207 Fmi E-Notes Unit 1

Chanderprabhu Jain College of Higher Studies
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An ISO 9001:2015 Certified Quality Institute
(Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi & Approved by Bar Council of India)
E-Notes
Class : B.COM (H) III SEMESTER
Paper Code : B.COM 207
Subject : Financial Markets & Institutions
Faculty Name : Ms. Isha Goyal
UNIT-1
Industrial Development Bank of India (IDBI): Functions and Developmental Activities of IDBI!
Industrial Development Bank of India (IDBI) established under Industrial Development Bank of
India Act, 1964, is the principal financial institution for providing credit and other facilities for
developing industries and assisting development institutions.
Till 1976, IDBI was a subsidiary bank of RBI. In 1976 it was separated from RBI and the
ownership was transferred to Government of India. IDBI is the tenth largest bank in the world in
terms of development. The National Stock Exchange (NSE), the National Securities Depository
Services Ltd. (NSDL), Stock Holding Corporation of India (SHCIL) are some of the Institutions
which has been built by IDBI.
Organisation and Management: IDBI consist of a Board of Directors, consisting of a chairman and
Managing Director appointed by the Government of India, a Deputy Governor of the RBI
nominated by that bank and 20 other Directors are nominated by the Central Government.
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The board had constituted an Executive Committee consisting of 10 Directors, including the
Chairman and Managing Director. The executive committee is empowered to sanction financial
assistance.
The Head office of IDBI is located in Mumbai. The bank has five regional offices, one each in
Kolkata, Guwahati, New Delhi, Chennai and Mumbai. Besides the bank have 21 branch offices.
Functions of IDBI:
The main functions of IDBI are discussed below:
(i) To provide financial assistance to industrial enterprises.
(ii) To promote institutions engaged in industrial development.
(iii) To provide technical and administrative assistance for promotion management or

expansion of industry.
(iv)To undertake market and investment research and surveys in connection with development of
industry.
IDBI Assistance: The IDBI provides financial assistance either directly or through some specified
financial institutions:
(i) Direct Assistance: The IDBI grants loans and advances to industrial concerns. There is no
restriction on the upper or lower limits for assistance to any concern itself. The bank guarantees
loans raised by industrial concerns in the open market from the State Co-operative Banks, the
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Scheduled Banks, the Industrial Finance Corporation of India (IFCI) and other ‘notified’
financial institutions.
(ii) Indirect Assistance:
The IDBI can refinance term loans to industrial concerns repayable within 3 to 25 years given by
the IFCI, the State Financial Corporation and some other financial institutions and to SIDCs (State
Industrial Development Corporations), Commercial banks and Cooperative banks which extend
term loans not exceeding 10 years to industrial concerns. IDBI subscribes to the shares and bonds
of the financial institutions and thereby provide supplementary resources.
Developmental Activities of IDBI:
(1) Promotional Activities:
In fulfillment of its developmental role, the bank continues to perform a wide range of promotional
activities relating to developmental programmes for new entrepreneurs, consultancy services for
small and medium enterprises and programmes designed for accredited voluntary agencies for the
economic upliftment of the underprivileged.
These include entrepreneurship development, self-employment and wage employment in the

industrial sector for the weaker sections of society through voluntary agencies, support to
Science and Technology Entrepreneurs’ Parks, Energy Conservation, Common Quality Testing
Centers for small industries.
(2) Technical Consultancy Organisations:
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With a view to making available at a reasonable cost, consultancy and advisory services to
entrepreneurs, particularly to new and small entrepreneurs, IDBI, in collaboration with other
AllIndia Financial Institutions, has set up a network of Technical Consultancy Organisations
(TCOs) covering the entire country. TCOs offer diversified services to small and medium
enterprises in the selection, formulation and appraisal of projects, their implementation and review.
(3) Entrepreneurship Development Institute:
Realising that entrepreneurship development is the key to industrial development; IDBI played a
prime role in setting up of the Entrepreneurship Development Institute of India for fostering
entrepreneurship in the country. It has also established similar institutes in Bihar, Orissa, Madhya
Pradesh and Uttar Pradesh. IDBI also extends financial support to various organisations in
conducting studies or surveys of relevance to industrial development.
HISTORY OF INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA
(ICICI)
The creation of Industrial Credit and Investment Corporation of India (ICICI) is another milestone
in the growth of the Indian Capital Market. It was incorporated in the year 1955, as a company
registered under the Companies Act. The ICICI was incorporated to finance small scale and
medium industries in the private sector.
The IFCI and SFCs confined themselves to lending activity and kept away from underwriting and
investing in business though they were authorized to subscribe for the shares and debentures of the
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companies and to undertake underwriting business. Therefore, a large number of up and coming
enterprises faced continuous problems in raising funds in the capital market.
Besides, they were not in a position to secure the desired amount of loan assistance from the
financial institutions due to their thin equity base. To encourage industrial development in the
private sector, a considerable provision of underwriting facility was considered necessary to
accelerate the phase of the industrialization. To fill these gaps, the ICICI was established.
OBJECTIVES OF ICICI BANK
1. Providing credit facilities to manufacturers for promoting sale of industrial equipment on

