1) CAPITAL MARKET OF INDIA

A capital market is a financial market in which long-term debt (over a year) or equity-
backed securities are bought and sold.[6] Capital markets channel the wealth of savers to
those who can put it to long-term productive use, such as companies or governments making
long-term investments
Modern capital markets are almost invariably hosted on computer-based electronic
trading systems; most can be accessed only by entities within the financial sector or the
treasury departments of governments and corporations, but some can be accessed directly by
the public.[b]There are many thousands of such systems, most serving only small parts of the
overall capital markets. Entities hosting the systems include stock exchanges, investment
banks, and government departments. Physically, the systems are hosted all over the world,
though they tend to be concentrated in financial centres like London, New York, and Hong
Kong.
 A capital market can be either a primary market or a secondary market. In primary
markets, new stock or bond issues are sold to investors, often via a mechanism known
as underwriting.

Classification:
The capital market in India includes the following institutions (i.e., supply of funds tor capital
markets comes largely from these:

(i) Commercial Banks

(ii) Insurance Companies (LIC and GIC)

(iii) Specialised financial institutions like IFCI, IDBI, ICICI, SIDCS, SFCS, UTI etc

(iv) Provident Fund Societies

(v) Merchant Banking Agencies

(vi) Credit Guarantee Corporations.

(vii)
The Indian capital market is divided into :

 gilt-edged market and

 the industrial securities market.

The gilt-edged market refers to the market for government and semi-government securities,

backed by the RBI. The securities traded in this market are stable in value and are much sought
after by banks and other institutions.

The industrial securities market refers to the market for shares and debentures of old and new

companies. This market is further divided into the new issues market and old capital market
meaning the stock exchange.

Growth of Indian Capital Market:

Indian Capital Market before Independence:
Indian capital market was hardly existent in the pre-independence times. Agriculture was the

mainstay of economy but there was hardly any long term lending to agricultural sector. Similarly

the growth of industrial securities market was very much hampered since there were very few
companies and the number of securities traded in the stock exchanges was even smaller.

Indian Capital Market after Independence:

Since independence, the Indian capital market has made widespread growth in all the areas as

reflected by increased volume of savings and investments. In 1951, the number of joint stock

companies (which is a very important indicator of the growth of capital market) was 28,500 both

public limited and private limited companies with a paid up capital of Rs. 775 crore, which in

1990 stood at 50,000 companies with a paid up capital of Rs. 20,000 crore. The rate of growth of

investment has been phenomenal in recent years, in keeping with the accelerated tempo of
development of the Indian economy under the impetus of the five year plans.
Factors Influencing Capital Market:
 operations of the institutional investors in the market and
 the excellent results flowing in from the corporate sector.

2. PERSONAL FINANCIAL PLANNING

Personal financial planning is the process of managing your money to achieve personal
economic satisfaction. This planning process allows you to control your financial situation.
Every person, family, or household has a unique financial position, and any financial activity
therefore must also be carefully planned to meet specific needs and goals.

 Most people want to handle their finances so that they get full satisfaction from each
available dollar. Typical financial goals include such things as a new car, a larger home,
advanced career training, extended travel, and self-sufficiency during working and
retirement years.
 To achieve these and other goals, people need to identify and set priorities. Financial and
personal satisfaction are the result of an organized process that is commonly referred to
as personal money management or personal financial planning.

 Increased effectiveness in obtaining, using, and protecting your financial resources

throughout your lifetime.
 Increased control of your financial affairs by avoiding excessive debt, bankruptcy, and
dependence on others for economic security.
 Improved personal relationships resulting from well-planned and effectively
communicated financial decisions.
 A sense of freedom from financial worries obtained by looking to the future, anticipating
expenses, and achieving your personal economic goals.

Six steps of financial planning process are:

 Establish the goal/relationship

 Gather data
 Analyze data
 Develop a plan
 Implement the plan
 Monitor the plan

Step 1 Establish the Goal / Relationship

This is where the adviser will introduce him or herself and typically explains the financial
planning process to a client or prospective client. The adviser may ask open-ended questions to
uncover anything and everything from immediate financial goals to feelings about market risk to
dreams about retiring in the Caribbean.
The purpose of establishing the goal or relationship is to form the foundation or purpose of
planning itself--to begin the financial journey with the clarification of a financial destination.
Too many people save and invest money with no specific goal in mind.

