FINANCIAL EDUCATION AND INVESTMENT AWARENESS (SEC)

MODULE-2: INVESTMENT AVENUES

INTRODUCTION TO INVESTMENT
MEANING:
Investment is said to be the dedication of an asset to attain an increase in value over a
period of time. The purpose of investment is to generate a return from the invested asset.
Investment may generate income in two ways:
1. Investment in saleable asset, income will be earned by way of profit when it is sold.
2. Investment made on return generating plan, income will be earned by accumulation of
the gains.
Investments can be made in:
1. Physical Assets – like real estate, gold etc.,
2. Financial Assets – like stocks, bonds, mutual funds, retirement schemes etc.,

NEED OF INVESTMENT:
1. To keep Money safe: Fixed deposits, government bonds and saving account
helps to keep the money safe.
2. To help Money grow: To make money grow investment objectives and
options which offers significant return on the initial amount invested needs to
be considered. Example Real estate, mutual funds, commodities and equity.
3. To earn a steady stream of Income: Investments helps to earn a steady source
of income. Example: Investment include fixed deposits that pays regular
interest or stock of companies that pays dividends consistently.
4. To Minimise the Burden of Tax: Tax benefits are offered by Income Tax Act,
1961 on Investments like Public Provident Fund (PPF), Equity Linked Savings
Schemes (ELSS) etc.,
5. To Save up for Retirement: Investing money earned during working years in
the right investment options, funds will grow and sustain after retirement.
6. To meet your Financial Goals: Investing can help to achieve short-term and
long-term financial goals without too much stress or trouble.

ESSENTIALS OF INVESTMENT:
1. Investment Objective: This is to define if an individual is looking at long term or
short term financial goal. Based on this goal-setting, one can decide on the type
of asset suitable.
2. Returns: Return-on-investment is related to the risks and prospects of the investment.
If it's a low-risk investment with better prospects than expected, the return would be
low and the capital value would be higher.
3. Lock-in Period: The period for which a particular investment is restrained from being
sold by the investor.
4. Net Asset Value: NAV is the value of one unit in a mutual fund scheme and is a
measure of the fund’s performance.
5. Risk: Risk is the measure of the ability of an investor to withstand market fluctuations
and volatility.

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INVESTMENT AND SPECULATION:

Definition of Investment
Investment refers to the acquisition of the asset, in the expectation of generating income. The
two main element of investment is time and risk.
• There is a range of investment options available in the market as depositing money in
the bank account, or acquiring property, or purchasing shares of the company, or
investing money in government bonds or contribution in the funds like EPF or PPF.
• Investments are majorly divided into two categories i.e. fixed income investment and
variable income investment.
• In fixed income investment there is a pre-specified rate of return like bonds, preference
shares, provident fund and fixed deposits.
• In variable income investment, the return is not fixed like equity shares or property.
Definition of Speculation
Speculation is a trading activity that involves engaging in a risky financial transaction, in
expectation of making enormous profits, from fluctuations in the market value of financial
assets.
• In speculation, there is a high risk of losing maximum or all initial outlay, but it is offset
by the probability of significant profit. Although, the risk is taken by speculators is
properly analysed and calculated.
• Speculation can be seen in markets where the high fluctuations in the price of securities
such as the market for stocks, bonds, derivatives, currency, commodity futures, etc.

Comparison Chart:
BASIS FOR
INVESTMENT SPECULATION
COMPARISON

Meaning The purchase of an asset with the Speculation is an act of conducting

hope of getting returns is called a risky financial transaction, in the
investment. hope of substantial profit.

Basis for decision Fundamental factors, i.e. Hearsay, technical charts and
performance of the company. market psychology.

Time horizon Longer term Short term

Risk involved Moderate risk High risk

Intent to profit Changes in value Changes in prices

Expected rate of return Modest rate of return High rate of return

Funds An investor uses his own funds. A speculator uses borrowed funds.