deferred payment terms.
2. Providing financial services like leasing, installment sale and asset credit.
The ICICI sells securities from its own portfolio to the investors whenever it can get a reasonable
price for them. It does so for the dual purpose of revolving its resources for new investments and
for encouraging the investment habit in others and thereby promoting a wide spread distribution
of private industrial securities. Thus, unlike normal investors the ICICI does not retain successful
investments merely because they are profitable.
3. ICICI assisted manufacturing industries in all sectors, that is, the private sector, the joint sector,
the public sector and the cooperative sector but the major beneficiary was the private sector.
ICICI’s assistance comprised of foreign currency loans, rupee loans, guarantees, and
subscription of shares and debentures. The Corporation showed increasing interest in the
development of new industries in backward regions.
4. There was a remarkably significant increase in financial assistance by ICICI in recent years.
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ROLE OF THE ICICI
The Corporation started a Merchant Banking Division in 1973 for advising its clients on a selective
basis, on raising finances in suitable forms and on restructuring of finances in the existing
companies. It also advises clients on amalgamation proposals. Assistance is provided in preparing
proposals for submission to financial institutions and banks and for negotiations with them for
loans, underwriting etc. This Division acts as Managers to the issue of capital. Assistance is also
provided for completion of formalities connected with the public issue and of legal formalities for
raising loans.
In 1982, the ICICI gave a new dimension to its merchant banking division by offering to provide
counseling for industrial investment in India to non-resident Indians and persons of Indian origin
living abroad. This is likely to prove not only the least expensive route for technological up
gradation but also a source of foreign currency funds by way of risk capital.
Industrial Finance Corporation of India (IFCI)
Industrial Finance Corporation of India (IFCI) is actually the first financial institute the
government established after independence. The main aim of the incorporation of IFCI was to
provide long-term finance to the manufacturing and industrial sector of the country. Let us study
more about IFCI.
Industrial Finance Corporation of India (IFCI)
Initially established in 1948, the Industrial Finance Corporation of India was converted into a
public company on 1 July 1993 and is now known as Industrial Finance Corporation of India Ltd.
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The main aim of setting up this development bank was to provide assistance to the industrial sector
to meet their medium and long-term financial needs.
The IDBI, scheduled banks, insurance sector, co-op banks are some of the major stakeholders of
the IFCI. The authorized capital of the IFCI is 250 crores and the Central Government can increase
this as and when they wish to do so.
Functions of the IFCI
First, the main function of the IFCI is to provide medium and long-term loans and advances to
industrial and manufacturing concerns. It looks into a few factors before granting any loans. They
study the importance of the industry in our national economy, the overall cost of the project, and
finally the quality of the product and the management of the company. If the above factors have
satisfactory results the IFCI will grant the loan.
The Industrial Finance Corporation of India can also subscribe to the debentures that these
companies issue in the market.
The IFCI also provides guarantees to the loans taken by such industrial companies.
When a company is issuing shares or debentures the Industrial Finance Corporation of India can
choose to underwrite such securities.
It also guarantees deferred payments in case of loans taken from foreign banks in foreign currency.
There is a special department the Merchant Banking & Allied Services Department. They look
after matters such as capital restructuring, mergers, amalgamations, loan syndication, etc.
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It the process of promoting industrialization the Industrial Finance Corporation of India has also
promoted three subsidiaries of its own, namely the IFCI Financial Services Ltd, IFCI Insurance
Services Ltd and I-Fin. It looks after the functioning and regulation of these three companies.
IFCI as a Business Facilitator
In the last few decades, the Industrial Finance Corporation of India has made a significant
contribution to the development of our economy. Also, it is responsible for the growth, expansion,
and modernization of our industrial sector.
The Industrial Finance Corporation of India has also been beneficial for the import and export
industry, the cause of pollution control, energy conservation, import substitution, and many such
initiatives and industries. Some sectors, in particular, have seen a lot of benefits. Some of these are
Agricultural Based Industries like paper, sugar, rubber, etc.
Service Industries like restaurants, hospitals, hotels, etc.
Basic industries in any economy like steel, cement. Chemicals etc.
Capital and goods industries like electronics, fibers, telecom services, etc.
MUTUAL FUNDS
A Mutual Fund is formed by the coming together of a number of investors who hand over their
surplus funds to a professional organization to manage it through investments in capital market.
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(Mutual Funds are known as ‘Unit Trusts’ in England).
A Mutual Fund is basically a risk reducing tool. Risk reduction is achieved by diversification of
the portfolio. Diversification means that a Mutual Fund invests in a large number of shares and
financial instruments thereby lowering the overall risk.
Further the fund managers’ investment decisions are based on the basis of intensive research and
are backed by informed judgement and experience.
Structure of a Mutual Fund
Mutual Funds in India are created as trusts. The parties involved are:
Sponsor – This is the one who sets up the Mutual Fund or trust. A sponsor is similar to a promoter
of a company. The sponsor of a Mutual Fund appoints / sets up the board of trustees, the asset
management company or fund house and appoints the custodian.
Board of trustees - The role of the trustees is to ensure that the interests of Mutual Fund holders
are protected. The board of trustees also needs to ensure that the fund house complies with all the
rules laid down by the Securities Exchange Board of India (SEBI). The board needs to have at
least four independent directors. The trustees act according to the Trust Deed executed by the
sponsor. The board sees to it that the fund house has established the required infrastructure and
ensures that processes are in place to operate and manage the fund effectively. The board appoints