Step 2 Gather the Relevant Data

This step is where the information required to make recommendations for the appropriate
strategies and financial products to reach your goals is gathered. For example, what is your time
horizon? Do you want to accomplish this goal in 5 years, 10 years, 20 years or 30 years? What is
your risk tolerance? Are you willing to accept a high relative market risk to achieve your
investment goals or will a conservative portfolio be a better option for you?

Step 3 Analyze the Data

You've gathered the relevant data, now analyze it! Following the retirement planning example,
the data you've gathered can help you arrive at some basic assumptions.

Step 4 Develop the Plan

Financial planning requires devising alternative solutions that are achievable for each individual.
With so many different variables to consider, your plan needs to develop, to evolve with your
needs but remain within your capabilities and risk tolerance.

Step 5 Implement the Plan

Now you simply put your plan to work! But as simple as this sounds, many people find that
implementation is the most difficult step in financial planning. Although you have the plan
developed, it takes discipline and desire to put it into action. Saving $250 or $300 per month may
be difficult. You may begin to wonder what may happen if you fail.

Step 6 Monitor the Plan

It's called financial planning for a reason: Plans evolve and change just like life. Once the plan is
created, it's essentially a piece of history. This is why the plan needs to be monitored and
tweaked from time to time. Think of what can change in your life, such as marriage,the birth of
children, career changes and more. These events all require new perspectives on life and
finance.
 CH 3. Personal Financial Planning Instrument
What is a 'Financial Instrument?'

Financial instruments are assets that can be traded. They can also be seen as packages of capital
that may be traded. Most types of financial instruments provide an efficient flow and transfer of
capital all throughout the world's investors. These assets can be cash, a contractual right to
deliver or receive cash or another type of financial instrument, or evidence of one's ownership of
an entity.

Equity-based financial instruments represent ownership of an asset. Debt-based financial

instruments represent a loan made by an investor to the owner of the asset. Foreign
exchange instruments comprise a third, unique type of financial instrument. Different
subcategories of each instrument type exist, such as preferred share equity and common share
equity.

Types of Financial Instruments

Financial instruments may be divided into two types:

 cash instruments and

 Derivative instruments.

The values of cash instruments are directly influenced and determined by the markets. These can
be securities that are easily transferable. Cash instruments may also be deposits and loans agreed
upon by borrowers and lenders.

The value and characteristics of derivative instruments are based on the vehicle’s underlying
components, such as assets, interest rates or indices. These can be over-the-counter
(OTC) derivatives or exchange-traded derivatives.

Asset Classes

Financial instruments may also be divided according to asset class, which depends on whether
they are debt-based or equity-based.

Short-term debt-based financial instruments last for one year or less. Securities of this kind come
in the form of T-bills and commercial paper. Cash of this kind can be deposits and certificates of
deposit (CDs). Exchange-traded derivatives under short-term debt-based financial instruments
can be short-term interest rate futures. OTC derivatives are forward rate agreements.

Long-term debt-based financial instruments last for more than a year. Under securities, these are
bonds. Cash equivalents are loans. Exchange-traded derivatives are bond futures and options on
bond futures. OTC derivatives are interest rate swaps, interest rate caps and floors, interest rate
options, and exotic derivatives.
Securities under equity-based financial instruments are stocks. Exchange-traded derivatives in
this category include stock options and equity futures. The OTC derivatives are stock options
and exotic derivatives.

There are no securities under foreign exchange. Cash equivalents come in spot foreign exchange.
Exchange-traded derivatives under foreign exchange are currency futures. OTC derivatives come
in foreign exchange options, outright forwards and foreign exchange swaps.

4. Credit analysis (CIBIL)

Credit analysis is a process of drawing conclusions from available data (both quantitative and

qualitative) regarding the credit – worthiness of an entity, and making recommendations

regarding the perceived needs, and risks.

Credit Analysis is also concerned with the identification, evaluation and mitigation of risks

associated with an entity failing to meet financial commitments.

