Module 2 Financial Knowledge

Interest Rate – Simple Interest – Compound interest- Effective Interest rate – EMI –
Inflation and its effect on purchasing power – Knowledge about money market
products- Capital market products – Fin tech- Investing in real assets- Factors to be
considered while choosing an investment- Concept of Risk and Return- Systematic
Investment- meaning and advantages- Factors to be considered while borrowing –
Insurance – life and health – Pure insurance and endowment policies – Testing
adequacy of insurance coverage- Difference between insurance and investment
• Financial knowledge refers to the understanding and awareness of money, financial
products, and concepts that individuals can apply to their financial decisions. It
includes knowledge of basic financial concepts such as asset management, interest
rate calculations, inflation, investments, cash flows, and risk analysis.
• Literature shows that there are two components of financial knowledge
• Subjective Financial Knowledge: - denotes the self-assessed financial knowledge or
indicates confidence in personal financial knowledge
• Objective Financial Knowledge: refers to the actual financial knowledge assessed by
financial literacy questions or represents an individual’s competence in financial
knowledge
• For example, individuals having high objective financial knowledge may not
necessarily have high subjective financial knowledge
• Interest Rate: An interest rate refers to the amount charged by a lender to a borrower
for any form of debt given, generally expressed as a percentage of the principal. The
asset borrowed can be in the form of cash, large assets such as vehicle or building, or
just consumer goods
• Interest rate is the cost of borrowing money or the return on investment for lending
money.
• Price paid by the borrower of money to the lender
• Eg; Saju deposited Rs 1,00,000 in a fixed deposit at IDBI Bank at the rate of 6%
interest p.a.
• What is the cost of money in the above case?
Types of interest rates
• Deposit rates – rate given by borrower to lender. Eg bank to depositors
• Lending rates- the rate of interest charged by a financial institution for lending money.
• Government borrowing rates
• Saving scheme rates
• Corporates deposit rates
Factors influencing Interest Rates
• Demand for money: demand for money increases rate oof interest will also increases
• Level of government borrowings:
• Supply of money: increase money supply reduces the interest rates
• Inflation rates; higher inflation rates usually lead higher interest rates
• Monetary policy: policy implemented by Central bank e.g. REPO/ Reverse REPO
• Fiscal Policy: Taxation policy of the government
Simple Interest
• (SI) I = PNR
• 100
• I = Interest
• P = Principal
• N = Number of Years
• R = Rate of Interest
• Formula: Simple Interest (SI) = Principal (P) x Rate (R) x Time (T) / 100
• Suppose you invest Rs 1 lakh in a scheme that offers you 10% annual returns. The
maturity of the scheme is after 7 years. So, considering that the interest that will be
earned on a recurring basis does not get reinvested, the amount of interest that you
will receive:
• SI = (P x R x T) / 100 = (1,00,000 x 10 x 7) / 100 = Rs 70,000
• Total maturity amount = P + SI = Rs 1,00,000 = Rs 70,000 = Rs 1,70,000
• If Ravi invest Rs 5,000 in SB A/C @ an annual interest rate of 4%, how much interest
will Ravi earn in 3 years?
• Excercise1
• Rs 12,000 @ 12% for a period of 3 years. How much is the interest amount?
4320
• Exercise 2
• Rs 12,000 @7% for a period of 6 years. How much is the interest amount?
5040
Exercise 3
• Rs 25,000 deposited in a SB a/c of a Bank @ 6% interest for period of 2 ½ Years.
FINDING PRINCIPAL AMOUNT
P = Interest amount
RXN

FINDING RATE OF INTEREST

R = = Interest amount
PXN

FINDING TIME
N = = Interest amount
PXR

COMPOUNND INTERST
CI is calculated on the principal amount and the accumulated interest of previous periods, and
thus can be regarded as interest on interest.
Compounding usually done annually, but it can be done half yearly, quarterly, monthly etc
then such compounding is known as multiperiod or intra – year compounding.

F = (1 + r) n A = P (1+r)n ANNUAL COMPOUNDING

(1 + r)
F = P(1+r/m)mn MULTIPLE PERIOD COMPOUNGING
F= FUTURE VALUE
r = RATE OF INTEREST
P = PRINCIPAL VALUE
n = YEARS TO MATURITY
m = FREQUENCY OF COMPOUNDING

HALF YEARLY COMPOUNGING

When interest is compounded half yearly there are two conversion periods in a year each
after 6 months. the time period after which the interest added each time to form a new
principal is called conversion period.
R = rate will be half
N = will be double
QUARTERLY
R = will be divided by 4
N = multiplied with 4
Monthly
R = will be divided by 12
N = multiplied with 12
Annuity
Annuity is a fixed amount payable periodically at equal interval. The intervals may be a year,
half year or a month and so on
If payments are to be made for a certain or fixed number of years it is called annuity certain
If payments are to be made beginning of period called annuity due
If payments are to be made at the end of period called annuity immediate annuity
If payments are to be made for an unspecified period called per perpetual annuity

FV = P(1+r)n - 1
R
Or A (1 +i)n - 1
I
Effective Rate of Interest
EIR = (1 + r )m - 1
m

Equated Monthly Instalment

An EMI is fixed payment amount made by a borrower to a lender a specified date in each
calendar month.
EMI = pi( 1+ i)n
(1 + i)n – 1
P = TOTAL AMOUNT, i = r
100
R = rate of interest
12
 a. Flat interest rate
Interest is charged on total loan amount
EMI of FROI = principal + principal X annual interest rate X Tenure (years)
Tenure (month)0
P (PX R X N)
M

Reducing balance method or Diminishing methods

After each EMI payment the outstanding loan amount gets reduced. Therefore, the interest
for next month is calculated only outstanding amount of loan
DROI = Pi (1+i) n
(1+I) n – 1

Inflation and its effect on purchasing power

Inflation
• Inflation simply means that prices rise in general. The rate of inflation is usually
calculated by adding together the prices of a virtual shopping basket containing items
that represent an average person's spending (food, energy, holidays, etc.). If that
basket cost 100 rupees last year and you are paying 102 rupees for the same basket
this year, it means the inflation rate is 2%. Because you need 2% more money to
make exactly the same purchases.
Inflation due to currency depreciation:
Ttotal currency value of country should be = total value of goods and services in that country
Eg 10 persons total 10 kg apple production, 1kg 10
10 persons Rs 1000 total 10 kg apple production, per kg 100
demand = supply
2008 Zimbabwe – hyperinflation 7.96 billion % each 24 hours price becomes double
$1 = 262core
Maharashtra – Nasik, Karnataka – Mysore, MP, West Bengal

Demand-pull inflation
• When the aggregate demand in the economy increases, it leads to demand-pull
inflation. There are several causes of this type of inflation. These include –
• Increase in the money supply in the economy
• Rise in the Forex reserves
• Government spending
• Tax reduction by government
• Depreciation of rupee
• Increased borrowing
• Low unemployment rate
Cost-push inflation
• There are several reasons which lead to cost-push inflation in an economy. These
include – (factors of production increasing = price of product increases)
• Speculation and hoarding of commodities
• Fluctuation in the prices of crude oil
• Low growth in the Agricultural sector
• Defects in the food supply chain
• Rise in the Interest rates by RBI
 • Increase in the prices of inputs
• Currency depreciation
• The rise in indirect taxes
Optimum inflation
• Developed countries 2%
• Developing countries 2 to 6 %
• Inflation control – monetary policy – RBI – Repo Rate Vs Reverse Repo
• Fiscal Policy – taxation policy = increase tax rate
Built-in inflation
• In this type of inflation, the workers aroused a high wage demand. Such demands are
fulfilled by raising the prices of the end product.
Purchasing Power
• In simple terms, it’s a currency’s buying power. It’s how much you can buy with one
unit of currency, i.e. one Rupee.
• purchasing power is the value of a currency expressed in terms of the number of
goods or services that one unit of money can buy.
• For example, an apple that cost Rs1.50 last year may cost Rs2 this year, which is a
33% increase
% change in purchasing power or Real Rate of Return = (1 +r) -1
(1+i)
R = rate of return I = inflation rate

Real value = nominal value

(1=i)n
Time Value of Money
1
t
(1+k )
K, denotes the discount rate
Higher the proportion of k, more will be the decrease in value of money
 Capital market
Market for the financial assets which have a long maturity period (above 1 years)
 Capital market mechanism
Individuals New Issue market Individuals
Corporates Corporates
Institutions give fund to Stock Exchange fund moves to Institutions
Banks Entrepreneur
Government Financial Institutions Government
Initial Public Offer (IPO)
is the process by which private companies sell their shares to the public intending to raise
equity capital from public investors?
To make eligible general public to buy the shares of a company
Capital market Intermediaries
a. Merchant bankers
b. Underwriters-
c. Bankers to an issue
d. Registrar to an issue
e. Brokers to an issue
f. Portfolio mangers
Objectives:
 Expansion
  Modernization
 Diversification
Means
 Permit to enter new partners
 Join with small investors- friends, family members, other companies – angel investors
 Venture capitalist
 Private equity firms
 Collateral loan from banks
 IPO
Procedure
 Appoint a merchant banker
a. Origination
b. Underwriting- Underwriters agree to take whole or portion of shares or debentures
floated but not subscribed by public
c. Red herring prospectus – history, financial position, purpose, use, lot
d. Application to SEBI – listing -m Listing means the admission of a company’s
securities to trading on a stock exchange. Listing is not a compulsory act under the
Companies Act 2013/1956. It only important when a Public Limited Company wants
to issue shares or debentures to public. When securities are listed on a stock exchange,
the company will have to comply with the exchange’s requirements.
e. Marketing of IPO
A company has two methods of IPO
a. Fixed Price Issue –
b. Book building Issue – price band - Book building is the process by which an
underwriter sets the price at which shares must be sold in an Initial Public
Offering (IPO). As part of the price discovery process, the underwriter must solicit
bids from diverse institutional investors, such as fund managers. However, there is
always the risk of overpriced or undervalued shares.
Retail Investor maximum 2 lakhs
High net worth individual investor – above 2 lahks
IPO issue
a. over subscription: lot and lucky draw
b. Undersubscription: if below 90% cancelled
c. Green Shoe Option – over subscription additional fixation
Listing Day: 9 to 9.45 per opening period, bid & ask
Applications
a. A/C with broker
b. User name & id
c. My profile
d. Net Banking – IPO – ADD BENEFICIARY – Co’s Name – investor category –
Application Window – Dp Id – Client ID- address
Follow on Issue/ seasoned equity offering
e. company issues more shares after their initial public offering (IPO). It happens when
the company wants to raise more capital by giving out additional shares to finance
projects, pay their debt, or make acquisitions
 Capital Market Products
1. Equity shares:
part ownership where each member is a fractional owner
Voting Right:
• Inferior Voting Rights: Under this scheme, a company can issue shares with
fractional voting rights. For example, a shareholder may be given 1:5 rights, meaning
they get 1 vote for every 5 shares owned.
Superior Voting Rights: Under this scheme, a company can issue shares that offer
multiple votes per share. For example, shareholders may be given 5:1 right, which
makes it 5 votes per share owned
Risk: high risk due volatility in the market
Return:
a. capital gain / - difference between purchasing price and selling price
b. Dividend - a sum of money paid regularly (typically annually) by a company to
its shareholders out of its profits (or reserves).
Procedure:
IPO
Right Issue
Private Placement – selected institutional investors
2. Preference Shares:
Preference shares, are a special type of share where dividends are paid to shareholders
prior to the issuance of common stock dividends.
Dividend:
They have the first rights to get dividends paid by the companies whose shares they
own.
Voting Right
Holders of these shares do not have any voting rights
• Convertible Preference Shares
Convertible preference shares are those shares that can be easily converted into equity
shares.
• Non-Convertible Preference Shares
Non-Convertible preference shares are those shares that cannot be converted into
equity shares.
• Redeemable Preference Shares
Redeemable preference shares are those shares that can be repurchased or redeemed
by the issuing company at a fixed rate and date. These types of shares help the
company by providing a cushion during times of inflation.
• Non-Redeemable Preference Shares
Non-redeemable preference shares are those shares that cannot be redeemed or
repurchased by the issuing company at a fixed date. Non-redeemable preference
shares help companies by acting as a lifesaver during times of inflation.
• Participating Preference Shares
Participating preference shares help shareholders demand a part in the company’s
surplus profit at the time of the company’s liquidation after the dividends have been
paid to other shareholders.
However, these shareholders receive fixed dividends and get part of the surplus profit
of the company along with equity shareholders.
• Non-Participating Preference Shares
 These shares do not benefit the shareholders the additional option of earning
dividends from the surplus profits earned by the company, but they receive fixed
dividends offered by the company.
• Cumulative Preference Shares
Cumulative preference shares are those type of shares that gives shareholders the right
to enjoy cumulative dividend payout by the company even if they are not making any
profit.
These dividends will be counted as arrears in years when the company is not earning
profit and will be paid on a cumulative basis the next year when the business
generates profits.
• Non - Cumulative Preference Shares
Non - Cumulative Preference Shares do not collect dividends in the form of arrears. In
the case of these types of shares, the dividend payout takes place from the profits
made by the company in the current year.
So if a company does not make any profit in a single year, then the shareholders will
not receive any dividends for that year. Also, they cannot claim dividends in any
future profit or year.
• Adjustable Preference Shares
• In the case of adjustable preference shares, the dividend rate is not fixed and is
influenced by current market rates.
Prospectus: details of PS including dividend rate, maturity, conversion terms
• Allotment: IPO or Pvt Placement
• Listed PS can be traded in SE
• SEBI, Co’s Act 2013

