressed in terms of
percentage per year.
Simple cost 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.

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Compound interest: It is addition of interest to the principal sum of a loan or deposit. This
indicates the interest calculated on the principal and interest accumulated over the previous.
Discounting: It is the act of estimating the present value of payment that is to be received in the
future which takes into account the time value of money.
Dividend capitalization: These are dividends due on the preferred shares which are capitalized by
adding them to the stated price of the preferred shares.
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.
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.
Equity Shares Valuation Models: The two important models used for valuation of equity shares
are:
Single period valuation model.
Multi-period valuation model.

Problems solved.

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 INVESTMENT AVENUES
Meaning: Investment 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.

Objectives of investment:
 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
have to choose investing in securities that are easy to liquidate.
 To save for retirement.

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.
 Return: It is related to the risks and prospects of the investment.
 Lock-in period: It is the period for which investments cannot be sold or redeemed. Investment
is locked for a fixed period during which one cannot access money.
 Net asset value: It is the value of funds 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.
 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.
 Diversification: It is a risk management strategy that spreads one's wealth across a variety of
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.

Need for diversification:

 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 investor’s 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.
 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 cumulative 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.

Factors influencing investment decision:

 Objectives: It involves decision making where investment depend on objectives of the individual.
It may be short term or long term fund allocation.
 Returns: Investors always tries to invest in that asset which yield 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 factors to be considered by
an investor. Investors who want to take less risk, they choose investment opportunities they are
taxed less.
 Safety: Investors 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 that security which has high degree of liquidity.
 Tenure: The investment decision also depends on maturity period and payback period as many
funds are blocked for a certain period.

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 rare, 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.
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.
Diversification is a risk management strategy that spreads one's wealth across a variety of 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.

Disadvantages of diversification:
 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 investments: Diversifying portfolio require consideration of assets having different fees
and charges. If not it may dilute the value of investment.
 It does not eliminate all types of risk within a portfolio.
 It may cause investing to feel burdensome requiring more management.

Investment and Speculation:

Basis Investment Speculation

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

INVESTMENT AVENUES FOR A COMMON INVESTOR:

BANK DEPOSITS: It is 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.

CURRENT ACCOUNT DEPOSIT is also called as demand deposit account, which is meant for
individuals who require amount a higher number of transactions daily. It allows customers to deposit
and withdraw 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 funds in his account, there is no restriction on the number and
amount of withdrawal made.
 These accounts allow account holder to withdraw money using bank cards, cheques, 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 holders do not maintain minimum balance.
 It do not promote saving habits among account holders.
Advantages of current accounts:
 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 cheques, Demand draft
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.
Disadvantages of current accounts:
 Account holders 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.

FIXED DEPOSITS: These deposits are offered by bank or NBFCs where a person can deposit lump
sum of money get higher rate of interest and in which money will be locked for a fixed period.
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.
Advantages of fixed deposits:
 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 an additional investment.
Disadvantages of fixed deposits:
 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 canned in this is added to the taxable income of the deposit holder unlike insuring
account.
 The returns received from PD 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.

SAVING ACCOUNT: It is a deposit account held with a bank to manage savings, expenses and
investments of people.
Features:
 Bank offers payment facilities such as bill pay 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.
Advantages of saving accounts deposits:
 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 institutions allow bills to be paid automatically out of this account without
subjecting to withdrawal and transfer laws. Hence, it avoids late fees or missed payments.
Disadvantages of saving accounts deposits:
 The interest rate of bank fluctuates 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.

RECURRING DEPOSIT: 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 do not 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 up to 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.
Advantages of recurring deposits:
 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 Rs100.
 There is no limit on number of RD accounts one can hold.
Disadvantages of Recurring deposits:
 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.

CORPORATE SECURITIES: These are negotiable financial instrument which holds monetary value
conferring the right to receive property not currently in possession of holder.
Types of corporate securities:
 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 deposits.
 Equity securities: It represents 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 main purpose is to minimize risk. There
are 4 types:
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 fulfil a commitment to
buy or sell the asset.
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.
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.
Swamps: It is an agreement between two counterparties to exchange financial instruments,
cash flows or payments for a certain time.
 Hybrid securities: It is a single financial product that combines different types of financial
securities or has features of multiple kinds of securities. Ex: Convertible bonds.

Equity shares are 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
finance.

Features of equity shares:

 These shares remains 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 sufficient capital.
 These shareholders are eligible to gain additional profits generated by a company.

Types of equity shares:

 Paid-up capital: It forms part of subscribed capital which the company invest in their business.
 Ordinary shares: these are issued to avail fund to meet long term expenses of business and
ownership benefits are provided to business.
 Preference equity shares: It is issued to an investor as guarantee of the payment of cumulative
dividend before returns are distributed among ordinary shareholders.
 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.
 Right share: It is issued to existing stockholders to preserve property rights of old investors.
 Sweat equity shares: As an appreciation for great job company reward employees with shares.

Preference shares: These are also known as preferred stocks, which are owned by the people who
have the right to receive part of the company's profit before the holders of ordinary shares are paid.

Features of preference shares:

 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 allows shareholders to receive dividend pay-outs when other stockholders may receive
dividend later.