the main members of the fund house including the board of directors and fund managers (scheme-
wise). They also devise the fund house’s internal control and audit processes including the rules
for enrolling and dealing with brokers / agents.
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Asset Management Company (AMC)/Fund house - An AMC or fund house will act as the
investment manager for the trust. It will be responsible for the day to day operations. This means
that it is be taking care of all the money put in by investors. The AMC or fund house is appointed
by the sponsor or the board of trustees. SEBI approval is required for setting up the AMC. 40% of
its net worth should be contributed by the sponsor.
Custodian – A custodian is one who has custody of all the shares and securities invested in by the
AMC. The custodian is responsible for the investment account of a fund house.
Advantages of Mutual Funds
a. Liquidity
Unless you opt for close-ended mutual funds, it is relatively easier to buy and exit a mutual fund
scheme. You can sell your units at any point (when the market is high). Do keep an eye on surprises
like exit load or pre-exit penalty. Remember, mutual fund transactions happen only once a day
after the fund house releases that day’s NAV.
b. Diversification
Mutual funds have their share of risks as their performance is based on the market movement.
Hence, the fund manager always invests in more than one asset class (equities, debts, money
market instruments, etc.) to spread the risks. It is called diversification. This way, when one asset
class doesn’t perform, the other can compensate with higher returns to avoid the loss for investors.
c. Expert Management
A mutual fund is favoured because it doesn’t require the investors to do the research and asset
allocation. A fund manager takes care of it all and makes decisions on what to do with your
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investment. He/she decides whether to invest in equities or debt. He/she also decide on whether to
hold them or not and for how long.
Your fund manager’s reputation in fund management should be an essential criterion for you to
choose a mutual fund for this reason. The expense ratio (which cannot be more than 1.05% of the
AUM guidelines as per SEBI) includes the fee of the manager too.
d. Less cost for bulk transactions
You must have noticed how price drops with increased volume when you buy any product. For
instance, if 100g toothpaste costs Rs.10, you might get a 500g pack for, say, Rs.40. The same logic
applies to mutual fund units as well. If you buy multiple units at a time, the processing fees and
other commission charges will be less compared to when you buy one unit.
e. Invest in smaller denominations
By investing in smaller denominations (SIP), you get exposure to the entire stock (or any other
asset class). This reduces the average transactional expenses – you benefit from the market lows
and highs. Regular (monthly or quarterly) investments, as opposed to lump sum investments, give
you the benefit of rupee cost averaging.
f. Suit your financial goals
There are several types of mutual funds available in India catering to investors from all walks of
life. No matter what your income is, you must make it a habit to set aside some amount (however
small) towards investments. It is easy to find a mutual fund that matches your income,
expenditures, investment goals and risk appetite.
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g. Cost-efficiency
You have the option to pick zero-load mutual funds with fewer expense ratios. You can check the
expense ratio of different mutual funds and choose the one that fits in your budget and financial
goals. Expense ratio is the fee for managing your fund. It is a useful tool to assess a mutual fund’s
performance.
h. Quick & painless process
You can start with one mutual fund and slowly diversify. These days it is easier to identify and
handpicked fund(s) most suitable for you. Maintaining and regulating the funds too will take no
extra effort from your side. The fund manager, with the help of his team, will decide when, where
and how to invest. In short, their job is to beat the benchmark and deliver you maximum returns
consistently.
i. Tax-efficiency
You can invest up to Rs.1.5 lakh in tax-saving mutual funds mentioned under 80C tax deductions.
ELSS is an example of that. Though a 10% Long-Term Capital Gains (LTCG) is applicable for
returns above Rs.1 lakh after one year, they have consistently delivered higher returns than other
tax-saving instruments like FD in recent years.
j. Automated payments
It is common to forget or delay SIPs or prompt lumpsum investments due to any given reason. You
can opt for paperless automation with your fund house or agent. Timely email and SMS
notifications help to counter this kind of negligence.
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k. Safety
There is a general notion that mutual funds are not as safe as bank products. This is a myth as fund
houses are strictly under the purview of statutory government bodies like SEBI and AMFI. One
can easily verify the credentials of the fund house and the asset manager from SEBI. They also
have an impartial grievance redressal platform that works in the interest of investors.
l. Systematic or one-time investment
You can plan your mutual fund investment as per your budget and convenience. For instance,
starting a SIP (Systematic Investment Plan) on a monthly or quarterly basis suits investors with
less money. On the other hand, if you have surplus amount, go for a one-time lump sum investment.
2. Disadvantages of Mutual Funds
a. Costs to manage the mutual fund
The salary of the market analysts and fund manager comes from the investors. Total fund
management charge is one of the first parameters to consider when choosing a mutual fund.
Higher management fees do not guarantee better fund performance.
b. Lock-in periods
Many mutual funds have long-term lock-in periods, ranging from five to eight years. Exiting such
funds before maturity can be an expensive affair. A specific portion of the fund is always kept in
cash to pay out an investor who wants to exit the fund. This portion cannot earn interest for
investors.
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c. Dilution
While diversification averages your risks of loss, it can also dilute your profits. Hence, you should
not invest in more than seven to nine mutual funds at a time.
As you have just read above, the benefits and potential of mutual funds can undoubtedly override
the disadvantages, if you make informed choices. However, investors may not have the time,
knowledge or patience to research and analyse different mutual funds.
Mutual Funds: What is Mutual Fund & Types of Mutual Funds in India
Based on Asset Class
Based on Structure
Based on Investment Goals
Based on Risk
Specialized Mutual Funds Based