Income Stable Uncertain and Erratic

Behaviour of participants Conservative and Cautious Daring and Careless

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INVESTMENT OBJECTIVES:
1. Growth
2. Income
3. Hybrid (Growth and Income)
1. Growth: Types of Growth – Conservative growth, Aggressive growth, Trading or
speculation.
• Conservative growth is when investors build an investment portfolio that will
generate wealth over time.
• Aggressive growth is when investors make a bold investment in stocks to make
short and long-term gains.
• Speculation is when investors try to maximise returns by trading shares and
securities through the speculation of share prices.
2. Income: Investment objectives means investing to generate a source of income. This
income comes in the form of dividends, interest or yields.
3. Hybrid (Growth and Income): “Income with capital preservation” is the most
conservative investment objective. Its emphasis on generating current income and a
minimum risk of capital loss. Lowering the risk generally means lowering the potential
income and overall return.

DIVERSIFICATION- NEED OF DIVERSIFICATION

Meaning of Diversification:
“Don’t put all your eggs in one basket” is a popular phrase applied to investments.
Diversification is they practice of spreading the investments around so that exposure any one
type of asset is limited. This practice is designed to help reduce volatility of the portfolio over
time.
Diversification is a technique that reduces risk by allocating investments across various
financial instruments, industries, and other categories. It aims to minimize losses by investing
in different areas that would each react differently to the same event.

Need of Diversification:
1. Spread your risk: Diversification helps mitigate the risk to you about such scenarios
by choosing different investments and types of investments.
2. Diversify across asset classes: A well-diversified portfolio combines different types
of investments, called asset classes, which carry different levels of risk. The three main
asset classes are stocks, bonds, and cash alternatives. Some investors also add other
investments, such as real estate and commodities, like gold and coal, to the list.
3. Diversify within asset classes: Investment can be diversified within the class. For
example, when it comes to stocks, the possibilities for diversification are vast. It can
diversify by the size of the companies (large-, medium-, or small-cap stocks), by
geography (domestic or international), and by industry and sector etc.,
4. Diversification attempts to protect against losses.
5. Provides Liquidity: One main advantage of portfolio diversification is that investment can
be made in few liquid investments along with the safe investments, which will allow to get
cash quickly whenever needed.

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INVESTMENT AVENUES FOR A COMMON INVESTOR

BANK DEPOSITS
Banks offer two kinds of deposit accounts. These are demand deposits like current/saving
account and term deposits like fixed or recurring deposits.
• Savings Bank Account: It is suitable for those who have a definite income and
want to save some money. For opening a savings bank account, a small amount
should be made as an initial deposit, which varies from bank to bank. The interest
is earned as per the rate of interest offered by the bank and is paid on the balance in
your account.
• Current Account: A type of bank account that has lesser restrictions than a savings
account in terms of transactions and withdrawals is known as a current account. The
current account is most opted by the businessmen for conducting their transactions
smoothly. There is no limit on the number of transactions from this account in one
day. The overdraft facility is also offered by the banks to its account holders.
• Recurring Deposit: A special type of account wherein no need to deposit a lump
sum amount rather to deposit a fixed amount every month. This fixed amount can
be as low as Rs. 100 every month. The rate of interest offered on a current deposit
varies from bank to bank and may range from 5% to 7% and different rates are
provided to the senior citizens. A recurring deposit can have different maturity
ranges that may vary from six months to 120 months.
• Fixed Deposit: The fixed deposit is a type of investment instrument offered by
banks, other financial institutions, non-banking financial companies. With a fixed
deposit, money is deposited for a fixed tenure and you get guaranteed returns.
The interest on fixed deposits ranges from 5% to 9%. The rate of interest offered in
a fixed deposit account is higher than what is provided in a savings account. The
tenure for which your money gets deposited in a fixed deposit ranges from seven
days to 10 years.