Types of preference shares:

Cumulative preference shares: It allows shareholders the right to enjoy cumulative dividend pay-out
by the company even it is not earning profit.
Non-cumulative preference shares: In this dividend pay-out takes place from the profit made by the
company and they do not collect dividends in the form of arrears.
Redeemable preference shares: These shares can be repurchased or redeemed by the issuing
company at a fixed rate and date.
Irredeemable preference shares: These shares cannot be repurchased or redeemed by the issuing
company at a fixed rate and date. These help companies by acting as lifesaver during inflation.
Convertible preference shares: These are converted into common equity shares at a specific price
and time depending on terms of issue.
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.
Participating preference shares: 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 earning.
Non-participating preference shares: These shareholders are entitled to pre-fixed dividends. They
cannot participate in surplus profit of the company.

Equity shares and preference shares:

Equity shares Preference shares
It represents extent of ownership in a It comes with preferential right when it comes
company. to receive dividend and repayment of capital.
Fluctuate as per earnings. Fixed earnings.
Shareholders have voting rights to choose No voting rights
managers.
Shareholders do not have right to claim their Shareholders have right to claim.
assets when company decide to wind up.
It is repaid at the end. Repaid before equity shares.
Cannot be redeemed. Can be redeemed.
Shares cannot be converted. Can be converted into equity shares.

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.
Features:
 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 investors 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.

Types of debentures:
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 instalment over a time period are called redeemable debentures.
Irredeemable debentures: 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.

Bond: It is a fixed income instrument that represents a loan from an 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.
Features:
 Bonds prices correlated with interest rate. If interest rate goes up, bond 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 investors 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 debt payment. This
determines the degree of confidence that investors have in an organisation's bond.

Types of bonds:
 Floating interest bonds: The bonds whose coupon rate is subject to market fluctuation are
called floating bonds. The return on investment depends on inflation condition of the economy
etc.
 Fixed rate bonds: In this bond, the interest remains 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 inflations the face value and interest
return.
 Perpetual bond: The bonds which do not have maturity period and these are fixed security
investments where issuers 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.
Debentures and bonds:
Debentures Bonds
These are secured or unsecured Secured by some kind of collateral.
The tenure is short-term or long-term based on It is a long-term investment and tenure is
fund requirement. generally long.
Issued by private companies. Issued by financial institutions, government
agencies, large corporations.
Have high risk as they are not backed by These are safe as they are backed by some form
collateral. of collateral.
They offer high rate of interest as they are Offer low rate of interest as the stability of
unsecured. repayment in future is high.
Payment is periodical as per the prospectus. It is on accrual basis which is monthly, half
yearly or annually.
It allow for converting debentures into shares if It cannot be converted into equity share.
they believe that the company’s stock will rise
in future.

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.
Features of company deposit:
 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 bank
deposit.
 It is suitable for conservative investors seeking assured returns from a lump sum investment for
goals up to 5 years.
 Interest depends on tenure of the deposit and the issuer.

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.

Post office savings account:

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

Post office recurring deposit account:

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

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 ₹ 4.5 lakh by combining all
account.
 Account cannot be closed before completing one year.

Senior citizen saving schemes:

 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 rate of 7.4% p.a.

GOVERNMENT SECURITIES: 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.

Different types of Government securities:

Treasury 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.
Cash management bill: These are also short-term securities and it will be issued at variety of terms.
It is issued by the government to fulfil the temporary cash flow requirements.
Treasury notes: These can be purchased in terms of 2,3,5,7 or 10 years. Interest will be paid every
months until they reach maturity date. Once it reaches maturity individuals can redeem the entire
face value.
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.
Treasury inflation protected securities: These are available based on 5 years, 10 years or 30 years
term period which pay interest to all user 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.
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 of interest.
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.

REAL ESTATE: It refers to physical property which includes land building or improvements attached
in the Land, whether natural or manmade. This includes activity of buying and selling of land and
building.

Features of real estate:

 One kind of real estate is not same as the other.
 Improvements made on land can increase its value which can generate more income.
 Once infrastructure is 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.
Kinds of real estate:
 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.
 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 costs 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.

GOLD & BULLION: 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.

Gold bullion: It is a form of direct gold ownership which is a form of pure or nearly pure, gold that
has been certified for its weight and purity. This consists of coins, bar and other forms of gold. It is
necessary to stay updated on price and it is better to use a reputable dealer.

Gold coins: These are commonly bought by investors from private dealers at a 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.

CHIT AND NIDHI COMPANIES:

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.
Features:
 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.

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.
Features:
 A Nidhi company can be registered as a public company and for this license is not required from
RBI.
 The liabilities of shareholders are extended 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.

Chit Fund Company and Nidhi Company:

Chit fund Nidhi company
It is a committee where some people It is an NBFC where members can deposit some
contribute fixed money for a decided period of amount of money or recurring deposit.
time.
It is mandated to legalize under Registrar of These are liable to follow Nidhi rules and public
Firms, societies and chits. limited Company’s Act 2013
These are administered by an outsider who is It is operated by its members only.
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 certain duration. Saving deposit or loans have a fixed duration,
not the company.

INSURANCE PLANS: 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.