on Asset Class
a. Equity Funds
Primarily investing in stocks, they also go by the name stock funds. They invest the money amassed
from investors from diverse backgrounds into shares of different companies. The returns or losses
are determined by how these shares perform (price-hikes or price-drops) in the stock market. As
equity funds come with quick growth, the risk of losing money is comparatively higher.
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b. Debt Funds
Debt funds invest in fixed-income securities like bonds, securities and treasury bills – Fixed
Maturity Plans (FMPs), Gilt Fund, Liquid Funds, Short Term Plans, Long Term Bonds and
Monthly Income Plans among others – with fixed interest rate and maturity date. Go for it, only if
you are a passive investor looking for a small but regular income (interest and capital appreciation)
with minimal risks.
c. Money Market Funds
Just as some investors trade stocks in the stock market, some invest in the money market, also
known as capital market or cash market. The government, banks or corporations usually run it by
issuing money market securities like bonds, T-bills, dated securities and certificates of deposits,
among others. The fund manager invests your money and disburses regular dividends to you in
return. If you opt for a short-term plan (13 months max), the risk is relatively less.
d. Hybrid Funds
Hybrid Funds (Balanced Funds) is an optimum mix of bonds and stocks, thereby bridging the gap
between equity funds and debt funds. The ratio can be variable or fixed. In short, it takes the best
of two mutual funds by distributing, say, 60% of assets in stocks and the rest in bonds or vice
versa. This is suitable for investors willing to take more risks for ‘debt plus returns’ benefit rather
than sticking to lower but steady income schemes.
2. Based on Structure
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Mutual funds can be categorized based on different attributes (like risk profile, asset class, etc.).
Structural classification – open-ended funds, close-ended funds, and interval funds – is broad in
nature and the difference depends on how flexible is the purchase and sales of individual mutual
fund units.
a. Open-Ended Funds
These funds don’t have any constraints in a period or a number of units – an investor can trade
funds at their convenience and exit when they like at the current NAV (Net Asset Value). This is
why the unit capital continually changes with new entries and exits. An open-ended fund may also
decide to stop taking in new investors if they do not want to (or cannot manage significant funds).
b. Closed-Ended Funds
Here, the unit capital to invest is fixed beforehand, and hence, they cannot sell a more than a
preagreed number of units. Some funds also come with an NFO period; wherein there is a deadline
to buy units. It has a specific maturity tenure, and fund managers are open to any fund size,
however large. SEBI mandates investors to be given either repurchase option or listing on stock
exchanges to exit the scheme.
c. Interval Funds
This has traits of both open-ended and closed-ended funds. Interval funds can be purchased or
exited only at specific intervals (decided by the fund house) and are closed the rest of the time. No
transactions will be permitted for at least 2 years. This is suitable for those who want to save a
lump sum for an immediate goal (3-12 months). 3. Based on Investment Goals
a. Growth Funds
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Growth funds usually allocate a considerable portion in shares and growth sectors, suitable for
investors (mostly Millennial) who have a surplus of idle money to be distributed in riskier plans
(albeit with possibly high returns) or are positive about the scheme.
b. Income Funds
This belongs to the family of debt mutual funds that distribute their money in a mix of bonds,
certificate of deposits and securities among others. Helmed by skilled fund managers who keep
the portfolio in tandem with the rate fluctuations without compromising on the portfolio’s
creditworthiness, Income Funds have historically earned investors better returns than deposits and
are best suited for risk-averse individuals from a 2-3 years perspective. c. Liquid Funds
Like Income Funds, this too belongs to the debt fund category as they invest in debt instruments
and money market with a tenure of up to 91 days. The maximum sum allowed to invest is Rs 10
lakhs. One feature that differentiates Liquid Funds from other debt funds is how the Net Asset
Value is calculated – NAV of liquid funds are calculated for 365 days (including Sundays) while
for others, only business days are calculated.
d. Tax-Saving Funds
ELSS or Equity Linked Saving Scheme is gaining popularity as it serves investors the double
benefit of building wealth as well as save on taxes – all in the lowest lock-in period of only 3 years.
Investing predominantly in equity (and related products), it has been known to earn you non-taxed
returns from 14-16%. This is best-suited for long-term and salaried investors. e. Aggressive
Growth Funds
Slightly on the riskier side when choosing where to invest in, the Aggressive Growth Fund is
designed to make steep monetary gains. Though susceptible to market volatility, you may select
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one as per the beta (the tool to gauge the fund’s movement in comparison with the market).
Example, if the market shows a beta of 1, an aggressive growth fund will reflect a higher beta, say,
1.10 or above.
f. Capital Protection Funds
If protecting your principal is your priority, Capital Protection Funds can serve the purpose while
earning relatively smaller returns (12% at best). The fund manager invests a portion of your money
in bonds or CDs and the rest in equities. You will not incur any loss. However, you need least 3
years (closed-ended) to safeguard your money, and the returns are taxable. g. Fixed Maturity Funds
Investors choose as the FY ends to take advantage of triple indexation, thereby bringing down tax
burden. If uncomfortable with the debt market trends and related risks, Fixed Maturity Plans (FMP)
– investing in bonds, securities, money market etc. – present a great opportunity. As a close-ended
plan, FMP functions on a fixed maturity period, which could range from 1 month to 5 years (like
FDs). The Fund Manager makes sure to put the money in an investment with the same tenure, to
reap accrual interest at the time of FMP maturity.
h. Pension Funds
Putting away a portion of your income in a chosen Pension Fund to accrue over a long period to
secure you and your family’s financial future after retiring from regular employment – it can take
care of most contingencies (like a medical emergency or children’s wedding). Relying solely on
savings to get through your golden years is not recommended as savings (no matter how big) get
used up. EPF is an example, but there are many lucrative schemes offered by banks, insurance
firms etc.
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4. Based on Risk
a. Very Low-Risk Funds
Liquid Funds and Ultra Short-term Funds (1 month to 1 year) are not risky at all, and
understandably their returns are low (6% at best). Investors choose this to fulfil their short-term
financial goals and to keep their money safe until then.
b. Low-Risk Funds
n the event of rupee depreciation or unexpected national crisis, investors are unsure about investing
in riskier funds. In such cases, fund managers recommend putting money in either one or a
combination of liquid, ultra short-term or arbitrage funds. Returns could be 6-8%, but the investors
are free to switch when valuations become more stable.
c. Medium-risk Funds
Here, the risk factor is of medium level as the fund manager invests a portion in debt and the rest
in equity funds. The NAV is not that volatile, and the average returns could be 9-12%. d. High-
risk Funds
Suitable for investors with no risk aversion and aiming for huge returns in the form of interest and
dividends, High-risk Mutual Funds need active fund management. Regular performance reviews
are mandatory as they are susceptible to market volatility. You can expect 15% returns, though
most high-risk funds generally provide 20% returns (and up to 30% at best).
5. Specialized Mutual Funds
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a. Sector Funds
Investing solely in one specific sector, theme-based mutual funds. As these funds invest only in
specific sectors with only a few stocks, the risk factor is on the higher side. One must be constantly
aware of the various sector-related trends, and in case of any decline, exit immediately. However,
sector funds also deliver great returns. Some areas of banking, IT and pharma have witnessed huge
and consistent growth in the recent past and are predicted to be promising in future as well.
b. Index Funds
Suited best for passive investors, index funds put money in an index. A fund manager does not
manage it. An index fund identifies stocks and their corresponding ratio in the market index and