CORPORATE SECURITIES
The term "security" refers to a negotiable financial instrument that holds some type of
monetary value.
Corporate securities are debt instruments issued by public or private corporations to finance
their operations. Stocks, bonds, debentures and preference shares are among the most common
examples of marketable securities.
• Equity Shares: An equity investment is money that is invested in a company by
purchasing shares of that company in the stock market. These shares are typically traded
on a stock exchange. Equity investors purchase shares of a company with the
expectation that they’ll rise in value in the form of capital gains, and/or generate capital
dividends. If an equity investment rises in value, the investor would receive the
monetary difference if they sold their shares, or if the company's assets are liquidated
and all its obligations are met.
• Preference Shares: Preference shares, more commonly referred to as preferred stock,
are shares of a company’s stock with dividends that are paid out to shareholders before

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common stock dividends are issued. If the company enters bankruptcy, preferred
stockholders are entitled to be paid from company assets before common stockholders.
• Debentures: Debentures are loan instruments for medium to a long term of period.
These are offered by both large companies and the government. Debentures mainly
work on the reputation of the issuing authorities and at a fixed interest rate. Authority
bodies issue debentures when they seek to borrow money from the public at a
predetermined rate of interest.
• Bonds: Bonds – also known as fixed income instruments – are used by governments or
companies to raise money by borrowing from investors. Bonds are typically issued to
raise funds for specific projects. In return, the bond issuer promises to pay back the
investment, with interest, over a certain period of time.
• Company Deposits: Company Fixed Deposit (corporate FD) is a term deposit which
is held over fixed period at fixed rates of interest. Company Fixed Deposits are offered
by Financial and Non-Banking financial companies (NBFCs). The maturities of various
company fixed deposits can range from a few months to a few years. Compared to a
regular bank fixed deposit, they fetch a higher rate of interest.

POST-OFFICE SAVINGS SCHEMES

One of the most well-known and easily accessible savings accounts in India is a Post Office
Savings Account.
• The minimum that may be kept are Rs.500.
• The maximum amount that can be placed into a post office savings account is unlimited.
• Post Office Savings Account is similar in many ways to a regular savings account. It is
considered to be a highly secure instrument to deposit funds into.
• These accounts generally offer a guaranteed return on investment and are ideal for
senior citizens and people who are looking to earn a regular income without exposure
to risk.
• The Central Government periodically determines the interest rate for Post Office
savings accounts, which is typically between 3% and 4%.
• Monthly balances are used to calculate interest, which is credited annually.
• The following individuals are eligible to open a Post Office savings account:
❖ Minors with a minimum age of ten years
❖ A guardian on behalf of a minor below the age of ten years
❖ A person of unsound mind
❖ Two or three adults can open a joint account

GOVERNMENT SECURITIES
Government Securities are securities issued by Central Government to borrow from financial
market to meet its fiscal deficit. Securities are issued for short term as well as long term. Short
term securities with maturity less than 1 year are called Treasury Bills (T-Bills) while Long
term securities with a maturity of one year or more are called Government Bonds or Dated
Securities. They are considered as safe investments, as Investors are guaranteed return of both
interest and principal, from Government of India.

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Government securities are government debt issuances used to fund daily operations, and
special infrastructure and military projects.
Key Features
G-Sec Bonds
• Long term maturities above 1 year and up to 40 years
• Coupon (interest) rate paid on face value payable half yearly
• Effective yield/returns depend on issue price
T-Bills
• Issued in three maturities of 91 days, 182 days and 364 days
• T-bills are zero coupon securities i.e. there are no periodic interest payments
• Issued at discount and redeemed at face value on maturity
State Development Loans
• Long term maturities ranging from of 3 year to 35 year.
• Coupon (interest)rate paid on face value payable semi-annually.
• Issue price can be at Par, Discount or Premium.

REAL ESTATE
Real estate investing refers to the purchase of property as an investment to generate income
rather than using it as a primary residence. In simple terms, it can be understood as any land,
building, infrastructure and other tangible property which is usually immovable but
transferable.
Real estate investing works through the buying, selling, managing, renting, and handling of
real estate properties in a way that generates income. There are many methods through which
a person can make money from real estate properties. Many people consider real estate a viable
source of income that allows flexible investment.