CREDIT ANALYSIS PROCESS

THE 5 C’S OF CREDIT ANALYSIS

CHARACTER

This is the part where the general impression of the protective borrower is analysed. The lender

forms a very subjective opinion about the trust – worthiness of the entity to repay the loan.

Discrete enquires, background, experience level, market opinion, and various other sources can

be a way to collect qualitative information and then an opinion can be formed, whereby he can

take a decision about the character of the entity.

CAPACITY

Capacity refers to the ability of the borrower to service the loan from the profits generated by his

investments. This is perhaps the most important of the five factors. The lender will calculate

exactly how the repayment is supposed to take place, cash flow from the business, timing of

repayment, probability of successful repayment of the loan, payment history and such factors, are

considered to arrive at the probable capacity of the entity to repay the loan.

CAPITAL

Capital is the borrower’s own skin in the business. This is seen as a proof of the borrower’s

commitment to the business. This is an indicator of how much the borrower is at risk if the

business fails. Lenders expect a decent contribution from the borrower’s own assets and personal

financial guarantee to establish that they have committed their own funds before asking for any

funding. Good capital goes on to strengthen the trust between the lender and borrower.

COLLATERAL (OR GUARANTEES)

Collateral are form of security that the borrower provides to the lender, to appropriate the loan in
case it is not repaid from the returns as established at the time of availing the facility. Guarantees
on the other hand are documents promising the repayment of the loan from someone else
(generally family member or friends), if the borrower fails to repay the loan. Getting adequate
collateral or guarantees as may deem fit to cover partly or wholly the loan amount bears huge
significance. This is a way to mitigate the default risk. Many times, Collateral security is also
used to offset any distasteful factors that may have come to the fore-front during the assessment
process.

CONDITIONS

Conditions describe the purpose of the loan as well as the terms under which the facility is

sanctioned. Purposes can be Working capital, purchase of additional equipment, inventory, or for

long term investment. The lender considers various factors, such as macroeconomic conditions,

currency positions, and industry health before putting forth the conditions for the facility.

What is a CIBIL Score and what factors affect my CIBIL Score?

CIBIL Score is a 3 digit numeric summary of your credit history, derived by using details found
in the ‘Accounts’ and ‘Enquiries’ sections on your CIBIL Report and ranges from 300 to 900.
The closer your score is to 900, the higher are the chances of your loan application getting
approved.
How can I improve my CIBIL Score?

You can improve your CIBIL Score by maintaining a good credit history, which is essential for
loan approvals by lenders. Follow these 6 steps which will help you better your score:

 Always pay your dues on time: Late payments are viewed negatively by lenders
 Keep your balances low: Always be prudent to not use too much credit, control your
utilization.
 Maintain a healthy mix of credit: It is better to have a healthy mix of secured (such as home
loan, auto loan) and unsecured loans (such as personal loan, credit cards). Too many
unsecured loans may be viewed negatively.
 Apply for new credit in moderation: You don’t want to reflect that you are continuously
seeking excessive credit; apply for new credit cautiously.
 Monitor your co-signed, guaranteed and joint accounts monthly: In co-signed, guaranteed
or jointly held accounts, you are held equally liable for missed payments. Your joint holder’s
(or the guaranteed individual) negligence could affect your ability to access credit when you
need it.
 Review your credit history frequently throughout the year: Monitor your CIBIL Score
and Report regularly to avoid unpleasant surprises in the form of a rejected loan application.

5. Ratio Analysis
Ratio analysis is the process of examining and comparing financial information by calculating
meaningful financial statement figure percentages instead of comparing line items from each
financial statement.
Ratio analysis compares relationships between financial statement accounts. This means that one
income statement or balance sheet account is being compared to another. These relationships
between financial statement accounts will not only give a manager or investor an idea of the how
healthy the business is on a whole, it will also give them keen insights into business operations.
Example
Take inventory turns for example. Inventory turnover is the ratio between cost of goods sold and
average inventory. Inventory turnover tells managers and investors not only how much inventory
the company maintained, it also tells them how efficient the company was with its inventory. A
high inventory turnover ratio means that the company is lean and is able to move its inventory
quickly. This could indicate proper management and thoughtful inventory purchasing.