put the money in similar proportion in similar stocks. Even if they cannot outdo the market (which
is the reason why they are not popular in India), they play it safe by mimicking the index
performance.
c. Funds of Funds
A diversified mutual fund investment portfolio offers a slew of benefits, and ‘Funds of Funds’ aka
multi-manager mutual funds are made to exploit this to the tilt – by putting their money in diverse
fund categories. In short, buying one fund that invests in many funds rather than investing in
several achieves diversification as well as saves on costs.
d. Emerging market Funds
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To invest in developing markets is considered a steep bet, and it has undergone negative returns
too. India itself a dynamic and emerging market and investors to earn high returns from the
domestic stock market, they are prone to fall prey to market volatilities. However, in a longerterm
perspective, it is evident that emerging economies will contribute to the majority of global growth
in the coming decade as their economic growth rate is way superior to that of the US or the UK.
e. International/ Foreign Funds
Favoured by investors looking to spread their investment to other countries, Foreign Mutual Funds
can get investors good returns even when the Indian Stock Markets perform well. An investor can
employ a hybrid approach (say, 60% in domestic equities and the rest in overseas funds) or a feeder
approach (getting local funds to place them in foreign stocks) or a theme-based allocation (e.g.,
Gold Mining).
f. Global Funds
Aside from the same lexical meaning, Global Funds are quite different from International Funds.
While a global fund chiefly invests in markets worldwide, it also includes investment in your home
country. The International Funds concentrate solely on foreign markets. Diverse and universal in
approach, Global Funds can be quite risky to owing to different policies, market and currency
variations, though it does work as a break against inflation and long-term returns have been
historically high.
g. Real Estate Funds
In spite of the real estate boom in India, many are wary about investing in such projects due to
multiple risks. Real Estate Fund can be a perfect alternative as the investor is only an indirect
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participant by putting their money in established real estate companies/trusts rather than projects.
A long-term investment, it negates risks and legal hassles when it comes to purchasing a property
as well as provide liquidity to some extent.
h. Commodity-focused Stock Funds
Ideal for investors with sufficient risk-appetite and looking to diversify their portfolio, commodity-
focused stock funds give a chance to dabble in multiple and diverse trades. Returns are not periodic
and are either based on the performance of the stock company or the commodity itself. Gold is the
only commodity in which mutual funds can invest directly in India. The rest purchase fund units
or shares from commodity businesses.
i. Market Neutral Funds
For investors seeking protection from unfavourable market tendencies while sustaining good
returns, market-neutral funds meet the purpose (like a hedge fund). With better risk-adaptability,
these funds give high returns, and even small investors can outstrip the market without stretching
the portfolio limits.
j. Inverse/Leveraged Funds
While a regular index fund moves in tandem with the benchmark index, the returns of an inverse
index fund shift in the opposite direction. It is nothing but selling your shares when the stock goes
down, only to buy them back at an even lesser cost (to hold until the price goes up again). k. Asset
Allocation Funds
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Combining debt, equity and even gold in an optimum ratio, this is a greatly flexible fund. Based
on a pre-set formula or fund manager’s inferences based on the current market trends, Asset
Allocation Funds can regulate the equity-debt distribution. It is almost like Hybrid Funds but
requires great expertise in choosing and allocation of the bonds and stocks from the fund manager.
l. Gift Funds
Yes, you can gift a mutual fund or a SIP to your loved ones to secure their financial future..
Exchange-traded Funds
It belongs to the Index Funds family and is bought and sold on exchanges. Exchange-traded Funds
have unlocked a world of investment prospects, enabling investors to gain extensive exposure to
stock markets abroad as well as specialized sectors. An ETF is like a Mutual Fund that can be
traded in real-time at a price that may rise or fall many times in a day.
What is Insurance?
In D.S. Hamsell words, insurance is defined “as a social device providing financial compensation
for the effects of misfortune, the payment being made from the accumulated contributions of all
parties participating in the scheme”
In simple terms “Insurance is a co-operative device to spread the loss caused by a particular risk
over a number of persons, who are exposed to it and who agree to insure themselves against the
risk”
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Thus, the insurance is
(a) A cooperative device to spread the risk;
(b) the system to spread the risk over a number of persons who are insured against the risk;
(c) the principle to share the loss of the each member of the society on the basis of probability of
loss to their risk; and
(d) the method to provide security against losses to the insured
Insurance may be defined as form of contract between two parties (namely insurer and insured or
assured) whereby one party (insurer) undertakes in exchange for a fixed amount of money
(premium) to pay the other party (Insured), a fixed amount of money on the happening of certain
event (death or attaining a certain age in case of life) or to pay the amount of actual loss when it
takes place through the risk insured (in case of property)
Assurance and Insurance
The two words were used synonymously at one time, but there is fine distinction between the two.
‘Assurance’ is used in those contracts which guarantee the payment of a certain sum on the
happening of a specified event which is bound to happen sooner or later, for example attaining a
certain age or death. Thus life policies comes under ‘assurance’.
Insurance, on the other hand, contemplates the granting of agreed compensation of the happening
of certain events stipulated in the contract which are not expected but which may happen, for
example risk relating to fire, accident or marine.
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Nature of Insurance : Following are the main characteristics of insurance which are applicable to
all types of insurance (life, fire, marine and general insurance).
Sharing of Risks - Insurance is a device to share the financial losses which may occur to individual
or his family on the happening of certain events
Co operative Device – Insurance is a co-operative device to spread the loss caused by a particular
risk over a large caused by a particular risk over a large number of persons who are exposed to it
and who agree to insure themselves against the risk.
Value of Risk – Risk is evaluated at the time of insurance. There are several methods of valuing
the risk. Higher the risks, higher will be premium
Payment on Contingency -If the contingency occurs, payment is made; payment is made only for
insured contingency. If there is no contingency, no payment is made. In life insurance contract,
payment is certain because the death or the expiry of term will certainly contract like fire, marine,
the contingency may or may not occur.
Amount of Payment of Claim - The amount of payment depends upon the value of loss occurred
due to the particular insured risk. The insurance is there upto that amount. In life insurance insurer
pay a fixed sum on the happening of an event or within a specified time period.
Example – In fire insurance, if fire occurs and half the property is destroyed, but the whole property
is insured, then payment of claim will be made only for that half building that is destroyed not the
whole amount of insured.
Insurance is different from Charity - In charity, there is no consideration but insurance is not given
without premium
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Large number of Insured Person - Insurance is spreading of loss over a large number of persons.
Larger the number of persons, lower the cost of insurance and amount of premium and incase
lower the number of persons, higher the cost of insurance and amount of premium.
Insurance is different from Gambling - In gambling, there is no guarantee of gain, by bidding the
person expose himself to risk of losing. Whereas in insurance, by getting insured his life and
property, he protect himself against the risk of loss.
Functions of Insurance
Functions of insurance can be divided into parts;
I Primary functions.
II Secondary functions.
I Primary Functions
1. Certainty of compensation of loss: Insurance provides certainty of payment at the