3. Debenture
• The word ‘debenture’ itself is a derivation of the Latin word ‘debere’ which means to
borrow or loan.
• Debentures are written instruments of debt that companies issue under their common
seal. They are similar to a loan certificate.
 • Debentures are issued to the public as a contract of repayment of money borrowed
from them.
• These debentures are for a fixed period and a fixed interest rate that can be payable
yearly or half-yearly.
• Debentures are also offered to the public at large, like equity shares.
Debentures are actually the most common way for large companies to borrow money
Some important features of debentures that make them unique,
• Debentures are instruments of debt, which means that debenture holders become
creditors of the company
• There is a certificate of debt, with the date of redemption and amount of repayment
mentioned on it. This certificate is issued under the company seal and is known as a
Debenture Deed
• Debentures have a fixed rate of interest, and such interest amount is payable yearly or
half-yearly
• Debenture holders do not get any voting rights. This is because they are not
instrumenting of equity, so debenture holders are not owners of the company, only
creditors
• The interest payable to these debenture holders is a charge against the profits of the
company. So these payments have to be made even in case of a loss.
Advantages of Debentures
• company can get its required funds without diluting equity.
• Interest to be paid on debentures is a charge against profit for the company. But this
also means it is a tax-deductible expense and is useful while tax planning
• Debentures encourage long-term planning and funding. And compared to other forms
of lending debentures tend to be cheaper.
• Debenture holders bear very little risk since the loan is secured and the interest is
payable even in the case of a loss to the company
• At times of inflation, debentures are the preferred instrument to raise funds since they
have a fixed rate of interest
Issue of Debentures
Debentures in the general course of business are issued for cash.
This issue of debentures that happens can be of three kinds,
 at par,
 at a discount,
 at a premium.
Issue at Par
• Here the debentures will be issued exactly at their nominal price, i.e. not above or
below the face value of the debentures. Now the company can decide to collect the
cash all at once, in a lump sum. Or the money will be collected in installments, like
with allotment, first call, second call, last call etc.
Issue at Discount
• When the debentures are issued at below face value, such issue of debentures is
known as a discount issue. Like, say for example the debenture has a nominal value of
100/- but is issued for 90/-. Then such debentures are said to be issued at discount.
Issue at Premium
Now we come to the issue of debentures at a premium, that is when more money than the
nominal value is charged. So if a debenture with a face value of 100/- is sold at 110/- then it
is issued at a premium
Issue of Debentures for Consideration other than Cash
• Debentures can be issued for non-cash considerations. The company may have
purchased assets from some vendors or acquired some other business. Then instead of
paying cash, the company may issue debentures to such vendors. Such an issue for
debentures can be at par, or for a discount or at a premium.
Issue of Debentures as Collateral Security
• Debentures can also be issued by a company as collateral security against a bank loan
or any such borrowings. A collateral security is like a parallel security which is
provided along with the actual security against the loan taken. Debentures issued as
such a collateral liability are a contingent liability for the company, i.e. the liability
may or may not arise. Only when the company defaults on such a loan will this
liability arise.
• Q: Harim Industries Ltd. purchased a plant for Rs. 100,000 payable Rs. 37,000 in cash
and balance by the issue of 10% debentures of Rs. 100 each at a premium of 10%.
The vendor will be issued____ debentures.
• Ans: The balance payment to vendor = 1,00,000 – 37,000 = 63,000
• The debentures are issued at 10% Premium. So the nominal value of such debentures
will be= (63,000 × 100) ÷ 110 = 57272.727272
• This is the nominal value of 100 debentures. So 572.27 debentures of Rs 100/- will be
issued.
Terms of Issue
 • As we know, debentures are an instrument of debt. So when their term expires they
have to be redeemed (paid back). So the terms of such redemption are generally
mentioned when issuing the debentures. The terms on which the money will be repaid
to debenture holders are the terms of the issue of debentures.
• Depending on the terms of issue, debentures can either be redeemed at par or at a
premium. Let us take a look.
• At Par: This is when debentures will be redeemed at their face value/nominal value.
So a debenture issued for face value 100/- will be redeemed also at 100/-.
• At Premium: This is when the redemption is at a higher value than the face value of
the debenture. Such a premium to be paid will be treated as a capital loss. And while
the premium amount is only paid at redemption, it will be shown as a liability since
the issue of the debentures.
• At Discount: This is when the debentures are redeemed at a price lower than face
value. However, this is now only a theoretical concept. Such debentures now cannot
be issued.
Interest on Debentures
• Debentures are borrowed capital. So, when a company issues debenture they have to
pay a rate of interest on them. This interest rate is usually mentioned in the name of
the debenture itself, for example, “9% Debentures”. The interest is calculated on the
face value of the debentures. This interest amount is paid periodically, generally
yearly or half-yearly.
• Interest on debenture is …………
a. charge against profit
b. appropriation of profit
c. adjustment of profit
d. none of the above
• Ans: The correct option is A. Debentures are financial instruments which carry a
certain percentage of interest. So, debentures are like other debts. Interest paid on
them is charged against the profit and loss account.
Redemption of Debentures
• Redemption of debentures refers to the repayment of these debentures by the
company to the debenture holders. So the company will discharge its liability and
remove it from the balance sheet. This is a major transaction for the company since
the amount of money involved tends to be quite significant.
There are a few ways in which this redemption of shares can take place. These methods all
have different accounting treatment as well. So let us take a look at the various methods of
redemption of debentures
Lump Sum Method
 • This method as the name suggests is a one-time payment method. Here the company
will repay the whole amount in one lump sum payment to the debenture holders. The
amount and the date of the payment will be according to the terms of issue.
• Since the company knows the date of the repayment in advance they can plan their
finances accordingly. So they make provisions to pay the debenture holders. So as per
the provisions of the Companies Act and the SEBI guidelines the company has to
make provisions for such a debenture. And hence the company sets up a special
account known as the Debenture Redemption Reserve.
• This debenture redemption reserve is a capital reserve account. It is funded by the
divisible profits of each year, i.e. a portion of the profits are set aside for this purpose.
This account can only be utilized for the purpose of redemption of debentures and for
no other purpose.
Installment Method
• This is also known as the drawing of lots method. Here the company will start
redeeming debentures in lots or installments from one particular year as agreed by
the terms of issue. Let us see the accounting entries for the same.
Conversion Method
• A company may opt to not pay the debenture holders at the time of redemption.
Instead of that, it can convert the debentures into a new class of debentures or even
equity shares. Such debentures are known as convertible debentures. Such new
debentures or shares can be issued at par, premium or even discount. Let us see the
accounting treatment for these scenarios.
Types of debentures.
• Convertible Debentures- One of the various types of debentures is convertible
debentures. The most significant feature of differentiation of a convertible debenture
is that it can be converted into shares or stocks at a certain point in time or when the
firm notifies of the same. Although these debentures have a lower interest rate when
compared to stock, they are extremely useful.
• Partially Convertible Debentures- The debentures which can be converted into
shares but to a certain limit or a certain percentage are known as partially convertible
debentures. It is hybrid as after its partial conversion, some portion remains debenture
while some become part of the company’s share
• Non- Convertible Debentures- These are normal or basic kinds of debentures which
can never be converted into stocks after they have been issued and till the time they
exist.
• Registered Debentures- The kind of debentures which are transferred providing a
pepper proof of records and documents needed for it. These are one of the safest kinds
of debentures as there is less chance of fraud compared to bearer debentures discussed
below.
• Bearer Debentures- The type of debentures that are unregistered and can be
delivered after purchase without any compulsory need for evidence or record are
 known as bearer debentures. There is no tertiary involvement in the transaction for a
bearer debenture and it a comparatively more prone to tax evasion and fraud.
• Secured Debenture- These are the kind of debentures that are like an alternative to a
loan where the collateral is needed to make money and when the firm starts paying off
the debts at the time of its closure due to any reason, then the secured debenture
holders are paid first.
• Unsecured Debentures- The type of debentures which don’t need any kind of
collateral are unsecured debentures and are preferred less at the time of payment
compared to secured debentures.
• Redeemable Debentures- The debentures which are purchases for a pre-specified
period and are paid by the end of this time are known as redeemable debentures.
• Irredeemable Debentures- Also known as perpetual debentures, irredeemable
debentures don’t have a fixed time for the redemption of the invested amount
Allotment
• IPO and Private placement
• Listed debentures can be traded on S/E
• investors can buy and sell thorough registered brokers
• Settlement through Demat A/C
• Governed by SEBI
• Companies Act 2013 applicable
BONDS
 A bond is a debt instrument issued by governments, corporations and other semi
government bodies or public corporations
 A bond is a (written and signed promise) debt investment in which an investor loans
money to an entity (typically corporate or governmental) which borrows the funds for
a defined period of time at a variable or fixed interest rate (coupon rate).
Bond Terminology
 Face value
The price of bond when first issued.
 Coupon rate
The periodic interest payments promised to bondholders are a
fixed percentage of bonds face value or simply the interest rate.
 Maturity
The time until the principal is scheduled to be repaid.
 Call provisions
Some bonds contain a provision which enables the issuer to buy the bond back from the
bondholder at a pre-specified price.
 Put provision
Some bonds contain a provision due to which the buyer can sell the bond at a pre-
specified price before its maturity date.

Types of bonds
 Government bonds
government bonds represent the borrowings of the government. Since they are backed by
the government, they are considered free from default risk.
 Corporate bonds
Corporate bonds represent debt obligation of private sector companies. They are backed
by the credit of issuing companies. It is company’s ability to earn money and meet the
debt obligation that determines the bond’s default risk.
 Convertible bonds
The bond that the holder can convert into a specified number of shares of common stock
in the issuing company or cash of equal value. It has the maturity greater than 10 years. It
is a hybrid security with debt and equity-like features.
 Municipal bond
A bond issued by state or local government or any of there agencies. Interest from these
bonds is generally tax-free to residents but in some cases, interest is federally taxable. It is
generally used to finance public project such as roads, schools, airports and seaports and
infrastructure related. Interest receives is excluded from income tax.
 Callable bond
It contains a provision that gives the issuer the right to call back the bond before its
maturity date.
 Term bonds
It will mature at a single specified future date.
 Serial bonds/ instalment bonds
Bonds that mature in instalments over a period of time. The matures in portions over
several different dates. Instead of facing a large lump-sum principal repayment at
maturity, an issuer can opt to spread the principal repayment over several periods.
 Secured bonds/ mortgage bond
Have specific assets of the issuer pledged as collateral for the bond. A bond can be
secured by real estate or other assets.
 Unsecured bonds
Bonds are not backed by a company that is financially sound
 Zero-coupon/ deep discount/ Accrual bond
It is a debt security that doesn’t pay interest(coupon) but is traded at discount, rendering
profit at maturity when the bond is redeemed for its full-face value. Having maturity of at
least 10 years. It doesn’t make regular interest payments.
 Floating rate bonds
Bonds interest rate depends on the interest rate prevailing in the market. The prices
remain relatively stable because neither a capital gain nor a capital loss occurs as market
rates go up or down.
 Fixed rate bond
The coupon rate remains the same through the course of investment.
 Traditional bond
A bond in which the entire principal can be withdrawn at a single time after the bond’s
maturity date is over.
 Perpetual bond
Bond with no maturity date. Therefore, it may treated as equity, not debt. Issue pay
coupons on the perpetual bonds forever and they do not have to redeem the principal.
 Bearer bond
It is a certificate issued without a name of its holder. The person who has the paper
certificate can claim the value of bond. They are traded like cash.
 Registered bond
Bond whose ownership is recorded by the issuer, or by a transfer agent. Interest payment
and principal upon maturity are sent to registered owner. It is alternative to bearer bond.
 War bond
Bond issued by governments to fund military operations during war time. This type of
bond has low rate return rate.
 Puttable bond
When the investor decides to sell their bond and get their money back before the maturity
date.
 Extendable bond
The bonds which allow the investor to extend the maturity period of bond.
 Revenue bond
Bonds are issued to raise finance for specific projects, such as the construction of a
particular building. Repayment of such bonds (principal and accrued interest) shall be
paid through revenues explicitly generated from the declared projects.
 General obligation bond
Bonds are issued to raise finances for general projects such as improving the
infrastructure of a region. Repayment of the bond, along with interest, is processed
through revenue generated from different projects and taxes.

 Asset-backed securities
Bonds whose interest and principal payments are backed by underlying cash flows from
other assets. Example of asset-backed securities are mortgage-backed securities (MBSs),
collateralized mortgage obligations (CMOs) and collateralized debt obligation (CDOs)
 Subordinated bonds
Bonds that have a lower priority than other bonds of the issuer in case of liquidation.
 High yield/ junk/ non-investment grade bond
Bonds are from issuers that are considered to be at greater risk of not paying interest
and/or returning principal at maturity. As a result, the issuer will offer a higher yield than
a similar bond of a higher credit rating and typically a higher coupon rate to entice
investors to take on the additional risk.
 Inflation-indexed/ inflation-linked bond
It provides protection against inflation and is designed to cut out the inflation risk of an
investment.
 Treasury bond / T-Bond
A marketable fixed interest U.S. Government debt security with a maturity of more than
10 years. T-bonds make interest payments semi-annually and the income that holders
receive is only taxed at the federal level.
 Climate bond
Bonds are issued by any government to raise funds when the country concerned faces any
adverse changes in climate
 Plain vanilla/ straight/ bullet bond
A bond without any unusual features, it is one of the simplest forms of bond with a fixed
coupon and a defined maturity and is usually issued and redeemed at the face value.
 Participatory bond
Bond whereby the issuer promises a fixed rate but the coupon cash flow may increase if
the profit/ income levels of the company rise to a pre-specified level and may reduce
when income falls below a pre-specified level; thereby the investor participates in the
return enjoyed based on company revenues/ income.
 Payment in kind bonds
These types of bonds pay interest/ coupon, not in terms of cash pay outs but in the form
of additional bonds.
 Yankee bonds
A dollar-denominated bond issued in the US by an issuer who is outside the US.

 Samurai bonds
A yen denominated bond issued in Japan by an issuer who is outside Japan.
 Prize/ lottery bond
Funds raised are used to offset government borrowing and are refundable to the bond
owner on demand.
 Masala bond
And Indian rupee denominated bond issued outside India.
 Uri dashi bond
A non-yen denominated bond sold to Japanese retail investors.
 Bulldog bond
London dollar dominated bond
 Lion city bonds
Singapore dollar dominated bond
 Investment grade bonds
Before they are issued bonds are given a credit rating by rating agencies such as
standard& poor’s (S&P), Moody’s and Fitch
Issuance Process
Offering: governments, municipalities, and corporations issues bonds to raise long term
funds for various purposes
Prospectus: a detailed document outlining the bond’s terms, interest rates, maturity,
repayments schedules
Allotment: through IPO or private placements
Trading Mechanism
Stock exchange: listed bonds can be traded on S/E
Regulatory Framework
SEBI regulations: Trading of corporate bonds are governed by SEBI regulations to ensure
transparency and investor protection
RBI regulations: issuance and trading of government bonds are regulated by RB
Mutual Funds
 A mutual fund is an investment vehicle that pools money from several investors to invest
in a mix of assets like stocks, bonds, government securities, and even gold. Mutual funds
allow investors to achieve portfolio diversification and professional management, with
returns and risks based on the performance of the fund’s investments.
MF is a Professionally managed fund which pools money from may investors to purchase
security
The funds are managed by financial experts called fund managers
These professionals have the skills to analyse and make investment decisions. To manage
the fund, the AMC charges a fee, known as the expense ratio.
The gains generated from this fund investment are distributed proportionately amongst
the investors after deducting applicable expenses, by calculating the Net Asset Value.
Equity Fund: large cap, medium cap, small cap
Market Cap: Market value of one share X No. of shares = total value
Large cap = 20 Core above market cap Cos (Risk-L & Return –L)
Medium cap = 5 to 20 Cores market Cap (Risk-M & Return –M)
Small Cap = 1 to 5 Cores market Cap (Risk-H & Return –H)
Multi Cap = Mix of L&M&S – Moderate return
Flexi Cap = fund manager decides proportion of fund invest in L, M, S
Thematic Funds = Theam based investment: Pharma, Toys
How Do Mutual Funds Work?
A mutual fund pools money from multiple investors to invest in a diversified portfolio of
assets, such as stocks, bonds, or other securities. Here’s a step-by-step overview of how
mutual funds work:

1. Pooling Money: Investors buy shares or units of the mutual fund, contributing their money
to the fund. This collective pool of money is managed by professional fund managers.
2. Investment Strategy: The fund manager uses the pooled money to buy a variety of assets
according to the fund’s investment objectives and strategy. For example, a stock fund
might invest in a range of companies, while a bond fund might invest in various
government or corporate bonds.
3. NAV Calculation: The Net Asset Value (NAV) is the value of one share or unit of the
mutual fund. It is calculated by dividing the total value of the fund’s assets minus any
liabilities by the number of outstanding shares or units. NAV changes daily based on the
performance of the fund’s investments.
4. Value Changes: As the prices of the assets within the fund fluctuate, the NAV also
changes. If the investments perform well, the NAV goes up; if they perform poorly, the
NAV goes down.
5. Returns to Investors: Investors can earn returns through capital gains (when the fund sells
investments at a profit) and income distributions (such as dividends or interest from the
 fund’s holdings). These returns are typically reinvested or paid out to investors, depending
on the fund’s policies.
6. Buying and Selling: Investors can buy or redeem (sell) their mutual fund shares at the
NAV price at the end of each trading day. This means the value you receive when you sell
your shares is based on the NAV at that day’s market close.
7. Fees: Mutual funds charge fees for managing the investments. These fees can include
management fees, administrative costs, and sometimes exit load. It’s important to
understand these fees as they can affect your overall returns.
8. Tax Implications: Mutual fund returns are subject to capital gains tax (short-term and
long-term capital gains). When the fund generates capital gains, those gains are distributed
to investors, who then pay taxes on them.
Read the mutual fund taxation guide for more information.

The Securities and Exchange Board of India (SEBI) has classified mutual funds based on
where they invest, some of which we have listed below.

1. Open-ended funds are mutual funds that allow you to invest and redeem investments at
any time, i.e. they are perpetual in nature. They are liquid in nature and don’t come with a
specific investment period.

2. Close-ended schemes have a fixed maturity date. You can only invest at the time of the
new fund offer and redemption can only be done on maturity. You cannot purchase the
units of a close-ended mutual fund whenever you pleas

3. Equity Mutual Funds invest at least 65% of their assets in stocks of companies listed on
the stock exchange. They are more suitable as long-term investments (> 5 years) as stocks
can be volatile in the short term. They have the potential to offer higher returns but also
come with high risk.

4. Debt Mutual Funds primarily invest in fixed-income instruments like Government

securities, corporate bonds, and other debt instruments. They are not affected by stock
market volatility and hence, can offer more stable returns compared to equity mutual funds.
The types of debt mutual funds are differentiated on the basis of the maturity period of the
securities they hold.

5. Hybrid Mutual Funds invest in both equity and debt in varying proportions depending on
the investment objective of the fund. Thus, hybrid funds give you diversified exposure to
various asset classes. Hybrid funds are categorized on the basis of their allocation to equity
and debt.

6. Equity Linked Savings Scheme: An ELSS or equity-linked savings scheme is a tax-

saving investment option under Section 80C of the Income Tax Act, 1961. ELSS funds are
equity-oriented, and at least 65% of their portfolio consists of equity-linked securities. The
debt and money market instruments form the remaining part of the portfolio

Ways/modes of Mutual Fund Investment

 1. Lumpsum: When you want to invest a significant amount in a mutual fund in one go. For
example, if you had a sum of Rs 1 lakh to invest then you could go in for lumpsum
investment and invest the entire amount of Rs 1.0 lakh at one go in a mutual fund of your
choice. The units allotted to you will depend on the NAV of that fund on that particular
day. If the NAV is Rs 1000, you will end up getting 100 units of the mutual fund.

2. SIP: You also have the option to invest small amounts periodically. In the above example,
say, you don’t have Rs 1 Lakh but can commit to an investment of Rs 10,000 per month for
10 months, and you can align your investments with your cash flows. This way of
investing is known as a Systematic Investment Plan (SIP). SIP encourages regular
investment of fixed amounts bi-monthly, monthly, quarterly and so on, depending on your
need and the options available with the mutual fund.
This method of investing inculcates a discipline of investment and also eliminates any need
to look for the right time to invest. Many investors try to time the market which generally
requires considerable time and expertise. What a SIP does instead is to average out your
costs and the investor doesn’t need to time the market. When the NAV is low, it gets you
higher units and vice versa. SIPs, when done regularly over the long term, can help you
build a more considerable mutual fund investment corpus.

The minimum amount for a lump sum and SIP investments are defined by mutual fund
companies and can vary but can start at as low as Rs 100

How-to Invest in Mutual Funds?

Broadly there are three ways to invest in mutual fund schemes:

 Through a Mutual Fund company’s website =

Eg. Abstock,

 Through a Mutual Fund distributor

 Through the ET Money

What are the documents required to invest in mutual funds?

PROOF OF IDENTITY:

1. PAN Card (Mandatory)

2. Voter ID Card

3. Driving License

4. Passport
5. Aadhaar Card

6. Any other valid identity card issued by the Central or State Government

Mutual Fund Functions

To understand mutual funds, let’s see how they function.

1. New fund offers (NFO) release: An AMC can start a mutual fund scheme by launching
its NFO. It creates and shares the strategy of the scheme before its launch. Investors can
then decide whether and how much they should invest. NFO units are often priced at a low
ticket, such as Rs 10.

2. Pooling money: After the NFO, fund houses receive funds from interested investors to
purchase shares in stocks, bonds, and other assets. Investors who didn’t participate in the
NFO can still buy the units of the fund after it gets operational.

3. Investments in securities: The scheme’s strategy determines how the fund manager will
invest the funds. The fund manager does extensive research on the economy, industries,
and companies before making an investment decision. He then buys the most appropriate
securities that will generate optimum returns for unitholders.

4. Return of funds: As mutual funds generate returns, the gains can be distributed among
investors or retained in the scheme for further growth. Investors receive pay-outs if they
choose the IDCW option (income distribution cum capital withdrawal). If they choose the
growth option, the gains are retained in the scheme and allowed to grow further.

MONEY MARKET PRODUCTS

Money market instruments are short-term (less than 12 months) financing instruments
with high financial liquidity and short maturity.
Features
a. Short – term: deals with instruments having maturity ranging from one day to
12 months
b. High liquidity: easily convertible into cash
c. Wide range of participants: bank, NBFC, Government, Semi- Government,
Corporations
d. Different instruments: T- Bills, CP, CD, Inter Corporate Deposits, Inter
Bank Participation Certificate, Repo/ Reverse Repo
e. Role in Interest setting: monetary policy will be depending on demand and
supply of money market instruments
f. Regulatory framework: Money market is typically regulated by RBI
1. Treasury Bills:
  Treasury bills or T-bills, which are money market instruments, are short term
debt instruments issued by the Government of India and are presently issued in
three tenors,
 namely, 91-day, 182 day and 364 day.
 Treasury bills are zero coupon securities and pay no interest. Instead, they are
issued at a discount and redeemed at the face value at maturity.
 For example, a 91-day Treasury bill of ₹100/- (face value) may be issued at
say ₹ 98.20, that is, at a discount of say, ₹1.80 and would be redeemed at the
face value of ₹100/-. The return to the investors is the difference between the
maturity value or the face value (that is ₹100) and the issue price
 individuals, Firms, Trusts, Institutions and banks can purchase T-Bills
T-Bill Yield calculation
Yield = Maturity value – purchase price X 365 X 100
Purchase Price Days

Price of a 91 days T- Bill Rs 100, issues at Rs 98 .20 , the yield of the same
wold be

After 41 days if the same T- bill trading at a price of 99, the yield would
be

Maturity Period Auction Frequency Minimum Investment

14 days Every Wednesday ₹ 1 lakh
91 days Every week ₹ 25,000
182 days Alternate week ₹ 25,000
364 days Alternate week ₹ 25,000

 Competitive bids: the investor will specify the discount rate that they are ready to
accept. In case, the bid is better than the discount rate that is set in the auction, the order
will be completed. Else the bid will either be rejected or partially filled.

 Non-competitive bids: These are similar to a market order where the investor accepts
the discount rate determined at auction. These bids can be placed via bank, Treasury
Direct or broker
Commercial Paper
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note. CP was introduced in India in 1990 with a view to enable highly rated
corporate borrowers to diversify their sources of short-term borrowings and to provide an
additional instrument to investors. Guidelines for issue of CP are presently governed by
various directives issued by the Reserve Bank of India, as amended from time to time.

Eligible issuers of Commercial Paper (CP)

 Corporates, primary dealers (PDs) and all-India financial institutions (FIs) that have been
permitted to raise short-term resources under the umbrella limit fixed by the Reserve Bank of
India are eligible to issue CP.

A corporate would be eligible to issue CP provided:

(a) the tangible net worth of the company, as per the latest audited balance sheet, is not less
than Rs.4 crore;

(b) company has been sanctioned working capital limit by bank/s or all-India financial
institution/s

(c) the borrowable account of the company is classified as a Standard Asset by the financing
bank/s/ institution/s.

Rating Requirement

All eligible participants shall obtain credit rating for issuance of Commercial Paper from
either the Credit Rating Information Services of India Ltd. (CRISIL) or the Investment
Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and
Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd. or such other credit rating
agencies as may be specified by the Reserve Bank of India from time to time, for the purpose.
The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other
agencies. The issuers shall ensure at the time of issuance of the CP that the rating so obtained
is current and has not fallen due for review.

Maturity

CP can be issued for maturities between a minimum of 7 days and a maximum of up to one
year from the date of issue. The maturity date of the CP should not go beyond the date up to
which the credit rating of the issuer is valid.

Denominations

CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount invested by a

single investor should not be less than Rs.5 lakh (face value).

Issuing and Paying Agent (IPA)

Only a scheduled bank can act as an IPA for issuance of CP.

8. Investment in CP

CP may be issued to and held by individuals, banking companies, other corporate bodies
registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs)
and Foreign Institutional Investors (FIIs). However, investment by FIIs would be within the
limits set for their investments by Securities and Exchange Board of India (SEBI).

Trading in CP
All OTC trades in CPs shall be reported within 15 minutes of the trade to the FIMMDA
reporting platform.

Mode of Issuance

CP can be issued either in the form of a promissory note (Schedule I) or in a dematerialised

form through any of the depositories approved by and registered with SEBI.

CP will be issued at a discount to face value as may be determined by the issuer

CERTIFICATE OF DEPOSITS
A certificate of deposit (CD) is a savings account that holds a fixed amount of money for a
fixed period of time, such as six months, one year, or five years, and in exchange, the issuing
bank pays interest. When you cash in or redeem your CD, you receive the money you
originally invested plus any interest.
CDs are negotiable money market instrument issued by banks and financial institutions to
raise funds.
Borrower
 Discount finance house of India
 Stock trading corporation of India
 Commercial Bank
Lender
 UTI
 LIC
 NABARD
Maturity period
 CD issued by bank ranges from 7 days to 1 year
 CD issued by financial institutions up to 3 years
Issues:
 CDs issued at a discount to face value and redeemed at par
Trade:
 CDs are negotiable instruments, therefore they can be traded in the secondary market
Fixed Tenure: CDs have fixed tenure and cannot be withdrawn before maturity
Eligibility:
 Individuals, corporations, trusts, and other entities
 The Cooperative Banks and the Regional Rural Banks (RRBs) are not eligible for
issuing a CD
  It is fully taxable under the Income Tax Act.
Minimum Amount:
 The minimum amount of CD is 1,00,000
Types
 Bank CDs: more secured
 Institutional CDs: issued by financial institutions offer higher return high risk

CD vs FD

Criteria Fixed Deposit Certificate of Deposit

Minimum The minimum investment The minimum deposit amount for a CD

Investment amount for a fixed deposit is is Rs. 1 lakh.
Amount Rs. 1000.

Return on It ranges from 3.5% to 8%. The interest rate on CDs, if issued by
Investment organisations, has higher interest rates as
compared to commercial banks.

Investment It is a long-term investment This is a short-term investment and

Tenure and offers a maximum offers a maturity period ranging from 1-
maturity period of 10 years. 3 years.

Collateral One can apply for a loan One cannot apply for a loan against a
against FD. CD.

Let’s assume that a scheduled commercial bank has issued a commercial deposit of Rs.10
lakh for a maturity period of 91 days at an interest rate of 6.5%. the denomination eligible for
this deposit is Rs.1 lakh. If you purchase one unit of this CD by investing Rs.1 lakh, what will
be your returns?
Difference between CD and CP
 banks and financial institutions issue certificates of deposit, but large corporations,
primary dealers, and All-India Financial Institutions issue commercial papers.
 you need to make a minimum investment of Rs.1 lakh and its multiples in certificate
of deposits. However, the minimum investment amount for commercial paper is Rs.5
lakhs and thereafter in multiples
Subscription
 investors subscribe CDs directly from bank or through brokers
Regulations:
 the issuance of CD is regulated by RBI
 All dealings in call/notice money on screen-based negotiated quote-driven system
(NDS-CALL) launched since September 18, 2006 do not require separate reporting. It
is mandatory for all Negotiated Dealing System (NDS) members to report their
call/notice money market deals (other than those done on NDS-CALL) on NDS.
Deals should be reported within 15 minutes on NDS,
 The reporting time on NDS is up to 5.00 pm on weekdays and 2.30 pm on Saturdays
or as decided by RBI from time to tim
Money at Call and Short Notice:
 The terms “call money” and “money at call” are synonymous. In both terms, the
borrower must repay the full amount upon the lender’s request, and they represent
short-term loans.
 short notice money allows for repayment within 14 days after receiving notice from
the lender
 Call Money" means deals in overnight funds
 "Notice Money" means deals in funds for 2 - 14 days
Borrowers
 Schedule Commercial Bank
 Co-operative Banks
 Primary Deals (PDs)
Lenders
 Scheduled Commercial Banks
 Co-operative Banks
 Primary Dealers (PDs)
 All India Financial Institutions
 Select Insurance Companies
 Select Mutual Funds

Call rate
 interest rate paid on call loans, and it’s known for its high volatility.
 The degree of this volatility varies on supply and demand within the call loan market.
 Eligible participants are free to decide on interest rates in call/notice money market.
 Calculation of interest payable would be based on FIMMDA’s (Fixed Income Money
Market and Derivatives Association of India) Handbook of Market Practices.
Time
  Deals in the call/notice money market can be done upto 5.00 pm on weekdays
and 2.30 pm on Saturdays or as specified by RBI from time to time
Example

Let’s say Bank A has a temporary shortage of funds due to unexpected withdrawals by its
customers. To cover this shortfall, Bank A decides to borrow ₹50 crore from Bank B in the
interbank market. The agreed upon Call Money Rate for this transaction is 6% per annum.

Regulator
As you are aware, the Reserve Bank of India has, from time to time, issued a number of
guidelines/instructions/directives to banks in regard to matters relating to call/notice money
market
Repurchase Agreement (REPO)
Repo is a money market instrument, which enables collateralised short term borrowing and
lending through sale/purchase operations in debt instruments. Under a repo transaction, a
holder of securities sells them to an investor with an agreement to repurchase at a
predetermined date and rate.
 The current Repo Rate in India has been fixed at 6.50% as per the announcement
made by the government on 8th August 2024.

Eligible participants

(1) The following are eligible to participate in repo transaction under these Directions:

(a) Any regulated entity.

(b) Any listed corporate.

(c) Any unlisted company, which has been issued special securities by the Government of
India, using only such special securities as collateral.

(d) Any All India Financial Institution (FIs) viz. Exim Bank, NABARD, NHB and Small
Industries Development Bank of India (SIDBI), constituted by an Act of Parliament and

(e) Any other entity approved by the Reserve Bank from time to time for this purpose

Inter- Corporate Deposits

Deposits made by one firm to another are known as inter-corporate deposits. All public
companies, whether they have share capital or not, have the option of using this finance. It
consists of

When a company acquires security of another company

When a company gives loans to another company.
When a company gives a guarantee to any person or institution who provides a loan to
another company. In general, we can say when companies arrange funds from another
company it is known as Inter-corporate deposits.
Stock Exchange / Secondary Market
A stock exchange is a marketplace where securities, such as stocks and bonds, are bought and
sold. Bonds are typically traded Over-the-Counter (OTC), but some corporate bonds can be
traded on stock exchanges.

Feature Over-the-Counter (OTC) Exchange

Definition A market where securities are A centralized platform where buyers and
traded directly between two sellers can trade securities, such as stocks
parties, without the use of an and derivatives, according to pre-established
exchange. rules and regulations.
Market Typically financial institutions, Retail and institutional investors, market
Participants hedge funds, and large makers, and authorized participants.
investors.
Trading Hours Continuous, 24/7 Limited to specific exchange hours
Price Based on direct negotiations Based on supply and demand, as determined
Discovery between buyer and seller. by the bid and ask prices of multiple market
participants.
Transparency Low, as prices are only known High, as all trades are publicly disclosed and
to the two parties involved in can be monitored in real-time.
the transaction.
Liquidity Depends on the size and Generally higher, due to the large number of
frequency of trades between market participants.
parties.
Regulation Minimal, as there is no central Regulated by government agencies, such as
authority overseeing the market. the SEC or CFTC.
Execution Fast, as transactions can be Can be slower, due to the need for price
Speed completed directly between matching and the potential for network
parties. delays.
Costs Typically higher, due to the Lower, due to the presence of price
absence of price competition. competition and the ability to take advantage
of volume discounts.
Accessibility Limited to large financial Generally, more accessible, with many
institutions and high net-worth online brokerages offering retail investors
individuals. the ability to trade on major exchanges.
BSE top 30 trading companies of the exchange in more than 10 sectors’ It ranks amongst the
10 most valued exchanges globally. Total listed companies around 7400. network 490 cities.
Market capitalization 296 trillion

NIFTY 50 stock Index. Total listed companies around 1790. Global 11 th position. Network
1900 cites. Market capitalization 199 trillion
Fin tech
Fintech, a combination of the words “financial” and “technology,”
It is a software that seeks to make financial services and processes easier, faster and more
secure
How Does Fintech Work
fintech apps, this is typically done through application programming interfaces (APIs), which
enable communication between two applications to facilitate data sharing. This makes it
possible for fintech products to automate fund transfers, analyse spending data and perform
other tasks.
a. Neo Banks— banks that operate exclusively online — enable customers to
complete actions like ordering credit cards and opening savings accounts
online without charging the same fees as traditional institutions
Fintech is the future of finance& NEO banking is the future of fintech.
 Neo means new. These are new-age banks without any physical location,
present entirely online. They provide digital, mobile-fast financial solutions for
payments, money transfers, lending etc
 most neobanks do not have a banking license and cannot operate stand-alone — most
neobanks partner with licensed banks to provide financial services.
 If you have a savings account with a Neo bank in India, you will be able to transfer
money to and from the account, earn interest on the amount in the account, make
online payments through the account, etc.
 Through smartphone one can open neo bank
 Bank will send their debit card to our address
 Scan QR code of the card and activate
 LIST OF TOP NEO BANKS IN INDIA
 Freo is the first credit-led neobank in India
 Fi Money
 Jupiter
 InstantPay is one of the biggest neobank in India
 FamPay
 Mahila Money
 Niyo
 Razorpay

b. Paytm
c. PhonePe
d. Pine Labs
e. Razorpay
f. UPstox
g. Policybazar.com CRED
UPI UNITED PAYMENT INTERFACE
UPI or Unified Payments Interface is an immediate real-time payment system that helps in
Instantly transferring the funds between the two bank accounts through a mobile platform.
This idea was developed by the National Payments Corporation of India and is controlled by
the RBI. As of March 2019, there are 142 banks live on UPI with a monthly volume of
799.54 million transactions and a value of ₹1.334 trillion
Process
 Create a UPI ID
 Link the bank accounts with UPI ID
 Once get UPI ID of others one can transfer fund to that account instantly
 There is no transaction charge

Investing in real assets

• A real asset is a tangible investment that has an intrinsic value due to its substance and
physical properties.
• A real asset is a tangible asset you can touch—like a bridge, or a building, or gold. These assets have
intrinsic value that can be exchanged for other goods and services and in that sense are more “real” than
traditional financial investments like equities or bonds.
Land
Building
Factory
Equipment
Human capital
Real estate
• Real assets provide portfolio diversification, as they often move in opposite directions
to financial assets like stocks or bonds.
• Real assets tend to be more stable but less liquid than financial asset
Factors to be considered while choosing an investment
Investment objective
Before making an investment decision, understand your investment objectives. Do you want
capital appreciation, regular income, or a combination of both? Understanding your
investment objectives will help you select the right investment vehicle
Budget
• The investor’s budget is the amount of capital that the investor has.
• Investors must budget for unexpected costs.
• The budget should provide for emergencies, savings and investments.
• Investors can decide how much of their surplus money can go to investments.
Investment Planning Factors / Safety
• When planning investments, you should consider the safest possible investment
opportunities. Although some investments offer low returns, they can be safer than
those that offer higher gains.
• Explore opportunities that have a history of good returns.
• To minimise risk, you should divide investments between the different investment
options.
• The method of calculating interest should also be considered.
Volatility / Fluctuations on Investment Markets/ Income stability
• Volatility is a rise and fall of market prices. If a market goes through frequent swings
or fluctuations, it is seen as highly volatile. Low volatility means that the investment,
market or economy is stable.
• Before making an investment, the investor should consider the fluctuations in national
and international economic trends.
• The level of volatility will have an impact on the amount of returns that the
investment yields
• Market volatility is usually associated with investment risk.
Liquidity
• Liquidity, therefore, refers to how quickly and easily an investment can be converted
to cash.
 • In case of emergencies, there should be an amount of capital allocated to an
investment that can be easily converted to cash.
• A savings account is more liquid than property because it is easier to convert to cash,
while property takes time to sell.
• Many shares on the stock market are considered fairly liquid because they can be
easily sold to other traders in the market.
Taxation / Tax Implications
• Tax is a compulsory fee that citizens must pay to the government.
• Different investments have different tax rates.
• The investor must consider income tax implications in order to secure a high net after-
tax return.
• A good investment must produce a good after-tax income.
Risk
• In finance, risk refers to the possibility of losing money due to unforeseen
circumstances.
• Possibility of incurring loss
• The higher the potential return, the higher the potential risk of losing money.
• For example, investing in shares has a higher risk than investing in a fixed deposit,
but it also promises higher returns.
Investment Period / Investment Term
• Investment period is the duration (length of time) of the investment, which can
influence the return on investment.
• The investment can be short, medium or long term.
• Long-term investments must be held for more than a year, while short-term
investments are held for one year or less.
• Long-term investments generally yield higher returns than short-term investments.
• The investment period depends on the personal needs of the investor.
Inflation Rate
• Inflation is the continuous rise in the prices of general goods and services, which
leads to a decrease in the value of money. The inflation rate is a percentage that is
calculated annually to measure the rise of the average price of goods and services in
the economy.
• In South Africa, the inflation rate has been around 4% for the past few years. A good
investment should, therefore, generate an interest of 6% or more in order to beat
inflation and produce visible returns.
 • When the inflation rate rises, the purchasing power of consumers decreases.
• A good investment should have a return on investment that is higher than the inflation
rate.
• Some investments such as property and shares are positively impacted by inflation.
Their value can increase as inflation rises.
Return on Investment (ROI)
• Return on investment is the benefit that the investor gains after deducting the cost of
the investment.
• It can be in the form of interest, dividends or capital appreciation (an increase in the
value of assets).
• The return on investment should be expressed as the net after-tax income.
• The net after-tax return should be higher than the inflation rate.
• There is usually a direct link between risk and return on investment.

Concept of Risk and Return

 Retune and Risk are the two sides of investment
Meaning of Return and Risk
 Return is the gain or loss from an investment over a period of time.
Eg including capital gains, interest, dividends, or rental income in the case of real
Let’s assume an initial investment of Rs100 that grows to Rs 120 in one year.
Calculate investment return
Types of Return
 Expected return = Expected return is the amount of profit or loss an investor can
anticipate from an investment
 Realised return = return earned after selling the holding security
 Nominal Return = return before adjusting for inflation, taxes, trading costs, and
investment fees.
 Real Return = return after adjusting for inflation, taxes, trading costs, and investment
fees.
Risk: taking risk can result in gain or loss avoiding risks also means forgoing gains and
pleasure in life.
“The biggest risk is not taking any risk”.in a world that is changing quickly, the only strategy
guaranteed to fail is not taking risk”. Mark Zuckerberg
 Risk is the uncertainty or variability of the outcome of an investment
 ‘Risk’ is a term that we use to refer to the chance of suffering a loss as a result of
uncertain events
 Possibility of incurring loss
  Systematic risk = risk external to the business organisation
 Unsystematic risk = risk raised internal matters of a firm
Financial Products associated Risk
Internal Risk
1. Payment Products
a. Phishing = Imposters trying to lure and collect important data like password, A/C
number, etc
Any communication either which is either threatening or too good to be true must be
ignored or at least reported to the nearest branch for the further action
b. Stolen Passwords = use only personal computer with proper Anti- Virus software only
for online transactions
c. Loss of Cards = report loss of cards and any suspected compromise on online
passwords immediately
d. Leaving the card at ATM= as far as possible use only OTP option for passwords
2. Investment Products:
a. Liquidity Risk = risk is not being able to redeem and realise money when needed is
called liquidity risk
Can be managed by planning cash flows needs and mapping cash flow needs to
investment
On 15th October 2016`the following investment options are available to Mr TOM
 6 months fixed deposits offering 5.5% interest rate (interest is subject to tax)
 One-year fixed deposits offering 7% interest rate (interest is subject to tax)
 3 years fixed deposits offering 7.5% interest rate (interest is subject to tax)
 15 years PPF offering 8% interest, interest subject to fluctuate
 15 years tax free bonds offering 7.2% coupon rate
Tom’s cash flow needs are follows
 1 lakh medical emergency for his father treatment
 2 lakhs towards his son’s admission to school in May 2017
 5 lakhs for the down payment for home which Tom plans to buy 2019
Tom has 10 lakhs with him today. Where should he invest so that he can manage
liquidity risk?
 1 lakh SB A/C
 2 lakhs 6 months Fixed deposit
 5 lakhs in 3 years fixed deposits
  1,50,000 in PPF
 5 lakhs in bonds

b. Credit Risk = is risk that a borrower may not repay the loan amount. The risk
includes both principal amount and interest
Credit risk can be assessed by credit rating given by SEBI and registered credit rating
agencies CRISIL, ICRA, FITCH, CAREBRICKWORK. Credit rating are identified
by symbols and different symbols are used for short term loans long term loans
Rating for long term loans

AAA HIGHEST SAFETY

AA HIGH SAFETY
A ADEIQUATE SAFETY
BBB MODERATE SAFETY
BB MODERATE RISK
B HIGH RISK
C VERY HIGH RISK
D DEFAULT

RATING FOR SHORT TERM LOANS

A1 HIGHEST SAFETY
A2 HIGH SAFETY
A3 MODERATE SAFETY
A4 HIGH RISK
D DEFAULT

c. Market Risk = it is the process of losses arising due to the factors that affect the
overall performance of financial markets. Market risk is also known as systematic
risk. Reasons political unrest, natural calamities, disaster, terror attacks etc
d. Interest Rate risk = fluctuation in the interest rate
Can be managed by Averaging
e. Business Risk = no certainty of prospects
 f. Company Risk = no certainty of prospects

3.Insurance products

a. Under Insured
b. Over Insured
c. Non- disclosure of relevant facts
3. Loan Products
a. Leverage Risk
b. Interest Rate Risk

External Risk

a. Inflation
b. Interest Rate Risk
c. Tax
d. Herd Metality = retail investors are influenced by the market movements
e. Political stability and Policy decision
f. Force Majeure = grater force

RISK APPITITE AND RISK CAPCITY DETERMINES HOW MUCH RISK ONE
SHOULD TAKE

RISK APPITITE = ability of the investor to handle loss

A. AGGRESASIVE RISK APPITITE: MAXIMUM RETUN FROM MAXIMUM EISK

B. MODERATE RISK APPITITE = BALANCED APPROACH AND MORE
DIVERSIFICATION
C. CONSEVATIVE RISK APPITITE: LESS KNOWLEDGEBLE SO STAND FOR
SAFETY AND LOW RETUN

RISK CAPACITY

a. Age
b. Income tax
c. Net worth
d. Goal Time frame
Based on research Daniel kahhman and Amos Tversky proposed that when it comes to risk
taking we are not rational. This irrational behaviour has been termed as “Loss Aversion”.
Peter Bernstein “Against the God’s”. speaks history of risk and human fascination towards
risk
Risk Measuring
 Probabilities and statistical techniques with help of modern computer risk can be
measured
 Slandered deviation
 Beta value
Risk management
a. Asset allocation = mix various assets eg; PF, FD,
b. Averaging
Exercises
1. The pain os losing money impacts us more than the pleasure of gaining money. We
are averse to any kind of loss and we take risk to avoid loss. What is this behaviour
called?
a. Risk aversion b. loss aversion. C. taste aversion. D. brand aversion
2. Which is the technique of risk management
a. Ignoring and avowing technique
b. Avowing and managing technique
c. Probability and statistical technique
d. None of the above
3. What is this risk of not able to redeem and realize money when needed called
a. Credit risk b. liquidity risk c. market risk d. interest rate risk
Systematic Investment- meaning and advantage
 Investing a definite amount regularly on weekly, monthly or yearly basis in some
rewarding avenues for a long period of time
 Regular contribution to PF, RD, Mutual Fund
 Goal oriented, piecemeal investment over a long period of time
Systematic Investment Plan (SIP)
 A Systematic Investment Plan (SIP), also known as AIP or Automatic Investment
Plan, is a disciplined investment approach that will allow you to invest a fixed
amount at regular intervals in mutual funds
BENEFITS OF SYSTEMATIC INVESTMENT PLAN (SIP)
 Disciplined Investing: SIPs encourage regular and disciplined investing as investors
commit to making fixed investments at regular intervals
  Rupee Cost Averaging: SIPs utilise the strategy of rupee cost averaging, which
allows investors to buy more units when prices are low and fewer units when prices
are high
 Flexibility: SIPs offer flexibility in terms of investment amount and duration.
Investors can start with a small amount and gradually increase their investment as
their financial situation improves. Additionally, SIPs can be started and stopped at the
investor's convenience
 Power of Compounding: Sips provide the benefit of compounding, as the returns
generated from investments are reinvested to generate additional returns
 Diversification: SIPs allow investors to diversify their investments across different
asset classes and securities. By spreading investments across a range of instruments,
such as mutual funds, stocks, or bonds, investors can reduce the risk associated with
investing in a single security or asset class.
 Professional Fund Management experienced fund managers make investment
decisions for you based on in-depth research and market analyse
 Saves time: It is the easiest way of investing for you as an investor due to various
reasons
 Auto deduct facility: You can opt for an auto deduct facility of banking through
which your SIP amount will automatically deduct from your bank account at a pre-
decided date
DISADVANTAGES OF SYSTEMATIC INVESTMENT PLAN
 Market Risk: Sips are exposed to market risks, and the value of investments can
fluctuate based on market conditions
 Timing
 Over dependence of fund manager
 Exit Load; Exit load refers to the charges the mutual fund company charge at the
time of redeeming your mutual fund units before the end of a particular period of time
 Lock-in Periods: The duration between which you cannot redeem your units
otherwise you have to pay exit loads is known as the lock-in period
 Expense Ratios: The expense ratio is the annual fee that you pay to the Asset
Management company (AMC) when you invest in a mutual fund scheme. It is a
percentage of the fund’s total value and includes cost such as administration,
marketing, legal fees, etc. The maximum expense ratio that can be charged for an
equity scheme is 2.25% and that for a debt scheme is 2%.
FACTORS TO CONSIDER BEFORE STARTING SIP
 Financial Goals: Are you saving for a dream home, your child's education, or a
comfortable retirement? If you clearly identify your goals, it will be easy for you to
determine the investment horizon and the amount you need to invest
through SIPs. Remember, a well-defined destination ensures a focused and fruitful
journey.
 Risk Appetite: Consider your tolerance for market fluctuations and volatility. Are
you comfortable with the potential ups and downs that come with equity investments,
or do you prefer the stability of debt funds? Understanding your risk appetite will help
you select SIP funds that align with your comfort level.
  Investment Duration
 Fund Selection- Research different funds, and evaluate their historical performance.
 Cost Considerations: It's essential to factor in the costs associated with SIP
investments. Assess the expense ratios and any additional charges imposed by the
mutual fund houses. While low costs don't guarantee high returns, it’s better to know
the impact of fees on your investment growth. It is necessary to keep a lookout for
funds that strike a balance between performance and costs.
 Track Record: When evaluating mutual funds, it’s important to consider the track
record and consistency of both the mutual fund house and the fund manager. Look for
funds that have demonstrated excellent performance across various market conditions.
This approach will help you as a beginner in making well-informed Investment
decisions
 Regular Monitoring: It's crucial to monitor your SIP investments periodically. Stay
updated on the fund's performance, review your portfolio, and adjust if required.
Changes in market conditions or shifts in your financial goals may necessitate
modifications in your investment strategy. So, be flexible with your investment
strategy.

Step 2 complete your KYC

Step 3 Register for a SIP

Step 4 select the right SIP
 Link the SIP with financial objective eg; retirement pension, buying home
 Equity linked plan if risk bearing capacity
 Debt balanced plan for risk tolerance
 Regular SIP: A Regular SIP is the most common type of Systematic Investment
Plan, where you invest a fixed amount of money at regular intervals, usually monthly.
The investment amount and frequency can be changed over time, but the investment
duration remains fixed. For example, you may start by investing INR 5000 per month
for five years. This type of SIP is ideal for people looking to create a disciplined
savings habit and invest in a long-term investment strategy.
 Flexi SIP: A Flexi SIP is a more flexible version of a regular SIP, where you can
change the investment amount and frequency based on your financial situation
and goals. This type of SIP allows you to increase or decrease the investment amount
as needed, making it ideal for people who want more control over their investments.
For example, you may want to increase your investment amount during times of high
disposable income or decrease it during times of financial stress
 Top-Up SIP: A Top-Up SIP is a type of SIP that allows you to increase the
investment amount with each instalment. This type of SIP is designed to take
advantage of the power of compounding, as the larger investment amounts will earn
more returns over time. For example, you may start with an investment of INR 5000
per month and gradually increase it by 10% or INR 500 each year.
 Trigger SIP : A Trigger SIP is a type of SIP that is triggered by certain market
conditions or events. This type of SIP is ideal for people who want to take advantage
of market opportunities and invest more during periods of low market prices. For
 example, you may set up a trigger SIP that automatically invests a larger amount
during market downturns
 Perpetual SIP; A Perpetual SIP is a type of SIP that has no fixed end date and
continues until you choose to stop it. This type of SIP is ideal for people who want to
create a long-term investment strategy and build wealth over time. With a perpetual
SIP, you can invest a small amount each month, gradually increasing your investment
to benefit from the power of compounding.

Step 5 Select the amount of investment that you wish to make

Step 6 Select a date for your SIP.

Step 7 Submit Your Form

Mont Investment Present Units Total Units

h Amt Value Allocated
0 5000 50 100 100
1 5000 40 125 125+100=2
25
2 5000 52.6 90 225+90=31
5
3 5000 100 50 315+50=36
5
Significance of SIPs
 Even small sums can be invested
 Improves financial knowledge
 Regularity of investment
 Control over expenditure
 Opportunity to build big corpus in the long run
 Excellent opportunity to achieve dream projects
 Financial satisfaction
 Create saving habit
 Motivates for more investment
SYSTEMATIC WITHDRAWAL PLANS (SWPs)
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 (monthly, quarterly, half
yearly, or annually). You can choose the amount and frequency of withdrawal. You can also
choose to just withdraw the gains on your investment keeping your invested capital intact
Features

 It is a facility to redeem units regularly

 You can choose the frequency of withdrawals

 You can either withdraw a fixed amount or only the capital appreciation

 It is ideal for investors seeking regular income from their investments

SIP SWP

Wha Regular investments in mutual fund Regular withdrawals from mutual fund
t schemes schemes

Why Wealth accumulation A steady stream of income

Who Ideal for investors of all ages, Ideal for retirees and senior citizens
especially young investors

How Money gets debited from your bank Mutual fund house sells your invested units
account to buy mutual fund units to credit the money in your bank account

Factors to be considered while borrowing / Factors to be considered before taking credit

 Need Assessment
 Security requirement
 Repayment capacity
 Repayment schedule
 Rate of interest on loan
 Processing Fees
 Existing fixed commitments
 Selection of the lender
Objective to borrow
• Micro loan
• Small business loan
• Large business Loan
What are the terms of the loan: The term of a loan is the length of time you have to repay
it. The term can be as short as a few months or as long as a few years
The repayment schedules. The repayment schedule is the timeline you have to repay the
loan.
The collateral. Collateral is something of value that you pledge to put up as security for the
loan
The fees. There are a number of fees associated with taking out a loan, including origination
fees, application fees, and closing costs.
The prepayment penalty. Some loans come with a prepayment penalty, which means you'll
be charged a fee if you pay off your loan early
What is the interest rate?
• The interest rate is the percentage of the loan that you'll have to pay back in addition
to the principal
• If you're paying a high interest rate, that means more of your money is going towards
paying off the loan, and less is available to reinvest in your business.
• On the other hand, a low interest rate can save you a lot of money over the life of the
loan
What are the repayment terms?
• You'll want to know how long you have to repay the loan, how much you'll need to
pay each month, and what the interest rate will be
How will the loan be used?
• The purpose of the loan: What do you need the money for? Whether you're looking to
expand your business, buy new equipment, or cover operational costs, it’s important
to have a clear idea of how you'll use the loan. This will help you determine which
type of loan is best for your needs.
How long will it take to repay the loan?
• Ideally, you want to find a loan that you can repay quickly. The longer it takes to
repay the loan, the more interest you'll pay, and the more of a burden the loan will be.
You also don't want to put your business in a position where it's struggling to make
loan payments.
What are the risks involved in borrowing?
 • you need to consider the risks involved in borrowing. There are always risks involved
in taking out a loan, but they're especially high for businesses. If you can't make your
payments, you could lose your collateral, and you might even have to declare
bankruptcy. This is why it's important to only borrow as much as you can reasonably
afford to pay back.
What are the benefits of borrowing?
• Borrowing money to finance your business can be a great way to get the capital you
need to grow your business. There are many benefits to borrowing, including the
ability to get the money you need quickly, the ability to choose how you use the
money, and the ability to pay back the loan over time
Insurance – life and health – Pure insurance and endowment policies – Testing
adequacy of insurance coverage
Story of island
Insurance
 Insurance is a financial tool specially created to reduce the financial impact of
unforeseen events and to create financial security. Indeed, everyone who wants to
protect himself against financial hardship should consider insurance
 Insurance is a mechanism of risk transfer and sharing by pooling of risks and funds
among a group of individuals who are exposed to similar kinds of risks for the benefit
of those who suffer loss on account of the risk.
 Social Insurance. Here, the State or government takes care of those who are
subjected to losses due to some risk event. Examples are, providing a pension when
one grows old or providing free medical treatment, meeting the cost of hospitalization
etc. The fund for this purpose comes from a pool made up from taxes or mandatory
social security contributions required to be made by all those who work and earn an
income. The Employees’ State Insurance scheme (ESI) that provides medical care and
other benefits to employees and Employees’ Provident Fund Organization (EPFO)
 voluntary Private Insurance. Here, individuals and groups can buy insurance from
an insurance company by entering into a contract of insurance with the company. The
insurance company enters into a contract (an insurance policy) whereby it (insurer)
undertakes, in exchange for a small amount of money (premium), to provide financial
protection by agreeing to pay the insuring person (insured) a fixed amount of money
(sum assured) on the happening of a certain event (insured peril)
Example1 In a village, there are 400 houses, each valued at Rs.20,000. Every year, on an
average, 4 houses get burnt, resulting into a total loss of Rs.80,000.
Number of houses 400 Value of each house Rs. 20,000 Houses that get burnt every
year (average) 4 Total loss (4 houses X Rs. 20,000) Rs. 80,000 Contribution to be
made by 400 house owners to compensate for loss of Rs. 80,000 = Rs. 80,000 / 400
Rs. 200
If all the 400 owners come together and contribute Rs.200 each, the common fund
would be Rs.80,000. This is enough to pay Rs.20,000 to each of the 4 owners whose
 houses got burnt. Thus, the risk of 4 owners is spread over 400 houses/ house-owners
of the village.
Example 2 There are 1000 persons, who are all aged 50 and are healthy. It is expected that of
these, 10 persons may probably die during the year. If the economic value of the loss suffered
by the family of each dying person is taken to be Rs.20,000, the total loss would work out to
Rs.2,00,000.
Case
“Insurance offers protection against unforeseen risks, just like a raincoat or umbrella protects
against rain”.
we face many risks in our lives. For example, if you drench yourself in rain, you may fall
sick. There is a risk of illness. Due to rain, there could be a short circuit of electricity. There
is a risk of electronic breakdown of this TV as well as other domestic appliances. There is a
risk of theft of our car which is parked in the garage and there is also the risk of an accident
while crossing the road. So risk is an inherent part of our life. Whether and when loss would
be caused because of risk and how much loss is caused cannot be foreseen, known or
controlled at all times. While we cannot avoid most of these risks, by purchasing insurance,
we can transfer the risk to the insurance company.”
The principles Insurance
1. Law of large numbers: it states that the more the number of members who are
insured, the more likely it is that the actual result would be closer to the expected.
( Eg. 4 houses and 10 persons)
2. Insurable interest; the term we use to describe the relationship between the insured
and the subject matter of insurance. The principle of indemnity dictates that the
insured is compensated for a loss of property, but is not compensated for more than
what the property was worth.
3. Utmost good faith: Let us distinguish between good faith and utmost good faith with
the help of example
Example 1: You have accompanied your parents to a car showroom where they sell
cars. Your father asks the salesman certain details about the car being considered. The
salesman is bound to give correct answers to the questions. Similarly, the brochures
about the particular car model cannot make a mis-representation (tell a lie) about the
model. This obligation to disclose only the truth applies when we speak of contracts
of good faith. Is the car salesman obliged to disclose (tell) everything he may know
about the car? The answer is No. The buyer has to be aware of what he is buying
4. Principle of indemnity
Let us understand the principle of indemnity with the help of an example
Example Jayesh had a shop which caught fire and as a result, a part of the goods that
were stored was destroyed. The shop was insured for its full value of Rs.5,00,000.
Jayesh claimed Rs. 5,00,000 since he had insured his shop for Rs. 5,00,000. The
insurance company’s surveyor examined the damage and estimated that the loss was
only Rs. 64,000. The insurance company paid Rs.64,000 as compensation, even
though Jayesh had a policy of Rs. 5,00,000 and claimed for more. The insurer was
applying a law known as the “Principle of Indemnity”.
 The principle of indemnity means that the loss, and only the loss, is compensated.
Insurer has to indemnify (i.e. pay for the financial loss suffered by) the insured. At the
same time, the insured should not be paid anything more than the financial loss
suffered by him. In other words, the insured should not be able to make a profit out of
the loss suffered.
5. Subrogation
Consider this situation
On his transfer from Kolkata to Mumbai, Mr.Rajan sends his household goods worth
Rs.1,00,000 through M/s. Jayant Transports. During the transit, part of the goods got
damaged due to the truck driver’s negligence. The insurer assessed the loss and found
that the value of the damage was Rs. 30,000 and paid this amount to Mr.Rajan as
indemnity. However Mr.Rajan took up the matter against M/s Jayant Transports with
the Court of Law and the Court ordered M/s. Jayant Transports to pay Rs.30,000 to
Mr.Rajan. Having already received Rs.30,000 from the insurer, Mr.Rajan would be
making a profit out of the loss if he gets Rs.30,000/- from the transporter also
taking over of the insured’s right by the insurer is called ‘subrogation’
In the matter of subrogation, one should be clear that the insurer’s rights of subrogation are
limited to the amount he has paid towards claims. If, in the case cited above, the Court had
ordered M/s. Jayant Transports to pay Rs.50,000 (instead of Rs.30,000) to Mr.Rajan, the
insurer would have subrogation rights only up to Rs.30,000 that it paid and the balance
Rs.20,000 would go to Mr.Rajan
Insurance Policy:
An insurance policy is a legal contract between the insurance company (the insurer) and the
person(s), business, or entity being insured (the insured)
Insurance premium
Payment of the amount to be paid by the policy holder for a contract of insurance in exchange
for coverage
Sum assured
Pre-defined benefit that the insurer pays to the policy holder in case the insured event takes
place / maximum amount of loss covered under the policy
Assignment
Policy holder can transfer rights to anther for reasons like availing loan
Lapsed policy
Policy which has expired and is no longer in force due to non-payment of premium due
Vesting Age
It is the age at which the policyholder starts receiving pension in an insurance cum pension
plan
Surrender Value
Value Payable to the policy holder in case the policy terminated before maturity of the policy
date
Death benefit
Amount of a benefit on a life insurance policy that will be paid to the beneficiary in the event
of the death of the insured person
Reinstatement
Renewal of a lapsed policy to live status
Exclusions
Can detailed conditions or situations for policy will not provide benefits
Maturity Claim
Payment of the agreed amount to the policy holder at the end of the contract term
Deductible / Excess
Amount of claim/loss for which insured is responsible
Under Insurance
If the insured insures their property for lesser than the the actual value
Insurable interest
Entities which are not subject to the financial loss and do not have an insurable interest can
not takes insurance policy
Nomination
Provision for the policy holder to designate any person to receive policy money in the event
of his death within policy tenure
Peril
Policy holder can transfer right to another for reasons like availing loan
Reinstatement
Replacement of the old property with the new one without deduction of depreciation
Market value
Replacement of the old property with the new one after deduction of depreciation
Third party administrator
Intermediary between insurer and insured who facilitate the cashless services of a health
insurance. The TAPs process and approves the bills
Co-payment: It refers to that part of medical expenses (usually a fixed percentage) that the
insured agrees to bear irrespective of the claim amount.
Due Date: Due date is the date by which the premium has to be paid to the company. It is
important to know the “due date” as if the insurance premium is not paid within the
prescribed grace period, the policy lapses or becomes paid up.
Additional Riders: Riders such as accidental death coverage, may incur an additional
premium when choosing additional benefits
Surveyor
An individual whose job is to assess the loss
There are two risk under Insurance
1. Pure Risk: those risk which carries only loss no gain. Untimely death, car accidents,
fire, flood, diseases, terroirs attack, cancellation of flight due to fog etc
(it can be managed through insurance)
2. Financial risk: risk either loss or gain. Stock investment corporate deposits, PF with
no guarantee
Risk Management
1. High Impact and High Frequency Events- RISK REDUCTION
2. High Impact and Low Frequency Events – RISK TRANSFER
3. Low Impact and High Frequency Events – RISK AVOIDENCE
4. Low Impact and Low Frequency Events – RISK RETENTION
Types of Insurance
Life insurance
Non-Life Insurance
Health Insurance
LIFE INSURANCE
a. Life insurance: financial coverage for contingency linked with human life like death,
disability, accident, retirement
b. Term Insurance: protection for a set period of time. no benefit is normally payable if
the life assured survives
c. Whole Life Insurance: Guaranteed lifelong protection. The sum assured and bonus is
paid at the death of the insured
d. Endowment Policy: An endowment policy is a type of life insurance policy that
combines the dual benefits of providing a predetermined sum assured in case of the
unfortunate demise of the insured person during the policy term and a maturity benefit
if the insured survives until the end of the policy term. The payment is made
whichever happened earlier
e. Money Back Policy is a life insurance product that offers both life coverage and
regular pay-outs during the policy term. It combines the benefits of insurance and
investment, providing financial protection along with steady returns at specific
intervals.
 f. Unit Linked Insurance Plans (ULIPs) are a type of life insurance plan that offer the
dual benefits of life insurance and investment. A portion of the premium paid for a
ULIP is invested in a variety of market-linked funds, while the remaining portion is
used to provide life insurance coverage
g. An annuity is a written contract typically between you and a life insurance company
in which the insurance company makes a series of regularly spaced payments to you
in return for a premium or premiums you have paid. An annuity is not life insurance.
A life insurance policy provides benefits to your family if you die.( instead of lump
sum payments sum assured will be paid in instalments -annuity means annual
payments but insurance companies pay monthly)
NON-LIFE INSURANCE
a. Marine cargo Insurance: Marine cargo insurance is a type of property insurance that
protects goods in transit from loss or damage while they are being transported by air,
sea, or rail/road/inland waterways. It covers damage or loss from external causes
b. Marine hull insurance is a type of insurance policy that covers watercraft such as a
boat, ship, yacht, fishing boat, steamer, and so on. The body of the vessel is referred
to as a hull, and that is exactly what this insurance policy cover
c. A fire insurance policy is a type of property insurance policy, which covers the
damages and losses caused to a residential or business property due to fire. This
policy enables the policyholder to claim compensation for costs incurred towards
repairing, replacing or reconstructing a property damaged in a fire. Indemnity is
applicable
d. Overseas medical insurance, also known as international health insurance or travel
medical insurance, is a type of insurance that covers medical expenses while traveling
or living abroad. It can provide financial protection and peace of mind, especially
when traveling to unfamiliar countries with different health system
e. Motor Insurance, also known as vehicle insurance or auto insurance, is a policy that
protects you and your vehicle from financial losses in case of an accident, theft, or
natural disaster. It covers the costs of any damage or injuries caused to you or other
people and their property
f. Third-party motor insurance, also known as third-party liability insurance, is a type
of insurance that protects against legal and financial liabilities that may arise from an
accident you cause while driving. It covers damages or losses caused to a third party's
person, property, or vehicle, but does not cover damages to your own vehicle
g. Personal Accident insurance or PA insurance is an annual policy which provides
compensation in the event of injuries, disability or death caused solely by violent,
accidental, external and visible events.
h. Burglary insurance is a type of property insurance that protects against loss or
damage to your property caused by burglary or theft. It can cover damage to your
property or premises, including
i. Travel Insurance is a type of insurance that covers different risks while travelling. It
covers medical expenses, lost luggage, flight cancellations, and other losses that a
traveller can incur while travelling. Travel Insurance is usually taken from the day of
travel till the time the traveller reaches back to India
 j. Crop insurance protects farmers from financial losses due to crop damage or
failure. This insurance can cover losses caused by natural disasters, such as cyclonic
rains or rainfall deficits, as well as losses due to price declines in agricultural
commodities

Endowment Insurance
An endowment policy is a type of life insurance policy that not only offers life coverage but
also includes a savings component. In the event of the policyholder’s death, the nominee
receives a death benefit. However, if the policyholder survives the policy term, a maturity
benefit is paid out, often including bonuses. This dual benefit makes endowment plans
meaning appealing for those who wish to ensure financial security for their loved ones in
case of an unfortunate event, while also building a financial corpus for future needs. It’s an
effective tool for long-term financial planning, combining protection with savings.
Features of Pure Endowment Insurance
• Maturity: A pure endowment plan pays you only if you survive the policy term. You
can use this maturity
• Savings: A pure endowment policy is a saving tool. You must pay the policy
premiums regularly when the policy is active and receive a lump sum amount then the
policy matures
• No death benefit: A pure endowment plan does not provide any maturity benefit or
death benefit to the family members if the policyholder dies during the policy term.
However, you may combine it with a traditional life insurance policy, such as term
plans to add the death benefit feature to your policy.
• Nomination facility: Unlike a traditional life insurance policy where the policyholder
assigns a nominee to receive the policy benefits, there is no need to assign a nominee
for a pure endowment plan since the plan does not offer any death benefits or maturity
benefit in the case of the policyholder’s death during the policy term.
• Premium payment: You must pay the pure endowment policy premiums regularly
and on time to keep the plan active.
• No surrender value: You cannot surrender a pure endowment plan before the
completion of the plan’s term in exchange for its cash value.
Aspects Term Insurance Endowment Policy
Type of Life coverage Life coverage plus savings
Plan
Plan Only life insurance coverage is Life insurance coverage along with
Coverage offered wealth creation

Sum Comparatively higher Comparatively lower

Assured
Premium Comparatively lower Comparatively higher
Rates

Policy No maturity benefit is provided A part of the sum assured along with
Maturity any relevant bonus amount is
Benefit provided as maturity benefit

Policy Lump-sum or monthly instalments Lump-sum

Payout
Modes
Add-ons Add-ons and riders are available Add-ons and riders are available
Tax Section 80C offers tax deduction of
Breaks Section 80C offers tax deduction of up to a limit of INR 1.5 lakhs on life
up to a limit of INR 1.5 lakhs on life insurance premiums paid. Section 10
insurance premiums paid. Section 10 (10D) makes maturity and death
(10D) makes maturity and death benefit amounts tax-free, given
benefit amounts tax-free, given certain conditions are fulfilled.
certain conditions are fulfilled

Testing adequacy of insurance coverage

• Adequacy of coverage refers to the sufficiency of an insurance policy in providing
financial protection to the policyholder against potential risks or losses.
• An adequate insurance coverage ensures that the policyholder has enough protection
to cover potential financial liabilities without being underinsured or over insured.
Underinsured means the coverage limits are too low to cover the entire loss, which
can result in significant out-of-pocket expenses for the policyholder. Over insured, on
the other hand, means the coverage limits are higher than necessary, which can lead to
unnecessarily high premium payments.
• Let’s consider a homeowner with a house valued at RS 300,000. To ensure
adequate insurance coverage, the homeowner purchases a home insurance policy with
coverage limits that sufficiently protect the value of the home and its contents.
• Over time, the homeowner makes significant renovations and improvements to the
house, increasing its value to RS 400,000. However, the homeowner does not update
 the insurance policy to reflect the increased value of the property. In this case, the
homeowner is underinsured, as the existing policy only covers the original RS
300,000 value of the home.
• Now, imagine a fire causes damage to the house, resulting in a loss of RS 350,000.
Since the insurance policy only covers up to RS 300,000, the homeowner would be
responsible for the additional RS 50,000 out-of-pocket. This situation highlights the
importance of maintaining adequacy of coverage by regularly reviewing and
adjusting insurance policies to match changes in asset values and potential risks.
• Difference between insurance and investment.
• Insurance vs Investment: Which Should You Do First?
• In financial planning, striking a balance between insurance and investment is a vital
decision that can shape your financial security.
• As you embark on your journey towards a financially stable future, a crucial question
may arise:
• “Should I prioritize insurance or investment?”
• This question warrants careful consideration, as both offer distinct benefits and serve
unique purposes.
• Insurance is not investment and vice versa. The goal of insurance is to protect you
financially from future risks, while investment helps you to build your wealth.
Parameter Life Insurance Investment
Meaning It is a protection tool that safeguards It is a financial product to help you
the financial stability of your family in create sustainable wealth for the
your absence. future.

Purpose Life insurance policies offer financial Investments help you meet your
security to your dependents, like long-term financial goals like
parents or children and reduce purchasing a house, your child’s
financial burden in your absence. education, starting a business, etc.

Risk factor Traditional life insurance policies Investment products carry risk
involve low to negligible risks, and depending on the type of option
the nominee will get death benefits if selected.
all premium payments are made on
time.
Common Term Insurance Stocks
types
Endowment Insurance Bonds
Whole Life Insurance Mutual Funds
Child Life Insurance Plans Fixed Deposits,
 Money Back Plans Real Estate investments
Pension Plans Public Provident Fund (PPF)
Unit Linked Insurance (ULIPs#) Unit Linked Insurance Plan
(ULIPs#)
Returns The returns from a life insurance You may enjoy higher returns if
policy include the death benefit, invested wisely. Diversification and
maturity benefit and bonus accrued time horizon play vital roles in
over time. The overall return is overall returns.
relatively low.

• To know which to choose first between Insurance and Investment, you have to
identify and understand your financial goal.
• In general, it is advisable to first establish a solid foundation of insurance coverage
before diving into investments.
• Insurance serves as a safety net, protecting you and your loved ones from unexpected
events and creating a financial cushion that gives you peace of mind.