Types of life insurance plans:

 Term insurance: It is an insurance that provide death benefit to beneficiary only if the insured
dies during the specified period. The premiums paid provide tax exemption and it provides 100%
risk coverage.
 Whole life policy: It is an insurance policy which covers a policy holder against death throughout
his life and individual enjoy the life coverage. The policyholder has to pay regular premium until
his death, upon this corpus is paid to the family.
 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.
 Money back policy: It is a policy that gives a percentage of the sum assured at 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 instalments paid. It offers new ULIP versions of
money back policies.
 Unit linked Insurance plans: It is one policy that provides dual advantage of protection and
flexibility in investment. Part of amount invested provides life coverage and remaining is invested
in the equity and debt instrument for maximizing returns.
 Child insurance plans: It is an important financial planning tool for parents which help to build a
significant sum for child’s education and marriage expenses. It provides maturity benefits either
in the form of annual instalments or one time pay-out after child turns 18.
 Retirement insurance plans: It helps to develop financial independence in non- working years. Ir
allows to save and invest for the long-term which ensure financial security and to accumulate
significant amount.
 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.
 Saving and investment plan: It channel regular saving into long-term investment goals. It helps in
protecting one’s financial goals with a premium protection option which allow planned
investment to continue even after demise.

Retirement & Pension Plan:

NPS (National Pension System): It is a voluntary defined contribution pension system and a long-
term investment plan to facilitate a regular income post retirement to all the subscribers.
APY 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.
PMVVY is abbreviated as Pradhan Mantri Vaya Vandana Yojana: It is pension scheme for senior
citizens which provides social security and financial independence to the people post retirement by
offers from returns on investment.
VPBY is abbreviated as Varishtha Pension Bima Yojana: 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.
IGNOAPS is abbreviated as Indira Gandhi National Old Age Pension Scheme: It is a pension scheme
for senior citizens to provide social protection by offering pension to its beneficiary which include
seniors, widows and disabled.

Features/ Benefits of NPS(National Pension Scheme):

 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 categories which stabilize risk return in the interest of investors, which means the
corpus is safe from the equity market volatility.
 Tax efficiency: It provide tax deduction up to ₹ 1.5 lakh to be claimed for NPS for one’s
contribution as well as from employer. It allows 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 provides 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.
 Access and portability: It is ensured through online access of the pension account to the NPS
subscriber through web portal and mobile app, across all geographical location and portability of
employments.

Features/ Benefits of APY(Atal Pension Yojana):

 Withdrawal policies: The contributions cannot be withdrawn 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, ₹ 1,000 to ₹ 5,000 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.
 Flexible: It is flexible as pension amount can be upgraded or downgraded based on choice of
subscriber.
 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.

RISK & RETURN:

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.

Types of risk:
 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.
Speculative risk: These are controllable risk and is risk taken on voluntarily and can result in either
profit or loss. Ex: Betting on sports.
 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 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.
 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.

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.
Nominal return: It is the not profit or loss of an investment expressed in the amount of currency
before any adjustments for taxes, fees, dividends etc.
Real return: It is adjusted for changes in prices due to inflation or other external factor. These are
lower than nominal returns which do not subtract taxes and inflation.

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.
 Risk – free bonds.
 Investment – grade bonds.
 High – yield bonds.
 Equities.
 Private assets.

In the above risk – free bonds, which are issued by government and consider as risk free and have
lowest investment returns. 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.

STOCK MARKET

Stock market is a place in which shares of a publicly held company are bought and sold. It is asset of
exchanges where companies issue shares and other securities for trading.

Features:
 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 is done through brokers on behalf of companies.
 Registered 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 of the organization or
business.
 Obligatory: The function of all stock exchanges is regulated by SEBI.

Functions of stock exchange:

 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 have 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 wish. It 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 facilitates 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, i.e. 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 enables investors and companies to sell or buy securities and enable
availability of funds. The banks also provide funds for dealing in stock exchange.

Primary Market 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.
Functions of primary market:
 Underwriting services: Underwriting 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
earlier which involve detail assessment of project viability.
 Distribution: A new issue is also distributed in this market which is initiated with new prospectus
issue.
 Global investment: These helps in improving domestic and foreign companies and enable risk
diversifying.

Secondary Market is a place where in shares of companies are traded among investors. Investors
purchase securities or assets from other investors rather than from issuing companies themselves.
Functions of secondary market:
 It provides a platform for trading of financial instruments like bonds, shares and debentures.
 These markets 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. The flow of
investment capital reduces economic uncertainty.
 This market trade only authorized securities and also there is strict oversight by regulatory
bodies.
 Valuation data of this market provide information to investors to know how much investment has
to be made. Also it helps in tax calculation and other financial task.
 Government also get benefit from tax accordingly Creditors can also assess valuation to
determine credit worthiness of a borrower and avoid risk.

Primary market and secondary market:

Primary market Secondary market
Meaning It is a market in which securities are A market in which sale and purchase of
sold for the first time newly issued securities are made.
Issued by companies Securities are transferred between
investors.
Capital It directly contributes to capital of the Indirectly contribute to capital as there is
formation company as there is transfer of fund exchange of funds between surplus only.
from surplus to deficit units.
Price The price of the securities is fixed by Price is fixed by demand and supply of
management of the company. stock exchange market.
Entry Company enter into this raise capital Listed companies only can enter.
for their activities
Types of Sale of new securities take place Existing or second hand securities are
securities sold.
Organised These are not organised. It has organised set up.
Geographical There is no fixed place. Every bank, It has fixed location and working hours.
Location institution etc. contribute to this
market.
Products IPO & FPO Shares and debentures, warrants etc.
purchasing Direct Indirect
Parties Trading takes place between company It takes place between investors.
and investors.