GOLD AND BULLIONS

At present, the second most popular use of Gold worldwide that accounts for 20% of the
world’s physical Gold are investments. These are held by individuals in the form of investments
such as Coins, Bars, or as underlying assets of Gold Exchange Traded Funds, Gold Mutual
Funds, or Digital Gold.
• The primary reason for investing in Gold is portfolio diversification and, in that context,
it is considered to be an ideal hedge against the potential volatility of equity investments
as well as inflation.
• Investments made in Gold have in most cases provided good returns over the past 40
years
• To invest in Gold, you either opt for the physical form or the digital form. In its physical
form, Gold as an investment can be held in the form of jewellery, coins, bars i.e. bullion,
etc.
• To overcome the limitations of physical gold, you can opt for the digital route which
includes investments such as Digital Gold, Gold ETFs, Gold Mutual Funds, and
Sovereign Gold Bonds.
❖ Digital Gold: These can be purchased through various apps in denominations
starting from 1 gram onwards.
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❖ Gold ETFs: Gold Exchange Traded Funds are traded on stock exchanges just
like shares and primarily feature Physical Gold and stocks of Gold
mining/refining as the primary underlying assets. A Demat (Dematerialised)
Account is mandatory for investing in Gold ETFs.
❖ Gold Mutual Funds: These are mutual funds managed by various asset
management companies (AMCs) that follow a fund of fund structure and
primarily invest in Gold ETFs.
❖ Sovereign Gold Bonds: These bonds are periodically released by the Reserve
Bank of India (RBI) and available for purchase through leading public and
private sector banks.

CHIT AND NIDHI COMPANIES

CHIT FUND:
A chit fund refers to a form of collective savings scheme in which a group of people agree to
contribute a fixed amount of money to a common pool of funds at regular intervals. One
member of the group is chosen by lottery or other means to receive the entire pool of funds for
that period. The members of the group then rotate receiving the fund, with each member
receiving the fund in turn as per the agreement.
• Deposits from all the members lead to the accumulation of a lump sum amount.
• They serve as a means of financial assistance for lower-income households.
• These funds offer you a lower interest rate than moneylenders.
• They come with a predefined value and duration.
• Such funds work as micro-finance institutions.
• They are a combination of savings and credit schemes.
NIDHI COMPANIES:
The full form of NIDHI is National Initiative for Developing and Harnessing Innovations.
Nidhi companies are created lend and borrow money to all the members. This is based on the
principle of mutual benefits and inculcates the habit of saving among all of its members. These
companies are more prevalent in the southern parts of India.
Benefits to the members:
• Nidhi Company works with the objective of increasing savings of its members.
• It is very easy to make donations and get loans from the company for its members.
• The loans given to the members at a lower rate compared to the market rate hence it
attracts the members to do more savings.
• The investments in the Nidhi company are secured ones. The risk of non-payment of loans
is less as compared to other finance businesses.

LIFE INSURANCE
Life insurance is bought for managing risks, while the death benefit functions as a hedge
ensuring cash in case of any sudden or unforeseen death/demise of the policyholder.
Life insurance can be taken as an investment owing to its associated tax benefits for
policyholders.

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• Term Insurance: Term insurance plans provide life cover to protect our loved ones at
most affordable rates. This is the simplest form of life insurance.
• ULIP: Unit linked insurance plans, better known as ULIPs, combines life insurance
with financial investment. Unit-linked insurance plans offer a wide choice of fund
options and portfolio strategies. ULIPs allow you to withdraw money regularly from
your policy after 5 years lock-in.
• Endowment Plan: Traditional savings insurance plans are risk-free investment plans
that also offer insurance shield.
• Savings Plan: Savings Plans are life insurance plans that combine the benefits of a life
insurance cover and investment. Most protection and savings plan usually offer a fixed
amount as Maturity Benefit when the policy ends,
• Whole Life Insurance Plan: Whole Life Insurance Plan cover up till 99 years of age.
• Retirement and Pension Plan: Retirement insurance plans offer ways to build our own
pension income. Accumulation of retirement corpus as per the risk appetite, or get
guaranteed immediate income for life by investing a lump sum.

