Feia - Full Notes-1

FINANCIAL EDUCATION AND INVESTMENT AWARENESS
MODULE-1 - FUNDATIONS FOR FINANCE

UNIT-01
INTRODUCTION TO BASIC CONCEPTS OF FINANCE
MONEY:
MEANING:
Money is any good that is widely used and accepted in transactions involving the transfer of
goods and services from one person to another.
OR
A current medium of exchange in the form of coins and banknotes; coins and
banknotes collectively.
OR
Money is anything that serves as a medium of exchange. Other functions of money are to
serve as a unit of account and as a store of value.
WHY MONEY IS NEEDED OR IMPORTANCE OF MONEY:

• Money gives you freedom: When you have enough money, you can live where you
want, take care of your needs, and indulge in your hobbies. If you are able to become
financially independent and have the financial resources necessary to live on without
working, you’ll enjoy even more freedom since you will be able to do what you
want with your time.
• Money gives you the power to pursue your dreams: Having money makes it
possible for you to start a business, build a dream home, pay the costs associated with
having a family, or accomplish other goals you believe will help you live a better
life.
• Money gives you security: When you have enough money in the bank, you’ll never
need to worry about having a roof over your head or about having enough to eat or
about being able to see a doctor when you’re sick. This doesn’t mean you’ll be able
to afford everything you want, but you’ll be able to enjoy a stable middle-class life.
• Money can lead to better goods and services: We need money to fund goods and
services. Beyond that, we need money to improve things. For example, consider a
smartphone. It’s called a “phone,” but it’s really so much more. Money made that
possible. Without funding every step of the way from the design to the software
development to security updates you wouldn’t have that phone in your pocket. The
same applies to progress in just about every field. New, improved products and
services all have a price.
• Money pays for more life experiences: A lot of people only think about the
material goods money can buy, but it pays for intangible experiences, too. Many
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often look back with fondness on family vacations every summer or holiday season.
Those trips
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were only possible because of money. Money is linked to life satisfaction and
happiness because it lets you do more things in life and helps to lead our life the way
we want it to be.
• Money helps families support each other: When people succeed in life, they’ve
most likely had help. Many get financial help from their family. For instance, when
Jeff Bezos started Amazon, his parents gave him $300,000. Even in families where a
member isn’t a billionaire, exchanges of money are common. The more money a
person has, the more helpful they can be to family members or friends in need. This
can create complex family dynamics, but for many families, it’s important.
• Money reduces financial stress: Finances are a huge source of stress for people. It
can lead to negative mental and physical health consequences. Even for people who
aren’t poor, money is still stressful. When a person’s finances become stable,
financial stress significantly reduces. They might still experience anxiety around
money, but financial stability means less stress.
• Money can strengthen communities: Organizations that work in
the community need money. All donations matter whether they’re small or large.
Getting government money and grants are also important to many organizations.
Without money, there would be a lot of services that disappear overnight, like
food banks, domestic violence shelters, after-school programs, and more.
• Having money helps you make money: Every individual would like to make money
and improve his or her standard of living. So they can invest in various other types of
investment avenues that are available for them based on their income. This helps a
person to earn money on money and this in-turn will improve their standard of living
as well.
• Money frees you from working to survive: The first is that you no longer need
to work for survival. If you hate your job, you can quit before you have another
one lined up. If you get fired, it doesn’t destroy your life. Having money
essentially “buys” you options and the freedom to do what you really want.
DOWNSIDES OF MONEY:
• Obsession with money, or a love of money, can create a host of problems: Trying
to acquire money at all costs, or constantly trying to acquire as much money as you
can, could lead you to unethical or even criminal behaviour, such as theft or
scamming others. It could also cause you and your family problems if you focus too
much on money or material things at the expense of other people and things in your
life. If all you have is money, but you have no one to share your life with and nothing
to enjoy, you’re unlikely to be happy.
• Money can lead to disagreements: When you and your partner or family members
don’t agree on what should be done with money, this can cause substantial friction in
your life. In fact, money is one of the leading causes of divorce for American
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couples.
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FINANCIAL PLANNING:
MEANING:
Financial planning is the process of meeting your life goals through the proper
management of your finances. Life goals includes buying a home, saving for your child’s
education, marriage, or planning for retirement.
The financial process includes 3 steps:
• A) Your finances i.e., your income, assets, and liabilities.
• B) Your goals,i.e., your current and future financial needs
• C) Your appetite to take risk
MEANING OF PERSONAL FINANCIAL PLANNING:

Personal financial planning is the process of managing your money to achieve personal
economic satisfaction. This planning process allows you to control your financial
situation.
OR
Personal financial planning also refers to short term and long-term financial planning
by somebody, either independently or with the assistance of a professional adviser.
WHY DO WE NEED FINANCIAL PLANNING?

• Increase your savings: It may be possible to save money without having a financial
plan. But it may not be the most efficient way to go about it. When you create a
financial plan, you get a good deal of insight into your income and expenses. You
can track and cut down your costs consciously. This automatically increases your
savings in the long run.
• Enjoy a better standard of living: Most people assume that they would have to
sacrifice their standard of living if their monthly bills and EMI repayments are to be
addressed. On the contrary, with a good financial plan, you would not need to
compromise your lifestyle. It is possible to achieve your goals while living in
relative comfort.
• Be prepared for emergencies: Creating an emergency fund is a critical aspect of
financial planning. Here, you need to ensure that you have a fund that is equal to at
least 6 months of your monthly salary. This way, you don’t have to worry about
procuring funds in case of a family emergency or a job loss. The emergency fund
can help you pay for varied expenses on time.
• Attain a peace of mind: With adequate funds at hand, you can cover your monthly
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expenses, invest for your future goals and splurge a little for yourself and your
family,
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without worry. Financial planning helps you manage your money efficiently and
enjoy peace of mind. If you are on the path of financial planning, the destination of
financial peace is not very far away.
• Manages the cash flow: Managing your income is one of the primary aspects of a
financial plan. You should be aware of where you are spending your money. In case
all the money from your income is getting extinguished by the month-end, you need
to develop a personal finance plan. Lack of a proper budget might lead to several
problems in the long run. Precisely, it helps in tracking your money including your
savings, expenses, and earnings.
• Right asset allocation: During a stock market rally, equity can be considered a
good investment option. In another scenario, when the stock market might not be
doing well, assets like real estate and gold can serve as wonderful investment
options. One of the best financial planning tips for asset allocation would be to
invest in multiple instruments. It will help the person to realize his financial goals
without too much risk. The financial plan will devise a strategy to shield you during
turbulent times of market volatility.
• Beneficial to achieve long term goals: A personal financial plan can help you
conclude where you want to be after twenty or thirty years. It takes you a step closer
to your dreams. It allows you to achieve your financial goals within a specific
period. It is better to start planning early as it will help you save more money and
reach your goals earlier. Early investment will also result in higher returns.
• Streamlines the investments: Investments should be such that a person gets
substantial benefits from them. A scattered method of investment will never be
helpful. Sufficient research must be done before narrowing down on what your
investment group or portfolio should look like. It is advised to have a diverse portfolio
to reduce the risks involved with the investment. You should not make investments
thoughtlessly.
VARIOUS FINANCIAL PLANNING FOR LIFE GOALS:

The importance of personal financial planning in India cannot be ignored. It is not just about
increasing your savings and reducing your expenses. Financial planning is a lot more than
that. This includes achieving your future goals, such as:
• Wealth creation: The rise in the price of everyday items means that if you want to
maintain or increase your current standard of living in the future, you need to create
a sufficient amount of wealth. You may also want to purchase a better car or a new
house in the future. All this requires money, and it merely highlights the importance
of wealth creation. It is possible to achieve these goals by carefully investing your
money in the right avenues. Equity mutual funds can be a suitable option for long
term goals. These funds could help the investor to accumulate wealth in the long run.
• Retirement planning: Your retirement may be 25 or 30 years in the future. But that
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does not mean you plan for it when you retire. To enjoy a happy and comfortable
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retired life, you need to start building your safety net right now. Planning at an early
stage in life can help secure your future against financial uncertainties. Also, you
invest lesser amounts if you start early and gain from the power of compounding
which helps to build a large enough quantity of money or wealth over the 25-30 year
period.
• Child’s education: Education has become very expensive, not only in India but
across the world. And in future, this cost is only going to rise. This is why it is
necessary to start planning from the moment your child is born. Calculate how much
you wish to earn and start investing in long-term investment avenues that can help
you achieve this goal.
• Saving tax: Every year, you are probably paying a substantial amount as tax. But you
can now lower your tax outgo legally. The Indian Income Tax Act provides various
provisions for people to reduce their tax outgo. By planning your taxes in advance,
you can identify the best avenues to invest your money and reduce your taxable
income. Mutual funds provide a tax efficient avenue for investing for your life goals.
STEPS IN CREATING A SUCCESSFUL FINANCIAL PLAN:

STEP-1: EXAMINE YOUR CURRENT FINANCIAL SITUATION:
Determine your present financial situation, including your income, expenses, debt, savings,
investments, risk attitude, and tolerance capacity. This is the first step in financial planning
because it provides you with a good understanding of the condition of your finances and
opportunities for improvement.
STEP-2: DEVELOP YOUR FINANIAL GOALS:

Determine the various financial goals you intend to achieve in your life. Make sure
your goals are clear. You can develop short term as well as long term financial goal.
Here are some examples of attainable goals.
1. I want to buy a car which costs 13 lakhs in the next 3 years
2. I want to buy a house which costs 80 lakhs in the next 6 years
The established financial goals should be practical in nature and feasible within the time
limit set for each of the goals. It delivers satisfaction and acts as a motivator. It serves as a
financial planning directing function.
STEP-3: IDENTIFY THE FINANCIAL GAPS:

Once you know where you are financially and where you want to be, you can figure out
how much money you have or how much you can anticipate to have in future, as well as
how much you will need to achieve each of the specific goals. This is critical and most
important
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step since quantifying the income from your investments is required to determine the
best investments to offset the shortfall.
STEP-4: DRAFT FINANCIAL PLAN:
Following goal formulation, plans are developed in such a way that the goals can be met as
soon as possible. The financial plan outlines how to attain specific financial goals. It tells us
whether to cut down the needless expenses or allocate savings to various investment avenues.
Examine various investment choices such as equities, mutual funds, debt instruments such as
PPF, bonds, fixed deposits, gilt funds, and so on, and determine which instruments or mix of
instruments best meets your needs. The time span for your investment much match the time
frame for your goals.
STEP-5: IMPLEMENT YOUR FINANCIAL PLAN:
A financial plan is carried out in accordance with the goals established. The plan should be
carried out in a systematic and consistent manner. Collect the relevant paperwork, open the
necessary bank, demat, and trading accounts, communicate with the brokers, and get started.
You must choose the best investment option based on characteristics such as your goals, age,
risk tolerance, and investment amount. If you are unclear about the funds to choose for your
portfolio, you can seek the advice of financial advisor. Insurance, retirement planning, estate
planning, and taxation should be included in the financial plan. Stick on to one particular plan
and start investing.
STEP-6: PERIODICALLY REVIEW YOUR PLAN:
Following the execution of a financial plan, the plans should be regularly checked and
evaluated against the intended goals to ensure successful financial planning. A successful
financial plan requires considerable dedication and regular assessment (once in six months, or
at a major event such as birth, death, inheritance). Based on the performance of your
investments, you should be prepared to make small or big changes to your present financial
position, goals, and investment time frame.
FINANCIAL GOALS:
MEANING:
Financial goal is the term used to describe the future needs of an individual that require
funding. It specifies the sum of money required in order to meet the needs and when it is
required. Identifying financial goals help put in place a spending and saving plan so that
current and future demands on income are met efficiently.
Goals described in terms of the money required to meet it at a point of time in future, is called
as a financial goal.
Each financial goal contains two important components:
1. Goal value; and
2. Time to achieve a goal or investment horizon
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CLASSIFICATION OF FINANCIAL GOALS:

1. SHORT TERM FINANCIAL GOAL: These are a type of financial goals which
can be achieved within a very short period of time say between quarterly,
semiannually or within a year.
EXAMPLES ARE AS FOLLOWS:
 Emergency fund
 Payments towards rent, insurance or students loans
 Credit card debt payments
 Personal goods
 Travel
 Minor repairs and home improvements
2. LONG TERM FINANCIAL GOAL: These are a type of financial goals which
can be achieved in a couple of years.
EXAMPLES ARE AS FOLLOWS:

 Retirement fund
 Paying off a mortgage
 Starting an own business
 Saving for child’s college fees
 Wedding
ESSENTIAL FEATURES OF FINANCIAL GOALS: (SMART)
• Specific: This involves describing exactly what you wish to accomplish. For example:
Mr. A wants to save RS. 3 lakhs for marriage expenses.
• Measureable: Every goal that is set should be measured that is it should be in
monetary terms. If the goals are in monetary terms it helps the individual to
measure the progress of the goal frequently. For example: Mr. X wishes to save RS.
5000 a month for the next 60 months in order to have RS. 3 Lakhs in 5 years.
• Achievable: To accomplish your goals, you will need to plan out specific actions to
make them a reality. For example: MR. B is working and set to build a house as his
goal. This can be accomplished by working overtime at his existing job or starting a
side business. Any incentives that is received will be used for his house building
goal.
• Realistic: The goals that are set should be realistic goals depending on aspects such
as your income, time and abilities. For example: To save money, MR. C is going to
cancel cable TV subscription, gym membership, and dine out less. These things will
help him to cut down his expenses and improve his income or savings by RS. 10,000
in a year.
• Time based: The last step is to set deadlines for achieving your goals. For example:
in 3 years, Mr. Y wishes to get married. So for that he will be to accumulate RS. 3
lakhs for marriage expenses. For this goal Mr. Y should choose a particular type of
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investment that helps him to achieve his goal.
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UNIT-02
TIME VALUE OF MONEY
MEANING:
“Time value of money is defined as “the value derived from the use of money over time as a
result of investment and reinvestment”.
OR
“Time value of money means that “worth of a rupee received today is different from the
worth of rupee to be received in future”.
IMPORTANCE OF TIME VALUE OF MONEY:

In the financial decisions, the time value of money holds great importance. It is now the most
significant principle in finance and economics. There are certain valid reasons for this state of
affairs.
 Inflation:
Because of inflationary conditions, the rupee today has a higher purchasing power
than rupee in future. As a result, those who have to receive the money prefer to
receive the same as early as possible, while those who have to pay the money try to
delay the payment.
 Uncertainty:
Since the future is characterised by uncertainty, individuals/business concerns prefer
to have current income rather than having the same payment at a later date. They have
an apprehension that the party making the payment may default due to insolvency or
other reasons.
 Availability of Better Investment Opportunities:

There are investment opportunities, where people can invest their cash and earn some
interest or return through lending or investment. A rupee invested today is more
valuable than a rupee invested tomorrow, so they prefer to receive money today than
to receive the same tomorrow.
 Preference for Present Consumption:

Both due to uncertainty and inflationary conditions, individuals prefer the
consumption to future consumption. They do not wish to save for the future by
curtailing current consumption.
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 Opportunities for reinvestment:

Money can be employed to generate real returns. Individual’s business concerns
reinvest the money at a certain rate so as to have some yield on it.
 Due to Urgency/Emergency:
People prefer to receive cash today than in some future date, to meet some urgent
needs or to meet emergency requirements.
2 Techniques for Estimating Time Value of Money are as follows:

 Discounting Technique or Present Value method
 Compounding Technique or Future Value method
Technique -1 Discounting or Present Value Method:

The current value of an expected amount of money to be received at a future date is known as
Present Value.
If we expect a certain sum of money after some years at a specific interest rate, then by
discounting the Future Value we can calculate the amount to be invested today, i.e., the
current or Present Value.
Hence, Discounting Technique is the method that converts Future Value into Present Value.
The amount calculated by Discounting Technique is the Present Value and the rate of interest
is the discount rate.
Technique -2 Compounding or Future Value Method:

Compounding is just the opposite of discounting. The process of converting Present
Value into Future Value is known as compounding.
Future Value of a sum of money is the expected value of that sum of money invested after n
number of years at a specific compound rate of interest.
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DISTINGUISH BETWEEN COMPOUNDING AND DISCOUNTING:
COMPOUNDING DISCOUNTING
The process of converting the Present Value The process of converting Future Value in
into Future Value is known as compounding. Present Value terms is known as
discounting.
Interest rate is used to calculate the Future Discount rate is used to calculate the Present
Value or the compounded value. Value.
Higher the interest rate greater will be the future Higher the discount rate lower will be
or the compounded value. the Present Value.
Future Value is always greater than the Present Value is always less than the
Present Value provided the interest rate is Future Value –
positive –
FV = PV (1 + r) n
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UNIT-03
VALUATION OF SECURITIES
MEANING:
Valuation is the process of determining the current worth of an asset or a company. There are
manytechniques used for doing a valuation. An analyst placing a value on a company looks at
the business’s management, the composition of its capital structure, the prospect of future
earnings, andthe market value of its assets.
Valuation of securities is the process of estimating the worth of a security. The valuation
process involves various factors to determine the present or expected value of a security.
NEED FOR VALUATION OF SECURITIES:
The purpose of calculating the valuation of securities is to ensure that we are paying a fair
price forthe investment. It also allows us to determine the rate of return that we would
need to receive to break even on our investment.
Stock valuation is a critical measure of calculating fair value. It allows investors to perform
a comparative study of stocks to learn, which can grow in the long run. However, there are
more thanone way to view stock valuation and to interpret it. Hence, investors must
consider a company’s strengths and weaknesses while gauging its value.
To value security different concepts are used. Some of these are as

follows:
1. Book Value (BV): Book Value of an asset is an accounting concept based on the
historical data given in the balance sheet of the firm. Book Value of an asset is
given in the balance sheet or can be ascertained based on figures contained in the
balance sheet. For example, the Book Value of adebenture is the face value itself
and is stated in the balance sheet. The Book Value of an equity share can be
ascertained by dividing the net worth of the firm by the number of equity shares.
2. Market Value (MV): Market Value of an asset is defined as the price for which the
asset can be sold. The Market Value of a financial asset refers to the price
prevailing at the stock exchange. In case asecurity is not listed, then its MV may
not be available.
3. The fair market value: The fair market value consists of an independent buyer
and seller havingthe requisite knowledge and facts, not under any undue
influence or stressors, and having access to all the information to make an
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informed decision. In other words, fair market value is the price at which the
property would change
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hands between a willing buyer and a willing seller, where both are not under any
compulsion to buy and sell and they have reasonable knowledge of relevant facts
and information. This means that any representative price would not work if it
affected buyer’s or seller’s unique motivations.
4. Going Concern Value (GV): Going Concern Value refers to the value of the
business as an operating, performing, and running business unit. This is the value
which a prospective buyer of a business may be ready to pay. Going Concern
Value (GV) is not necessarily the MV or BV of theentire asset taken together.
Going Concern Value may be less than or more than the Market Value or Book
Value of the total business. Rather, GV depends upon the ability to generate sales
and profit in future. If the GV is higher than the MV, then the difference between
the two represents the synergies of the combined assets.
5. Liquidation Value (LV): LV refers to the net difference between the realizable
value of all assetsand the sum of the external liabilities. This net difference
belongs to the owners/shareholders and is known as LV. The LV is a factor of
realizable value of an asset and therefore, is uncertain. The LV may be zero also
and in such a case, the owners/shareholders do not get anything if the firm
isdissolved.
6. Capitalized Value (CV): CV of a financial asset is defined as the sum of present

value of cash flows from an asset discounted at the required rate of return. To
find out the CV, the futureexpected benefits are discounted for time value of
money. In the valuation of financial assets, the CV is the most relevant concept of
valuation.
VALUATION OF FIXED INCOME SECUR ITIES:

Debt securities issued by governments, government and quasi- government organisations, and
private business firms are fixed income securities. Bonds and debentures are the examples of
fixed income securities.
The intrinsic value of a bond or debenture is equal to the present value of its expected cash
flows. The coupon interest payments and the principal repayment are known, and the present
value is determined by discounting these future payments from the issuer at the appropriate
discount rate or market yield.
Debentures: - A debenture is a private and long-term debt instrument issued by

financial, non-financial institutions, governments, or corporations. A debenture is
classified as a type of bond,where the instrument carries a fixed rate of interest,
commonly known as the ‘coupon rate.’
Debentures are generally unbacked by any collateral and depend exclusively on the
financial merit and credibility of the issuing corporation. As opposed to loans and
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other forms of debt instruments,debentures carry longer repayment schedules coupled

with lower interest rates, thus being extremely beneficial to the issuing corporation.
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BONDS:
A bond is an instrument of debt issued by a business house or a government unit. The
bonds may beissued at par, premium or discount. The par value is the amount stated on
the face of the bond. It states the amount the firm borrows and promises to repay at the
time of maturity.
The bonds carry a fixed rate of interest payable at fixed intervals of time. The interest
is calculatedby multiplying the value of bonds with the rate of interest.
Bond valuation is, generally, called debt valuation because the features that
distinguish bonds fromother debts are primarily non-financial in nature. Since bonds
have a promised payment stream, they are less risky as compared to shares. But it
does not mean that they are totally risk free.
(i) Bonds with a Maturing Period:

When the bonds have a definite maturity period, their valuation is determined by
considering theannual interest payments plus its maturity value.
(ii) Bonds in Perpetuity:

Perpetuity bonds are the bonds which never mature or have an infinitive maturity
period. The value of suchbonds is simply the discounted value of infinite streams of
interest (cash) flows.
Yield to Maturity or Bond’s Internal/Rate of Return:

The investor’s required rate of return, also called the discount rate, is given for
calculating the value of the bond/debenture. However, in many cases, we may be
required to calculate the required rate of return when the cash inflows and the current
value/price of the bond are given.
Valuation of Zero Coupon/Deep Discount Bonds (DDBs/ZCBs):

The deep discount bond does not carry any interest, but it is sold by the issuer
company at a deepdiscount from its eventual maturity (nominal) value.
Since there is no intermediate payment of interest between the date of issue and the
maturity date,these DDBs may also be called zero coupon bonds (ZBBs).
The valuation of a deep discount bond can also be made in the same manner as that
of the ordinarybond or debenture. The only point to remember is that there shall be
only one cashflow at the time of maturity in case of a deep discount bond.
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VALUATION OF PREFERENCE SHARES:

Preference shares are a hybrid security. They have some features of bonds and some
features of equity shares.
Preference shares have the qualities of stocks and bonds, which makes their valuation
a little different than common shares. The owners of preferred shares are part owners
of the company inproportion to the held stocks, just like common shareholders.
Preferred shares are hybrid securities that combine some of the features of common
stock with thatof corporate bonds.
Preferred shares differ from common shares in that they have a preferential claim on
the assets ofthe company. That means in the event of a bankruptcy, the preferred
shareholders get paid before common shareholders.
In addition, preferred shareholders receive a fixed payment that's like a bond issued by
the company. The payment is in the form of a quarterly, monthly, or yearly dividend,
depending on thecompany's policy, and is the basis of the valuation method for a
preferred share.
If preferred stocks have a fixed dividend, then we can calculate the value by
discounting each of these payments to the present day. This fixed dividend is not
guaranteed in common shares. If youtake these payments and calculate the sum of the
present values into perpetuity, you will find the value of the stock.
VALUE OF A PERPETUAL PREFERENCE SHARE: - If the preference

share has no maturity date or is irredeemable and the future dividends
are expected to be constant,
The valuation of preferred shares is based off this dividend rate and how it compares to
that of high-grade publicly traded preferences share. A lower rate than these publicly
traded stocks indicate shares worth less than par. If the rate used by the company on
other financial instruments, such as on loans to creditors, is higher than this rate, then
this should be higher than the publicly traded securities. You should also consider
whether the preferred shares have a fixed dividend rate, and if it is a participating share
or not. Both will affect the valuation of preferred shares of the company.
The actual dividend rate would be taken as fact as long as the company has the
financial ability to pay the dividends to the preference shareholders even if the
company is not profitable or is having. liquidation issues, then the dividend rate
and dividend paying ability may need to be re-adjusted based on the financial
health of the company.
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VALUATION OF EQUITY SHARES
Equity valuation is a blanket term and is used to refer to all tools and techniques used
by investorsto find out the true value of a company’s equity. It is often seen as the
most crucial element of a successful investment decision. Investment Banks typically
have an equity research department, where research analysts produce equity research
reports of select securities in various industries.
The valuation of common stock or equity shares is relatively difficult as compared to

bonds or preferred stock. The cash flows of the latter are certain because the rate of
interest on bonds and therate of dividend on preference shares are known. The cash
flows expected by investors on commonstock are uncertain. The earnings and
dividends on equity shares are expected to grow.
The main purpose of equity valuation is to estimate the value for a firm or its security.
A key assumption of any fundamental value technique is that the value of the security
(in this case an equity or a stock) is driven by the fundamentals of the firm’s
underlying business at the end of theday.
There are several different methods of valuing a company with one of the primary
ways beingthe comparable (or comparable) approach.
There are a few different ways to perform equity valuation. The most popular
methods include are:
 Comparable Approach. A company's equity value should bear some

resemblance to other equities in a similar class. This entails comparing a
company's equity to competitorsor other firms in the same sector,
 Discounted Cash Flow. A company's equity value is determined by the future
cash flow projections using net present value. This approach is most useful if
the company has strongdata to support future operating forecasts.
 Precedent Transactions. A company's equity depends on historical prices
for completed M&A transactions involving similar companies. This approach
is only relevant if similar entities have been recently valued and/or sold.
 Asset-Based Valuation. A company's equity value is determined based on the
fair market value of net assets owned by the company. This method is most
often used for entities witha going concern, as this approach emphasizes
outstanding liabilities determining net asset value.
 Book-Value Approach. A company's equity value is determined based on
its previous acquisition cost. This method is only relevant for companies
with minimal growth that might have undergone a recent acquisition.
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DIVIDEND CAPITALIZATION APPROACH:
DEFINITION OF DIVIDEND CAPITALIZATION MODEL

Method for estimating a firm's cost of common (ordinary) equity. This approach
approximatesa future dividend stream based on the firm's dividend history and an
assumed growth rate and computes the market capitalization rate that equates it with
the current market price. In the case of closely held firms (such as sole proprietorships
and partnerships) which do usually not distribute profits as dividends, the firms
dividend paying capacity is estimated from its averagenet income and average cash
flow and compared with the dividends actually paid by a similar size firm. Also called
dividend growth model.
The dividend discount model (DDM) is a quantitative method used for predicting the
price of acompany's stock based on the theory that its present-day price is worth the sum
of all of its
future dividend payments when discounted back to their present value. It attempts to
calculate thefair value of a stock irrespective of the prevailing market conditions and
takes into consideration the dividend payout factors and the market expected returns.
If the value obtained from the DDM is higher than the current trading price of shares,
then the stock is undervalued and qualifies for a buy, and vice versa.
EARNINGS CAPITALISATION METHOD

Capitalization of earnings is a process of estimating the value of a company through
its present earnings and cash flow that help estimate the company’s future earnings
and profits. Its purpose isto help investors better understand and estimate future
profits and growth of the company to plan their investments.
The capitalization of earnings method calculates business valuation by considering
the current earnings of a business, its cash flows, and the annual rate of return for
investors to determine futureprofits of the business.
The capitalization of earnings method assists in determining the business valuation

for investors and other stakeholders. Thus, capitalization on earnings estimates the
gross income generated over aperiod that also applies to subsidiary holdings of a
business, its product line, etc. This capitalization rate, or the rate of returns for the
investor, weighs against the gross income generated.
To determine the business valuation based on its earnings, it is important to first

know about the business profile, industry, and operations of a business. These
factors assist an investor in havingmore realistic expectations of their gains or
returns. These insights also allow an investor to buildon the existing growth
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trajectory of a company and predict future outcomes.
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MODULE-02 INVESTMENT AVENUES

UNIT-01 INTRODUCTION TO INVESTMENT
INTRODUCTION:
The word “investment” can be defined in many ways according to different theories and
principles. Generally, investment is the application of money for warning more money.
Investment also means savings or savings made through delayed consumption.
According to finance, Investment refers to the buying of a financial product or any valued
item with anticipation that positive returns will be received in the future. The most important
feature of financial investments is that they vary high market liquidity. The methods used for
evaluating the value of a financial investment is known as valuation.
On the other hand, financial professionals define an investment as money utilized for buying
financial assets, for example stocks, bonds, bullion, real properties, and precious items (gold,
silver, diamond).
MEANING:
Investment refers to commitment of funds for a long-term purpose in expectation of monetary
returns.
Investment is an activity where you set aside some money now, in anticipation of receiving
a higher amount in future.
An investment refers to an asset or an item acquired with the goal of generating income
or appreciation over a period.
WHAT IS THE NEED FOR INVSESTMENT?
 To counter inflation: Inflation is the general rise in price of commodities. Inflation
reduces the purchasing power of money we have and makes us poorer as time passes
by. Unless you take steps to address this problem, you can be in serious trouble. The
best way to combat the negative effect of inflation is to invest the money that you
have in your hands today. Investing regularly will enable you to beat inflation and
your purchasing power will not go down.
 To meet financial goals: Our lives are made up of various goals:
 Education
 Employment
 Accumulating Wealth
 Family
 Kids’ Education
 Retirement
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We need to achieve these goals as we progress, and almost all our goals need some
financial support.
A few financial goals, like household expenses, clothing, and entertainment costs, etc.
can be met with your regular income. However, goals like buying a house, paying for
higher education of kids, and retirement, etc. need a large financial pool. Developing
the ability to meet your financial goals is the second important reason to invest.
 It is a great source of passive income: One thing that the ongoing corona virus crisis
has taught everyone is that we cannot solely rely on your regular income. If we Are
unable to earn our regular income for some reason, we can land up in immense
hardships.
To mitigate this risk, you will need to have a second line of income which will help
you to sustain yourself in times of such crisis. This can be your investments in Fixed
deposits, equities, Mutual Funds, properties, and other assets. These investments will
continue to earn returns for you even when your regular income stops and enable you
to tide over the situation comfortably.
 Brings financial independence: You can get financial freedom in your old age by
investing regularly to create a retirement, Amount. The passive income you will earn
from this amount will enable you to take care of your monthly expenses and other
needs comfortably after retirement.
 It lets to follow the passion: Investments are the key for achieving your dream.
The strategy should be to invest and accumulate wealth in a planned way in your early
years and when you accumulate a sizable wealth, retire early. The passive income you
earn from those investments will help you to meet your expenses thereafter while you
are busy in actively pursuing your passion.
 Get tax benefits: Various investment products like PPF, ELSS, Tax Saving Bonds
and long-term fixed deposits offer tax benefits under section 80C of the Income Tax
Act 1961. Invest in them wisely to reduce your tax burden.
OBJECTIVES OF INVESTEMENT:
 To keep money safe: Capital preservation is one of the primary objectives of
investment for people. Some investments help keep hard-earned money safe from
being eroded with time. By parking your funds in these instruments or schemes, you
can ensure that you do not outlive your savings. Fixed deposits, government bonds,
and even an ordinary savings account can help keep your money safe. Although the
return on investment may be lower here, the objective of capital preservation is easily
met.
 To help money grow: Another one of the common objectives of investing money is
to ensure that it grows into a sizable corpus over time. Capital appreciation is
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generally a long-term goal that helps people secure their financial future. To make the
money you earn grow into wealth, you need to consider investment objectives and
options that offer
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a significant return on the initial amount invested. Some of the best investments to
achieve growth include real estate, mutual funds, commodities, and equity. The risk
associated with these options may be high, but the return is also generally significant.
 To earn a steady stream of income: Investments can also help you earn a steady
source of secondary (or primary) income. Examples of such investments include fixed
deposits that pay out regular interest or stocks of companies that pay investors
dividends consistently. Income-generating investments can help you pay for your
everyday expenses after you have retired. Alternatively, they can also act as excellent
sources of supplementary income during your working years by providing you with
additional money to meet outlays like college expenses or EMIs.
 To minimize the burden of tax: Aside from capital growth or preservation, investors
also have other compelling objectives for investment. This motivation comes in the
form of tax benefits offered by the Income Tax Act, 1961. Investing in options such
as Unit Linked Insurance Plans (ULIPs), Public Provident Fund (PPF), and Equity
Linked Savings Schemes (ELSS) can be deducted from your total income. This has
the effect of reducing your taxable income, thereby bringing down your tax liability.
 To save up for retirement: Saving up for retirement is a necessity. It is essential to
have a retirement fund you can fall back on in your golden years, because you may
not be able to continue working forever. By investing the money, you earn during
your working years in the right investment options, you can allow your funds to grow
enough to sustain you after you’ve retired.
 To meet your financial goals: Investing can also help you achieve your short-term
and long-term financial goals without too much stress or trouble. Some investment
options, for instance, come with short lock-in periods and high liquidity. These
investments are ideal instruments to park your funds in if you wish to save up for
short-term targets like funding home improvements or creating an emergency fund.
Other investment options that come with a longer lock-in period are perfect for saving
up for long-term goals.
 Economic development: Investment activities have an efficient role in the overall
development of the economy. It helps in efficient mobilization of ideal lying
resources of peoples into productive means. Investment serves as a mean for bringing
together those who have sufficient funds and one who are in need of funds. It enables
in capital creation and leads to economic development of the country.
FEATURES OF INVESTMENT:
 Safety of principal: Every investment is subject to fluctuations in its price which is
caused due to changing market conditions. An investment tool is termed as adequate
if it ensures the safety of the principal to investors. It should possess an ability of
redemption as and when required as per the needs of the person. Proper evaluation of
distinct economic and industry trends should be done before deciding the type of
investments.
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 Capital appreciation: Capital appreciation is an important feature of every

investment tool. Every investment is expected to rise in its value over a period of time
which is a key determinant for making deploying funds in it. Investors should
properly forecast which assets are expected to appreciate in the future and make
timely purchases of them.
 Expectation of return: The investment provides returns from time to time to
investors which varies as per the market conditions. It is the amount expected by
people for deploying their funds for a particular period of time in a set of assets. It is
the main objective of every investment, and every investor expects a stable and
regular return from their investment.
 Marketability: Marketability refers to the ease with which the investment securities
can be purchased and sold or can be transferred in the market. This feature of
investment tools determines their value as assets with better marketability are
preferred more by the people looking for the investment.
 Purchasing power stability: Every investor before making an investment considers
the future purchasing power of their funds. In order to maintain the stability of
purchasing power, he ensures that the money value of the investment should increase
in accordance with rising in price levels to avoid any chance of losing money.
 Tax benefits: Tax implications on the income provided by investment programs are
seriously taken into consideration by investors. The real return earned by people is
one that is left after paying income tax. While deciding an investment option, the
burden of taxes on its income is an important determinant analysed by investors. He
should choose such investment securities which put less tax burden and maximize its
return.
 Legality: Investment securities must be evaluated from legal aspects before selecting
them. Only such securities which are approved by law should be chosen as illegal
securities will land investor in trouble. The best way is to do investment in securities
issued by LIC, UTI, and Post office national saving certificates which are legal and
save investors from various troubles.
ESSENTIAL CHARACTERISTICS OF AN INVESTMENT:

o 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.
o Returns: Return refers to the income expected from investment done. It is the key
objective for doing investment by investors. Investment provides benefits to peoples
either in the form of regular yields or through capital appreciation.
o Lock-in period: The period for which a particular investment is restrained from being
sold by the investor. It is also the number of years the money is held by an investor
up- to the date of maturity.
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o Risk: Risk is an inherent characteristic of every investment. Risk refers to loss of

principal amount, delay or non-payment of capital or interest, variability of return etc.
Every investment differs in terms of risk associated with them. However, less risky
investments are the most preferred ones by investors.
o Safety: It refers to the surety of return or protection of principal amount without any
loss. Safety is an important feature of every investment tool that is analysed before
allocating any fund in it.
o Income stability: Income stability refers to the regularity of income without any
fluctuations. Every investor wants to invest in such assets which provide return
consistently.
o Liquidity: Liquidity refers to how quickly an investment can be sold or converted
into cash. It simply means easiness with which investment can be sold in the market
without any loss. Most of the investors want to invest in liquid assets.
SPECULATION:
MEANING:
Making money for a short-term period that is selling gold when the price raises is called
speculation.
Buying of securities when the prices are low and selling them when there is hike in prices is
called speculation.
Speculation involves trading a financial instrument involving high risk, in expectation of
significant returns. The motive here is to take maximum advantage from fluctuations in the
market.
DISTINGUISH BETWEEN INVESTMENT AND SPECULATION:
BASIS FOR INVESTMENT SPECULATION
COMPARISON
MEANING The purchase of an asset with the Speculation is an act of

hope of getting returns is called conducting a risky financial
investment. transaction, in the hope
substantial profit.
BASIS FOR Fundamental factors, i.e., Here, technical charts and
DECISION performance of the company. market psychology.
TIME HORIZON Longer term Short term.
RISK INVOLVED Moderate risk High risk.
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INTENT TO PROFIT Changes in value. Changes in prices
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EXPECTED RATE OF Modest rate of return. High rate of return

RETURN
FUNDS An investor uses his own funds. A speculator uses borrowed
funds
INCOME Stable. Uncertain and erratic
BEHAVIOUR OF Conservative and cautious. Daring and careless

PARTICIPANTS
DIVERSIFICATION:
MEANING:
Diversification is the practice of spreading your investments around so that your exposure to
any one type of asset is limited. This practice is designed to help reduce the volatility of your
portfolio over time.
Diversification is a strategy that mixes a wide variety of investments within a portfolio to
reduce portfolio risk.
Diversification is most often done by investing in different asset classes such as stocks,
bonds, real estate, or crypto currency.
WHAT IS THE NEED FOR DIVERSIFICATION: THIS CAN ALSO BE WRITTEN AS