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.

Procedure for trading and settlement of stock exchange operation:

1. Selecting a broker: As trading of securities in stock exchange cannot be done by itself; a broker
has to be selected based on their requirement. This broker may be an individual or partnership or
a financial institution which must be registered under SEBI.
2. 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 & NDSL.
3. Placing order: The investor then place the order to buy or sell share with his broker. The broker
will act according to investor’s transaction and place order for share at the price mentioned. He
will provide order confirmation slip to investor.
4. Execution of the order: When broker receives the order from investor, he executes it. Within 24
hour, he must issue contract notes which contain all information about transactions. This
contract note is important evidence in case of any legal dispute.
5. Settlement: It is actual transfers of securities from buyer to seller align with the fund. There are 2
types of settlement:
 On spot settlement: Funds will be exchanged immediately and settlement follows the
T+2 patterns. That is transaction occurring on Tuesday will be settled on Thursday.
 Forward settlement: It happens when both the parties decided to settle on some future
date. It can be T+% or T+9.

DEMAT account: It is necessary account to hold financial securities in a digital form and to trade
shares in market. It enables electronic transaction of securities to be bought and sold through
process of dematerialization.

Features of demat account:

 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 investors are having certificates in physical form, they have to
provide detailed instructions to Depository Participant 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 for 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
 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

Advantages of demat account:

 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 allows to store any number of shares and can monitor details of all shares
held in this account.
 Reduce time: Unlike in physical securities, it allows 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 reduces cost and time.
 Stores other investments: Apart from shares, this account can hold multiple assets like mutual
fund, government securities etc.

Steps in opening 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 details 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 confirm 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 form has to be submitted and account will be created
shortly. You will receive details of account like account number, login credentials to access account.

Depository Participants: 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.

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. They give
investor details of their transaction and securities held by them.

Functions of Depository Participants:

 They help investors to open account which is necessary prerequisite to trade on stock exchange.
 They help in demat process which is temporarily transferring of shares from seller’s account 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.

Grievances of investor against brokers:

• 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 the purchased
security to his clients within 48 hours of pay out 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.

Grievances of investor against companies: The common grievances are:

 Delay in dematerialisation of securities.
 Non-receipt of dividend.
 Delay in transfer of securities.
 Non-receipt 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.

The method of redressal of grievance against broker in Investor Service Cell:

 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.
 If there is no reply or if it is not satisfactory, it will be placed before Investor Grievance Redressal
Committee.
 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.
 A sole arbitrator is in charge of this if the sum is less than 25lakhs and for above 25 lakhs, a penal
of 3 arbitrators is appointed.
 Appeal against arbitrator can be made in Appropriate court.
The method of redressal of grievance against companies in Investor Service Cell:
• The cell receives 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.
• If the company again fails to resolve the complaint within 7 days of issue of show cause notice,
the scrip of the company is suspended from the trading.
• It 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.

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.

Measures taken by Company law board:

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

Measures taken by Redressal of investors grievances through courts:

 This is the option for investors when he tried in all the above mentioned redressal methods.
 Complaint against companies can be filed with high court which has special designated benches
about company affairs.
 The time taken for processing in this much longer and costly and hence beyond the reach of small
investors.
 MUTUAL FUNDS
A mutual fund is a company that pools money from many investors and invests the
money in securities such as stocks, bonds, and short-term debt. The combined 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.

HISTORY OF MUTUAL FUNDS IN INDIA:

Phase 1 (1964-1987)- Establishment:
The naissance of mutual funds in India can be traced back to 1963 when the
Government of India established the Unit Trust of India (UTI) through an Act of Parliament.
The objective was to encourage and facilitate wider participation in the financial market by
investors (and institutions?) with the eventual goal of strengthening the economy of the
country. The Unit Scheme, launched in 1964, was the first scheme that was launched by the
UTI.
UTI initially worked under the administrative and regulatory control of the Reserve
Bank of India (RBI), but was delinked from the RBI in 1978, following which the Industrial
Development Bank of India (IDBI) took over its administration and regulation.

Phase 2 (1987-1993) - Launch of Public Sector Mutual Funds

In 1987, the first public sector mutual funds entered the market. These were mutual
funds set up and managed by Insurance Corporation of India (LIC), General Insurance
Corporation of India (GIC) and various public sector banks. For example, SBI Mutual Fund
was the first non-UTI' mutual fund established in June 1987. This was subsequently followed
by Canbank Mutual Fund in December 1987, Punjab National Bank Mutual Fund in August
1989, Indian Bank Mutual Fund in November 1989, Bank of India Mutual Fund in June
1990, Bank of Baroda Mutual Fund October 1992. LIC also established its mutual fund in
June 1989 and GIC set up its mutual fund in December 1990. At the end of 1993, the Mutual
Fund industry had assets under management of 347,004 crores.