Managers and investors use a ton of different ratios in this analysis. Here are a few:

 Current Ratio
 Acid Test Ratio
 Accounts receivable turnover
 Inventory turnover
 Total asset turnover
 Debt-to-equity ratio

Significance of ratio analysis

Ratios calculated from the information in financial statements help investors in three ways:

 They simplify financial statements: Ratio analysis simply information given in companies’
financial statements. Investors can easily obtain data from a few ratios instead of trying to
understand entire statements.
 They help detect a problematic trend: Each type of ratio analysed over a long period can
point to a defect in the functioning of a business. The analysis can also predict the future
performance of a company in a particular aspect of business.
 They facilitate comparisons: Ratios not only help analyse the performance of one company
but also facilitate a comparison of the performances of two or more companies within an
industry or a sector.
1. Decision Making:

Mass of information contained in the financial statements may be unintelligible a confusing. Ratios help in
highlighting the areas deserving attention and corrective action facilitating decision making.

2. Financial Forecasting and Planning:

Planning and forecasting can be done only by knowing the past and the present. Ratio help the
management in understanding the past and the present of the unit. These also provide useful idea about
the existing strength and weaknesses of the unit. This knowledge is vital for the management to plan and
forecast the future of the unit.

3. Communication:

Ratios have the capability of communicating the desired information to the relevant persons in a manner
easily understood by them to enable them to take stock of the existing situation:

4. Co-ordination is Facilitated:

Being precise, brief and pointing to the specific areas the ratios are likely to attract immediate grasping
and attention of all concerned and is likely to result in improved coordination from all quarters of
management.

5. Control is more Effective:

System of planning and forecasting establishes budgets, develops forecast statements and lays down
standards. Ratios provide actual basis. Actual can be compared with the standards. Variances to be
computed an analyzed by reasons and individuals. So it is great help in administering an effective system
of control.

Liquidity Ratios
S. No. RATIOS FORMULAS

1 Current Ratio Current Assets/Current Liabilities

2 Quick Ratio Liquid Assets/Current Liabilities

3 Absolute Liquid Ratio Absolute Liquid Assets/Current Liabilities

Profitability Ratios
S. No. RATIOS FORMULAS

1 Gross Profit Ratio Gross Profit/Net Sales X 100

2 Operating Cost Ratio Operating Cost/Net Sales X 100

3 Operating Profit ratio Operating Profit/Net Sales X 100

4 Net Profit Ratio Operating Profit/Net Sales X 100

Capital Structure Ratios

S. No. RATIOS FORMULAS

1 Debt Equity Ratio Total Long Term Debts / Shareholders Fund

2 Proprietary Ratio Shareholders Fund/ Total Assets

3 Capital Gearing ratio Equity Share Capital / Fixed Interest Bearing Funds

4 Debt Service Ratio Net profit Before Interest & Taxes / Fixed Interest Charges
Overall Profitability Ratio
S. No. RATIOS FORMULAS

1 Overall Profit Ability Ratio Net Profit / Total Assets

6. Break Even Analysis

A break-even analysis is a calculation of the point at which revenues equal expenses. In

securities trading, the break-even point is the point at which gains equal losses.

HOW IT WORKS (EXAMPLE):

The basic idea behind doing a break-even analysis is to calculate the point at
which revenues begin to exceed costs. To do this, one must first separate a company's costs into
those that are variable and those that are fixed. Fixed costs are costs that do not change with the
quantity of output and they are not zero when production is zero. Examples of fixed cost include
rent, insurance premiums or loan payments. Variable costs are costs that change with the
quantity of output. They are are zero when production is zero. Examples of common variable
costs include labor directly involved in a company's manufacturing process and raw materials.

For example, at XYZ Restaurant, which sells only pepperoni pizza, the variable expenses per
pizza might be:

 Flour: $0.50
 Yeast: $0.05
 Water: $0.01
 Cheese: $3.00
 Pepperoni: $2.00
 Total: $5.56

Its fixed expenses per month might be:

 Labor: $1,500
 Rent: $3,000
 Insurance: $200
 Advertising: $500
 Utilities: $450
 Total: $5,650
Based on the total variable expenses per pizza, we now know that XYZ Restaurant must price its
pizzas at $5.56 or higher just to cover those costs. But if the price of a pizza is $10, then the
contribution margin, or the revenue minus the variable cost for XYZ Restaurant, is ($10 - $5.56
= $4.44).