RETIREMENT AND PENSION PLANS

National Pension System:
National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme
designed to enable the subscribers to make optimum decisions regarding their future through
systematic savings during their working life. NPS seeks to inculcate the habit of saving for
retirement amongst the citizens.
A systematic investment like this can make a massive difference in your life post-retirement.
In fact, salaried people who want to make the most of the 80C deductions can also consider
this scheme.
• This scheme has been in effect for over a decade, and so far, has delivered 9% to 12%
annualised returns.
• There is a deduction of up to Rs.1.5 lakh to be claimed for NPS for your contribution
as well as for the contribution of the employer.
• If you have been investing for at least three years, you may withdraw up to 25% for
certain purposes.
Atal Pension Yojana:
The Atal Pension Yojana is a government of India scheme that ensures the old age income
security of the working poor and is focused on encouraging and enabling them to save for their
retirement.
• As a part of the scheme, people can make contributions in their Atal Pension Yojana
account till the age of 60 years and get a monthly pension. This is a beneficial, since it
provides people with an assured minimum pension sum to meet their expenses after
they turn 60 years of age.
• Atal Pension Yojana provides tax benefits under Section 80CCD of the Income Tax
Act. The maximum tax exemption limit is 10% of the total income up to ₹1.50 lakh
under Section 80CCD (1)
• Beneficiaries of this scheme will receive a minimum monthly pension payment ranging
from ₹1,000 to ₹5,000.

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• This scheme is beneficial to meet costly medical requirements and other expenses
common in old age.
• If the beneficiary dies, his/her spouse will receive the pension benefits.
• This scheme allows applicants to opt for monthly, quarterly or half-yearly
subscriptions.
• Even private employees can apply for this scheme who are not covered under pension
benefits.

RISK AND RETURN RELATIONSHIP

The term risk refers to the probability of some undesirable event. The element of risk that
troubles investors is the possibility of downside fluctuations in value and return.
Risk is the probability that actual results will differ from expected results. In the Capital
Asset Pricing Model (CAPM), risk is defined as the volatility of returns.
• The portion of the variability of return of a security that is caused by external factors is
called systematic risk or market risk or non-diversifiable risk.
• Economic and political instability, economic recession, macro policy of government
etc. affect the prices of all shares systematically. Variation of return in shares which is
caused by these factors is called systematic risk.
• The return from a security sometimes varies because of various types of risk involved
in investments.
• Deciding what amount of risk one can take while investing is very important.
• Risk is the chance that an investment’s actual return will be different than expected.
Low levels of uncertainty (low-risk) are associated with low potential returns. High level of
uncertainty (high risk) are associated with high potential returns. The risk return trade-off is
the balance between the desire for the lowest possible risk and the highest possible return. A
higher standard deviation means a higher risk and higher possible return.

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The risk-return trade-off tells that the higher risk gives the possibility of higher returns. There
are no guarantees. Just as risk means higher potential returns. It also means higher potential
losses.
On the lower end of the scale, the risk-free rate of return is represented by the return on
government securities because their chance of default is impossible.
Determining what risk level is most appropriate for one is a difficult decision. Risk tolerance
differs from a person to person. The decision depends on investor’s goals, income and personal
situation, among other factors.