uncertainty of loss. The elements of uncertainty are reduced by better planning and administration.
The insurer charges premium for providing certainty.
2. Insurance provides protection The main function of insurance is to provide protection

against risk of loss. The insurance policy covers the risk of loss. The insured person is indemnified
for the actual loss suffered by him. Insurance thus provide financial protection to the insured. Life
insurance policies may also be used as collateral security for raising loans.
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3. Risk sharing : All business concerns face the problem of risk. Risk and insurance are
interlinked with each other. Insurance, as a device is the outcome of the existence of various risks
in our day to day life. It does not eliminate risks but it reduces the financial loss caused by risks.
Insurance spreads the whole loss over the large number of persons who are exposed by a particular
risk.
II Secondary Functions
1. Prevention of losses: The insurance companies help in prevention of losses as they join
hands with those institutions which are engaged in loss prevention measures. The reduction in
losses means that the insurance companies would be required to pay lesser compensations to the
assured and manage to accumulate more savings, which in turn, will assist in reducing the
premiums
2. Providing funds for investment: Insurance provides capital for society. Accumulated funds
through savings in the form of insurance premium are invested in economic development plans or
productivity projects.
3. Insurance increases efficiency: The insurance eliminates the worries and miseries of losses.
A person can devote his time to other important matters for better achievement of goals.
Businessman feel more motivated and encouraged to take risks to enhance their profit earning.
This also helps in improving their efficiencies.
4. Solution to social problems: Insurance takes care of many social problems. We have
insurance against industrial injuries, road accident, old age, disability or death etc.
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5. Encouragement of savings: Insurance not only provides protection against risks but also a
number of other incentives which encourages people to insure. Since regularity and punctuality of
payment of premium is a perquisite for keeping the policy in force, the insured feels compelled to
save.
Principles of Insurance
The basic principles which govern the insurance are -
(1) Utmost good faith
(2) Insurable interest
(3) Indemnity
(4) Contribution
(5) Subrogation
(6) Causa proxima
(7) Mitigation of loss
1. Principle of utmost good faith: A contract of insurance is a contract of ‘Uberrimae Fidei’ i.e.,
of utmost good faith. Both insurer and insured should display the utmost good faith towards each
other in relation to the contract. In other words, each party must reveal all material information to
the other party whether such information is asked or not. There should not be any fraud, non
disclosure or misrepresentation of material facts.
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Example – in case of life insurance, the insured must revel the true age and details of the existing
illness/diseases. If he does not disclose the true fact while getting his life insured, the insurance
company can avoid the contract.
Similarly, in case of the insurance of a building against fire, the insured must disclose the details
of the goods stored, if such goods are of hazardous nature
A material fact means important facts which would influence the judgment of the insurer in fixing
the premium or deciding whether he should accept the risk, on what terms. All material facts should
be disclosed in true and full form
2. Principle of Insurable Interest: This principle requires that the insured must have a insurable
interest in the subject matter of insurance. Insurance interest means some pecuniary interest in the
subject matter of contract of insurance. Insurance interest is that interest, when the policy holders
get benefited by the existence of the subject matter and loss if there is death or damage to the
subject matter.
For example – In life insurance, a man cannot insured the life of a stranger as he has no insurable
interest in him but he can get insured the life of himself and of persons in whose life he has a
pecuniary interest. So in the life insurance interest exists in the following cases:-
Husband in the life of his wife and wife in the life of her husband
Parents in the life of a child if there is pecuniary benefit derived from the life of a Child
Creditor in the life of debtor
Employer in the life of an employee
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Surety in the life of a principle debtor
In life insurance, insurable interest must be present at the time when the policy is taken. In
fire insurance, it must be present at the time of insurance and at the time if loss if subject matter.
In marine insurance, it must be present at the time of loss of the subject matter.
3. Principle of Indemnity: This principle is applicable in case of fire and marine insurance
only. It is not applicable in case of life, personal accident and sickness insurance. A contract of
indemnity means that the insured in case of loss against which the policy has been insured, shall
be paid the actual cost of loss not exceeding the amount of the
insurance policy. The purpose of contract of insurance is to place the insured in the same
financial position, as he was before the loss.
Example – A house is insured against fire for Rs. 50000. It is burnt down and found that the
expenditure of Rs. 30000 will restore it to its original condition. The insurer is liable to pay only
Rs. 30000.
In life insurance, principle of indemnity does not apply as there is no question of actual loss. The
insurer is required to pay a fixed amount upon in advance in the event of accident, death or at the
expiry of the fixed term of the policy. Thus, a contract of a life insurance is a contingent contract
and not a contract of indemnity.
4. Principle of Contribution: The principle of contribution is a corollary to the doctrine of