FEATURES OF DIVERSIFICATION:
Spread your risk: If you invested all your money into one company’s stock and it
plunged, you'd lose some if not all your money. If you put all of your money into a
single bond and the issuer declared bankruptcy, you'd lose some if not all your funds,
too. Diversification helps mitigate the risk to you about such scenarios by choosing
different investments and types of investments. Diversification doesn’t guarantee
investment returns or eliminate risk of loss including in a declining market.
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.
Stocks generally carry the most risk of the three main asset classes, but they also offer
the greatest potential for growth. Bonds are less volatile, but their returns are more
modest, and cash alternatives are generally considered to carry the least risk but with
the lowest returns. Each asset class tends to perform differently under similar market
conditions. Asset allocation, or splitting your assets among categories, helps to
balance your portfolio.
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Investors typically choose a percentage they want to invest in each asset class based
on their risk tolerance, years until retirement, and other factors. A person just a few
years from retirement might shift money out of stocks and into bonds or cash for a
more conservative allocation.
Diversify within asset classes: Once you’ve diversified by distributing your
investment dollars among stocks, bonds, cash, and possibly other categories, you may
need to diversify again. Your diversification strategy should be tailored to your
personal financial goals and tolerance for risk. If you’re uncertain about how to
diversify, consider seeking the guidance of a Financial Advisor.
 For example, when it comes to stocks, the possibilities for diversification are
vast. You can diversify by the size of the companies (large-, medium-, or
small- cap stocks), by geography (domestic or international), and by industry
and sector.
 For example, if you want to diversify among stocks but don’t have the time or
inclination to do so, consider mutual funds or exchange-traded funds. These
funds generally hold shares in many different companies.
Gives you higher and consistent overall returns: Historically, the stock market is
very volatile. So, just investing in stocks cannot give you consistent returns on your
investment. Moreover, investing in safe assets like fixed deposits gives you meagre
investment returns. But if you invest in different asset classes, you can ensure you get
significant and consistent returns.
Provides liquidity: People often stick to safe investment options like fixed deposits
or public provident funds. While these investments are safe, they have lock-in periods.
So, if you try to cash in on these during an emergency, you will have to pay a fine.
One main advantage of portfolio diversification is that you can invest in a few liquid
investments along with these safe investments, which will allow you to get cash quickly
whenever you need it.
NOTE: MEANING OF PORTFOLIO:
Portfolio refers to group of financial assets or bundle of financial assets.
ADVANTAGES OF DIVERSIFICATION:
 Reduces the impact of market volatility: A diversified portfolio minimizes the
overall risk associated with the portfolio. Since investment is made across different
asset classes and sectors, the overall impact of market volatility comes down.
Owning investments across different funds ensures that industry-specific and
enterprise-specific risks are low. Thus, it reduces risks and generates higher returns in
the long run.
 Reduces the time spent in monitoring the portfolio: A diversified portfolio is more
stable because not all investments will perform badly at the same time. If you have
invested only in equity shares, you will be spending a lot of time studying the market
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movement and analysing your next step. Similarly, if you have invested solely into
low- risk mutual funds, your all-time worry will be to find avenues to increase returns.
With diversification, you will have to spend lesser time on the same and the portfolio
will not require a lot of maintenance.
 Helps seek advantage of different investment instruments: By selecting mutual
funds, investors may gain the benefit of investing in a mix of debt and equity.
Similarly, by investing in fixed deposits, investors benefit from a fixed return and a
low risk. Hence, diversification of the portfolio will balance the risk and return
associated with different funds. Even if one fund does not perform well, the loss may
be compensated by the profits made from other funds.
 Helps achieve long-term investment plans: It is important for the investor to invest
indifferent high-performing sectors. If the market volatility has a positive impact on
stocks, the investor will be able to generate higher returns on them. If it has a positive
impact on debt, the investor will be able to make the most out of mutual funds.
 Helps avail the benefit of compounding of interest: Selecting a mutual fund as an
investment option allows investors to avail of the benefit of compounding interest.
This means that every investment made will generate interest on the principal amount
as well as on the accumulated interest over the previous invested years. It is important
to keep in mind that if you are investing in two different funds, the fund holding for
both the schemes should be different; otherwise, diversification does not make any
sense.
 Helps keep the capital safe: Not every investor is ready to play a risky game.
Investors who are on the verge of retirement or have just started investing prefer
stability in their portfolio and diversification ensures the protection of their savings.
Diversification allows investors to achieve their investment plans while maintaining
the investment risk at a minimum. It is also a method of playing safe in the volatile
market.
 Let’s shuffle among investments: Diversification is a practical approach that every
investor should take advantage of. It allows investors to shuffle their investments and
take advantage of the market movement. It lets investors spread their investment
across different asset classes and increase annual returns.
 Offers peace of mind: The biggest advantage of diversification is peace of mind.
When the total investment is divided amongst a number of asset classes, an investor
will not be stressed about the performance of the portfolio.
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UNIT-02
INVESTMENT AVENUES FOR A COMMON INVESTOR
BANK DEPOSITS
MEANING:
Bank deposits are a savings product that customers can use to hold an amount of money at a
bank for a specified length of time.
TYPES OF BANK
DEPOSITS:
SAVINGS ACCOUNT
MEANING:
A savings account is a bank account that gains interest at a variable rate over time. These
accounts are typically offered by banks, credit unions and other financial institutions, and
they often accrue interest at a variable rate, which adds to the account’s balance over time.
FEATURES OF SAVINGS ACCOUNT:

1. Easy Transactions: You can use your Savings Account to send and receive payments.
This can be done by either Net Banking, or through your Debit/ATM Card. This feature cuts
down the dependency on cash for all transactions, especially when it comes to payment of
bills.
2. Payment of Bills: These days, banks offer payment facilities such as Bill Pay with Savings
Accounts. This enables account holders to make payments for utilities such as electricity,
water and phone recharges directly from their account.
3. ATM facility: Should you feel the need to withdraw cash, then you can do so from your
Savings Account via an ATM. Most banks have their ATM branches spread all over the
country. But in case you cannot find one in your vicinity, and the need for cash is too
pressing, then you can access your account from another bank’s ATM well. All you need is
your ATM/debit card.
4. Debit Card: Banks provide Savings Account holders with ATM/Debit Card not just for
accessing the account through the ATM, but also for making payments, whether at the
merchant’s store, or through an online payment gateway.
5. Savings interest rates: With every Savings Account, banks offer an interest rate enabling
your idle money to grow over time.
ADVANTAGES OF SAVINGS ACCOUNT:

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1. Meeting life goals: many of our life goals aren’t free. Anything from pursuing higher
education to buying a home requires a certain amount of funding, which you’ll need to plan
ahead for.
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2. Work flexibility: Saving your money allows you to have a cushion of support during gaps
in employment or a switch in jobs.
3. Reduced tax liability: When you save money in a retirement plan, you get different tax
advantages, depending on the plan. With a traditional 401(k), for example, you can reduce
your taxable income by making savings contributions to the tax-deductible plan.
4. More travel opportunities: Getting to travel is one of the great rewards of life. It can
offer a chance to decompress, explore the world and expose yourself to exciting new
experiences.
5. Helping others: Once you get to a point in saving where you feel comfortable with your
various savings funds and have grown your wealth, you’re also able to support causes that go
beyond individual goals. That could mean helping out a friend or family member in need or
donating to a charity that you care about.
DISADVANTAGES OF SAVINGS ACCOUNT:

1. Variable interest rates: With savings accounts, a variable APY (annual percentage yield)
means the interest rate can change over time as dictated by market conditions. This can make
it difficult to estimate how much you’ll earn in interest over time.
2. Extra fees: Some financial institutions may charge monthly fees for account holders to
maintain a savings account. You might be able to avoid these fees depending on bank-
specific factors, like your account balance, as well as any other accounts you might have open
with the bank.
3. High liquidity: The easy access to funds can prove detrimental to your savings if you’re
an impulsive spender and do not keep a monthly budget.
4. Minimum balance: You need to maintain a certain balance in the account. If you cannot,
you may be penalised by the bank.
5. High purchase and withdrawal limit: As of 2021, the account has a purchase limit of ₹6
lakhs and daily ATM withdrawal limit of ₹2 lakhs.
TAX BENEFIT FOR SAVINGS ACCOUNT:

 Interest from savings account is exempted from tax for an amount up to ₹10,000
during a financial year.
 This deduction can be availed under Section 80TTA of the Income Tax Act and is
available to an Individual and Hindu Undivided Family (HUF).
CURRENT ACCOUNT
MEANING:
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Current account is a deposit account held at a bank or other financial institution. It is

available to the account owner “on demand” and is available for frequent and immediate
access by the
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account owner or to others as the account owner may direct. Access may be in a variety of
ways, such as cash withdrawals, use of debit cards, cheques (checks) and electronic transfer.
FEATURES OF CURRENT ACCOUNT:
1. The main objective of current bank account is to enable the businessmen to conduct their
business transactions smoothly.
2. Current bank accounts are operated to run a business.
3. It is a non-interest-bearing bank account.
4. It needs a higher minimum balance to be maintained as compared to the savings account.
5. Penalty is charged if minimum balance is not maintained in the current account.
6. It charges interest on the short-term funds borrowed from the bank.
7. It is of a continuing nature as there is no fixed period to hold a current account.
8. It does not promote saving habits with its account holders.
ADVANTAGES OF CURRENT ACCOUNT:

1. It helps businessmen to make a direct payment to their creditors by issuing cheques,
demand- drafts, or pay-orders, etc.
2. It enables a bank to collect money on behalf of its customers and credits the same in their
customers’ current accounts.
3. It enables the current account holder to obtain overdraft (short-term borrowing) facility.
4. The creditors of the account holder can get credit-worthiness information of the account
holder through inter-bank connection.
5. It facilitates the industrial progress of the country. Without its help, businessmen would
face difficulties in running their businesses.
6. It has the facilities of Internet-banking and mobile-banking to carry out important business
transactions with ease and quickly.
DISADVANTAGES OF CURRENT ACCOUNT:

1. Current bank accounts are usually interest-free accounts; therefore, customers will not get
the advantage of a monetary benefit on their money in a current account.
2. Due to rendering additional services with current accounts, most banks charge high fees
from customers.
3. Banks could also impose a limit on the number of free cheque books and demand drafts for
current account holders.
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4. The most prominent disadvantage of a current account is that account holders have to
maintain a high amount of minimum balance in their accounts at all times. Without said
balance, banks may levy penalty charges.
5. A current account might help you with frequent transactions, but every transaction is
subjected to a predetermined fee by the bank.
6. Contrary to a savings bank account, a current account holder cannot automate bill
payments on a set date. This is a major inconvenience if you have only one functioning
account for your business and have to pay monthly bills.
NO TAX BENEFIT AVAILABLE ON CURRENT ACCOUNT:

Current Account is a zero-interest account and hence there is no tax benefit available on
Current Account.
FIXED DEPOSIT ACCOUNT

MEANING:
A fixed deposit is a type of deposit in which a sum of money is locked in a fixed period of time.
However, the tenure for the fixed deposit is decided by the person who invests his funds. This tenure
could be anywhere from a few days to several years. In return for locking in these funds, fixed
deposits pay the depositor a fixed rate of interest.
FEATURES OF FIXED DEPOSITS:

1. It makes the account holder to save money for the future transactions and not waste by
withdrawing cash for unnecessary transactions.
2. This type of account assures the return that would be accrued to them at the end of each
period.
3. It provides higher rate of interest than the savings account.
4. Interest accrued to them on this account would be given at the maturity of the period, so at
a time of maturity Hugh amount will be accrued.
5. This type of account meets the future cash flows of the individual.
6. Can get more than 1 fixed deposit account.
7. The term period for which the fixed account can be kept is between 6 months to 10 years.
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ADVANTAGES OF FIXED DEPOSIT:

1. Assured rate of return: The major reason why people prefer investing their funds in a
fixed deposit is the assured rate of return. Once you invest your funds in a fixed deposit
account, you can be guaranteed of receiving the stated rate of return. Banks publish the fixed
deposit rate of interest on their website and in bank branches which makes it easy for a
customer to ascertain how much return he will get.
2. Tax threshold for interest: Banks are not mandated to deduct tax on any interest until it
crosses Rs. 10,000. This means unless the total interest earned by a customer on different
fixed deposits totals Rs. 10,000, the bank will not deduct any tax. This provides comfort to
small deposit holders.
3. Flexible tenure: The tenure for a fixed deposit is flexible and depends on the deposit
holder. Each bank has their own minimum tenure rules however, the final decision can be
taken by the deposit holder. It is also possible to decide whether to redeem the fixed deposit
or to extend it for the same period of time.
4. Easy liquidation: It is relatively easy to liquidate a fixed deposit. For FDs booked online,
they can be liquidated online via net banking as well. Otherwise, most bank branches have a
form to liquidate the FD.
5. Loans against fixed deposit: An FD is a dependable instrument to keep in case of
financial emergencies. Taking a loan against a fixed deposit is very easy. You can take a loan
up to 95% of the fixed deposit amount depending on the bank. This makes it a dependable
investment.
DIS-ADVANTAGES OF FIXED DEPOSIT:

1. Reducing interest rates: Even though fixed deposits have a lot of advantages; the interest
rates do not move in line with inflation. This means in some cases; they may actually earn
less than the inflation rate. The interest rates for fixed deposits have been falling in recent
times which has reduced the attractiveness of this investment.
2. Locked in funds: Fixed deposits lock in your funds for a fixed duration. These funds are
not available for you to use unless you withdraw the funds prematurely. Fixed deposits are
not at all liquid and cannot be converted into cash easily.
3. Penalties on withdrawal: Banks charge penalty to the depositors who withdraw their
fixed deposits prematurely. This penalty is in the form of a reduced rate of interest.
4. No tax benefit: The interest earned on fixed deposit is added to the taxable income of the
deposit holder. There is no deduction on any interest earned. However, senior citizens get a
deduction up to Rs. 50,000 on interest.
5. Fixed interest rate: The rate of interest on a fixed deposit remains the same for the entire
duration of the fixed deposit. Even if the rates increase, the bank does not pay additional
interest to the deposit holder.
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TAX BENEFIT AVAILABLE FOR FIXED DEPOSIT ACCOUNT:

 FDs offer flexibility in the deposit amount based on the investor's convenience.
 Investors can get income tax deductions up to Rs.1,50,000 per annum under Section
80C of the Income Tax Act, 1961.
RECURRING DEPOSIT ACCOUNT

MEANING:
A Recurring Deposit (RD) account is an investment tool that allows investors to make regular
monthly investments and save money over a specified period.
FEATURES OF RECURRING DEPOSIT ACCOUNT:

1. One can Open an RD account by investing a minimum of Rs.100 per month.
2. The minimum deposit tenure for RD accounts is six months and can go up to 10 years.
3. RD accounts offer an interest rate higher than that of a savings account.
4. Generally, banks compound the interest once every quarter.
5. RD accounts come with a lock-in period of 30 days-3 months subject to the bank’s
discretion. Withdrawal within the lock-in period will not fetch any interest.
ADVANTAGES OF RECURRING DEPOSIT:

1. Easy Eligibility: It is very easy to qualify for opening an RD account because the
eligibility criteria are typically relaxed. You can easily start saving in an RD if you
meet any of the following criteria:
▪ ️You are an Indian resident
▪ ️You can be a citizen above 60 years
▪ ️You are a minor with a guardian
▪ ️You are a non-resident Indian (NRI)
2. Option to Avail the Loan Facility: Many banks and NBFCs give you the option to avail a
loan against your recurring deposit. Typically, the maximum amount of loan that can avail is
around 80% to 90% of the balance in your account.
3. Disciplined Savings: From an early age and stage, you can instil the habit of saving in
yourself or your children by including a recurring deposit in your investment portfolio. This
is because RDs help you develop the habit of saving systematically.
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4. Low Minimum Investment Amount: Even someone with the most modest income can
open a recurring deposit. While the minimum amount can vary from one institution to the
other, RD accounts can generally be opened with an amount as low as ₹100 a month.
5. Flexible Tenor: Another advantage of recurring deposits is that you can easily save for
your short-term goals that may be coming up in the next 6 to 12 months.
DISADVANTAGES OF RECURRING DEPOSIT:

1. Penalty on premature withdrawal: If you withdraw the amount before the term is
over, you will have to pay a penalty.
2. Lack of flexibility: Once the RD account is opened, you cannot make changes in the
instalment amount or the tenor.
3. Minimal interest rates: The interest you earn on your recurring deposit may be
lower when compared to other investment options.
4. Monthly Instalments: It is not possible in the case of recurring deposits to be able to
change your deposit amount, regardless of your financial situation at the moment.
With a fixed amount for investment each month, someone with chances of extra or
less funds for the deposit should be discouraged from opting for this product.
5. No tax benefits: RDs are not tax effective, and you will not get any deductions u/s
80C on the money you invest and the interests you earn are also taxable.
TAX BENEFIT AVAILABLE FOR RECURRING DEPOSIT ACCOUNT:

 Investment in bank RD is not eligible for tax exemption under Section 80C of the
Income Tax, 1961.
 Therefore, one cannot claim a tax deduction for investment in any of the bank
recurring deposits.
CORPORATE SECURITITIES
MEANING:
Corporate securities are debt instruments issued by public or private corporations to finance
their operations. They offer fixed coupon rate and enjoy better yields than Government
Securities (GS).
INCOME TAX BENEFIT AVAILABLE FOR CORPORATE SECURITIES:

This includes equity stocks as such and equity-oriented mutual funds. However, this long-
term capital Gain (LTCG) tax of 10% is applicable for gains/ profits earned by a company
beyond Rs 1 lakh per financial year. In other words, LTCG of up to Rs 1 lakh is exempt from
tax.
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VARIOUS TYPES OF CORPORATE SECURITIES:

 Equity Shares
 Preference Shares
 Debentures
 Bonds
 Company deposits
EQUITY SHARES
MEANING:
Equity shares are those shares which does not receive preferential rights in terms of the
payment of dividend and return of capital.
FEATURES OF EQUITY SHARES:

1. Permanent Shares-Equity shares are permanent in nature. The shares are permanent
assets of a company. And returned only when the company winds up.
2. Significant Returns-Equity shares have the potential to generate significant returns to the
shareholders. The price movements can be drastic and are dependent on multiple internal and
external factors.
3. Voting Rights-Most equity shareholders have voting rights. This allows them to select
the people who will govern the company.
4. Additional Profits-Equity shareholders are eligible for additional profits a company
makes. It will in turn increases the wealth of the investors.
5. Limited Liability-Losses a company makes in a year doesn’t affect the ordinary
shareholders. In other words, the shareholders are not liable for the company's
debt obligations. The only effect is the decrease in the price of the stocks.
6. Dividend Pay-out and Transferable-Equity shareholders share the profits of a
company. In other words, a company may distribute dividends to its shareholders from its
annual profits.
ADVANTAGES OF EQUITY SHARES:

1. High Returns-Equity shares have the potential to generate high returns as they are
high risk investments. Higher the risk, higher the reward.
2. Voting Rights-Equity shareholders enjoy voting rights. They can vote for or
against corporate policies and business decisions.
3. Limited Legal Obligations-Though equity shareholders own a part of the company; they
have limited legal liabilities.
4. Liquidity-These shares trade on the stock exchange. Buying and selling them is quite easy.
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DIS-ADVANTAGES OF EQUITY SHARES:

1. Company’s performance-The performance of the share largely depends on the
company's performance. when the company is not performing and is unable to make profits,
the equity shareholders will not receive any dividends.
2. Capital Loss-Since equity shares are high risk, high reward investments, the probability
of capital loss is also high. due to many internal and external factors prices may fluctuates.
3. Volatility-Volatility in share prices can be for many reasons like inflation, deflation
and other economic factors. The market sentiments drive the share prices up and down.
PREFERENCE SHARES
MEANING:
Preference shares are those which have preferential right to the payment of dividend during
the lifetime of the company and a preferential right to the return of Capital when the company
is wound up.
OR
Preference shares also known as preferred stock, is an exclusive share option which enables
shareholders to receive dividends announced by the company before the equity shareholders.
FEATURES OF PREFERENCE SHARES:

 Preference in dividends: Preferred stocks pay high dividends in comparison to
common stocks in this current low-interest-rate environment and companies can pay
dividends to equity shareholders only after paying preferred shareholders.
 Capital Appreciation: The capital appreciation is low as compared to equity shares of
profitable companies.
 Right on assets: Preference shareholders right on the assets of the company is similar
to that of bond holders. When the company is liquidated, preference shareholders are
paid, and the residue is available to the equity shareholders. So, preference
shareholders have a prior right to that of the equity shareholders.
 Voting Rights: Shareholders who own preference shares are sometimes entitled to
voting rights in the event of extraordinary circumstances. However, this is not always
the case. Generally, buying the stocks in a company does not give an individual voting
rights in the company’s management.
 They can be converted into common stock- Preference can be easily converted into
common stock. If a shareholder wants to change its holding position, they are
converted into a predetermined number of preference stocks.
 Dividend Payouts-Preference shares allow shareholders to receive dividend payouts
when other stockholders may receive dividends.
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ADVANTAGES OF PREFERENCE SHARES:
 Appeal to cautious Investors-Preference shares can easily sold to investors who

prefer reasonable safety of their capital and want a regular and fixed return on it.
 No obligation for dividends-A company is not bound to pay dividend on preference
shares if its profits in a particular year are insufficient. No fixed burden is created on
its finances.
 No interference-Preference shares do not carry voting rights. Therefore, a company
can raise capital without dilution of control. Equity shareholders retain exclusive
control over the company.
 Trading on equity-The rate of dividend on preference shares is fixed. Therefore, with
rise in its earnings, the company can provide the benefits of trading on equity to the
equity shareholders.
 No charge on assets-Preference shares do not create any mortgage or charge on the
assets of the company.
DIS-ADVANTAGES OF PREFERENCE SHARES:

1. Fixed Obligation-Dividend on preference shares has to be paid at a fixed rate and
before any dividend is paid on equity shares.
2. Limited appeal-Bold investor does not like preference shares. Cautious and conservative
investors prefer debentures and government securities.
3. Law return-When the earnings of the company are high, fixed dividend on preference
shares becomes unattractive. They do not have right to participate in the prosperity of the
company.
4. No Voting Rights-Preference shares generally do not carry voting rights. As a result,

preference shareholders are helpless and have no say in the management and control of the
company.
5. Fear of Redemption-The shareholders of redeemable preference shares might

have contributed finance when the company was badly in need of funds.
NO TAX BENEFIT AVAILABLE FOR PREFERENCE SHARES:
 The investment in preference shares is to be regarded as an investment in an unlisted

and unquoted security & is therefore definitely eligible to tax.
 Preferred shares do not actually offer the issuing company a direct tax benefit.
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DEBENTURES
MEANING:
A debenture is essentially a long-term loan that a corporate or government raises from the
public for capital requirements. Debentures holders are the creditors.
For example- a government raises funds to construct roads for the public.
FEATURES OF DEBENTURES:
1. Debentures are usually the unsecured form of bonds which are not backed by any
asset or collateral. Instead, the investors consider the issuers.
2. They have fixed coupon rate at which the investors receive interest at specific
intervals, i.e. monthly quarterly half yearly or yearly.
3. They can be easily exchanges in the stock market, just like other securities. Thus, they
are a flexible debt instrument.
4. It is a promise by the issuing company that owes the specified money to the holder.
5. It is a debt instrument that the company issues with a maturity date mentioned in the
certificate.
6. As per the deed this long term debt instrument carries an assurance of repayment on
the specified date.
7. Parties- company, trustee, debenture holder.
TYPES OF DEBENTURES:
 Secured and non-secured loans- Apart from non-secured companies also issue
secured debentures in which investors hold a claim over the issuers assets.
 Convertible and non-convertible loans-Convertible ones can be transformed into
equity shares after a particular period. conversely the non-convertible type is a debt
instrument that cannot be converted into equity shares.
 Perpetual-These bonds don’t have a maturity date and the issuer need not redeem them.
 Fixed charge-under the fixed charge type the unsecured bonds are locked at a
predetermined or standard coupon rate throughout the holding period.
ADVANTAGES OF DEBENTURES:
 Effective way to raise funds-Issuing debentures is one of the most effective ways to
raise funds for a company compared to equity or preference shares.
 Fixed income for Investors-Fixed income is an investment approach focused on
presentation of capital and income.
 Secured investments-Debentures of companies where the issuer puts collateral like
fixed assets against the borrowed fund are called secured debentures.
 No detection of ownership-They do not carry any voting rights because debenture
holders are not owner of a company.
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 Cheaper source-A debenture is a cheaper because they carry option to be converted

into equity shares.
DIS-ADVANTAGES OF DEBENTURES:
 No voting rights-Debentures are part of loan, debenture holder is only a creditor of
the company.
 Rigidity as to interest payment-A rise in real interest rates converted into an equal
rise in nominal interest rates therefore leads to disinflation.
 Less control over mortgaged assets-Which charges are made cannot be employed
freely for the company.
 The debentures holders cannot claim profits beyond interest rate -The debenture
holder has no right to claim payment of the principal unless the company defaults in
making regular interest payment.
TAX BENEFIT AVAILABLE FOR DEBENTURES:

 The debentures are not tax deductible for the investor. However, they are tax
deductible for the company issuing them.
 The interest paid on the debentures is tax deductible. Issuing debentures,
therefore, reduces the cost of debt for a company.
BONDS
MEANING:
Bonds refer to the debt instrument bearing interest on maturity. In simple terms, organisations
may borrow funds by using debt securities named bonds.
OR
Bonds refer to high security debt instruments that enable an entity to raise funds and fulfill
capital requirements. It is a category of debt that borrow avail from individual investors for a
specified tenure.
Organizations including companies, government and other entities, issue bonds for investors
in primary markets.
 For ex: - If Mr. X wants to expand his business, he’ll need a certain amount to do so.
Therefore, he issues the bonds of a specific amount, which the investors will buy,
bonds have their fixed maturity period after which the investor gets the returns which
consists of face value of the bond plus the interest amount.
 Having a fixed maturity period and pay a specified rate if interest on the principal
amount to the holders.
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 Bonds have a maturity period of more than one year which differentiates it from other
debt securities like commercial papers, treasury bills and other money market
instruments.
FEATURES OF BONDS:
 Face Value –Face value implies the price of a single unit of a bond issued by an
enterprise. Principal, nominal, or par value is used alternatively to refer to the price of
bonds. Issuers are under a legal obligation to return this value to the investor after a
stipulated period.
 Interest or coupon rate- Bonds accrue fixed or floating rates of interest across their
tenure, payable periodically to creditors. Bonds interest rates are also called coupon
rates as per the tradition of claiming interests on paper bonds in the form of coupons.
Interest earned on a bond depends on various aspects such as tenure, the issuers repute
in the public debt market.
 Tenure of bonds-Tenure or term refers to the period after which bonds mature. these
are financial debt contracts between issuers and investors. Financial and legal to the
investor or creditor are valid only until the tenures end.
 Credit quality-The credit quality of a bonds refers to the creditors consensus on the
performance of a company's assets in the long term. It is determined by the degree of
confidence that investors have in an organisation. Credit rating agencies classify
bonds on the risk of a company defaulting on debt repayment.
 Tradable Bonds-Bonds are the tradable in the secondary market. The ownership can
thus shift among various investor within a given tenure. These creditors often sell
their bonds to other entities when market prices exceed the nominal values as they
have an option to secure bonds with high yield and appropriate credit ratings.
KINDS OF BONDS:
 Fixed – interest Bonds-Fixed bonds are debt instruments which accrue consistent
coupon rates throughout their tenure. These predetermined interest rates benefit
investors with predictable returns on investments irrespective of alterations in market
conditions.
 Floating- interest Bonds- These bonds incur coupon rates which are subject to
market fluctuations and elastic within their tenures. The return on investment through
interest income is thus inconsistent as it is determined by market factors such as
inflation, condition of the economy, and confidence of investors in an entity's bonds.
 Inflation- linked bonds-Inflation linked bonds are special debt instruments designed
to curb the impact of the economic inflation on the face value and interest return. The
coupon rates offered on inflation linked bonds are usually lower than fixed interest
bonds.
 Perpetual Bonds-Perpetual bonds are fixed security investment options whereby
issuers do not have to return the principal amount to the purchaser. This investment
type does not have any maturity period, and customers benefit from steady interest
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payments for perpetuity.
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MERITS OF BONDS:
1.Easy to buy and sell:- Bond is an instrument which can be bought and sold easily by the
.It is not necessary for the investors to keep the bonds until maturity date.
2.A good financial investment: - Investing on bonds is a better and a safe of investing our
money, as we get the face value and also interest amount after the maturity date.
3.A safe investment compared to others: - Bonds are considered to be a safe way of
investing as guaranteed returns are sure in the investment of bonds.
4.Bonds are better than banks: -If a company wants to expand their business, the whole
amount cannot only be funded by the amount hence, by issuing the bonds the companies can
raise their desired and needed capital.
4.Legal protection: - The investors will be protected legally if they invest in bonds as the
bonds are traded in secondary market which is regulated by the Securities and Exchange
Board of India(SEBI).
DEMERITS OF BONDS: -
1. Bonds pay out lower return than stocks : - The bonds usually vary inversely with the
interest rate in the market. If the interest rates are high, then the bond value will be low and
vice versa.
2. Companies can default on your bonds: - If the companies face losses ,they might fail to
pay the interest amount to the investors on a right time and also they might fail to pay the
principal amount.
3. Bond yields can fall:- As the bonds always fluctuate in the secondary market .The bond’s
yield can easily fall if the rate of interest is high.
4. Interest rate risk: - The company might face losses if the interest rates of the bonds are
high. Therefore, it is convenient and beneficial for the company of the interest rates are low
so that the bonds have a good face value.
5. Liquidity risk: - If the bonds fail to perform at their level of expectation, it is very evident
that the company will face losses and therefore create problem of liquidity (converting an
asset into cash).
TAX BENEFIT AVAILABLE FOR BONDS:
In the case of tax-free bonds, the interest income is entirely tax-exempt. Also, the tax
deducted at source (TDS) does not apply to these bonds.
COMPANY DEPOSITS
MEANING:
Corporate deposits or company deposits are term deposits wherein you put your money for
a fixed tenure at a fixed rate of interest.
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TYPES OF COMPANY DEPOSITS:

1. Current Account-A current account is a deposit account for traders businessmen etc
who need to make and receive payments more often.
2. Recurring Deposit-It has fixed tenure. To invest a fixed sum of money in it regularly every
month or once a quarter interest is earned. The maturity period is between in six to ten
months.
3. Savings Accounts-It is a regular deposit account, where you earn a minimum rate
of interest. Bank offers variety of savings account based on depositors.
4. Fixed Deposits Accounts-It allows you to earn a fixed rate of interest for keeping a certain
sum of money locked in for a given time, that is until it matures. It ranges between a maturity
period of seven to ten years.
FEATURES OF COMPANY DEPOSITS:

 Capital protection-The capital in a company fixed deposit is not protected if the
company is unable to meet its financial obligations.
 Inflation protection-The company fixed deposit is not inflation protected. this means
that whenever inflation is above the guaranteed interest rate offered by the deposit.
 Investment objective and risks-The prime objective of investing in a company fixed
deposit is to earn a higher interest rate compared to a bank fixed deposit.
 Suitability and Alternative-Suitable for moderately conservative investors seeking
assured returns from a lump sum investment for goals up to five years away.
Alternatives can be National savings certificate, post office time deposits etc.…
ADVANTAGES OF COMPANY DEPOSITS:
 Competitive interest rates-Effective and attractive interest rate will be given on your
deposit where you can earn high to low interest for all types of deposits.
 Profitable investments means-Company deposits allow you to make profitable
investments where you can make your money double.
 Ease of accessing interest-Company deposit is the easy way to access interest on
your deposit.
 Smaller investment risk-There will be smaller investment risk where your money
can be invested and doubled in short span of time with lower risk.
 Money stored safely-In company deposit money are stored safely without any
disturbance.
DIS-ADVANTAGES OF COMPANY DEPOSITS:

 Low interest rate-In some situation the banks will not provide interest as you expected.
 Federal withdrawal limits-There will be limit for withdrawal of money from bank
which varies from account to account.
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 Inflation-Due to regular change in interest rates it may occur inflation where it affects
your deposits.
 Minimum balance requirements-Banks charges some amount to your deposits in
name of maintenance and minimum balance requirements. This may vary from bank
to bank.
POST OFFICE SAVINGS SCHEMES

INTRODUCTION:
Post office is one of the oldest organizations in India which started way back during the
British era in October 1854, initially focusing only on delivering mail(post)and later started
providing an array of other financial services i.e., Banking Insurance and Investments.
MEANING:
 Account can be opened with minimum of Rs. 1000 and in multiple of Rs. 1000.
 A maximum of Rs. 4.50 lakh can be deposited in a single account and 9 lakhs in Joint
account.
 In a joint account, all the joint holders shall have equal share in investment. It is a
beneficial scheme for individual investors who wish to earn a fixed rate of interest by
investing a significant portion of their financial assets. Post office savings account is
also a very helpful scheme for those residing in rural parts of India.
TYPES OF POST OFFICE SAVING SCHEME:
 Savings Schemes Under Post Office Investments
 Post Office Savings Account
 5-Year Post Office Recurring Deposit Account (RD)
 Post Office Time Deposit Account (TD)
 Post Office Monthly Income Scheme Account (MIS)
 Senior Citizen Savings Scheme (SCSS)
 15-Year Public Provident Fund Account (PPF)
 National Savings Certificates (NSC)
 Kisan Vikas Patra (KVP)
 Sukanya Samriddhi Accounts (SSA)
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NATIONAL SAVINGS CERTIFICATE(NSC): - The national savings certificate is a fixed

income investment scheme that you can open with any post office branch.
Who should invest in NSC?
 Who are looking for a safe investment and as well as to earn steady interest while
saving on taxes can choose to invest in NSC.
 NSC offers guaranteed interest and complete capital protection.
 Government of India promote the NSC as a saving scheme for individuals.
 NSC offers guaranteed interest and complete capital protection.
FEATURES OF NSC
* Fixed Income
* Tax saver
NATIONAL SAVINGS MONTHLY INCOME ACCOUNT(MIS):-This is a scheme in

which investors contribute a certain amount and earn a fixed interest every month.
MINIMUM AMOUNT FOR OPENING ACCOUNT AND MAXIMUM BALANCE

THAT CAN BE RETAINED.
 In multiples of INR 1000/-.
 Maximum investment limit.
 An individual can invest maximum INR 4.5 lakh in MIS (including his share in joint
accounts.
 For calculation of share of an individual in account, each joint holder has equal share
in each joint account.
FEATURES OF MIS
*The accounts under the MIS provided a fixed rate of interest, regardless of the market
scenario.
*The current interest rate on these accounts is 6.6% p.a.
*The lock-in period of these accounts is only five years.
*One can invest as low as RS 100 in a deposit.
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SUKANYA SAMRIDDHI ACCOUNT: - SSY is a savings scheme launched by the

government of India, for the financial betterment of the girl child . The scheme enables
parents to build capital for the future education and marriage expenses of their female child
and provides an attractive interest rate on the investment.
FEATURES OF SSY:
 Account can be opened with a minimum amount of Rs 250.
 Account can be opened by parents/guardian of a girl child up to the age of 10 years .
Only one account is permissible for a girl child not more than 2 accounts in a family.
 Minimum of Rs250 and maximum Rs1.5lakh can be deposited in a year.
 The account stands for 21 years.
 An amount up to 50% of the balance can be withdrawn by the girl child after attaining
the age of 18 years.
PUBLIC PROVIDENT FUND (PPF): -Public provident fund is a long-term investment

scheme declared by government of India. It is a safe post office deposit scheme that offers tax
exemption and attractive interest rates as decided each financial year.
FEATURES OF PPF:
* The account can be opened only for self.
* Only one PPF account, per person is permitted.
* Withdrawals from PPF account are subject to certain Conditions.
SENIOR CITIZEN SAVINGS SCHEME ACCOUNT: -The scheme is a savings

instrument offered to Indian residents aged over 60 years. The deposit matures after 5 years
from the date of account opening but can extended once by an additional 3 years by the
investor.
FEATURES OF SENIOR CITIZENS SAVINGS SCHEME ACCOUNT:

* Each SCSS amount is permitted only one investment.
* This amount must be a multiple of 1000 and must not exceed Rs.15lakhs.
* You can open an SCSS account with your certified bank or through the Indian postal system.
* You can open multiple accounts. In case of a joint a/c- you can open it with your spouse.
* Maturity period is 5years which can be extended up to 8 years.
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* SCSS helps seniors save money for their retirement.
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RATE OF INTEREST AND MINIMUM INVESTMENT IN EACH OF THE DEPOSIT

SCHEMES UNDER POST OFFFICE:
Scheme Name Minimum Investment Interest Rate
Post Office Time Deposit INR 1,000 7.00%

(POTD)
Senior Citizen Savings INR 1,000 8.00%

Scheme (SCSS)
Sukanya Samriddhi INR 250 7.60%

Account (SSA)
Public Provident Fund INR 500 7.10%

(PPF)
National Savings INR 100 7.00%

Certificate (NSC)
ADVANTAGES OF POST OFFICE SAVINGS SCHEME:

 Easy investment– One of the reasons why you should be going ahead with the post
office saving scheme is that one can easily enroll for the same. Moreover, it is a risk-
free return, so you don’t really have to worry about your money.
 Long–term investment gain– Some of the post office saving plans extend for a
period of 15 years, which makes it easy for the people who are retiring to get the
benefit.
 Tax exemption- Another advantage of the post office saving scheme is that you will
get tax exemption under Section 80C for the deposit amount. The interest earned on
some new Post Office schemes, like Sukanya Samriddhi Yojana, are also exempted
from tax.
 A wide array of options- Apart from the tax benefit and interest earned, the post
office schemes also have offered a wide spectrum of schemes which you can choose
as per the budget and investment requirement.
DIS-ADVANTAGES OF POST OFFICE SAVINGS SCHEME:
 The maximum tenure of a post office FD is five years, and you cannot opt for a longer
tenure.
 If you opt for a premature withdrawal, you may be charged a fee.
 Most services rendered are not online, and this may be a disadvantage to many.
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 Banks offer more flexible tenures of FDs than post office FDs, offering only tenures
of 1,2,3 and 5 years.
 Interest payout is only annually, whichever tenure you choose.
GOVERNMENT SECURITIES
MEANING:
Government securities are debt instruments sold to fund an independent government’s
operations. Government securities work in a similar fashion to corporate bonds. Corporate
bonds help firms afford equipment, operational expenses and other expenses that may help
them grow or boost profits.
EXAMPLES OF GOVERNMENT SECURITIES:
• Savings Bonds Savings bonds offer fixed interest rates over the term of the product. ...
• T-Bills Treasury bills (T-Bills) have typical maturities of 4, 8, 13, 26, and 52 weeks. ...
• Treasury Notes Treasury notes (T-Notes) have two, three, five, or 10-year maturities
making them intermediate-term bonds. ...
• Treasury Bonds Treasury bonds (T-Bonds) have maturities of between 10 and 30 years.
WHY ARE GOVERNMENT SECURITIES ISSUED??

Government securities are issued basically for 2 reasons:
 The Primary is that most of the government securities are issued is to raise funds for
government expenditure.
 Secondary reason is to control the supply of money in an economy. For example: If
the securities are sold the economy growth rate will go down and if securities are
bought the economy growth rate will raise.
FEATURES OF GOVERNMENT SECURITIES:

1. Government Securities are issued at face value.
2. Government Securities carry a sovereign guarantee and hence have zero risks of default.
3. Investors can sell these Government Securities in the secondary market.
4. Payments of Interest on Government Securities are paid on its face value.
5. The interest payment on these Government Securities does not attract TDS, or Tax
Deducted at Source.
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TAX BENEIFT AVAILABLE FOR GOVERNEMENT SECURITIES:

 Under Section 80CCF, taxpayers enjoy special deductions on tax-saving bonds/
securities.
 Individual taxpayers can avail a maximum tax deduction of Rs. 20,000 under this
section of the Income Tax Act.
TYPES OF GOVERNMENT SECURITIES:

• Treasury Bills: Treasury bills or T-bills are short-term securities. This means they
come with shorter maturity dates than bonds and notes. T-bills are often sold in terms
ranging from a few days to 52 weeks.
• Treasury Notes: You can buy treasury notes or T-notes in terms of two, three, five,
seven or 10 years. They pay interest every six months until they reach their maturity
date. Once a treasury note reaches maturity, individuals can redeem the entire face
value.
• Treasury Bonds: Treasury bonds or T-bonds have 30-year terms and pay interest
every six months. Once the bond matures, you’ll receive the entire face value of the
security. If you want to buy a treasury bond, you’ll need at least $100 to purchase a
security directly from the U.S. Treasury, or from a broker or banker. You can
either let the treasury bond reach maturity or sell it before the maturity date on a
secondary market.
• Treasury Inflation-Protected Securities (TIPS): Treasury Inflation-Protected
Securities (TIPS) are available for five-, 10- or 30-year terms. Like conventional
treasury bonds, you’ll receive interest payments every six months. TIPS are very
similar to conventional Treasury bonds, but there’s one essential difference. A
standard treasury bond keeps the same principal during the entire term of the bond.
• Floating Rate Notes (FRN): A floating rate note (FRN) issues for a term of two
years. It’s a government debt instrument with an interest rate that changes based on an
external benchmark. This benchmark is usually equal to the money market reference
rate.
• Savings Bonds: Savings bonds are a low-risk investment product that helps savers
combat inflation. These bonds do this by combining a fixed interest rate with
inflation. This government security allows the government to borrow money for a set
period. The borrowing period can be anywhere from one to 30 years.
ADVANTAGES OF GOVERNMENT SECURITIES:
o Zero risk: Government securities are free from any risk as there are no chances of
default and government assures payment of principle along with interest.
o Interest is paid regularly: In government bonds interest is paid at regular intervals
generally half yearly or quarterly.
o Liquidity: Government securities can be bought and sold regularly and can be
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instantly converted into cash

o Tax exemption: There is tax relief on the interest earned on government securities.
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o Assured interest for long period of time.