STOCK MARKETS

PRIMARY MARKET AND SECONDARY MARKET

Primary Market:
The primary market is the part of capital market that deals with the issuance of new securities.
Companies, governments or public sector institutions can obtain funding through the sale of a
new stock and bond issue. The process of selling new issues to investors is called underwriting.
In the case of a new stock issue, this sale is an Initial Public Offering (IPO).
Features of Primary Market:
• Market for new long-term equity capital
• Securities are issued by the company.
• The company issues new security certificates.
• The company uses the money for the purpose of setting up new business.
• Redeemed by the original holder.
Advantages of Primary Market:
• Companies can raise capital at a relatively low cost, and the securities so issued in the
primary market have high liquidity because they can be sold in the secondary market
almost immediately.
• Primary markets are important for the mobilisation of savings in an economy.
• Compared to the secondary market, the primary market has considerably fewer chances
of price manipulation.
Disadvantages of Primary Market:
• Small investors may not always benefit from it. Small investors might not receive
allocations if a share is oversubscribed.
Secondary Market:
Secondary market is the market in which existing securities are bought and sold. Existing
securities are bought and sold on the stock exchanges with the help of brokers.
The secondary market is market for all those securities and stock which are already issued to
the public. It deals with sale/purchase of already issue equity/debts by corporate and others. It
is also known as stock market.
Features of Secondary Market:
• It creates liquidity.
• It comes after primary market.
• It has particular place for trading i.e., stock exchange.
• It encourages new investment.

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Advantages of secondary market:

• Investors can get the cash they need by selling their shares in a secondary market.
• The secondary market is a valuable indicator of what the current fair valuation for any
company might be.
• Price adjustment of securities is a swift process when new information about the
company becomes available.
• The secondary stock market is heavily regulated to keep investor’s funds safe.
• With the power of securities, investors can mobilize their savings more quickly and
easily.
Disadvantages of Secondary Market:
• The prices of securities in a secondary market are subject to high volatility. Price
fluctuations may lead to sudden or unpredictable losses for investors.
• Buying and selling in a secondary market can be time consuming.
• Investors must be careful with their brokerage commissions because they are taxed
every time the trade is made.
• Multiple external factors influence the investments in a secondary capital
market thereby subjecting them to high risk.

STOCK EXCHANGES
The stock exchange in India serves as a market where financial instruments like stocks, bonds
and commodities are traded.
Stock exchange in India can be defined as a market where financial securities like stocks, bonds
and commodities are traded. It is a platform for buyers and sellers to trade their financial assets
by adhering to SEBI's guidelines.
Features of Stock Exchange:
• A market for securities- It is a wholesome market where securities of government,
corporate companies, semi-government companies are bought and sold.
• Second-hand securities- It associates with bonds, shares that have already been
announced by the company once previously.
• Regulate trade in securities- The exchange does not sell and buy bonds and shares on
its own account. The broker or exchange members do the trade on the company’s
behalf.
• Dealings only in registered securities- Only listed securities recorded in the exchange
office can be traded.
• Transaction- Only through authorised brokers and members the transaction for
securities can be made.
• Recognition- It requires to be recognised by the central government.
• Measuring device- It develops and indicates the growth and security of a business in
the index of a stock exchange.
• Operates as per rules– All the security dealings at the stock exchange are controlled
by exchange rules and regulations and SEBI guidelines.