indemnity. It applies to any insurance which is a contract of indemnity. So it does not apply to life
insurance. A particular property may be insured with two or more insurers against the same risks.
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In such cases, the insurers must share the burden of payment in proportion to the amount insured
by each. If one of the insurer pays the whole loss, he is entitled to contribution from other insurers
Example – B gets his house insured against fire for Rs. 10000 with insurer P and for Rs. 20000
with insurer Q. a loss of Rs. 15000 occurs, P is liable to pay for Rs. 5000 and Q is labile to pay Rs
10000. If the whole amount pf loss is paid by Q, then Q can recover Rs. 5000 from P. The liability
of P &Q will be determined as under:
Sum insured with Individual insurer (i.e. P or Q ) x Actual Loss = Total sum insured
Liability of P = 10000 x 15000 = Rs.5000
30000
Liability of Q = 20000 x 15000 = Rs.10000
30000
The right of contribution arises when:
(a) There are different policies which related to the same subject matters;
(b) The policies cover the same period which caused the loss;
(c) All the policies are in force at the time of loss; and
(d) One of the insurer has paid to the insured more than his share of loss.
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5. Principle of Subrogation: The doctrine of subrogation is a collorary to the principle of

indemnity and applies only to fire and marine insurance. According to doctrine of subrogation,
after the insured is compensated for the loss caused by the damage to the property insured by him,
the right of ownership to such property passes to the insurer after settling the claims of the insured
in respect of the covered loss.
Example – Furniture is insured for Rs. 1 lac against fire, it is burnt down and the insurer pays the
full value of Rs. 1 lac to the insured, later on the damage Furniture is sold for Rs. 10000. The
insurer is entitled to receive the sum of Rs. 10000.
A loss may occur accidentally or by the action or negligence of third party. If the insured suffer a
loss because of action of third party and he is in a position to recover the loss from the insurer then
insured cannot take action against third party, his right is subrogated (substituted) to the insurer on
settlement of the claim. The insurer, therefore, can recover the claim from the third party.
If the insured recovers any compensation for the loss (due to third party), from the third party, after
he has already been indemnified by the insurer, he holds the amount of such compensation as the
trustee if the insurer.
The insurer is entitled to the benefits out of such rights only to the extent of the amount he has paid
to the insured as compensation
6. Principle of Causa Proxima : Causa proxima, means proximate cause or cause which, in a
natural and unbroken series of events, is responsible for a loss or damage. The insurer is liable for
loss only when such a loss is proximately caused by the peril insured against. The cause should be
the proximate cause and can not the remote cause. If the risk insured is the remote cause of the
loss, then the insurer is not bound to pay compensation. The nearest cause should be considered
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while determining the liability of the insured. The insurer is liable to pay if the proximate cause is
insured.
Example – In a marine insurance policy, the goods were insured against damage by sea water,
some rats on the board made a hole in a bottom of the ship causing sea water to pour into the ship
and damage the goods. Here, the proximate cause of loss is sea water which is covered by the
policy and the hole made by the rats is a remote cause. Therefore, the insured can recover damage
from the insurer
Example – A ship was insured against loss arising from collision. A collision took palce resulting
in a few days delay. Because of the delay, a cargo of oranges becomes unsuitable for human
consumption. It was held that the insurer was not liable for the the loss because the proximate
cause of loss was delay and not the collision of the ship.
7. Principle of Mitigation of Loss: An insured must take all reasonable care to reduce the loss.
We must act as if the property was not insured.
Example – If a house is insured against fire, and there is accidental fire, the owner must take all
reasonable steps to keep the loss minimum. He is supposed to take all steps which a man of
ordinary prudence will take under the circumstances to save the insured property.
Benefits of Insurance or Role and Importance of Insurance
Benefit of insurance can be divided into these categories -
1. Benefits to Individual
2 Benefits to Business or Industry
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3. Benefits to the Society
It can be explained as under - 1.

Benefits to Individual
(a) Insurance provides security & safety: Insurance gives a sense of security to the policy
holder. Insurance provide security and safety against the loss of earning at death or in old age,
against the loss at fire, against the loss at damage, destruction of property, goods, furniture etc.
Life insurance provides protection to the dependents in case of death of policyholders and to the
policyholder in old age. Fire insurance insured the property against loss on a fire. Similarly other
insurance provide security against the loss by indemnifying to the extent of actual loss.
(b) Encourage Savings: Life insurance is best form of saving. The insured person must
regularly save out of his current income an amount equal to the premium to be paid otherwise his
policy get lapsed if premium is not paid on time.
(c) Providing Investment Opportunity: Life insurance provides different policies in which
individual can invest smoothly and with security; like endowment policies, deferred annuities etc.
There is special exemption in the Income Tax, Wealth Tax etc. regarding this type of investment
2 Benefits to Business or Industry
(a) Shifting of Risk: Insurance is a social device whereby businessmen shift specific risks to
the insurance company. This helps the businessmen to concentrate more on important business
issues.
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(b) Assuring Expected Profits: An insured businessman or policyholder can enjoy normal
expected profits as he would not be required to make provisions or allocate funds for meeting
future contingencies.
(c) Improve Credit Standing: Insured assets are easily accepted as security for loans by the
banks and financial institutions so insurance improve credit standing of the business firm
(d) Business Continuation – With the help of property insurance, the property of business is
protected against disasters and chance of closure of business is reduced
3. Benefits to the Society
(a) Capital Formation: As institutional investors, insurance companies provide funds for
financing economic development. They mobilize the saving of the people and invest these saving
into more productive channels
(b) Generating Employment Opportunities: With the growth of the insurance business, the
insurance companies are creating more and more employment opportunities.
(c) Promoting Social Welfare: Policies like old age pension scheme, policies for education,
marriage provide sense of security to the policyholders and thus ensure social welfare.
(d) Helps Controlling Inflation: The insurance reduces the inflationary pressure in two ways,
first, by extracting money in supply to the amount of premium collected and secondly, by
providing funds for production narrow down the inflationary gap.
Type of Insurance
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Insurance cover various types of risks and include various insurance policies which provide
protection against various losses.
There are two different views regarding classification if insurance:-
I. From the business point of view; and
II From the risk points of view
I. Business point of view
The insurance can be classified into three categories from business point of view
1. Life insurance;
2. General Insurance; and
3. Social Insurance.
1. Life Insurance: The life insurance contract provide elements of protection and investment after
getting insurance, the policyholder feels a sense of protection because he shall be paid a definite
sum at the death or maturity. Since a definite sum must be paid, the element of investment is also
present. In other words, life insurance provides against pre-mature death and a fixed sum at the
maturity of policy. At present, life insurance enjoys maximum scope because each and every
person requires the insurance.
Life insurance is a contract under which one person, in consideration of a premium paid either in
lump sum or by monthly, quarterly, half yearly or yearly installments, undertakes to pay to the
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person (for whose benefits the insurance is made), a certain sum of money either on the death of
the insured person or on the expiry of a specified period of time.
Life insurance offers various polices according to the requirement of the persons -
- Term Assurance
- Whole Life
- Endowment Assurance
- Life Annuity Joint Life Assurance
- Pension Plans
- Unit Linked Plans
- Policy for maintenance of handicapped dependent
- Endowment Policies with Health Insurance benefits
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-
2. General Insurance: The general insurance includes property insurance, liability insurance and
other form of insurance. Property insurance includes fire and marine insurance. Property of the
individual and business involves various risks like fire, theft etc. This need insurance Liability
insurance includes motor, theft, fidelity and machine insurance
Types of General Insurance policies available are -
- Health Insurance
- Medi- Claim Policy
- Personal Accident Policy
- Group Insurance Policy
- Automobile Insurance
- Worker’s Compensation Insurance
- Liability Insurance
- Aviation Insurance
Business Insurance
- Fire Insurance Policy
- Travel Insurance Policy
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-
3. Social Insurance: Social insurance provide protection to the weaker sections of the society
who are unable to pay the premium. It includes pension plans, disability benefits, unemployment
benefits, sickness insurance and industrial insurance.
II Risk Points of View
The insurance can be classified into three categories from Risk point of view
1. Property Insurance
2. Liability Insurance
3. Other forms of Insurance
1. Property Insurance: Property of the individual and business is exposed to risk of fire, theft
marine peril etc. This needs insurance. This is insured with the help of:-
(i) Fire Insurance
(ii) Marine Insurance
(iii) Miscellaneous Insurance
(i) Fire Insurance: Fire insurance covers risks of fire. It is contract of indemnity. Fire insurance
is a contract under which the insurer agrees to indemnify the insured, in return for payment of the
premium in lump sum or by instalments, losses suffered by the him due to destruction of or damage
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-
to the insured property, caused by fire during an agreed period of time. It includes losses directly
caused through fire or ignition. There are various types of fire insurance policies.
Consequential loss policy
- Comprehensive policy
- Valued policy
- Valuable policy
- Floating policy
- Average policy
(ii) Marine Insurance: Marine insurance is an arrangement by which the insurer undertakes to
compensate the owner of the ship or cargo for complete or partial loss at sea. So it provides
protection against loss because of marine perils. The marine perils are collisions with rock, ship
attack by enemies, fire etc. Marine insurance insures ship, cargo and freight.
The following kinds of marine policies are -
- Voyage policy
- Time policy
- Valued policy
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-
- Hull Policy
- Cargo Policy
- Freight Policy
(iii) Miscellaneous Insurance: It includes various forms of insurance including property