Phase 3 (1993-2003)-Launch of Private Sector Mutual Funds

In April 1992, the Securities and Exchange Board of India was set up with the aim of
regulating the securities market and protect the interests of investors while also to promoting
the development of the industry. The first set of SEBI Mutual Fund Regulations came into
effect in 1993 and applied to all funds with the exception of UTI. The first private mutual
fund was Kothari Pioneer (now merged with Franklin Templeton MF), which was registered
in July 1993. The entry of private players gave a wider range of investment choices to
investors. 1996, SEBI issued a new set of regulations that had been revised from the previous
regulations. These are currently in effect. In the years that followed this, several foreign
sponsors also set up mutual funds in India. The industry also saw many mergers and
acquisitions leading to a move towards consolidation, At the end of January 2003, there were
33 MFs with total AUM Asset under Management of 81,21,805 crores, out of which UTI
alone had AUM of $44,541 crores.
Phase 4 (2003-2014)-Consolidation and slowdown
In February 2003, the Unit Trust of India Act, 1963 was repealed and UTI was
bifurcated into two separate entities – the Specified Undertaking of the Unit Trust of India
(SUUTI) and UTI Mutual Fund which functions under the SEBI MF Regulations. During this
time, several private sector funds also underwent mergers and the industry entered into a
consolidation phase ion.
The global meltdown of 2009 had an impact on financial markets around the world as
well as in India. Investors who entered in the market during the peak saw steep falls in their
portfolio values and consequently lost faith in investments in financial markets, which
included mutual funds. The abolition of Entry Load by SEBI, along with the after-effects of
the global financial crisis had an adverse effect on the Indian mutual fund industry, which
struggled to recover for over two years, in an attempt to maintain its economic viability
which is evident from the sluggish growth the industry AUM between 2010 to 2013.

Phase 5 (since 2014)

With a view to correcting and rejuvenating the mutual fund industry after years of
sluggish growth, SEBI introduced several new measures to enhance the image of and trust in
mutual funds among investors. There was also a specific objective to penetrate more Tier II
and Tier III cities to increase the pool of investors within the country and thus revitalise the
market. These were successful in general and the industry stabilized and moved towards
growth. Since May 2014, the Industry has had a consistent growth in inflows and increase in
the AUM as well as the number of investor folios.
Some of the important milestones and information are listed below:
• May 2014: The industry's AUM crossed 10 Trillion (10 Lakh Crore) for the first time.
• August 2017: The industry's AUM crossed 20 trillion (220 Lakh Crore)
• November 2020: The industry's AUM crossed 30 trillion (230 Lakh Crore) • Between
2012 and 2022 the Indian MF Industry has grown from 6.99 trillion to 237.22 trillion
• Between 2017 and 2022 the number of investor folios went up from 5.72 crore folios
to 13.33 crore.
• On an average 12.69 lakh new folios are added every month in the last 5 years since
May 2017.

Mutual fund distributors have played an important role in the achievement of these
milestones by providing a connect with investors, particularly in Tier II and Tier III cities,
which helped expand the retail base. Mutual fund distributors not only enable investments by
providing consultations on the various types of funds available for investment based on
investors' objectives, but also play a role helping them navigate market volatility and thus
experience the benefit of investing in mutual funds.

Mutual fund distributors have especially had a big role in popularizing Systematic
Investment Plans (SIP) among investors. As on May 31, 2022 there were 5.48 crore SIP
accounts.

MF Distributors have been providing the much needed last mile connect with
investors, particularly in smaller towns and this is not limited to just enabling investors to
invest in appropriate schemes, but also in helping investors stay on course through bouts of
market volatility and thus experience the benefit of investing in mutual funds. MF distributors
have also had a major role in popularizing Systematic Investment Plans (SIP) over the years.
In April 2016, the no. of SIP accounts has crossed 1 crore mark and as on 31st May 2022 the
total no. of SIP Accounts are 5.48 crore.
ADVANTAGES OF MUTUAL FUNDS: A Mutual Fund is a special type of institution
which acts as an investment intermediary and channelizes the savings of large number of
people of the corporate securities in such a way that investors get steady returns, capital
appreciation and a low risk. Mutual funds are becoming very popular worldwide because of
the following important advantages:
➢ Diversification: A large number of investors have small savings with them. They can
at the most buy shares of one or two companies. When small savings are pooled and
entrusted to mutual Funds then these can be used to buy shares of many different
companies. Thus, investors can participate in a large basket of shares of different
companies. This diversification of investment ensures regular returns and capital
appreciation at reduced risks as all the eggs are not put in one basket.
➢ Expert Supervision and Management: A small investor cannot be an expert in
portfolio management. When he invests in mutual funds, he gets the benefit of expert
supervision and management which mutual funds can afford because of large
resources at their disposal. The funds can be professionally employed through the
mutual funds ensuring good returns The mutual fund managers also have extensive
research facilities at their disposal. They can analyze the performance and prospects
of various companies and take better decisions in making investments
➢ Liquidity: A peculiar advantage of a mutual fund is that investment made in its
schemes can be converted back into cash promptly without heavy expenditure on
brokerage, delays, etc. According to the regulations of SEBI, a mutual fund in India is
required to ensure liquidity. For open ended schemes, the investor can always
approach the Mutual Fund to repurchase units at declared "net assets value (NAV). In
case of close ended schemes, units can easily be sold in the stock market
➢ Reduced Risk: As mutual funds invest in large number of companies and are
managed professionally, the risk factor of the investor is reduced. A small investor, on
the other hand, may not be in a position to minimize such risks.
➢ Tax advantage: There are certain schemes of mutual funds which provide tax
advantage under the Income Tax Act Thus, the tax liability of an investor is also
reduced when he invests in these schemes of the mutual funds.
➢ Low Operating Costs: Mutual funds have large investible funds at their disposal and
thus can avail economies of large scale. This reduces their operating costs by way of
brokerage, fees, commission etc. Thus, a small investor also gets the benefit of large
scale economies and low operating costs
➢ Flexibility: Mutual funds provide flexible Investment plans to its subscribers such as,
regular investment plans, regular withdrawal plans and dividend reinvestment plans,
etc Thus, an investor can invest or withdraw funds according to his own requirements.
➢ Higher Returns: Mutual funds are expected to provide higher returns to the investors
as compared to direct investment because of professional management, economies of
scale, reduced risk, etc.
➢ Investor Protection: Mutual funds are regulated and monitored by the Securities and
Exchange Board of India (SEBI). The SEBI (Mutual Funds) Regulations, 1996 which
have replaced the regulations of 1993, provide better protection to the investors,
impart a greater degree of flexibility and facilitate competition.
From the above discussed advantages, we can conclude that investing in
securities through mutual funds is a better choice than investing directly for the small
investors.
DISADVANTAGES OF MUTUAL FUNDS IN INDIA: The following are some of the
problems that are being faced by Indian Manual Funds
➢ Liquidity Crisis: Mutual funds in India face liquidity problems. Investors able to
draw back from some of the schemes, there is no easy not exit route. "Bad delivery
has caused a lot of problems and liquidity crisis for the mutual funds.
➢ Lack of Innovation: Mutual funds in India have not been able to provide innovative
schemes in terms of risk, liquidity and choice of the investors.
➢ Inadequate Research: Most of the mutual funds in India are suffering because of
inadequate research facilities. Most of the funds depend upon external research and
have no facilities for in-house research. They should provide more money on the
research and development if they want to be successful in future.
➢ No Provision for Performance Guarantee: Mutual funds in India have so far failed
to provide performance guarantee to the investors. In many cases, there has been
erosion of capital.
➢ Inadequate Disclosures: There have not been adequate and timely disclosures of
material information to the investors by the mutual funds in India.
➢ Delays in Service: Mutual funds in India have also not been able to provide quick
and adequate service to the investors. In many cases, there is no response to the
investor's grievances.
➢ No Rural Sector Investment Base: Indian mutual funds, so far, have not been able to
create rural sector investment base. Sufficient efforts have not been made to educate
the potential investors. Mutual Funds should launch investor's education programmes
and expand their activities to rural areas.
MAJOR FUND HOUSES IN INDIA: Some of the major Fund Houses in India include:
• Axis AMC
• Aditya Birla SunLife AMC
• Franklin Templeton Asset Management (India)
• HDFC AMC
• Invesco Asset Management (India)
• Kotak Mahindra AMC
• LIC Mutual Fund AMC
• Motilal Oswal AMC
• Nippon Life India Asset Management
• SBI Funds AMC
• UTI AMC
(Please note the list is not exhaustive)

TYPES OF MUTUAL FUNDS: There are a number of mutual funds to suit the needs and
preferences of investors. Mutual funds adopt different strategies and accordingly offer
different schemes of investments.
The various mutual funds may be classified under five broad categories:
a. According to Ownership
b. According to the Scheme of Operation
c. According to Portfolio
d. According to location
According to Ownership: According to ownership, mutual funds in India may be classified
as Public Sector and Private Sector Mutual Funds.
1. Public Sector Mutual Funds: Unit Trust of India (UTI) has been functioning in the
arena of Mutual fund business in India since 1963-64. However, it was only after
23years, in 1987 that second fund was established in India by the State Bank of India.
Although UTI was functioning successfully, it was found inadequate to meet the
requirements of small and medium household sectors. Thus, UTI’s monopoly in
mutual fund business was curtailed by the Central Government by opening the
operation of Mutual Funds to the requirements of the common investors. SBI –
Mutual fund was the first among all the public sector commercial banks that started
operations during November 1987. Thereafter a number of public sector organizations
like IND bank – MF, CAN Bank MF, BOI - MF, PNB - MF, GIC – MF, LIC – MF,
etc. have joined in the mutual fund business in a short span of time.
2. Private Sector Mutual Funds: Seeing the success and growth of Mutual Fund in the
Indian capital market, the Government of India allowed the private sector corporates
to join the Mutual Fund Industry on 14 Feb 1922. Since then, a number of private
sector companies have approached SEBI for permission to set up private mutual
funds.
According to Scheme of Operation: The most important classification of mutual funds is on
the basis of the scheme of their operations as all types of mutual funds fall under this
classification Open ended funds, close ended funds and the interval funds.
1. Open – Ended Schemes: Open ended scheme means a scheme of mutual funds
which offers units for sale without specifying any duration for redemption. These
schemes do not have a fixed maturity and entry to the fund is always open to investor
who can subscribe it at any time. Open ended funds provide better liquidity to the
investor. An investor can directly purchase and sell units under open ended schemes,
these are not listed. Ex: UTI, ULIP, Dhanraksha and Dhanvridhi of LIC Mutual Fund.
2. Close – Ended Schemes / Funds: A close – ended scheme means any scheme of
mutual fund in which the period of maturity of the scheme is specified. The corpus of
close-ended scheme is fixed and an investor can subscribe directly to the scheme only
at the time of initial issue. After the initial issue is closed, a person can buy or sell the
units of the scheme in the secondary market i.e. the stock exchanges where these are
listed.
3. Interval schemes / Funds: An interval scheme is a scheme of mutual fund which is
kept open for a specific interval and after that it operates as a close scheme. Thus, it
combines the features of both open ended as well as close-ended schemes. Interval
schemes have been permitted by the SEBI in recent year only. The scheme is open for
sale or repurchase at fixed predetermined intervals which are disclosed in the offer
document. The units of the scheme are also traded in the stock exchanges.
According to Portfolio: Mutual funds can also be classified according to portfolio or the
objectives of the fund. Some of these funds are discussed as follows:
1. Income funds: These funds aim at providing maximum current return/ income to the
investors. The investments are made in stocks yielding higher returns. Such funds
distribute the income earned by them periodically amongst the investors. There may
 be income funds of two types: some funds may concentrate on low risk, constant
returns while others, may aim at maximum return even at the cost of some risk.
2. Growth funds: These funds aim at providing capital appreciation in the value of
investment. Such funds invest in growth-oriented securities have a potential to
appreciate in long run. Growth funds concentrate on value appreciation of securities
and not on the regularity of income and are also known as ‘Nest eggs’ investment.
However, the risk involved in such funds is higher than the income funds.
3. Balanced or Conservative funds: Balanced funds spend both on common stock and
preferred stock. Some part of funds is spent on buying equity while other part is used
in acquiring interest bearing debentures and preference shares ensuring certain
amount of dividend. These funds are also known as Conservative Funds or Income
and Growth Funds.
4. Stock / Equity funds: These funds mainly invest in shares of the companies. The
investments may vary from ‘blue chip’ companies to newly established companies.
They undertake risk associated with investment in equity shares of companies. Stock
funds may have further sub-divisions such as income funds and growth funds. A
special type of equity fund is known as ‘index fund’ or ‘never beat market fund’.
5. Bond Funds: These funds employee their resources in bonds. These investments
ensure fixed and regular income. Sometimes bonds are available in the market at
lower than face value, the net income on these bonds goes higher because interest will
be received on the face value of the bond. Some companies offer non- convertible
bonds along with the shares. Any person subscribing for the shares will have to take
up bonds also. Bonds funds may have a tie up with companies and offer a certain
price if the subscribers want to sell their bonds at the time of allotment.
6. Specialized Funds: These funds invest in a particular type of securities. The funds
may specialize in securities of companies dealing in a particular product, firms in a
particular industry or of certain income producing securities. Any investor wanting to
invest in a particular security will prefer a fund dealing in such securities.
7. Leverage Funds: The primary aim of leverage funds is to maximize capital
appreciation. These funds may use even borrowed funds for buying speculative stock
which ensures a profit in the future. The cost of raising loaned funds and the gain
from holding shares is the profit of the leverage fund.
8. Taxation Funds: Mutual funds may be designed to suit the tax payers. The
contributors to such funds get some concession in income tax. The investors are
required to keep the money with the fund for a certain period called lockup period
which at present is 3 years in India. These funds distribute the profits among the unit
holders.
9. Money Market Mutual Funds [MMMF]: It means a scheme of a mutual fund
which has been set up with the objective of investing exclusively in money market
instruments. These instruments include treasury bills, commercial paper. Commercial
bills and certificates of deposits.
According to Location: Mutual fund can also be classified on the basis of location from
where they mobilize funds, as:
 1. Domestic Funds: These are the funds which mobilize savings of people within the
country where investments are made. Domestic funds can further be sub-divided on
the basis of scheme of operation or portfolio.