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STOCK EXCHANGE OPERATIONS

TRADING AND SETTLEMENT:
Trade settlement is a two-way process which comes in the final stage of the transaction. Once
the buyer receives the securities and the seller gets the payment for the same, the trade is said
to be settled. While the official deal happens on the transaction date, the settlement date is when
the final ownership is transferred. The transaction date never changes and is represented with
the letter ‘T’. The final settlement does not necessarily occur on the same day. The settlement
day is generally T+2.
Types of settlements in the stock market:
Trade settlements in the stock market have been broadly categorised into two:
1. Spot settlement – This is when the settlement is done immediately following the rolling
settlement principle of T+2.
2. Forward settlement – This happens when you agree to settle the trade at a future date
which could be T+5 or T+7.
Trading and Settlement Procedure:
1. Selecting a Broker or Sub-broker
The transactions can only occur through a broker or a sub-broker. So according to one’s
requirement, a broker must be appointed. A broker can be an individual or a partnership or
a company or a financial institution (like banks). They must be registered under SEBI.
Once such a broker is appointed you can buy/sell shares on the stock exchange.
2. Opening a Demat Account
Since the reforms, all securities are now in electronic format. There are no issues of
physical shares/securities anymore. So, an investor must open a dematerialized account,
i.e. a Demat account to hold and trade in such electronic securities.
So, you or your broker will open a Demat account with the depository participant.
Currently, in India, there are two depository participants, namely Central Depository
Services Ltd. (CDSL) and National Depository Services Ltd. (NDSL).
3. Placing Orders
And then the investor will actually place an order to buy or sell shares. The order will be
placed with his broker, or the individual can transact online if the broker provides such
services. One thing of essential importance is that the order /instructions should be very
clear. Example: Buy 100 shares of XYZ Co. for a price of Rs. 140/- or less.
Then the broker will act according to your transactions and place an order for the shares
at the price mentioned or an even better price if available. The broker will issue an order
confirmation slip to the investor.
4. Execution of the Order
Once the broker receives the order from the investor, he executes it. Within 24 hours of
this, the broker must issue a Contract Note. This document contains all the information
about the transactions, like the number of shares transacted, the price, date and time of
the transaction, brokerage amount, etc.
Contract Note is an important document. In the case of a legal dispute, it is evidence of
the transaction. It also contains the Unique Order Code assigned to it by the stock
exchange.

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5. Settlement
Here the actual securities are transferred from the buyer to the seller. And the funds will
also be transferred. Here too the broker will deal with the transfer. There are two types of
settlements,
On the Spot settlement: Here we exchange the funds immediately and the settlement
follows the T+2 pattern. So, a transaction occurring on Monday will be settled by
Wednesday (by the second working day)
Forward Settlement: Simply means both parties have decided the settlement will take
place on some future date. It can be T+5 or T+7 or T+9 etc.

DEMAT ACCOUNT
The full form of Demat account is a dematerialised account. The purpose of opening a Demat
account is to hold shares that have been bought or dematerialised (converted from physical to
electronic shares), thus making share trading easy for the users during online trading.
A Demat Account or Dematerialised Account provides the facility of holding shares and
securities in an electronic format. During online trading, shares are bought and held in a Demat
Account, thus, facilitating easy trade for the users. A Demat Account holds all the investments
an individual makes in shares, government securities, exchange-traded funds, bonds
and mutual funds in one place.

Meaning of Dematerialisation:
Dematerialisation is the process of converting the physical share certificates into electronic
form, which is a lot easier to maintain and is accessible from anywhere throughout the world.
Benefits of Demat account:
• Seamless and fast transfer of shares
• Facilitates digitally secured storing of securities
• Eliminates theft, forgery, loss and damage of security certificates
• Easy tracking of trading activities
• All-time access
• Allows to add beneficiaries
• Online opening of Demat account is faster and easier.
• It eliminates unnecessary paperwork
Types of Demat Account:
• Regular Account - A Regular Demat account is a standard Demat account that Indian
investors (who reside in India) use.
• Repatriable Account - Non-Resident Indians use this account, and it plays an active role
in transferring funds abroad. The Repatriable account needs to be linked with the NRE
bank account. However, repatriation depends upon the laws of the host country and the
foreign country, and the transference of funds is possible if laws allow it and if the
governments are not impeding the transfer process.
• Non-Repatriable Account - This is a variant of Repatriable Account, and Non-Resident
Indians also use it. However, funds cannot be transferred abroad through this account, and
it needs an associated NRO bank account to function effectively.

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Steps to open a Demat Account:

Step 1: Choose a depository participant which matches your needs and requirements. In India,
banks, stockbrokers, and online investment platforms offer DP services.
Step 2: Visit the official DP’s website and fill in the Demat account opening form. Also, assign
a nominee to your account.
Step 3: After filling out the form, also fill out the information on Know Your Customer (KYC)
norms.
Step 4: Submit the scanned copies of the KYC documents including identity proof, address
proof, bank account statement and income proof. This will prove ownership of assets through
self-declaration.
Step 5: After successful submission of your forms along with the required documents, you will
need to go through the verification process known as 'In-Person Verification' or IPV. This step
is mandatory. DP can either do this online or at their office (the investor needs to be present at
their office physically) for offline verification.
Step 6: Next, you need to sign an agreement with the DP. This agreement includes the duties
and rights of both the DP and the investor.
Step 7: After thorough checking of the documents and other complete forms by the DP, the
request for opening a Demat account will be approved.
Step 8: Lastly, a unique Beneficial Owner Identification Number or BO ID will be issued to
you (investor) which can be used to access the Demat account online.

DEPOSITARY AND DEPOSITARY PARTICIPANTS

Meaning of Depositary:
Depository is a place where financial securities are held in dematerialised form. It is responsible
for maintenance of ownership records and facilitation of trading in dematerialised securities.
A depository provides a Demat account where the financial securities are held in an electronic
form.
Meaning of Depositary Participant:
A Depository Participant (DP) is described as an Agent (law) of the depository. They are the
intermediaries between the depository and the investors. The relationship between the DPs and
the depository is governed by an agreement made between the two under the Depositories Act.
Depository Participants (DP) can simply be called agents of the depository, usually, depository
participants are also stockbrokers. If a new investor intends to open a Demat account it can
only be done through a depository participant.
Depository Participants (DPs) include SEBI, selected brokers, banks, sub-brokers etc., who act
as agents or intermediaries between depositors and investors by providing dematerialised
DEMAT accounts.
Types of Depository Participants in India:
• National Securities Depository Limited (NSDL): The NSDL is backed by the National
Stock Exchange, Unit Trust of India, and Industrial Development Bank of India, with
services being executed by the DP, Clearing Corporations, and Share Transfer Agents. To
provide services to investors, the DPs must register themselves with the NSDL.
• Central Depository Services (India) Limited (CDSL): The CDSL is backed by the
Bombay Stock Exchange, Bank of India, and State Bank of India, aiding DPs registered

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with them to facilitate investors to undertake a range of trading services provided by the
CDSL.
Example: Zerodha Broking Limited, the Depository Participant (DP), is a member
of CDSL(Depository). Motilal Oswal is a member of both NSDL and CDSL.
Functions of a Depository Participant:
• Help investors open accounts.
• Facilitate the Demat process of converting physical certificates into electronically
backed securities.
• Enabling the transfer of securities.
• Enabling the pledging and un-pledging of securities to grant loans against shares.

INVESTOR PROTECTION
Meaning:
The term ‘investor protection’ means a process or a mechanism by which the interest of an
investor is protected in the security market.
Definition:
Investor Protection According to the SEBI Act, 1992 Investor protection is ‘protecting the
interest of the investors in securities and promoting the development of and to regulate the
securities market and for matters connected therewith or incidental thereto.’
The term ‘investor protection’ means those steps and measures which are required to protect
the interest of the investors by enacting suitable legislation, establishing regulatory bodies or
by passing of regulations or guidelines for protecting the interest of the investors in the capital
market.
Investor Protection Measures by SEBI
Investor protection legislation is implemented under the Section 11(2) of the SEBI Act. The
measures are as follows:
• Formulation of Stock Exchange and other securities market business regulations.
• Registering and regulating the intermediaries of the business like brokers, transfer
agents, bankers, trustees, registrars, portfolio managers, investment consultants,
merchant bankers, etc.
• Recording and monitoring the work of custodians, depositors, participants, foreign
investors, credit rating agencies, etc.
• Registering investment schemes like Mutual fund & venture capital funds, and
regulating their functioning.
• Promotion and controlling of self-regulatory companies.
• Keeping a check on frauds and unfair trading methods related to the securities market.
• Observing and regulating major transactions and take-over of the companies.
• Carry out investor awareness and education programme.
• Train the intermediaries of the business.
• Inspecting and auditing the security exchanges (SEs) and intermediaries.
• Assessment of fees and other charges.

23 Compiled by Ashwini J, Asst. Professor, SGHFGC