insurance, liability insurance, personal injuries are also insured. The property, goods, machine,
furniture, automobile, valuable goods etc. can be insured against the damage or destruction due to
accident or disappearance due to theft.
Miscellaneous insurance covers
- Motor
- Disability
- Engineering and aviation risks
- Credit insurance
- Construction risks
- Money Insurance
- Burglary and theft insurance
- All risks insurance
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-
2. Liability Insurance: The insurer is liable top pay the damage of the property or to compensate
the loss of personal injury or death. It includes fidelity insurance, automobile insurance and
machine insurance.
The following are types of liability Insurance:-
- Third party insurance
- Employees insurance - Reinsurance
3. Other forms of Insurance: It include export credit insurance, state employee insurance etc.
whereby the insurer guarantees to pay certain amount at the happening of certain events.
The following are other form of Insurance-
- Fidelity Insurance
- Credit Insurance
- Privilege Insurance
42

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Chanderprabhu Jain College of Higher Studies

Class : B.COM (H) III SEMESTER

Paper Code : B.COM 207

Subject : Financial Markets & Institutions

Faculty Name : Ms. Isha Goyal

The main functions of IDBI are discussed below:

(i) To provide financial assistance to industrial enterprises.

(ii) To promote institutions engaged in industrial development.

(iii) To provide technical and administrative assistance for promotion management or

(ii) Indirect Assistance:

Developmental Activities of IDBI:

(1) Promotional Activities:

These include entrepreneurship development, self-employment and wage employment in the

(2) Technical Consultancy Organisations:

(3) Entrepreneurship Development Institute:

HISTORY OF INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA

OBJECTIVES OF ICICI BANK

1. Providing credit facilities to manufacturers for promoting sale of industrial equipment on

ROLE OF THE ICICI

Industrial Finance Corporation of India (IFCI)

Industrial Finance Corporation of India (IFCI)

Functions of the IFCI

IFCI as a Business Facilitator

Agricultural Based Industries like paper, sugar, rubber, etc.

Service Industries like restaurants, hospitals, hotels, etc.

Basic industries in any economy like steel, cement. Chemicals etc.

(Mutual Funds are known as ‘Unit Trusts’ in England).

Structure of a Mutual Fund

Advantages of Mutual Funds

d. Less cost for bulk transactions

e. Invest in smaller denominations

f. Suit your financial goals

h. Quick & painless process

l. Systematic or one-time investment

2. Disadvantages of Mutual Funds

a. Costs to manage the mutual fund

Based on Asset Class

Based on Investment Goals

Specialized Mutual Funds Based

c. Money Market Funds

f. Capital Protection Funds

a. Very Low-Risk Funds

5. Specialized Mutual Funds

d. Emerging market Funds

e. International/ Foreign Funds

g. Real Estate Funds

h. Commodity-focused Stock Funds

i. Market Neutral Funds

Thus, the insurance is

(a) A cooperative device to spread the risk;

(d) the method to provide security against losses to the insured

Assurance and Insurance

Functions of insurance can be divided into parts;

1. Certainty of compensation of loss: Insurance provides certainty of payment at the

2. Insurance provides protection The main function of insurance is to provide protection

The basic principles which govern the insurance are -

(1) Utmost good faith