DIS-ADVANTAGES OF GOVERNMENT SECURITIES:
o If interest rate rises in the future investor may lose: If market rates of interest rise
in the future, the investor will have to suffer losses as his money is locked in a fixed
rate government security.
o The rate of return is lower: The rate of return in government securities are generally
lower than that of corporate securities.
REAL ESTATE
MEANING:
Real estate is defined as the land and permanent structure, like a home, or improvements
attached to the land, whether natural or manmade.
OR
It is a form of real property. It differs from personal property, which is not permanently
attached to the land, such as vehicles, boats, jewellery, furniture, and form equipment.
FEATURES OF REAL ESTATE:

1. Scarcity: While most of the land on earth remains unused or inhabitant, the supply
of land in a given location or a given quality is generally limited.
2. Improvements: Building an improvement on one parcel of land can affect that land’s
value and use. It can also affect the property of neighbour and community.
3. Location: It is the most important characteristics because people prefer certain
geographic areas over others, and these preferences will result in different values
for properties in different locations.
4. Immobility: Even though one can move dirt and land, they can never change
the location of a parcel.
5. Indestructibility: Land is also indestructible, permanent, and the location will
never change.
6. Uniqueness: Although land can be similar and homes may even have the same design
or layout, no two pieces off land are ever the same.
IMPORTANCE OF REAL ESTATE:
 It includes ability to generate wealth.
 Use equity as leverage.
 Protects money from inflation.
 Provides a considerable ability to generate cash flow.
 It gives a title of ownership.
 It is an important driver of economic growth.
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TAX BENEIFT AVAILABLE FOR REAL ESTATE PROPERTIES:

o There are quite a few tax benefits of investing in real estate. If you have opted for a
home loan, under section 80C, you can save up to INR 1.5 lakh on the principal
amount.
o Similarly, as per section 24, you can also save up to 2 lakhs on the interest payable.
ADVANTAGES OF REAL ESTATE:

1. Real estate can be easier to understanding: Investing in real estate can be much
easier to understand than complex investments developed by mathematicians.
2. Real estate is improvable: With good management of overall real estate portfolio,
we can tangibly improve the value of your investment and build wealth.
3. Real estate is a hedge against inflation: Though real estate in general is a hedge
against inflation, rental properties that are re-leased every year are especially effective
since monthly rent can be adjusted upward in inflationary periods. Therefore, estate is
best ways to hedge an investment portfolio against inflation.
4. Real estate exists in an ineffective market: There is a lack of transparency relating
to individual property values and also the strength of different markets, which
means that real estate investments have the potential for very high profits.
5. Real estate can be financed and leveraged: Real estate investments purchased with
hard money, or a mortgage can be made with a relatively small initial investment.
DIS-ADVANTAGES OF REAL ESTATE:

1. Real estate has higher transaction costs: In real estate the transaction costs are very
higher. Its cost can be significantly affecting the value of the investment and make it
more difficulty to turn a profit.
2. Real estate has low liquidity: Real estate investments are comparably illiquid
because properties can’t be quickly and easily sold without a substantial loss in value.
3. Real estate requires management and maintenance: Once an investor purchases a
property, it must be payments, real estate taxes, insurances, management fees, and
maintenance costs can add up quickly, especially if the property sits empty for
extended periods of time.
4. Real estate markets have significant inefficiencies: Investors with rental property
deal with fluctuating demographics and volatile economics, which can either add or
take away from their bottom-line profits. It includes dealing with market
inefficiencies which can be mishandled to result in financial ruin.
5. Real estate creates liabilities: Even though investment properties may be in a
corporation, there are often personal guaranties associated with the business, and the
risk of losing the income and profits generated by the company.
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TYPES OF REAL ESTATE:

1. Residential Real Estate: Single family (one dwelling) or multifamily (more than one
dwelling on a plot of land). In this case, the property can be brand new developments
or homes that are hundreds of years old.
2. Commercial Real Estate: Business use real estate for commercial purpose. It
includes properties where products are sold like shopping centre, services are
rendered like nail salons and medical offices, and income is generated like apartments
and hospitality.
3. Industrial Real Estate: Property used for industrial purpose and manufacturing.
People use these buildings for research, production and storage or distribution.
4. Land: Encompasses raw vacant land, land used for agricultural purposes like farms or
ranches, and land in development stages of the other real estate type.
5. Special purpose: It is a property that has limited utility and marketability other tan
for its original use. These properties may include a hazardous waste facility an oil
refiner or a specialized manufacturer.
GOLD AND BULLION

MEANING OF GOLD:
Gold is a yellow metallic element that occurs naturally in pure form, and it is used especially
in coins, jewelry and as a form of wealth.
MEANING OF BULLION:
Bullion refers to physical gold of high purity that is often kept in the form of bars, ingots or
coins. Bullion is recognized as being at least 99.5 and 99.9% pure. It is often kept as a reserve
asset by government and central banks.
TAX BENEFIT AVAILABLE FOR GOLD AND BULLION:

You can take indexation benefit on the cost of acquisition of physical gold to derive the value
of long-term capital gain. Such gain is chargeable to tax at 20 per cent plus a cess of 4 per
cent on the income tax amount. Hence, the total tax will be 20.08 per cent.
FEATURES OF GOLD AND BULLION:

 Gold does not act as a medium of exchange, but it remains a measure of value.
 Coinage of gold is not allowed.
Ex: people cannot get their gold converted in to coins at the mint.
 Government guarantees full convertibility of currency into gold bullion.
 The government is always ready to buy and sell gold at fixed prices.
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 There are no restrictions on export and import of gold.
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ADVANTAGES OF GOLD AND BULLION:

• Economy in the use of Gold: Gold coins are not in circulation and there is no
wastage of precious metal.
• Use of gold in public interest: Under gold bullion standard, all gold is not kept idle
in reserves, it can be properly utilized for public purpose.
• Exchange stability: Since there is unrestricted import and export of gold, stability in
the exchange rate is easily maintained.
• Elastic Money supply: The currency is not fully convertible the monetary authority
can expand adequate money supply by a small increase in gold reserves.
• Public confidence: Since government is always ready to convert token money and
paper money into gold at fixed price. Gold bullions inspire public confidence.
DIS-ADVANTAGES OF GOLD AND BULLIONS:
 Fair-weather standard: Like gold coin standard, gold bullion also fails to work at
the time of economic crisis.
 Government intervention: Government manages the token money, paper money and
gold reserves.
 Uneconomical: Under this system, enough gold reserves are kept. They remain idle
and cannot be put to productive uses.
 Less public confidence: The currency is generally converted into gold only for
foreign exchange.
WHY SHOULD THE INVESTMENT BE DONE IN GOLD MARKET:

There are many reasons to invest in gold since it is often viewed as a safe option compared
with other investments.
 Preservation: Secure form of long-term investment and wealth preservation.
 Hedging: Gold maintains its value or prices even improve as the dollar falls. It is not
directly impacted by interest rates.
 Portfolio diversification: Gold is often negatively correlated to stock market
meaning that even as the stock market falls, gold may remain steady, or prices may
increase.
 Stock opportunities: Stocks in gold companies can usually maintain profitability
even when the gold price is low.
CHIT AND NIDHI COMPANIES
MEANING OF CHIT FUND:
A chit fund is a type of saving scheme in India. Chit fund means an institution which accepts
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savings at interest and offer money for house and other needs.
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FEATURES OF CHIT FUND COMPANIES:

1. Multiple Usages: You can use these funds for various purposes such as children's
education, festivals, religious ceremonies, medical expenses, travel, shopping, and marriage.
2. Low-interest rate: - Bidders determine the rate of interest mutually; it differs from auction
to auction. Besides, chit funds keep lower interest rates for borrowers as compared to other
financiers.
3. High Dividend: Investors receive a comparatively higher dividend than interests earned on
the savings in multiple deposit schemes
4. Urgent Cash: You can access instant cash during a financial emergency or meet a sudden
expense. You also have the chance to borrow the pot (lump sum amount) after paying your
first instalment.
5. No Queries: An applicant does not need to disclose why he/she is borrowing the money
(the pot).
TAX BENEIFTS: There is no tax benefit available to chit fund companies.

 The dividend income earned per month is neither tax deductible nor taxable.
 The overall income is subject to income tax.
 In case of loss, the overall loss can be claimed as business loss.
ADVANTAGES OF CHIT FUND COMPANIES:

1. Chit fund has an advantage both for saving a need and as an investment.
2. Money can be readily draw in case of Emergency.
3. Chit funds can be relied upon to satisfy personal needs.
4. They promise to give high returns for the investment made by an investor.
5. The rate of interest of borrowing from chit funds are very low compared to other
borrowings.
DIS-ADVANTAGES OF CHIT FUND COMPANIES:

1. High transaction Cost
2. Chit funds have known to be vulnerable to scams.
3. Associated with a number of risks.
They are as follows:
 The Biggest risk involving a chit fund is the misuse of the pooled funds by the
foreman.
 Sometimes members stop paying the dues, after having taken the first bid.
 In certain chit funds, discount rate is rigged, and a desperate member ends up
paying a higher discount.
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TYPES OF CHIT FUNDS:
 Registered Chit Funds: Registered chit funds are the ones that are registered with
the Registrar of Firms Societies and Chits.
 Unregistered Chit Funds: Unregistered chit funds are saving schemes that are
operated among friends, family, or colleagues.
 Online Digital Chit Funds: With digitalization, chit funds have evolved and are
organized online. These types of chit funds have online auctions. The subscribers can
make their monthly contributions online and also receive their prize money through
online modes.
 Organized Chit Funds: More common in North India, this type of chit fund requires
all the members to come together on a monthly or weekly basis. The names of all the
members are written on small paper slips and collected in a box. The person in charge
of the group, picks up a paper slip in front of all the group members.
 Special Purpose Chit Funds: Special purpose chit funds are organized to save for a
particular purpose such as marriages etc.
NIDHI COMPANY
MEANING OF NIDHI COMPAMY:
Nidhi means a company which has been incorporated with the object of developing the habit of thrift
reserve fund amongst its member and also receiving deposits and lending to its members only for their
mutual benefit. Nidhi companies existed even prior to the Existences of companies act 2013.
OBJECTIVES OF NIDHI COMPANY:

1. To enable encourage member to save money, by cultivating the habit of thrift and provide
facilities for this purpose.
2. To receive money by way of fixed, recurring and saving deposits from the member of the
company only as allowed by law and the company will carry out the businesses as per the
rules prescribed for Nidhi/ Mutual benefits company.
3. To grant loan to the members at favourable rate of interest on immovable properties, on
deposits with company and on gold, silver and jewellery.
4. To restrict the business specifically to its members only and to have transaction only with
the members.
ADVANTAGES OF NIDHI COMPANY:

 Easy Formation: -The registration process of a Nidhi Company is relatively easy in
comparison to other Non-Banking Financial Corporations (NBFCs). To create a Nidhi
company, only seven persons are required wherein three will be appointed as a director.
Moreover, the registration process requires less documentation and paperwork, which
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makes it easy to register a Nidhi Company.
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 Minimal risk of non-payment of Loans: -Since Nidhi Companies accept deposit and
offer loans only to its members, it reduces the risk of non-repayment of loans as
compared to other businesses of the same nature. As all the financial activities of a Nidhi
company are restricted to its members only, this risk of external factors affecting the
functioning of the Company also reduces. Nidhi Companies are considered as one of the
safest and easiest ways of inviting deposit from the public.
 Limited RBI Regulations: -Even though Nidhi Company comes under the category of
NBFC, it doesn't require the approval of RBI to start its operations, Nidhi Companies
have to incorporate themselves as a Public Limited Company with the Ministry of
Corporate Affairs (MCA), Financial activities of Nidhi Companies fall under the ambit of
Nidhi Rules, 2014, and Companies Act, 2013. The regulatory compliances of Nidhi Rules
are less stringent as compared to that of RBI. Hence, it becomes easier to start a Nidhi
Company in India as RBI has exempted it from following stringent compliances.
 Low Capital Requirement: -The minimum requirement of capital for registration is one
of the vital advantages of Nidhi Company. As per Nidhi rules 2014, the minimum capital
required for registering a Nidhi Company is Rs 5 Lakh only where you have the
opportunity to invest the capital within the two months after the registration also by
paying the registering fees of Rs 19,999 only. When compared with the minimum net
owned fund required for registering other NBFCs in India, the capital needed for
registering a Nidhi Company is very less.
 No outside interference: -The overall operations of a Nidhi Company are concerned
with and to their members only. No external party can deposit money, also they can't
intervene in management-related decisions of the Company.
 Easy Registration Process: -If you wish to enter the NBFC sector with less investment,
then Nidhi Company is the best option for you. A Nidhi Company requires a paid-up
equity share capital of 5 lakhs to begin with, whereas an NBFC requires a net worth of Rs
2 crores. Other than low investment, the overall process of Nidhi Company Registration is
free from all complexities, and one doesn't need to attain a license from RBI to
incorporate a Nidhi company. Moreover, the documentation process is also quite less, and
the registration process gets completed within one or two weeks.
 Minimum Paperwork and Compliance: - Nidhi Company, by its nature of functioning,
falls under the category of NBFC but does not require approval from RBI. Nidhi
Companies are governed under the Nidhi Rules, 2014, and have to follow fewer
guidelines imposed by RBI. RBI has exempted Nidhi companies from its stringent
compliances, which make it easier to run a Nidhi Company in India.
 Fulfilling the needs of Lower-Middle Class: - Nidhi Companies play a very important
role in meeting the demands of lower and middle-income society by extending financial
support to them without any further involvement of documentation. Additionally, these
Companies help their members to channelize their small savings and earn attractive
interest on them.
 Net owned fund: - Net owned fund implies the amount of capital that has been spent by
the owner in his business to raise funds. Net Owned Funds = aggregate of paid-up equity
share capital+ free reserves- accumulated losses and intangible assets appearing in the last
audited balance sheet. In the case of Nidhi Companies, the ratio of Net Owned Fund is
1:20, which means on investment of 1 rupee, one shall raise a deposit of twenty rupees.
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DIS-ADVANTAGES OF NIDHI COMPANY:

o Nidhi Companies can accept deposit and lend the money only to its members and
shareholders. No outsider can deposit money in a Nidhi Company.
o A Nidhi Company has to ensure that by the end of 1st-year post- incorporation, it holds
minimum 200 members and the Net Owned fund should be Rs 10 lakh or more than 10
lakh rupees.
o Nidhi Companies are restricted from advertising their depositing schemes.
o Nidhi Companies are allowed to advertise among its members only.
o Nidhi Companies are restricted from running any other business other than lending and
borrowing on its name.
o A Nidhi Company is not allowed to carry on its deposit schemes any more than a period
of 5 years.
DIFFERENCE BETWEEN CHIT FUND COMPANY AND NIDHI COMPANY:

CHIT FUND COMPANY NIDHI COMPANY
The chit funds register as per NBFC and chitNidhi company is registered under the
funds Act, 1982. companies Act and directives of RBI.
Chit fund can be managed by on outsider Nidhi company, there are no outsider. It is
appointed for supervision. entirely run by the members.
A chit fund is also known as the committee Nidhi company is an NBFC, the members
where fixed instalment is paid by the can deposit some amount of money
members. recurring
deposit and lend money.
The chit fund members can withdraw some Nidhi company shareholders, money is lent
amount of money through a lucky draw. as a loan and must be returned with some
interest.
A chit fund is kept for a certain duration. Nidhi company saving deposits or loans have
fixed duration not the company.
LIFE INSURANCE
MEANING:
Life insurance companies offer policies that protect you from the risk of death. Life insurance
policies are available in a variety of forms, including term plans, endowment plans, whole
life insurance plans, money back plans, and unit linked investment plans, among others.
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FEATURES OF LIFE INSURANCE:

1. Issued in the name of the policyholder:
One of the primary features of life insurance plans is that it is issued only in the name of the
policyholder. A policyholder is basically the individual who purchases a life insurance policy
and pays the requisite premiums.
Generally, for a typical life insurance plan, there tends to be just one policyholder. That said,
that’s not always the case. Some plans, like a joint life insurance plan, allow you to have
more than one policyholder.
2. Flexible premium payments:

As you’ve already seen above, to be able to enjoy a life cover, you’re required to pay
premiums to the insurance service provider. You can also choose the frequency of premium
payments that you wish to make.For instance, you can choose to pay the premiums for your
life insurance policy as a lump sum amount. Or alternatively, you could choose to pay them
at periodic intervals such as monthly, quarterly, half-yearly, or annually.
3. Customizable tenure:
When you purchase a life insurance policy, you’re required to choose the tenure of the plan.
The policy offers protection only until the end of the selected tenure, which is known as the
policy term. The life cover is only valid during this tenure.
This tenure can be customized according to your needs and requirements. For instance, you
can simply choose a tenure of 20 years if you require life insurance coverage for the next 20
years. There are also some life insurance plans that offer you whole life coverage, meaning
that they are valid till you attain 99 or 100 years of age. This varies from one plan to another.
4. Customizable sum assured:

The sum assured component of a life insurance plan is the pay-out that your nominee gets
from the insurance service provider in the event of your demise. Just like the tenure of a life
insurance plan, you can also customize the sum assured when purchasing the policy. That
said, here’s something that you need to know. The premium that you’re required to pay for a
life insurance policy depends on the sum assured amount that you choose. So, for example,
the premium for a life insurance plan with Rs. 1 crore as the sum assured is likely to carry a
higher premium than a similar plan with just Rs. 50 lakhs as the sum assured.
5. Pay-out on death or on maturity:

Another one of the important features of life insurance is that the insurance service provider
pays out the sum assured only under one of two incidents - upon the death of the policyholder
or upon the maturity of the life insurance plan. For pure term insurance plans, pay-outs are
only made on death.
When the insurer pays out the sum assured to the nominee in the event of the policyholder’s
death, the pay-out is termed as death benefit. Similarly, when the pay-out is made to the
policyholder themselves on maturity of the policy, it is termed as maturity benefit.
6. Ability to assign nominees:

Nominees are the individuals who are entitled to receive the sum assured in the event of the
policyholder’s demise. Nominees usually need to be assigned at the time of purchase of a life
insurance policy itself.
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However, you can also choose to assign them at a later point as well. That’s not all. You can
also choose to switch your nominees at any point during the tenure of your life insurance
plan.
7. Features an investment component:

Not all life insurance policies stick to just providing a life cover. Unit Linked Insurance
Plans (ULIPs) and savings plans also come with an investment component over and above a
life cover. This feature ensures that you get benefits that are paid out to you on maturity.
TAX BENEIFTS AVAILABLE FOR LIFE INSURANCE:
 Income tax deductions of up to Rs. 1.5 lakh under section 80C of the Income
Tax Act, 1961, subject to provisions stated therein.
 Tax-free death benefit and maturity benefit pay-outs under Section 10(10D) of the
Income Tax Act, 1961, subject to provisions stated therein.
ADVANTAGES OF LIFE INSURANCE:
 Return on Investment: Advantages of life insurance as an investment. Whenever

you visit a financial advisor for financial planning you can see that most of them
suggest you go for life insurance. They encourage you to invest in life insurance so
that you and your loved ones are not only protected but also a considerable number of
returns can be obtained from the policy. Many life insurance schemes in India provide
decent returns as well as bonuses that no other investment tools offer. Life insurance
is considered one of the safest tools for investment as the money invested is returned
to you or your family at the time of maturity or as a death benefit.
 Death Benefit: In case of any unexpected event to you, which results in the loss of
income to the family, the insurance company provides compensation in the form of
the death benefit to the family. The nominee of the insured receives the death benefit
as well as the accrued bonus if any, depending on the type of the policy. The death
benefit can be claimed as a lump sum or monthly benefit, in which the monthly
benefit option can be a boon for the family having old age people or disabled people.
 Financial Security: This is the main advantage of life insurance. The main purpose
of life insurance is financial protection. If the sudden demise of the insured can put
the family in jeopardy. With no regular income, the family may soon face a financial
crisis. Having a life insurance policy helps your family come out from any financial
crisis after your sudden demise.
 Income tax exemption: The premiums paid under the life insurance policy are
eligible for income tax exemption under section 80C. At present under this section of
income tax, you can avail of a maximum tax deduction of Rs.1.5Lakh.
 Additional Coverage: Additional coverage is also called riders. The riders allow you
to increase the coverage and get comprehensive coverage. Riders may include
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coverage against personal accident, waiver of premium payments, critical illness, loss
of income due to a disability, etc.
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 Loan availability: In the event of any emergency such as a college fee or property
purchase, the loan can be availed against your life insurance policy. These days
almost all insurance companies are providing this option. When you apply for a loan a
certain amount of your sum assured is provided as the loan amount.
 Retirement Income: Life insurance policies can also be taken for the purpose of
regular income after retirement. These policies are called annuity policies and are
available with every life insurance company. If you take an annuity policy and pay a
premium till your retirement age, then after your retirement monthly income is paid to
you by the insurance company.
DIS-ADVANTAGES OF LIFE INSURANCE:
 High premium for aged people: This is the major disadvantage of life insurance policy.
The higher the age the higher would the premium to be paid in the life insurance. This is
due to the simple fact that the risk increases with the age so is the premium. So, it is
advisable to take life insurance at a very early age to prevent yourself from paying high
premiums. There is a chance where the insurance companies have rejected or denied
providing policy to old age people having ailments.
 Difficult to calculate the returns: The returns on the life insurance policies are quite
complicated and it is highly difficult to predict the returns. The returns from life insurance
are purely based on market conditions and performance. So, a particular figure is difficult
to arrive at in the case of life insurance unlike PPF and other fixed deposit schemes.
 Complex Policies: In India, many insurance companies offer different types of life
insurance plans. You can choose the best life insurance plan as per your requirement. But
it can also create confusion in the minds of the customer because different insurance
policies have different features. Some policies are simple, and some are not so simple. It
can be daunting to choose the right life insurance policy.
 Insurance Companies May Not Pay the Benefits: The insurance companies use various
tricks to avoid paying the benefits even after the maturity of the policy and also, they have
denied paying the sum assured or the death benefit to the policyholder or the nominee.
They would mention many hidden charges or clauses to reduce the pay-out. So, it is
important to carefully understand the details of the policy and choose a company that has
a positive pay- out rate. Things to know about the merits and demerits of life insurance
and the importance of having life insurance it is advisable to talk to our agents before
entering a contract.
 Awareness of Exclusions, Hidden clauses: Any financial product available in the
market certainly has some exclusions and hidden clauses incorporated into it. It is your
responsibility to find out those clauses and choose the right life insurance policy. For
example, most of the policies don’t pay for suicide in the first year and almost all the
policies exclude loss of life due to drugs overdose or involvement in criminal activities.
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RETIREMEMT AND PENSION PLANS