2. Off- Shore Funds: Off- shore funds are those which raise or mobilize funds in
countries other than where investments are to be make. These funds attract foreign
savings for investment in India.
SYSTEMATIC INVESTMENT PLAN [SIP]: A systematic investment plan (SIP) is one in
which an investor invests in a mutual fund Scheme, a pre specified amount, say ₹ 1,000, at
pre specified intervals, say one month. So, in SIP, the investor can invest smaller amounts in
different installments rather than a lump sum. The amount is invested in the units of the
mutual fund at the prevailing NAV. Number of units which the investor will get every month
depends upon the prevailing NAV of the scheme.
Concept of SIP is based on the principle of cost-averaging. As the securities prices
are volatile, the NAV of the mutual fund schemes also keeps changing. In SIP, the units
available to the investor would be based on the NAV. So, the unit available to the investor
over a longer period would be based on the average NAV. In case, NAV falls because of fall
in the market, an investor will get more units at lower rates. In case of increase in prices, he
would get lesser units. Over a long period of investment, SIP may bring down the average
unit price.
SIP is an investment strategy which attempts to acquire mutual fund units at regular
intervals regardless of what direction, the market is moving. In order to participate in SIP, an
investor has to concentrate on three things:
• How much money he can invest each month?
• Depending on the risk-profile, he should select a mutual fund scheme
• Invest the required amount each period in the fund.
Investors who want to invest good amount but are unable to pile up a big amount in one
shot, would also find SIP to be worthwhile. So, SIP is not a mutual fund, rather it is method
of investing in a mutual fund. It is a simple strategy designed to help investors to accumulate
wealth in a disciplined manner over long-term, to provide for the following benefits:
• Power of compounding by investing now: An investor has two options to invest.
First, to invest regularly as and when surplus funds are available, and second, to
accumulate these smaller savings and to invest at yearly interval. For example, he
may invest ₹ 200 every alternate month or ₹ 1,200 at the end of the year. He continues
to do so for 5 years. His total investment is same in both cases i.e. ₹ 6,000. However,
if he is getting an interest of 12% p.a., then his accumulation in first case would be ₹
8113, whereas in second case would be ₹ 7,624. The first option is an example of SIP.
• Cost Averaging: As explained earlier, in SIP, an investor invests a fixed amount
irrespective of NAV. So, he gets fewer units when NAV is higher. It can smoothen
out the markets ups and down and reduce the risk of investment when markets are
more volatile. SIP helps reducing the average cost per unit and helps an investor to
take advantage of market fluctuations and thereby reduces the risk.
 • Convenience: By adopting a SIP scheme, an investor can avoid the trouble of making
investment every now and then. The post-dated cheques are given to the mutual fund
which will encash these cheques as per the instructions given.
• Disciplined Investing: SIP helps an investor to eliminate the fear that he may buy
mutual fund units at its peak just before the market heads into a slump. SIP offers a
disciplined way of investing a portion of income of an investor.
Thus, the importance of SIP lies in disciplined investing and elimination of emotions
from investing. It helps creating a significant pool of savings for small investors. Particularly
it is valuable for those investors who want to get their investment going but do not have a
large amount to invest.
SYSTEMATIC WITHDRAWAL PLAN (SWP): SWP is a facility provided by a mutual
fund to its unit holders to withdraw money from the scheme on a regular basis. It is
particularly suitable to those who need regular income. SWP may be available in 2 options:
• Fixed withdrawal, where a fixed specified amount is withdrawn on monthly or
quarterly basis.
• Appreciation withdrawal, where 90% (or some other) of the appreciated amount can
be withdrawn on monthly/quarterly basis.
SYSTEMATIC TRANSFER PLAN (STP): STP is a situation when an investor in the
mutual fund scheme has instructed the mutual fund to transfer (shift) a specific amount from
one scheme to another scheme. Two of such types of transfers are:
• Transfer of a specific amount per month from one scheme to another. In this case,
some units of the existing scheme are redeemed at the prevailing NAV. This will raise
a specific amount which is then invested in the other notified scheme at the rate of
NAV of the other scheme. Gradually, the entire amount will be transferred from one
scheme to another. It may be noted that every month, the amount to be redeemed and
invested remains same, but the units sold and bought may change depending on the
NAV.
• Transfer of the gain in one scheme to another scheme. In this case, only the gain is
shifted and invested in the other scheme. The initial amount invested in one scheme
remains same. However, if there is a decline in NAV, then the principal value may
decline. Say, an investor has invested ₹ 1,00,000 in one scheme with the instruction
that the gain should be transferred to another scheme. NAV of the first scheme (FV ₹
10 per unit) is ₹ 11, ₹ 11.50, ₹ 12.50 and ₹ 12 for the next four months. Amount
remaining invested in first scheme and amount transferred to the other scheme are
shown as follows:
Month Opening NAV Value ₹ Amount No. of Closing Value ₹
Balance ₹ to be units Balance
redeemed redeemed
0 1,00,000 10.00 1,00,000 - - 10,000 1,00,000
1 10,000 11.00 1,10,000 10,000 909 9091 1,00,001
2 9,091 11.50 1,04,547 4,547 395 8,696 1,00,004
3 8,696 12.50 1,08,700 8,700 696 8,000 1,00,004
4 8,000 12.00 96,000 - - 8,000 96,000
 From the above table at the end of each month, the increase in total value beyond the
initial investment (₹ 1,00,000) is redeemed and invested in the other scheme. The balance
number of units in the account of the investor is reduced with every redemption. However, if
the NAV reduces thereafter, there may not be any investment (as in month 4) and the total
value may be less than the initial value. The total investment of the investor will be ₹ 96,000
plus the NAV based value of investment in the other scheme.
NET ASSETS VALUE (NAV) OF A MUTUAL FUND: Investors are the owners of the
mutual fund. Funds collected under a particular scheme are known as 'corpus' or 'assets under
management. The corpus is invested in different securities. The ownership interest of the unit
holder is represented by these securities. Investment made by investors is represented by
units. A unit is a currency of a fund. Net Assets Value (NAV) refers to the ownership interest
per unit of the mutual fund, i.e., NAV refers to the amount which a unit holder would receive
per unit if the scheme is closed. NAV is represented as follows:
NAV = Value of Securities - Liabilities
No. of unit outstanding

NAV of any scheme tells as to how much each unit is worth. It may be taken as the
simplest measure of Performance of a mutual fund.
Problem solved.