But how many pizzas does XYZ Restaurant need to sell at $10 each to cover all those fixed
monthly expenses? Well, if $4.44 is left over from each pizza after accounting for variable costs,
then we can determine that XYZ Restaurant must sell at least ($5,650 / $4.44 = 1,272.5) pizzas
per month in order to cover monthly fixed costs.

It is important to note that some fixed costs increase "stepwise," meaning that after a certain level
of revenue is reached, the fixed cost changes. For example, if XYZ Restaurant began selling
5,000 pizzas per month rather than 2,000, it might need to hire a second manager, thus increasing
labor costs.

Break-even analysis

By inserting different prices into the formula, you will obtain a number of break-even points, one
for each possible price charged. If the firm changes the selling price for its product, from $2 to
$2.30, in the example above, then it would have to sell only 1000/(2.3 - 0.6)= 589 units to break
even, rather than 715.

To make the results clearer, they can be graphed. To do this, draw the total cost curve (TC in the
diagram), which shows the total cost associated with each possible level of output, the fixed cost
curve (FC) which shows the costs that do not vary with output level, and finally the various total
revenue lines (R1, R2, and R3), which show the total amount of revenue received at each output
level, given the price you will be charging.
The break-even points (A,B,C) are the points of intersection between the total cost curve (TC)
and a total revenue curve (R1, R2, or R3). The break-even quantity at each selling price can be
read off the horizontal axis and the break-even price at each selling price can be read off the
vertical axis. The total cost, total revenue, and fixed cost curves can each be constructed with
simple formula. For example, the total revenue curve is simply the product of selling price times
quantity for each output quantity. The data used in these formula come either from accounting
records or from various estimation techniques such as regression analysis.

CH -7-WORKING CAPITAL
Working capital is money available to a company for day-to-day operations.

The formula for working capital is:

Current Assets - Current Liabilities

HOW IT WORKS (EXAMPLE):

Here is some balance sheet information about XYZ Company:

Using the working capital formula and the information above from Figure 1, we can calculate
that XYZ Company's working capital is:

$160,000 - $65,000 = $95,000

WHY IT MATTERS:

Working capital is a common measure of a company's liquidity, efficiency, and overall health.
Because it includes cash, inventory, accounts receivable, accounts payable, the portion
of debt due within one year, and other short-term accounts, a company's working capital reflects
the results of a host of company activities, including inventory management, debt
management, revenue collection, and payments to suppliers.

Positive working capital generally indicates that a company is able to pay off its short-term
liabilities almost immediately. Negative working capital generally indicates a company is unable
to do so. This is why analysts are sensitive to decreases in working capital; they suggest a
company is becoming overleveraged, is struggling to maintain or grow sales, is paying bills too
quickly, or is collecting receivables too slowly. Increases in working capital, on the other hand,
suggest the opposite. There are several ways to evaluate a company's working capital further,
including calculating the inventory-turnover ratio, the receivables ratio, days payable, the current
ratio, and the quick ratio.

Inputs
Current assets and current liabilities include three accounts which are of special importance.
These accounts represent the areas of the business where managers have the most direct impact:

 accounts receivable (current asset)

 inventory (current assets), and
 accounts payable (current liability)

Working capital cycle

The working capital cycle (WCC) is the amount of time it takes to turn the net current assets and
current liabilities into cash. The longer the cycle is, the longer a business is tying up capital in its
working capital without earning a return on it. Therefore, companies strive to reduce their
working capital cycle by collecting receivables quicker or sometimes stretching accounts
payable.
Working Capital Management

Decisions relating to working capital and short-term financing are referred to as working capital
management. These involve managing the relationship between a firm's short-term assets and
its short-term liabilities. The goal of working capital management [3] is to ensure that the firm is
able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-
term debt and upcoming operational expenses.