INTRODUCTION:
A pension plan or retirement plan is designed to cater to your financial needs and
requirements post-retirement, including medical emergencies, household expenses, and other
living costs.
MEANING OF RETIREMENT:
Retirement planning is the process of deciding the goals to pursue after retirement and the
road map to achieve those goals.
TAX BENEIFTS:
The Section 80CCC of the Income Tax Act was introduced by the government in order to
make people invest in pension plans. Under this, any investment made towards pension plans
can be deducted from gross income, thus saving taxes.
FEATURES OF RETIREMENT PLAN:

 Regular and Guaranteed Income: It provides a regular and steady income after
retiring or immediately after investing, depending upon the type and options chosen.
 Income Tax Relief: Tax relief is a reduction in the amount of tax that a Person has to
Pay.
 Lifetime Payment: Payment duration is the total duration for which you keep
receiving the pension after retirement. For instance, if your plan offers to pay you a
regular income from the age of 60 to the age of 75, then the payment duration is 15
years.
 Death benefits: On any tragic and unforeseeable occurrence, such as the death of the
insurer, the nominee receives an amount as death benefit from the insurance firm as
compensation.
 Earn Bonus: Some of the plans also provide a bonus every year after a few years to
ensure your fund grows over time.
ADVANTAGES OF RETIREMENT PLAN:

 It could be good for your health: Sleeping later, getting out in the fresh air and
sunshine, we can all easily have a good health by not stressing more on work life.
 You'll enjoy more time to travel: As in retired life everyone can be free, and they
don't even have to ask permission for taking leave. Therefore, they will get more time
to travel along with family and friends.
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 It's an opportunity to start a new career: If you dream of switching field or starting
your own business. You will be a more desirable candidate to many employers as
your experienced for many years.
 Returns on Investment: Investing in a retirement plan can help you save and grow
your money overtime. The returns from such investment will be better when you plan
them at right time.
 Peace of Mind / Financial Independence: Having a strong portfolio will give you
the confidence to step into a new life phase without worry. The older you get the need
for financial support becomes more apparent.
DIS-ADVANTAGES OF RETIREMENT PLAN:

o It could also be bad for your health: It has been reported that retirement at early age
leads to declines in mental health and mobility and increase in others poor health
outcome.
o Your social security benefits will be smaller: The sooner you start to take social
security, the lower your benefits will be. And you start taking benefits at age 62 the
earliest age at which you're eligible, your monthly benefits will be 30% less than if
you wait until age 67, which Social Security refers to as your “full retirement age.”
o Your retirement savings will have to last longer: If you retire at 70 years and live
for 90 years your savings will only have to bust for 20 years.
o You'll need to find health insurance: Unless your ex-employer provides it, you'll
have to pay for health insurance on your own until you’re eligible for medical at age
65.
o You might get bored and miss working: Many retired persons have a tough time
making the transition from the daily routines of a full-time job to the unstructured life
of retirement. They may also miss their colleagues (sometimes even the boss) and
yearn to return. Unfortunately, it isn't easy to get back into the workforce once you've
left it, voluntarily or otherwise.
MEANING OF PENSION PLAN:

Pension plans are individual retirement plans that let you allocate a part of your savings for
your future.
OR
A pension plan can be understood as a plan that guarantees you to provide a good salary after
your retirement.
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FEATURES OF PENSION PLAN:
▶ Guaranteed Pension/Income: You can get a fixed and steady income after retiring or
immediately after investing , based on how you invest. This ensures a financially
independent life after retiring.
▶ Tax-Efficiency: Some pension plans provide tax exemption. If you wish to invest in a
pension plan, then the Income Tax Act, 1961, offers significant tax respite. For
instance,
Atal Pension Yojana (APY) and National Pension Scheme (NPS) are subject to tax
deductions.
▶ Vesting Age: This is the age when you begin to receive the monthly pension. For
instance, most pension plans keep their minimum vesting age at 45 years or 50 years.
It is flexible up to the age of 70 years, though some companies allow the vesting age
to be up to 90 years.
▶ Payment Period: This is the period in which you receive the pension post-retirement.
For example, if one receives a pension from the age of 60 years to 75 years, then the
payment period will be 15 years.
▶ Surrender value: Surrendering one’s pension plan before maturity is not a smart move
even after paying the required minimum premium. This results in the investor losing
every benefit of the plan, including the assured sum and life insurance cover.
IMPORTANCE OF PENSION PLAN:

 It ensures a financial support in your past retirement.
 It ensures your independency for money, even in those days when there will be no
income and job in your life.
 It is a planning for secure future.
 To encourage pension schemes, the State provides tax relief on contributions
made to pension schemes and the growth in their investments.
GOVERNMENT SCHEMES AVAILABLE FOR RETIREMENT PLANS:
1. PRADHAN MANTRI JEEVAN JYOTI BIMA YOJANA (PMJJBY):
 It was formally launched by prime minister Narendra Modi on May 9th in Kolkata.
 It is available to people in the age group of 18 and 50 years of age with bank
accounts.
 The amount will be automatically debited from the account on or before 31st May
every year.
 Those who register for auto debited facility will have auto renewal up to 55 years.
 There is no need for a person to submit health report or certificate while joining to
the scheme.
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 In case of death due to any cause, the payment to the nominee will be 2 lakhs.
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OBJECTIVES:
The main objective to encourage insurance protection of poor and low-income sections of the
society.
TAX BENEFITS AVAILABLE FOR PENSION PLAN:

They can claim tax deduction under section 80C of the income tax act ,1961.
2. PRADHAN MANTRI JAN DHAN YOJANA:
 It is a financial inclusion program of the government of India open to Indian
citizens, that aims to expand affordable access to financial services.
 One basic savings bank account is opened for unbanked person.
 There is no requirement to maintain any minimum balance in
(PMJDY)accounts.
 Interest is earned on the deposit account.
 Accident insurance cover of Rs 1 lakh.
 Rupay debit card is provided to account holder.
3. PRADHAN MANTRI MUDRA YOJANA (PMMY):

 PPMY is a scheme launched by prime minister on April 8th, 2015.
 PPMY is a government of India scheme, which enable a small borrower to
borrow from Banks, MFI, NBFC for loans up to 10 lakhs for non-form income
generating activities.
 TYPES OF MUDRAS:
 Shishu –loan up to 50000
 Kishore -50001 up to 5 lakhs
 Tarun -500001 up to 10 lakhs
4. STAND UP INDIA SCHEME:

 The stand-up India scheme aims at providing people belonging to the schedule
tribe or women of the country a loan between Rs 10 lakh to Rs 1 crore, based
on their requirement. The aim is to promote entrepreneurship among them.
 3 pillars of stand-up India:
• Simplification and hand holding.
• Funding support and incentives.
• Industry – academia partnership and incubation.
5. PRADHAN MANTRI SURAKSHA BIMA YOJANA:

 It is a government backed accident insurance scheme in India. It was
originally mentioned in 2015 budget speech by finance minister Late Arun
Jaitley in Feb 2015.
 It was formally launched by the prime minister Narendra Modi on 8 th May in
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Kolkata.
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 PMSBY is to ensure risk coverage in case of accidental death, full or partial

disability.
 The insured amount for accidental death and full disability Rs 2 lakh and it is
Rs 1 lakh for partial disability.
 It has an annual premium of Rs 12 lakh only, which will be directly auto
debited by the bank from the subscribers account.
 It is the only mode of paying the premium and thus creates a change between
the beneficiary and the bank.
 A person has to obtain the scheme every year by submitting a simple form to
the bank by 1st June.
 One can also obtain for the scheme on a long-term basis and in that case his
account will be auto debited every year by the bank.
 People between the age of 18-70 years, having an Aadhar card linked bank
account are eligible for the scheme.
6. PRADHAN MANTRI VAYA VANDANA YOJANA (PMVVY):

 PMVVY is an insurance policy cum pension scheme that provides security to
senior citizens. This pension plan is provided by life insurance corporation
(LIC) which caters need for post-retirement financial planning.
 He /she should be 60 years or above to be eligible for the scheme.
 The policy term should be 10 years.
 The minimum pension should be Rs1000 per month and should not be more
than Rs 10000 per month.
 The PMVVY does not offer any tax benefit.
RELATIONSHIP BETWEEN RISK AND RETURN

MEANING OF STOCK RETURN:
A stock market return is the positive or negative change in value of an investment or asset
over time. A positive return means a profit has been made on the investment. A negative
return means that there has been a loss on the investment.
MEANING OF RISK:
Risk refers to the degree of uncertainty and/or potential financial loss inherent in an
investment decision.
In general, as investment risks rise, investors seek higher returns to compensate themselves
for taking such risks. Every saving and investment product has different risks and returns.
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RISK IS FURTHER DIVIDED INTO TWO:

SYSTEMATIC RISK:
By the term ‘systematic risk’, we mean the variation in the returns on securities, arising due
to macroeconomic factors of business such as social, political, or economic factors. Such
fluctuations are related to the changes in the return of the entire market.
Systematic risk is caused by the changes in government policy, the act of nature such as
natural disaster, changes in the nation’s economy, international economic components, etc.
The risk may result in the fall of the value of investments over a period. It is divided into
three categories, that are explained as under:
 Interest risk: Risk caused by the fluctuation in the rate or interest from time to time
and affects interest-bearing securities like bonds and debentures.
 Inflation risk: Alternatively known as purchasing power risk as it adversely affects
the purchasing power of an individual. Such risk arises due to a rise in the cost of
production, the rise in wages, etc.
 Market risk: The risk influences the prices of a share, i.e., the prices will rise or fall
consistently over a period along with other shares of the market.
UNSYSTEMATIC RISK:
The risk arising due to the fluctuations in returns of a company’s security due to the micro-
economic factors, i.e., factors existing in the organization, is known as unsystematic risk.
The factors that cause such risk relates to a particular security of a company or industry so
influences a particular organization only. The risk can be avoided by the organization if
necessary, actions are taken in this regard.
It has been divided into two category business risk and financial risk, explained as under:
 Business risk: Risk inherent to the securities, is the company may or may not
perform well. The risk when a company performs below average is known as
a business risk. There are some factors that cause business risks like changes
in government policies, the rise in competition, change in consumer taste and
preferences, development of substitute products, technological changes, etc.
 Financial risk: Alternatively known as leveraged risk. When there is a change in the
capital structure of the company, it amounts to a financial risk. The debt – equity ratio
is the expression of such risk.
CONCLUSION:
The avoidance of systematic and unsystematic risk is a big task for companies. As external
forces are involved in causing systematic risk, so these are unavoidable as well as
uncontrollable. Moreover, it affects the entire market, but can be reduced through hedging
and asset allocation. Since unsystematic risk is caused by internal factors so that it can be
easily controlled and avoided, up to a great extent through portfolio diversification.
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DISTINGUISH BETWEEN SYSTEMATIC RISK AND UNSYSTEMATIC RISK:
BASIS FOR SYSTEMATIC RISK UNSYSTEMATIC RISK

COMPARISON
MEANING Systematic risk refers to the Unsystematic risk refers to
hazard which is associated the risk associated with a
with the market or market particular security,
segment as a whole. company,
or industry.
NATURE Uncontrollable Controllable
FACTORS External factors Internal factors
AFFECTS Large number of securities in Only particular company.
the market.
TYPES/ SOURCES Interest risk, market risk and Business risk and financial
purchasing power risk. risk
PROTECTION Asset allocation Portfolio diversification
MEASUREMENT Systematic risks are Unsystematic risks are not

measured by beta. measured or indicated with
the help of any tool.
However Unsystematic risks
can be measured by
subtracting systematic risks
from the total risks.
EXAMPLES The examples of systematic The examples of
risks are as follows: Unsystematic risks are as
 Inflation follows:
 Movement in interest  Higher operational
rate costs
 Higher rate of  Higher labour
unemployment turnover
 Poverty  Higher overhead
 Fluctuations in the costs
price. Etc.  Manipulation in the
company’s financial
statements.
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MODULE-02
UNIT-03 - STOCK MARKETS
INTRODUCTION TO STOCK MARKET:
Stock market is a platform where traders places orders for buying and selling shares of
company. Based on the demand and supply of the shares, the price of the stock is unlocked.
Not just the shares of the company, the stock market platforms facilitate trading of other
financial instruments, like stock derivative contracts (futures and options), Interest rate
derivatives, currency derivatives, etc.
MEANING OF STOCK MARKET:

It is a place where shares of public listed companies are traded.
OR
The term stock market refers to several exchanges in which shares of publicly held
companies are bought and sold.
OR
The stock market is where investors buy and sell shares of companies. It’s a set of exchanges
where companies issue shares and other securities for trading purpose.
SIGNIFICANCE OF THE STOCK MARKET:

 The stock market is a component of a free-market economy.
 It allows companies to raise money by offering stock shares and corporate bonds.
 It allows investors to participate in the financial achievements of the companies, make
profits through capital gains, and earn income through dividends.
 The stock market works as a platform through which savings and investments of
individuals are efficiently channelled into productive investment opportunities and
add to the capital formation and economic growth of the country.
CAPITAL MARKET:
MEANING:
Capital markets are financial markets that bring buyers and sellers together to trade stocks,
bonds, currencies, and other financial assets.
OR
Capital market is a place where the medium-term and long-term financial needs of business
and other undertakings are met by financial institutions which supply medium and long-term
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resources to borrowers.
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FEATURES OF PRIMARY MARKET:

• It deals in long- and medium-term funds.
• It consists of primary market, secondary market, and special financial institutions.
• It covers both individual and institutional investors.
• It makes funds available to industrial and commercial undertakings.
MONEY MARKET:
MEANING:
Money market refers to the market where money and highly liquid marketable securities are
bought and sold having a maturity period of one or less than one year. The money market
constitutes a very important segment of the Indian financial system.
The money market is a financial market wherein short-term assets and open-ended funds are
traded between institutions and traders.
DEFINITION:
According to Reserve Bank of India, “Money market is the centre for dealing, mainly of
shorty term character, in money assets; it meets the short-term requirements of borrowings
and provides liquidity or cash to the lenders. It is the place where short term surplus investible
funds at the disposal of financial and other institutions and individuals are bid by borrowers’
agents comprising institutions and also the government itself”.
OBJECTIVES OF MONEY MARKET:

• To provide a place to employ short term surplus funds.
• To overcome short term deficits.
• To enable the central bank to influence and regulate liquidity in the economy through
its intervention in this market.
• To provide reasonable access to the users of short-term funds to meet their
requirements quickly, adequately and at reasonable costs.
FEATURES OF MONEY MARKET:

 It is a market purely for short term funds or financial assets called near money.
 It deals with financial assets having a maturity period up to one year only.
 It deals with only those assets which can be converted into cash readily without loss
and with minimum transaction cost.
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 Transactions have to be conducted without the help of brokers.

 The components of money market are the central bank, commercial banks, non-
banking financial companies, discount houses and acceptance house. Commercial
banks generally play a dominant role in this market.
DIFFERENTIATE BETWEEN CAPITAL AND MONEY MARKET:
BASIS OF MONEY MARKET CAPITAL MARKET

DIFFERENCES
MEANING A segment of the financial A section of financial market

market where lending and where long-term securities is
borrowing of short-term issued and traded.
securities are done.
MARKET NATURE Money markets are informal Capital markets are formal in
in nature nature.
INSTRUMENTS Commercial Papers, Treasury Bonds, Debentures, Shares,

INVOLVED Certificate of Deposit, Bills, Asset Secularisation, Retained
Trade Credit, etc. Earnings, Euro Issues, etc.
INVESTOR TYPES Commercial banks, non- Stockbrokers, insurance

financial institutions, central companies, Commercial banks,
bank, chit funds, etc. underwriters, etc.
MARKET LIQUIDITY Money markets are highly Capital markets are

liquid. comparatively less liquid
RISK INVOLVED Money markets have low risk. Capital markets are riskier in
comparison to money markets.
PURPOSE SERVED To achieve short term credit To achieve long term credit
requirements of the trade. requirements of the trade.
FUNCTIONS SERVED Increasing liquidity of funds in Stabilising economy by

the economy. increase in savings.
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RETURN ON ROI is usually low in money ROI is comparatively high in

INVESTMENT market. capital market.
(ROI)ACHIEVED
RISK FACTOR Since the market is liquid and Due to less liquid nature and
INVOLVED the maturity is less than one long maturity, the risk is
year, risk involved is low. comparatively high.
PRIMARY MARKET:
MEANING:
The primary market is where securities are created. It's in this market that firms sell (float)
new stocks and bonds to the public for the first time.
An initial public offering, or IPO, is an example of a primary market.
OR
Primary market is a market wherein corporates issue new securities for raising funds
generally for long term capital requirement.
The companies that issue their shares are called issuers and the process of issuing shares to
public is known as public issue.
FEATURES OF PRIMARY MARKET:

 Market for long new term equity capital: This is the market for long new term
equity capital. The primary market is the market where the securities are sold for the
first time. Therefore, it is also called the new issue market.
 Securities are issued by the company: In primary issue, the securities are issued by
the company directly to investors.
 The money and issue of new security certificates: The company receives the money
and issues new security certificates that is shares or any other securities to the
investors.
 Used by companies for setting up new business: Primary issues are used by
companies for the purpose of setting up new business or for expanding or
modernizing the existing business.
 Performs the crucial function of facilitating capital: The primary market performs
the crucial function of facilitating capital formation in the economy.
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 Redeemed by the original holder: The financial assets sold can only be redeemed by
the original holder.
 The new issue market does not include certain other sources of new long term
external finance, such as loans from financial institutions. Borrowers in the new issue
market may be raising capital for converting private capital; this is known as “going
public”.
IMPORTANCE OF PRIMARY MARKET:

o Capital formation: Primary market facilitates capital growth by enabling individuals
to convert savings into investments. It provides attractive issue to the potential
investors and with this company can raise capital at lower costs.
o Liquidity: As the securities issued in primary market can be immediately sold in
secondary market and hence the rate of liquidity is higher.
o Diversification: Many financial intermediaries invest in primary market. Therefore,
there is less risk if there is failure in investment as the company does not depend on a
single investor. The diversification of investment reduces the overall risk for an
investor as well as for the company.
o Reduction in cost: Prospectus containing all details about the securities are given to
the investors hence it helps in reducing the cost in searching and assessing the
individual securities.
o Business expansion: The primary market enables business expansion and growth for
domestic and foreign companies.
FUNCTIONS OF PRIMARY MARKET:

 Origination: Primary market deals with the origin of new issue. The proposal is
analysed in terms of the nature of the security, the size if the issue, timings of the
issue and flotation method of the issue.
 Under-writing: Underwriting is a kind of guarantee undertaken by an institution or
firm of brokers ensuring the marketability if an issue. It is a method whereby the
guarantor males a promise to the stock issuing company that he would purchase a
certain specific number of shares in the event of their not being invested by the public.
 Distribution: The third function is that of distribution of shares. Distribution means
the function of sale of shares and debentures to the investors. This is performed by
brokers and agents. They maintain regular lists of clients and directly contact them for
purchase and sale of securities.
 Household savings: Companies raise funds in the primary market by issuing initial
public offerings (IPO). These stock offerings authorize a share of ownership in the
company to the extent of the stock value. Companies can issue IPOs at par (market
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value) or above par value (premium), depending on the past performance and future
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prospects. In a booming economy, a greater number of corporations float IPOs since

more investors have surplus funds for investment purposes.
 Global investments: The primary market enables business expansion and growth for
domestic and foreign companies. International firms issue new stocks in American
Depository Receipts (ADRs) to investors in the U.S., which are listed in American
stock exchanges. By investing in ADRs, which are dollar denominated, one can
diversify the risk associated with balancing all the savings in just one geographical
market.
 Sale of government securities: The government directly issues securities to the
public via the primary market to fund public work projects such as constructions of
roads, building schools etc. these securities are offered in the form of short-term bills,
promissory notes, that mature in two to seven years, longer- term bonds and treasury
inflation- protected securities (TIPS) linked to the Consumer Price Index.
TYPES OF SECURITIES TRADED IN PRIMARY MARKET:

 Equity shares
 Preference shares
 Debentures
 Bonus issue
 Employees stock option
 Sweat equity shares.
 Buy back shares.
PROCEDURE FOR TRADING IN PRIMARY MARKET:
• STEP-01: Open a DEMAT account.
• STEP-02: Apply for shares by way of an application form issued by the issuer
company.
SECONDARY MARKET:
MEANING:
The secondary market is where investors buy and sell securities they already own.
OR
The secondary market is where investors buy and sell securities from other investors
(think of stock exchanges).
For example, if you want to buy Apple stock, you will purchase the stock from investors who
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already own the stock rather than Apple. Apple would not be involved in the transaction.
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Secondary market is a market for all those securities and stock which are already issued to the
public. It deals with sale/purchase of already issued equity/debts by corporate and others. It is
also known as stock market.
FEATURES OF SECONDARY MARKET:

 It creates liquidity: The most important feature of the secondary market is to create
liquidity in securities. Liquidity means immediate conversion of securities into cash.
This job is performed by the secondary market.
 It comes after the primary market: Any new security cannot be sold for the first
time in the secondary market. New securities are first sold in the primary market and
thereafter comes the turn of the secondary market.
 It has a particular place for trading: The secondary market has a particular place
which is called Stock Exchange. However, it must be noted that it is not essential that
all the buying and selling of securities will be done only through stock exchange.
Two individuals can buy or sell the stocks mutually. This will also be called a
transaction of the secondary market. Generally, most of the transactions are
made through the medium of stock exchange.
 It encourages new investment: The rates of shares and other securities often
fluctuate in the share market. Many new investors enter this market to exploit this
situation. This leads to an increase in investments in the industrial sector of the
country.
FUNCTIONS OF SECONDARY MARKET:

Market place for stock: Stock exchange provides a marketplace for selling and
buying of securities freely by the brokers for their clients.
Ready and continuous market: Stock exchanges provide ready and continuous
market for stocks and shares. It provides ready liquidity, price continuity and
negotiability to the capital invested in securities. The market facilitates quick
setting of stock, shares and debentures at comparatively small variation from the
last quoted price and thus convert their investment into cash. Mobility of capital
takes place smoothly.
Assessment of securities: The Stock exchange ensures correct appraisal of
security. The free play of demand for and supply of securities determines price
continuously. The real worth of securities is evaluated by free play at market
force. All the concerned investors, companies, brokers get information about the
stock exchange operations through press, radio, television etc. This enables the
investors to obtain proper and correct information of the various type of
investments available in the market.
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Stock exchanges forecast the future: Besides providing continuous market,

stock exchanges render forecasting function. The price movements for securities
reflect and forecast the future happenings in business operations.
Mobilization of savings: The stock markets are perfect markets where securities
are standardized, carrying costs are negligible, demand and supply play freely,
limitless competitive activity is in operation etc. The investing class study the
price movements of securities dealt in stock exchanges and invest their funds in
securities having profitability, ready liquidity, and appreciation in value. Stock
exchanges have facilitated the conversion of small savings of the public into
productive activities.
Capital formation: Besides including public to save and invest in securities, the
stock market promotes capital formation and provides necessary funds to the
needy industries. Capital formation and disbursement is an automatic mechanism
found in Stock exchanges. Efficient and successful corporate enterprises are able
to secure more capital for their expansion and diversification programmes. The
new capital issues in the form of equity or debentures of these enterprises can be
easily sold in this market.
Economic barometer: Like Barometer, which indicates the variation in
temperature of the environment at any point of time, the stock exchange indicates
the health of the economy. Price trends on a Stock exchange reflect the economic
progress and socio- political conditions of a country. It indicates the boom or
depression prevailing in the country.
Control of corporate enterprises: To get the stocks and shares listed on Stock
exchanges, the companies have to follow certain rules and regulations. “Listing”
means getting the name of the company registered with the Stock Exchange to
deal with its securities officially on the exchange. After listing the security, the
company has to follow the official policies of the exchange while dealing with its
securities. Thus, stock market exercises healthy control over the companies.
Speculation: The operators on the stock exchange are authorized agents. They are
called by different names. These operators hold corporate securities- new and old
for a temporary period. Particularly, the new shares, because od temporary
holding by financial intermediaries called “speculators”. The speculators, who
wish to make profit out of variation in prices of securities, operate skilfully and
provide good liquidity position to securities. This facilitates speedy economic
development and fair dealing in buying and selling of securities.
Management of public deposit: The government of India and all State
Governments are engaged in planned economic development. Because of this
planned growth, governments require huge capital and they have to float loan,
bonds and other securities to geta part of finance for these projects. These
securities are also dealt within the stock exchange. The Government’s financial
needs in the form of public debt are satisfied by Stock exchange by providing
market for these securities. Share broking firms take active interest in dealing with
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the government bonds.
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PROCEDURE FOR TRADING IN SECONDARY MARKET:

STEP-01: Opening a DEMAT account: The investor should open a demat account. This is
because the securities will be held in the demat account.
STEP-02: Selection of broker: An investor can buy/sell securities only through the
authorized brokers. The investor needs to select the broker through whom the trades will be
placed.
STEP-03: Getting unique client number: Every investor has a unique ID. The trades are
tracked through this ID. This client ID is given by the depository.
STEP-04: Entering ISIN of scrip: Each security has its own unique 12-digit ISIN. It is the
identification number for the security. The investor must mention ISIN of security while
placing the trade.
STEP-05: Placing of the order: Investor has to place and confirm order of securities he
intends to buy or sell.
STEP-06: Completing a contract note: For every trade, the broker sends a contract note to
the client.
STEP-07: Settlement of transaction: The settlement is a two-way process. For purchase
transaction, money is paid, and the security is received and vice - versa for sales. The
settlement on BSE and NSE takes place on T+2 days, i.e., in two working days after the
transaction days.
DIFFERENTIATE BETWEEN PRIMARY AND SECONDARY MARKET:
PRIMARY MARKET SECONDARY MARKET
A primary market is defined as the market in On the other hand, the secondary market is
which securities are created for first-time defined as a place where the issued shares are
investors. traded among investors.
The company issues the shares, and the There is no interference of the government or
government interferes in the process. the company.
The primary market is called as a new issue The secondary market is an aftermarket.
market.
The buying and selling of shares take place The trading take place only among the
among the investors and the companies. investors.
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The primary market provides finance to the The secondary market does not provide
companies who want expansion and growth. financing to the companies.
Underwriters are involved in the intermediary Underwriters are involved in the intermediary
process. process.
The prices in the primary market do not On the other hand, the prices fluctuate a lot in
fluctuate, i.e., they are fixed. the secondary market because of the demand
and supply.
The products in a primary market are limited, Shares, debentures, warrants, derivatives, etc.,
i.e., they include IPO and FPO. are the kind of products offered in the
secondary market.
The purchase process happens directly in the The company issuing the shares do not involve
primary market. in the purchasing process.
The frequency of buying and selling is limited, On the other hand, the frequency of buying
i.e., the investors can invest once in the and selling is quite high, i.e., the investors can
market. trade as many times as they wish to.
The beneficiary in the primary market is the The beneficiary in the secondary market is the
company. investor.
The primary market is not organized. The secondary market has an organized setup.
The companies issuing shares and debentures The investors in the secondary market follow
have to follow all regulations. the rules provided by the stock exchanges and
the government.
The major disadvantage of the primary market The major disadvantage of the secondary
is that it is very time-consuming and costly. market is that the investors can incur huge
losses due to price fluctuation.
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MAJOR PARTICIPANTS IN STOCK MARKET:

1) Stockbrokers: Stockbrokers are licensed by the Securities and Exchange Board of
India and are entitled to trade at the stock exchange. They act as the middlemen or
agents between the sellers and the buyers of stocks in the stock market. For providing
these broking services, they receive buying or selling commission from their clients.
2) Investors: Investors are also called stockholders or shareholders. These are the people
who own the shares of companies that are listed on the stock exchange. They are
entitled to receive dividends and other benefits due to shareholders.
3) Depository: A depository refers to an organization or an institution that assists in the
trading of securities. This institution also holds securities in electronic form or in
dematerialized form. One of the major functions of the depositories is to transfer the
ownership of shares from one inventor's account to another when a trade takes place.
4) Clearing house: Clearing houses are wholly owned subsidiaries of Securities and
Exchange Board of India. They are formed to ensure the orderly settlement of trades
executed on various stock exchanges. Clearing Houses settle the funds and transfer
shares based on everyday transactions between sellers and buyers.
5) Stock exchange: A stock exchange is an organized marketplace that brings all the
investors or traders together. It facilitates the sale and purchase of stocks by different
buyers and sellers. Most of the trading in Indian stock market takes place on BSE and
NSE. These stock exchanges enforce strict rules and regulations that listed companies
and trading participants must follow.
6) Listed companies: Also known as issuers, these are the companies whose shares are
traded on the stock exchange. All the listed companies go through Initial Public
Offering (IPO) and register themselves with the stock exchange after abiding by all
the prescribed regulations.
7) Transfer agents: Transfer Agents record changes of ownership of shares. They
provide the listed companies with a list of its security holders. Transfer Agents are
also responsible for cancelling or issuing of certificates and distribute dividends.
8) Settlement banks: The settlement banks perform the function of accepting the
deposit of funds for payment of stocks bought by an investor or confirm payment of
funds when due. These banks debit or credit the investor's account during settlement
and report balances and other information as may be required.
FUNCTIONS OF STOCK EXCHANGE:
 Liquidity and Marketability: One of the main drawing factors of the stock exchange
is that it enables high liquidity. The securities can be sold at a moment’s notice and be
converted to cash. It is a continuous market and the investors can divest and reinvest
with ease as per their wishes.
 Price Determination: In a secondary market, the only way to determine the price of
securities in via the rules of supply and demand. A stock exchange enables this
process via constant valuation of all the securities. Such prices of shares of various
companies can be tracked via the index we call the Sensex.
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 Safety: The government strictly governs and regulates the stock exchanges. In the
case of the BSE, the Securities Board of India is the governing body. All transactions
occur within the legal framework. This provides the investor with assurances and a
safe place to transact in securities.
 Contribution to the Economy: As we know the stock exchange deals in already-

issued securities. But these securities are continuously sold and resold and so on. This
allows the funds to be mobilized and channelized instead of sitting idle. This
boosts the economy.
 Spreading of Equity: The stock exchange ensures wider ownership of securities. It

actually educates the public about the safety and the benefits of investing in the stock
market. It ensures a better quality of transactions and smooth functioning. The idea is
to get more public investors and spread the ownership of securities for the benefit of
everyone.
 Speculation: One often hears that the stock exchange is a speculative market. And
while this is true, the speculation is kept within the legal framework. For the stake of
liquidity and price determination, a healthy dose of speculative trading is necessary,
and the stock exchange provides us with such a platform.
TYPES OF STOCK EXHANGES IN INDIA (EXISTING):
 Bombay stock exchange Ltd. (BSE)

 Calcutta stock exchange Ltd.
 Multi commodity exchange of India Ltd.
 National commodity and derivatives exchange Ltd.
 Indian commodity exchange Ltd.
 National stock exchange of India Ltd. (NSE)
TRADING AND SETTLEMENT PROCEDURE IN STOCK EXCHANGES:

Step-01: Selecting a broker or sub-broker: When a person wishes to trade in the stock market, it
cannot do so in his/her individual capacity. The transactions can only occur through a broker or a
sub-broker. So according to one’s requirement, a broker must be appointed.
Now such 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.
Step-02: 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.
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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).
Step-03: 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.
Step-04: 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.
Step-05: 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+% or T+9 etc.
DEMAT ACCOUNT:
MEANING:
A Demat account refers to an account which helps investors hold shares and securities in an
electronic form. This kind of account is also called as a dematerialised account.
• It helps to keep a proper record of all the investments an individual makes in shares,
exchange-traded funds, bonds, and mutual funds in one place.
DEMATERIALISATION:
MEANING:
Dematerialisation is the process of converting the physical share certificates into electronic
form, making it easy to maintain and access them from anywhere.
• An investor who wants to convert his physical shares into digital form needs to open a
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Demat account with a depository participants (DP).
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DEPOSITORY:
MEANING:
A depository is an institution or organisation which holds the securities of an investor
through the depository participant and also provides services in relation to these securities.
• A depository is a facility or institution, such as a building, office, or warehouse,
where something is deposited for storage or safeguarding.
• Depositories may be organizations, banks, or institutions that hold securities and
assist in the trading of securities.
• In India, there are two depositories: National Securities Depositories Ltd (NSDL) and
Central Securities Depositories Ltd (CDSL).
• Both the depositories hold your financial securities, like shares and bonds, in
dematerialised form and facilitate trading in stock exchanges.
DEPOSITORY PARTICIPANTS:
MEANING:
Depository Participant ('DP') is the agent or the registered stockbroker of a depository.
• 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.
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 a process or a mechanism by which the interest of an
investor is protected in the security market.
Investment protection is a broad economic term referring to any form of guarantee or
insurance that investments made will not be lost, which may be through fraud or otherwise.
STEPS TAKEN BY SEBI TO PROTECT INVESTORS/ ROLE OF SEBI IN

PROTECTING THE INVESTORS:
Investing activities become pleasurable if the investor knows.
 How to invest? It comprises of how much money should an investor invest that is
long term or short term.
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 Where to invest? It comprises of where the investor should invest that is which type
of financial institutions should he/ she invest in.
 What to invest in? which type of investment should an investor do that is whether in
shares, stocks, bonds or mutual funds or any other type of financial security.
 Has knowledge about markets? Which type of market does the securities which he
wishes to invest trade in that is whether primary market or secondary market.
 There are no malpractices.
 And there is redressal for grievances for the malpractices.
SEBI’s investor protection strategy has four main branches: They are as follows:
1) Educating the Investors or Investor Education and Awareness: To protect the

interests of investors in securities and to promote the development of, to regulate
the securities market and for matters connected therewith or incidental thereto, the
Central Government (GOI) has established a fund called Investor Education and
Protection Fund. SEBI also conducts workshops to educate and spread awareness
about the investments that are available to the investors to invest.
SEBI answers the queries of the investors directly through email, letters. SEBI
also publishes cautions through the media.
2) Disclosure based regulatory Regime: Under this the issuers, intermediaries, etc.,
disclose about themselves, the product, the market which helps the investors to take
decisions carefully. For these SEBI has come up with guidelines to monitor the
disclosures regularly.
3) Systems and practices which make transactions safe:

Screen based Trading: Screen based trading refers to a facility introduced by NSE
which is fully automated nationwide, where a member can input into the computer the
quantities of a security and the price at which he would like to transact, and the
transaction is executed as soon as a matching sale or buy order from a party is found.
Dematerialisation of Securities: Dematerialisation means the process of converting

the physical form of Certificates into E-form which helps in reducing the risks.
Implementing T+2 rolling Settlements: For years, there was weekly settlement (i.e.,
every Tuesday) done by NSE (National Stock Exchange) which came down to T+3.
Now there is T+2 settlement (T stands for transaction day and numbers stands for
days after transaction date). A thorough screening is done on intermediaries ensuring
only fit and proper person /agency can operate in the
market.
4) Redressal of Investor Grievances:

 The investor may have complaints about companies or intermediaries.
 The investor may approach the concerned company or intermediaries with
their complaints.
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 If the complaints are not redressed or unsatisfactory, the investor may

approach SEBI.
 SEBI follows up with the Companies or intermediaries who haven't responded
to the grievances
 To facilitate replies to various queries of the general public on matters relating
to the securities market, SEBI has undertaken a new initiative and launched
toll free helpline service number.
SCORES (SEBI Complaints Redress System)

 SCORES is web enabled and provides online access 24 x 7. Set up by SEBI.
 SCORES enables investors to lodge and follow up their complaints and track the
status of redressal of such complaints online from the above website.
 An email is generated acknowledging the registered complaint with a unique number.
 This is forwarded to the concerned entity for redressal.
 The entity uploads an Action Taken Report.
 SEBI pursues the Action Taken Report.
 Every complaint has an audit and trail.
 All the complaints are saved in a central database which generates relevant MIS
reports to enable SEBI to take appropriate policy decisions and or remedial actions, if
any.
 There is also a mobile app for SEBI SCORES.
Complaints can be launched under the Purview of SEBI:

 Securities and Exchange Board of India Act,1992
 Securities Contract, (Regulation) Act ,1956
 Rules and regulation made there under and relevant provisions of Companies
Act,2013
 Depositories Act,1996.
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MODULE-03
MUTUAL
FUNDS
MEANING:
A Mutual fund is an avenue of investment in the form of a trust where money mobilised from
various investors who share a common objective is pooled and invested in securities like
bonds, equity, and short-term debt.
A key feature of a mutual fund is that it is managed by an asset management company and is
overseen by a professional fund manager.
OR
Mutual Fund is a fund that is mobilised from investors, mutual fund Company, and market.
The funds are sponsored by issue of 1 unit of Mutual Fund.
Asset management companies are popularly known as mutual fund companies.
DEFINITION:
According to the Securities and Exchange Board of India (Mutual Funds) Regulations, 1993,
Mutual fund is defined as
“A fund established in the form of a trust by a sponsor, to raise money by the trustees through
the sale of units to the public, under one or more schemes, for investing in securities in
accordance with these regulations”.
FEATURES OF MUTUAL FUNDS:
▶ Risk Diversification: Mutual funds offer a diversified investment portfolio even with
a small amount of investment. Mutual funds invest in a number of companies across a
broad cross-section of industries and sectors. This diversification reduces the risk
because all stocks decline at the same time and in the same proportion.
▶ Affordability: A mutual fund investors generally buy and sell various assets in large
volumes allowing investors to benefit from lower trading costs.
▶ Liquidity: Mutual funds are more liquid than most investments in shares, deposits, and
bonds. In addition, a standardized process enables quick and efficient redemption
allowing investors to get cash in hand as soon as possible.
▶ Transparency: Mutual funds are the most transparent form of investment. Investors
receive detailed information and timely updates about the nature of investments made,
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fund manager’s investment strategy behind investments, the exact amount invested in
each type of security, etc.
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▶ Rupee-cost averaging: Rupee- cost averaging or SIP provides the investor a

disciplined approach of investing specific amount at regular intervals regardless of the
unit price of the investment.
▶ Regulations: All mutual funds are required to register with SEBI. To protect the
interest of investors, SEBI has laid down strict regulations to safeguard investors
against possible frauds. It is even mandatory for Mutual fund distributors to register
with Association of mutual funds in India (AMFI) and abide by the norms laid by the
SEBI and AMFI for the distributors.
▶ Choice of investment: Mutual funds are the only product category that caters to
everyone’s needs. There are wide variety of choices available to the investors to
invest. The adviser will help choose the right funds for investing for the investors.
▶ Minimising costs: Mutual funds help investors to benefit from economies of scale as
mutual funds pool money from vast number of people with common interest and
invest
their money in the relevant asset class/classes. Mutual funds are a relatively less
expensive way to invest compared to directly investing in capital market because the
benefits of scale in brokerage, custodial and other fees translate into lower costs for
investors.
IMPORTANCE OF MUTUAL FUNDS:
▶ Professional Management: The investor avails of the services of experienced and

skilled professionals who are backed by a dedicated investment research team which
analyses the performance and prospects of companies and selects suitable investments
to achieve the objectives of the scheme.
▶ Diversification: Mutual funds offer a diversified investment portfolio even with a

small amount of investment. Mutual funds invest in a number of companies across a
broad cross-section of industries and sectors. This diversification reduces the risk
because all stocks decline at the same time and in the same proportion.
▶ Convenient administration: Investing in a mutual fund reduces paperwork and helps

it avoid many problems such as bad deliveries, delayed payments and unnecessary
follow up with brokers and companies. Mutual funds save time and make investing
easy and convenient.
▶ Return potential: Over a medium to long term, mutual funds have a potential to
provide a higher return as they invest in a diversified basket of selected securities.
▶ Low costs: Mutual funds are a relatively less expensive way to invest compared to
directly investing in capital market because the benefits of scale in brokerage,
custodial
and other fees translate into lower costs for investors. Mutual funds help investors to
benefit from economies of scale as mutual funds pool money from vast number of
people with common interest and invest their money in the relevant asset
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class/classes.
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▶ Liquidity: Mutual funds are more liquid than most investments in shares, deposits, and
bonds. In addition, a standardized process enables quick and efficient redemption
allowing investors to get cash in hand as soon as possible.
▶ Flexibility: Through features such as regular investment plans, regular withdrawal

plans and dividend reinvestment plans, it can systematically invest or withdraw funds
according to the needs and convenience.
HISTORY OF MUTUAL FUNDS IN INDIA:

The Mutual fund industry in India started in 1963 with the formation of Unit Trust of India
(UTI) at the initiative of the Reserve Bank of India (RBI) and the Government of India. The
objective then was to attract small investors and introduce them to market investments. Since
then, the history of mutual funds in India can be broadly divided into 6 phases:
▶ Phase -1: 1964 to 1987 – Growth of UTI: In 1963, UTI was established by an Act of
Parliament. As it was the only entity offering mutual funds in India. Operationally,
UTI
was set up by the Reserve Bank India (RBI), but was later delinked from the RBI. The
first scheme was launched by UTI in 1964.
Later in the 1970s and 80s, UTI started innovating and offering different schemes to
suit the needs of different classes of investors. Unit Linked Insurance Plan (ULIP)
was launched in 1971. The first Indian Offshore fund, India fund was launched in
August 1986.
▶ Phase- 2: 1987 to 1993 – Entry of Public Sector Funds: The year 1987 marked the
entry of other public sector mutual funds. The opening up of the economy, many
public sector banks and institutions were allowed to establish mutual funds. The
State Bank
of India established the first non UTI mutual fund, SBI mutual fund in November
1987. This was followed by Can bank mutual fund, LIC mutual fund, Indian Bank
mutual fund, Bank of India Mutual fund, GIC mutual fund and PNB mutual fund.
▶ Phase- 3: 1993 to 1996 – Emergence of Private Funds: A new era in the mutual fund
industry began in 1993 with the permission granted for the entry of private sector
funds. This gave the Indian investors a broader choice of ‘fund families’ and
increasing
competition to the existing public sector funds. During the year 1993-94, 5 private
sector fund houses launched their schemes followed by six others in 1994-95.
▶ Phase- 4: 1996 to 1999 – Growth and SEBI regulation: Since 1996, the mutual fund
industry scaled newer heights in terms of mobilization of funds and number of
players.
Deregulation and Liberalization of the Indian economy had introduced competition
and provided a good amount of growth of the industry.
A comprehensive set of regulations for all mutual funds operating in India was
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introduced with SEBI (Mutual Fund) Regulations, 1996. The budget of the Union
Government in 1999 took a big step in exempting all mutual fund dividends from
income tax in the hands of the investors. During this phase SEBI and Association of
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mutual fund of India (AMFI) launched investor awareness programme aimed at

educating the investors about investing through MFs.
▶ Phase- 5: 1999 to 2004 – Emergence of large and uniform industry: The year 1999
marked the beginning of a new phase in the history of the mutual fund industry in
India,
a phase of significant growth in terms of both amount mobilized from investors and
assets under management (AUM).
In February 2003, the UTI act was revised. UTI no longer has a special legal status as
a trust established by an act of Parliament. Instead it has adopted the same structure as
any other fund in India. UTI mutual funds are now under the SEBI’s regulations, 1996
like all other mutual funds in India.
▶ Phase- 6 : From 2004 Onwards – Consolidation and growth: The industry has
witnessed the mergers and acquisitions, most recent ones being the acquisition of
schemes of Allianz Mutual fund by Birla Sun Life, PNB mutual fund etc… At the
same time more international players continue to enter India.
ADVANTAGES OF MUTUAL FUNDS:
▶ Mobilises savings: Mutual funds play an important role in mobilising savings of

millions of investors across the country. In mutual funds, savings of small investors
are
mobilised, invested and returns are distributed in the same proportion to the unit
holders.
▶ Instrument of investing money: Now a days bank rates have become very low so,
keeping large amount of money in bank does not give higher returns. People can
invest in stock market but the common investor is not well informed about the
complexities
involved in stock market movements. Here mutual funds play an important role in
helping common public to get higher returns.
▶ Protection to small investors: A small investor is not safe in share market. In mutual
fund industry there is no such risk. Mutual funds help to reduce the risk of investing
in
stocks by spreading or diversifying investments. Small investors enjoy the benefit of
diversification.
▶ Tax benefit: Investors in mutual funds enjoy tax benefits. Dividend received by
investors is tax free. Tax exemption is allowed on income received on units of mutual
funds and UTI. Investment in mutual funds enjoys wealth tax exemption within the
overall limit of Rs.5 lakhs. No tax will be charged on gifts of mutual fund unit’s up-to
Rs.30, 000.
▶ Diversification: Investment in mutual funds enable investors to spread out and

minimise the risks up-to certain extent. Mutual funds invest in diversified portfolio of
securities. This diversification helps to reduce risk since all the stocks do not fall at
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the
same time. Thus investors are assured of average income which is not possible in
other sources.
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▶ Multi-purpose service: Mutual funds introduce variety of innovative schemes

containing various benefits. Innovative schemes are designed to meet the needs of
different types of investors in terms of investment, dividend distribution, liquidity
etc…..
▶ Boost to capital market: Mutual fund has become a capital market intermediary. It
bridges the gap between retail investors and capital market. The rapid growth of
mutual fund industry leads to increased vibrancy of capital market.
▶ Arrival of foreign capital: Mutual fund attract foreign capital. Indian mutual fund
industries open offshore funds in various foreign countries and secure safe investment
avenues abroad to domestic savings. These funds enable NRIs and foreign investors
to participate in Indian Capital market.
▶ Savings for retirement and education: Various schemes of funds with their tax
benefits can help the households to save for the retirements and education of their
children.
▶ Provides wide portfolio to Investors: Retail investors usually does not have expertise
in capital market operations. Mutual funds with expert panel provides different types
of investment opportunities to the small investors. By managing the portfolio
efficiently the mutual funds reduces the risk associated with equity investment.
▶ Promotes industrial development of the country: Mutual funds pool huge amount
of funds from investors and invests such funds in the shares and debentures of various
industries. In this process, industrial undertaking gets funds needed for their activities
hence industrial development in the country can be achieved.
▶ Well regulated: Mutual funds activities in India are well regulated by regulatory
agencies such SEBI and RBI. The possibility of misappropriation of funds are very
rare.
DIS-ADVANTAGES OF MUTUAL FUNDS:
▶ Market risk: Mutual fund industries are subjected to market risk. Mutual funds invest
the funds in equity shares or companies, which are subjected to wide fluctuations
depending upon market conditions. Investors in mutual funds loses when equity
market falls.
▶ Misappropriation of funds: There is a possibility that experts who manages the funds
of mutual funds may misappropriate the funds, thereby the retail investor face the risk
of losing money.
▶ Political risk: With the change in the Government, policies many also change. Change
in policies may bring uncertainty in capital market, which adversely affects the
mutual fund industry also.
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MAJOR MUTUAL FUND HOUSES IN INDIA:

▶ SBI mutual fund
▶ ICICI PRUDENTIAL mutual fund
▶ HDFC mutual fund
▶ ADITHYA BIRLA SUNLIFE mutual fund
▶ KOTAK MAHINDRA mutual fund
▶ NIPPON INDIA mutual fund
▶ AXIS mutual fund
▶ UTI mutual fund
▶ IDFC mutual fund
▶ DSP mutual fund
ORGANISATION OR STRUCTURE OF MUTUAL FUNDS:
▶ Unit holders: Investors of mutual funds are known as unit holders. A unit holder is an
investor who owns one or more units in an investment trust. A unit is equivalent to a
share, or a piece of interest. The profit or losses are shared by investors in proportion
to their investments. Mutual funds come out with a number of schemes which are
launched from time to time with different investment objectives.
▶ Trustees: Trustees are appointed to manage the trust. A mutual fund house must have
an independent Board of trustees, where two-thirds of the trustees are independent
persons who are not associated with the sponsor in any manner. The primary
responsibility of the trustees is to protect the interest of the investors of the mutual
funds. They are considered as the primary guardians of the investors’ funds. They also
ensure that the operations of the mutual fund comply with the relevant regulations.
▶ Asset Management Company: Asset Management Company is created by the

sponsor to manage the funds of the mutual fund. They play a major role as they are
the fund managers. The AMC will invest the investors’ money in various securities
(equity,
debt and money market instruments) after proper research of market conditions and
the financial performance of individual companies and specific securities in the effort
to meet average market return and analysis. They also look after the administrative
functions of mutual fund for which they charge management fee.
▶ Sponsors: Sponsor is any person who either itself or in association with another body
corporate sets up a mutual fund. The sponsor is expected to contribute at least 40% to
the net worth of the Asset Management Company (AMC). However, if any person
hold
40% or more of the net-worth of an AMC, he shall be deemed to be a sponsor and
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will be required to fulfil the eligibility criteria specified in the mutual fund regulation.
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▶ Custodian: Custodian is an independent organisation. Custodian keeps the physical

custody of all the securities bought by the AMC. The securities are bought in the
name
of trustees but they are not kept with them. Securities, which are in physical form are
kept in the safe custody of a custodian and securities which are in Dematerialised
form are kept with a depository participant, as per the advice of the custodian.
▶ Transfer agent: The main function of a transfer agent is to process, maintain and
update all the investor’s records. Other function is to offer the investor servicing
through its office and various branches located in different parts of the country. It
processes all the transactions like application, purchase, redemption, switch etc…
submitted by the investors directly or through the AMC in various schemes and plans.
TYPES OF MUTUAL FUND SCHEMES:

▶ Geographical classification:
1. Domestic funds: The funds are mobilised and invested in India. These are the
schemes which are launches with a view to mobilize savings of the citizens of India.
2. International funds: A mutual fund located in India might raise money in India to
invest in abroad. Thus the Funds are mobilised in India and are invested outside.
3. Offshore funds: A mutual fund located in India might raise money in abroad to
invest in abroad. Thus the funds are mobilised outside India and are invested in India.
▶ Classification on the basis of sponsorship:
1. Public sector MF: These funds are sponsored by a company belonging to the Public
sector. For example: UTI, SBI, LIC, GIC, Canara Bank etc…
2. Private sector MF: These funds are sponsored by a company belonging to the
Private sector. For example: Kotak Mahindra MF, HDFC MF, Axis MF, TATA MF,
BIRLA MF etc…
3. Foreign MF: These funds are sponsored by foreign companies. These funds raise
money in India, operate from India and invest in India. For example: Franklin and
Templeton etc….
▶ Classification on the basis of portfolio:
1. Equity or growth MF: The investment is maid only in stocks. Equity or growth
funds is one which offers capital appreciation as well as a variable dividend
opportunity available to the investors. The investors may get dividend income from a
mutual fund on a regular basis and the capital appreciation is available in the form of
increase in market price.
2. Income MF: The mutual funds are called as income or debt funds because they
promise a regular and a guaranteed return to the investors in the form of dividends or
interest. The investment is maid only in bonds, fixed securities that gives fixed returns
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on the investment in the form of interest every month.
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3. Hybrid or Balanced MF: These are the funds which are invested both in equity as
well as the bonds.
4. Index MF: The funds here are mobilised only in a particular indexes of stock market
Stock market has a stock index, which is intended to measure the upward and
downward trends of stock market. Index funds are low cost funds.
5. Money market MF: Funds are invested in money market instruments which has a
maturity period of less than one year. These include treasury bills, commercial papers,
certificate of deposits, etc…
6. Gilt Hedged funds: Gilt funds are government securities with the medium and long
range maturity. These funds have a low default risk.
7. Sector MF: A sector fund invests its entire money in a particular industry. For
example: A Pharma fund invests only in Pharmaceutical industry and tech fund
invests only in technology companies. A utility fund invests only in the utility
industry like power, natural gas, and telephone companies.
8. Speciality or Commodity MF: Investment made in commodities are known as
speciality or commodity funds. For example: Gold, Silver etc…
9. Hedge MF: These are the funds which are invested in risky assets. Higher the risk
and higher will be the return.
10. Fund of funds: Investing funds by one mutual fund Company in the funds of the
other mutual fund company is called as fund of funds.
▶ Functional Classification:
1. Open ended MF: Open ended mutual funds are those where investors sell and
repurchase mutual fund units on a continuous basis.
2. Close ended MF: Close ended mutual funds are those in which limited number of
units are sold to the investors during a specified period only.
DISTINGUISH BETWEEN OPEN-ENDED AND CLOSE-ENDED MUTUAL FUND:
OPEN ENDED MUTUAL FUND CLOSE ENDED MUTUAL

FUND
They are always open for subscription. They are open for subscription only
during offer period.
There is no pre- defined maturity period There is a pre-defined maturity period.

i.e., it is perpetual.
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Buying and selling from MF units from Buying and selling from MF units is
MF companies, is possible at any time. only through the market (after the offer
period).
Corpus available for investment keeps Corpus available for investment

varying. remains fixed/ rigid.
Number of units keep varying. Number of units does not vary it

remains fixed.
These units may or may not be listed in Units are listed in stock exchanges as
stock exchange. ETF’s (Exchange traded funds).
Buying or selling of units will be at Buying or selling of units will be at

NAV value or price. market price.
TYPES OF MUTUAL FUND PLANS:

The various types of mutual fund plans are as follows:
▶ Dividend Payment Plan
▶ Dividend Re-investment Plan
▶ Bonus Plan
▶ Growth Plan
MEASURING PERFORMANCE OF MUTUAL FUNDS:

There are three types of ratios which are used widely to measure the performance of mutual
funds. They are as follows:
▶ Sharpe Ratio
▶ Treynor Ratio
▶ Jensen Ratio
SYSTEMATIC INVESTMENT PLAN (SIP):

Systematic Investment plan is a method of investing in mutual funds where in an investor
chooses a mutual fund scheme and invests a fixed amount of his choice at regular intervals.
A SIP is a systematic approach to investing and involves allocating a small pre-determined
amount of money for investment in the market at regular intervals (usually every month).
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SYSTEMATIC TRANSFER PLAN (STP):

Systematic transfer plan is a facility by which a pre-determined amount can be transferred
from one scheme of mutual fund to another scheme at pre-defined intervals.
 This transfer occurs periodically, enabling investors to gain market advantage by
changing to securities when they offer higher returns.
 It safeguards the interests of an investor during market fluctuations, to minimize the
damages incurred.
SYSTEMATIC WITHDRAWAL PLAN (SWP):

A Systematic Withdrawal plan or SWP is a facility extended to investors allowing them to
withdraw a fixed amount from a mutual fund scheme regularly.
An investor can choose the amount and frequency of withdrawal.
NET ASSET VALUE (NAV):

 The Net Asset Value (NAV) of a mutual fund is the amount which a unit holder
would get if the mutual fund were wound up today.
 The investors’ subscription is treated as the unit capital in the balance sheet of the fund
 The investments on their behalf are treated as assets.
NAV is calculated by using the below mentioned formula:

NAV= Net Asset of the Scheme
No. of units outstanding
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FINANCIAL EDUCATION AND INVESTMENT AWARENESS

MODULE-1 - FUNDATIONS FOR FINANCE

WHY MONEY IS NEEDED OR IMPORTANCE OF MONEY:

MEANING OF PERSONAL FINANCIAL PLANNING:

WHY DO WE NEED FINANCIAL PLANNING?

VARIOUS FINANCIAL PLANNING FOR LIFE GOALS:

STEPS IN CREATING A SUCCESSFUL FINANCIAL PLAN:

STEP-2: DEVELOP YOUR FINANIAL GOALS:

STEP-3: IDENTIFY THE FINANCIAL GAPS:

CLASSIFICATION OF FINANCIAL GOALS:

EXAMPLES ARE AS FOLLOWS:

investment that helps him to achieve his goal.

IMPORTANCE OF TIME VALUE OF MONEY:

 Availability of Better Investment Opportunities:

 Preference for Present Consumption:

 Opportunities for reinvestment:

2 Techniques for Estimating Time Value of Money are as follows:

Technique -1 Discounting or Present Value Method:

Technique -2 Compounding or Future Value Method:

DISTINGUISH BETWEEN COMPOUNDING AND DISCOUNTING:

NEED FOR VALUATION OF SECURITIES:

To value security different concepts are used. Some of these are as

6. Capitalized Value (CV): CV of a financial asset is defined as the sum of present

VALUATION OF FIXED INCOME SECUR ITIES:

Debentures: - A debenture is a private and long-term debt instrument issued by

other forms of debt instruments,debentures carry longer repayment schedules coupled

(i) Bonds with a Maturing Period:

(ii) Bonds in Perpetuity:

Yield to Maturity or Bond’s Internal/Rate of Return:

Valuation of Zero Coupon/Deep Discount Bonds (DDBs/ZCBs):

VALUATION OF PREFERENCE SHARES:

VALUE OF A PERPETUAL PREFERENCE SHARE: - If the preference

VALUATION OF EQUITY SHARES

The valuation of common stock or equity shares is relatively difficult as compared to

 Comparable Approach. A company's equity value should bear some

DIVIDEND CAPITALIZATION APPROACH:

DEFINITION OF DIVIDEND CAPITALIZATION MODEL

EARNINGS CAPITALISATION METHOD

The capitalization of earnings method assists in determining the business valuation

To determine the business valuation based on its earnings, it is important to first

trajectory of a company and predict future outcomes.

MODULE-02 INVESTMENT AVENUES

 To meet financial goals: Our lives are made up of various goals:

 Capital appreciation: Capital appreciation is an important feature of every

ESSENTIAL CHARACTERISTICS OF AN INVESTMENT:

o Risk: Risk is an inherent characteristic of every investment. Risk refers to loss of

MEANING The purchase of an asset with the Speculation is an act of

INTENT TO PROFIT Changes in value. Changes in prices

EXPECTED RATE OF Modest rate of return. High rate of return

BEHAVIOUR OF Conservative and cautious. Daring and careless

WHAT IS THE NEED FOR DIVERSIFICATION: THIS CAN ALSO BE WRITTEN AS

FEATURES OF SAVINGS ACCOUNT:

ADVANTAGES OF SAVINGS ACCOUNT:

DISADVANTAGES OF SAVINGS ACCOUNT:

TAX BENEFIT FOR SAVINGS ACCOUNT:

Current account is a deposit account held at a bank or other financial institution. It is

ADVANTAGES OF CURRENT ACCOUNT:

DISADVANTAGES OF CURRENT ACCOUNT:

NO TAX BENEFIT AVAILABLE ON CURRENT ACCOUNT:

FIXED DEPOSIT ACCOUNT

FEATURES OF FIXED DEPOSITS:

ADVANTAGES OF FIXED DEPOSIT:

DIS-ADVANTAGES OF FIXED DEPOSIT:

TAX BENEFIT AVAILABLE FOR FIXED DEPOSIT ACCOUNT: