INDEX

CHAPTER - 1. INTRODUCTION TO FINANCIAL LITERACY

CHAPTER - 2. VARIOUS FINACIAL INSITUTIONS – BANKS, INSURANCE

COMPANIES, POST OFFICE: MOBILE APP BASED SERVICES

CHAPTER - 3. FINANICAL PLANNING AND BUDGETING

CHAPTER - 4. INTRODUCTION TO BANKING AND INSURANC

CHAPTER - 5. Some Market: Some Basic Concepts

 CHAPTER - 1

INTRODUCTION TO FINANCIAL LITERACY

Q1. What is financial literacy? Briefly explain scope and importance of financial
literacy.

Ans. Financial literacy is the ability to understand and make use of a variety of
financial skills, including personal financial management, budgeting, and investing. It
also means comprehending certain financial principles and concepts, such as the
time value of money, compound interest, managing debt, and financial planning.

Achieving financial literacy can help individuals avoid making poor financial decisions

and help them become self-sufficient and achieve financial stability. Key steps to
attaining financial literacy include learning how to create a budget, track spending,
pay off debt, and plan for retirement. Educating yourself on these topics also involves
learning how money works, setting and achieving financial goals, becoming aware of
unethical/discriminatory financial practices, and managing financial challenges that
life throws your way.

Definitions of financial literacy

There is a diversity of definitions used by NGOs, think tanks, and advocacy groups
but in its broadest sense financial literacy is an awareness or understanding of

money. Some of the definitions below are closely aligned with "skills and
knowledge", whereas others take broader views:

(i) The Government Accountability Office definition (2010) is "the ability to make
informed judgments and to take effective actions regarding the current and future
use and management of money. It includes the ability to understand financial
choices, plan for the future, spend wisely, and manage the challenges associated with

life events such as a job loss, saving for retirement, or paying for a child's education".

(ii) The Financial Literacy and Education Commission (2020) includes a notion of
personal capability in its definition as "the skills, knowledge and tools that equip
people to make individual financial decisions and actions to attain their goals; this
may also be known as financial capability, especially when paired with access to

financial products and services."

(iii) The National Financial Educators Council adds a psychological component

defining financial literacy as "possessing the skills and knowledge on financial

matters to confidently take effective action that best fulfills1 an individual's personal,
family and global community goals."

(iv) The OECD's Programme for International Student Assessment (PISA) in

2018 published a definition in two parts. The first part refers to kinds of thinking

and behaviour, while the second part refers to the purposes for developing the
particular literacy. "Financial literacy is the knowledge and understanding of financial
concepts and risks, and the skills, motivation and confidence to apply such

knowledge and understanding in order to make effective decisions across a range of

financial contexts, to improve the financial well-being of individuals and society, and
to enable participation in economic life".

Scope of Financial Literacy

Although there are many skills that might fall under the umbrella of financial literacy,
popular examples include household budgeting, learning how to manage and pay
off debts, and evaluating the trade-offs between different credit and investment
products. These skills often require at least a working knowledge of key financial
concepts, such as compound interest and the time value of money.

Other products, such as mortgages, student loans, health insurance, and self-directed
investment accounts, have also grown in importance. This has made it even more
imperative for individuals to understand how to use them responsibly.

Financial literacy also covers short-term financial strategy as well as long-term

financial strategy. Financial literacy encompasses knowing how investment decisions
made today will impact your tax liabilities in the future. This also includes knowing
which investment vehicles are best to use when saving for retirement."

The Importance of Financial Literacy

Trends in the United States indicate that Americans' financial literacy is declining. In

its National Financial Capability Study, conducted every few years, the Financial
Industry Regulatory Authority (FINRA) poses a five-question test that measures
consumers' knowledge about interest, compounding, inflation, diversification, and
bond prices. In the latest study, only 34% of those who took the test answered at

least four out of five questions correctly.

Yet making informed financial decisions is more important than ever. Take retirement
planning: Many workers once relied on pension plans to fund their retirement lives,
with the financial burden and decision-making for pension funds borne by the
companies or governments that sponsored them. Today, few workers get pensions;

some are instead offered the option of participating in a 401(k) plan, which involves

decisions that employees themselves have to make about contribution levels and
investment choices. Those without employer options need to actively seek out and
open individual retirement accounts (IRAs) and other tax-advantaged retirement
accounts.

Add to this people's increasing life spans (leading to longer retirements), Social
Security benefits that barely provide enough for basic survival, complicated health
and other insurance options, more complex savings and investment instruments to

select from-and a plethora of a choices from banks , credit unions , brokerage firms ,

credit card companies and more . It’s clear that financial literacy is a must for making
thoughtful and informed decisions , avoiding unnecessary levels of debt , helping
family members through these complex decisions , and having adequate income in

retirement .
Q2. What is "5 C" approach?

Ans. The "5 C" approach would be used to spread financial literacy and is as follows-

(i) Content - Financial literacy materials for instructors, students (both academic
and extracurricular). young adults. women, Micro Small Medium Enterprises (MSMEs)

(new entrants at work), senior citizens, people with disabilities, those who are
illiterate, etc.

(ii) Capacity - (a) Enhance the abilities of various intermediates who can help people
learn about money.

(b) Create a "Code of Conduct" for those who deliver financial education.

(iii) Community- (a) Maximizing the benefits of Community led financial literacy

model.

(b) Develop community- led strategies for effectively and sustainably distributing
financial literacy.

(iv) Communication- Through appropriate Communication Strategy,

(a) Use technology, media outlets, and creative communication methods to spread

financial education messages.

(b) Choose a specific time of the year to widely spread financial literacy lessons. (c)

Utilize more visible public spaces, such as bus stops and train stations, to effectively

spread messages about financial literacy.

(v) Collaboration-

(a) Improving Collaboration among various stakeholders.

(b) Creation of a dashboard of information.

(c) Integrate financial education topics into the curricula of several professional and
vocational courses (offered by the Ministry of Skill Development and

Entrepreneurship (MSD&E) through Sector Skilling Missions and programmes similar

to B.Ed./M.Ed.

(d) Include the spread of financial education in a number of ongoing programmes.

(e) Streamline other stakeholders' efforts to promote financial literacy.

Q3. Why knowledge of financial literacy is essential? What are the financial
skills and components of financial literacy?

Ans. Understanding financial ideas and principles including financial planning,

compound interest, debt management, effective investment strategies, and money-

time value is also necessary for financial literacy. Poor financial decisions brought on
by financial illiteracy may harm a person's ability to manage their finances. Learning
how to construct a budget, keep track of costs, learn debt- reduction tactics, and
properly plan for retirement are some of the main steps to enhancing financial

literacy. Financial advisor counselling is another example of such approaches.

Understanding how money functions, setting and accomplishing financial objectives,
and dealing with both internal and external financial obstacles are all part of financial

education. Financial literacy is the ability to manage money and debt effectively. It is
made up of a number of financial skills and components-

(i) Budgeting- It is the most crucial ability for someone to possess because it aids in

financial planning and management. It assists you in keeping tabs on your spending
patterns, maximizing the use of your funds, and developing a workable financial plan
that will assist you in keeping track of your expenses, separating out unnecessary
spending, and making good financial decisions. This is how to increase your savings.

By finding the right balance between the fundamental uses of money, people can
make better use of their income and attain financial stability and prosperity. In
general, a budget should be made in a way that eliminates all existing debt while
allocating funds for savings and prudent investments. An example of a budget for a

salaried employee earning a salary of Rs. 1,00,000 per month can be drawn as
follows-

Expense Monthly Expense

Rent Rs. 30,000

Loan Repayment for cash loan Rs. 10,000

Education for children Rs. 15,000

Grocery Bill Rs. 15, 000

Miscellaneous Expenses Rs. 10,000

Savings for future Rs. 20,000

(ii) Debt- It just amounts to borrowing and spending someone else's money. Debt
comprises numerous borrowing practices, including bank loans and credit card use
among a few others However, not every debt is a bad debt, thus for this reason, one
must be aware of the distinction between bad and good debt. This differentiation is
necessary since not everyone is wealthy enough to afford everything required in life.
The sole option is to take out a loan or borrow money in order to finance an

education, a home, or an automobile. Borrowing money for necessities of daily living

is considered good debt and can cover things like funding one's education, getting a
house, or an automobile. However, obtaining credit to cover unnecessary costs, such

as the purchase of luxury items by using credit cards is termed as poor credit. As a
result, one should always make an effort to avoid collecting bad debts. The basics of
debt management is to have the capacity to distinguish between required good debt
and unnecessary bad debt is important. Avoiding excessive spending will prevent you

from falling into a financial trap.

(iii) Saving- Financial well-being and future security are all a result of saving.
Planning of finances wisely will enable us to accumulate wealth over time. Keeping

track of one's expenditures will enable one to save money, and healthy/strong saving
habits can help one to accomplish a number of tasks, such as reaching financial

objectives, developing financial discipline, and setting up an emergency fund, among

other things.

(iv) Investing- With investing we can direct our funds toward certain financial
instruments rather than leaving money idle in the bank account. Investing can assist
in creating and increasing. wealth for future security and happiness. By investing, we

can allocate certain funds and also achieve our financial objectives of post retirement

life. Some of the popular investment instruments are debts, stocks, homes, mutual
funds, equity linked saving schemes and gold.
 CHAPTER – 2

VARIOUS FINACIAL INSITUTIONS – BANKS, INSURANCE COMPANIES, POST

OFFICE: MOBILE APP BASED SERVICES

Q4. What do you mean by financial institution? What is the importance of

financial institution? Also mention functions of financial institution.

Ans. The term "Financial Institutions" refers to a diverse group of organizations that
conduct business within the financial services industry. These organizations include

banks, insurance companies, post offices, and many more. Financial institutions play
the role of intermediaries, which is essential to the efficient operation of the financial
system. It takes deposits from one group of customers (savers) and then lends those

monies to another group of consumers (borrowers). It collects the savings generated

by the excess units and invests them in productive activities that guarantee a higher
rate of return. Additionally, financial institutions offer their services to individuals,
businesses, and governments seeking guidance on various issues, ranging from

reorganization strategies to diversification plan recommendations.

Importance of Financial Institutions: These are as follows-

(i) Promotional activities- (a) Financial institutions facilitate innovation by

providing venture capital, particular capital and seed capital to new and technically
skilled entrepreneurs.

(ii) Infrastructural facilities- Financial institutions also offer basic infrastructural

facilities needed to develop and promote lucrative ventures. Infrastructural facilities

create industrial estates, tech parks, roads and water etc.

(iii) Balanced development - Expanding banking activities to rural and semi-urban

areas. The banks have enabled the transfer of surplus capital from the developed

regions to the less developed areas where it is scarce and most needed. Allocation of
funds between different parts promotes economic development in underdeveloped
regions of the country.

(iv) Employment generation - Channelizing the funds for investment, building

industrial facilities, and accelerating industries generate employment for the
educated and qualified people of the state.

Functions of financial institution- The main functions of the Financial

Institutions are as follows:

(i) Financial institution is an intermediary to convert a short-term liability into a

long- term investment- Short-term debt, also called current liabilities, are to be
paid off within a year. Long-term investments are stocks, bonds, and mutual funds.
For example, Insurance companies operate on the principle of shared risk. Therefore,
customers make a payment known as a premium to the insurance provider, which

assumes the risk and is responsible for settling any damage claims. The insurance
company is responsible for calculating the premiums so that the total amount it
receives from its customer is sufficient to pay for the limited number of damage
claims and additional funds remaining for administration and profit. The insurance
company calculates the premiums in such a way that the total amount received from
all of its customers is sufficient to pay for the limited number of damages.

(ii) Financial institution helps in the conversion of a risky investment into a risk-
free investment- Financial institution transforms a risky investment into one that
doesn't have any risks. In finance, Risk is the possibility that an event or investment

may yield less than expected. All investments carry some degree of Risk. Namely,

stocks, bonds, and funds can lose value, which makes a risky investment. However, a

risk-free asset has an inevitable future return-fixed deposits, Recurring Deposits, and
post office deposits. For example, if a customer requires a loan and has a significant

guarantee, Bank offers loans at low-interest rates & flexible tenure. On the other

hand, if a customer has a deposit, the RBI bank may offer them a high-interest rate,
and if the customer has a significant guarantee, the Bank may offer them a small
loan.

(iii) Financial institutions also provide a whole range of services to entities-

Lenders can also ask for routine Management Information System (MIS) reporting to
minimize credit risks. In this case, the lender will ask the borrower to send

predetermined financial statements regularly. The bank may monitor the borrower's
current financial situation and capacity to repay the loan. Lenders can also request
periodic Management Information System MIS reporting to manage credit risks. In
this scenario, the borrower will be asked to submit predetermined financial

statements to the lender periodically. The bank may monitor the borrower's current

financial status and ability to repay their loan.

Q5. Define bank. What are the primary functions of a bank?

Ans. Definition of a Bank- According to Herbert Hart "a banker is one who in the
ordinary course of business honours cheques drawn upon him by persons from and
for whom he receives money on current account".

According to Section 5 of the Banking Regulation Act, 1949, "a banking company
means any company which transacts the business of banking. Banking means the
accepting for the purpose of lending or investment, of deposits of money from the

public, payable on demand or otherwise, and withdrawable by cheque, draft or

otherwise".

Primary Functions of a Bank- Initially, collection of deposits and granting advances

used to be the primary functions of a commercial bank. However, in modem
economies creation of credit and foreign exchange dealings are also treated as

primary functions of a bank.

(a) Collection of Deposits: The most important primary function of a commercial

bank is collection of deposits. These deposits may be in the form of:

(i) Fixed deposits: A fixed deposit, also known as term deposit, is one where a
customer keeps. a specified amount with the bank for a fixed period, Fixed deposit

holder gets interest on the deposit for that period. However, if he withdraws before
the expiry of the stipulated period, he loses all or a major part of the interest earned

on that deposit. Generally, the rate of interest on fixed deposits is the highest
compared to that on other three forms of deposits.

(ii) Savings bank deposits: Savings bank deposits can be opened with a very small'
amount. Though money in the savings account can be withdrawn at will, there are,
however, certain limitations on the total number of withdrawals per week. The rate of

interest on this deposit is normally higher than that of current deposit but less than

fixed deposit. By mobilizing small amounts from large number of individuals through
savings, bank deposits, banks are generally able to gather huge amount of funds.

(iii) Current account deposits: It is also known as demand deposit. The bank opens
this account on an initial deposit of Rs. 100 but only after satisfying itself about the
credit worthiness of the customer. There are no limitations on the amount of deposit
and number of withdrawals. Normally no interest is paid on current deposit.

(iv) Recurring deposits: Another type of deposit devised recently is recurring

deposits. The ́depositor is required to deposit a fixed amount once in every month
for a specified number of years. The depositor gets the principal amount along with
interest after the expiry of that specified period. The mk of interest offered on these
deposits is generally the same as that offered on fixed deposits.

(b) Loans and Advances: Normally commercial banks grant short-term loans and

advances to:

(1) Loans to business and trade: Commercial banks grant loans on short -term
basis. Business bans are divided into:
(i) Overdraft: Overdraft is an arrangement by which the borrower is allowed to
withdraw from his account more than what is deposited in his account. It is granted

against collateral security. Interest is charged on . he amount overdrawn.

(ii) Cash credit: Cash credit is granted against the security of goods or personal
security of one or more persons other than the principal borrower. Interest is

charged only on the amount made use of by the customer under this management.

(iii) Direct loans: Direct loans are granted against security of movable properties.
Borrower has to pay interest on the entire amount of loan sanctioned from the date

of taking the loan till the time of repayment.

(iv) Bill discounted: If trade bills are allowed by banks for discounting, they are
called bills discounted. Discounting of bills of exchange is the most popular method
in western countries.

(2) Loans to industry: Banks grant loans and advances to industry for its working
capital requirement. They grant the loans to industry in the form of overdraft, ckb
credit, and direct loans.

(3) Loans to agriculture and allied activities: Banks provide short-term credit to
agriculture and its allied activities in the form of crop loans, loans for irrigation, land
development, purchase of cattle, etc.

(4) Export and import trade: Commercial banks also grant loans and advances for
export and import trade. They grant dict loans, guaranteeing deferred payments,

discounting bills etc, for the purpose.

Q6. What is the importance of a Banking institution ?

Ans. Banking Institutions- Banks provide financial services like withdrawals and
deposits, mortgages, and various types of loans to retail and commercial customers.

Banks also facilitate monetary transactions through charge cards, electronic funds
transfers, and currency conversion. Banking Institution plays a vital role in the
economic development of the country. The stability of the economy is closely related
to the growth and soundness of its banking system.

Importance of Banks- These are as follows-

(i) Encourage people to save money- Bank attracts depositors by introducing safe
and attractive deposit schemes and providing a higher interest rate. These accounts
are opened as per the requirement of customers, such as current accounts, fixed
deposit accounts, saving accounts and recurring accounts.

(ii) The facility of capital transfer- Bank sends money from one place to another

quickly at less rate. They mail it through drafts, cheques and digital forms for the
developing economy.

(iii) Finance trade, commerce, industry, and agriculture- Banks collect small and

significant savings of the country and use them for production. It helps in the
economic development of the country. Banks provide timely financial assistance to
traders and industrialists. Large-scale transactions would only be possible with bank
savings of people deposited in the bank. It is used as credit for industries.

(iv) Aid to Government- Banks provide financial assistance to the government for
various economic planning and development schemes by purchasing government
bonds, certificates, debentures, etc.

Q7. Differentiate between Commercial Bank and Cooperative Bank.

Ans. (a) Commercial Bank- Commercial bank accepts deposits, offers to check
account services, does business, personal, and mortgage loans, and offers essential

financial products like certificates of deposit (CDs) and savings accounts to

individuals and small businesses. Their primary function is to accept deposits and
grant loans to the general public, corporate and the government. Commercial banks
are three types. These are as follows-
(i) Public sector- Public sector is type of commercial bank that the government of a
country nationalizes. These banks operate under the guidelines of the Reserve Bank

of India (RBI), the central bank. These are the nationalized banks Majority of stakes in
these banks are held by the government. Regarding volume, SBI is the largest public

sector bank in India, Punjab National bank etc.

(ii) Private sector- It is the second commercial bank in which private businesses and
individuals hold a significant share of capital. These banks are registered as
companies with limited liability. These include banksin which private shareholders
hold a significant stake or equity. RBI rules and regulations are mandatory for

private-sector banks. Like ICICI bank, HDFC bank etc.

(iii) Foreign banks- Foreign banks are owned and managed by foreign promoters.
Their headquarter is in a foreign country, but they operate in different countries,

namely, HSBC, Standard Chartered Bank etc.

(b) Cooperative Bank- A cooperative bank is a small-sized financial entity whose

members are the bank's owners and customers. A cooperative society is formed by
small groups with common interests. Cooperative banks work based on mutual
benefit. They are regulated by the Reserve Bank of India (RBI) and are registered
under State Cooperative Act. There are two types of Cooperative Banks. These are as
follows-

(i) Urban- "Urban Cooperative Bank" refers to any cooperative bank in an urban or
semi- urban center (UCB). These banks are established to provide financing for

smaller businesses. One of the most critical distinctions between UCBS and

commercial banks is organizational ownership.

(ii) Rural- Primary Agricultural Credit societies that mainly give only agricultural
loans are permitted to use the word 'bank 'in their names. In some states, primary

agricultural credit societies are called 'Rural Co-op Bank". They cannot have accounts
with check books. They should accept deposits only from members.
Q8. What are the secondary or non-banking functions of a bank? Also mention
utility services provided by a commercial bank.

Ans. Secondary functions of a commercial bank: For the convenience of

customers, banks also perform a host of non-banking functions called secondary
functions.

These functions can be divided into two categories:

Agency Services: Various functions performed by a biker as an agent on behalf of

the customer are called agency services. These agency services include:

(i) Collections: Commercial banks take up collection of promissory notes, cheques,

bills. dividends, subscriptions, rents, etc., on behalf of their customers as agents. The
bank charges *service charges for rendering these services to its customers.

(ii) Payments: Banks also accept the responsibility to pay insurance premium, rents,
taxes electricity bills, etc., periodically on behalf of its customers for which they
charge commission.

(iii) Sale and purchase of securities: Customers sometimes approach the bankers
for sale an purchase of their securities. For these services the banks charge
commission.

(iv) Trustee, executor and attorney: Banks also act as trustees, executors an;9+

d attorneys on behalf of their customers. As a trustee, the banker takes care of funds
of the customer. - helps in proper management of trust. As executor, he carries out
the desires of the deceased customer in terms of the will, left by him. As an attorney,

the banker signs transfer forms and documents on behalf of the customer.

(v) Correspondent: Banks serve as correspondents, agents or representatives of

their customers. They obtain passports, traveller tickets, etc.

General Utility Services: In addition to agency services, commercial banks perform

various services useful to the customer. These services include letters of credit, Mt
facilities, underwriting, guarantee for deferred payments, locker facilities, references,
business and statistical information and foreign exchange dealings.

(i) Letters of credit: Banks issue letters of credit to their customers. These are useful
to traders to buy goods from foreign countries on credit.

(ii) Draft facilities: Banks issue drafts to customers and enable them to transfer
funds from place to place.

(iii) Underwriting: Banks underwrite share capital and debenture capital to be raised
by government, joint stock companies, etc.

(iv) Guarantee for deferred payments: Importers may not be in a position to pay

for their imports immediately. Exporters may allow then1 to pay in future but only if
the payment is guaranteed. In such cases banks may give guarantee for deferred

payments.

(v) Locker facility: Banks provide locker facility to customers to keep their valuables,
such as securities, jewellery. documents etc.

(vi) Referee: Banks serve as referee to the financial standing, business reputation
and responsibility of their customers.

(vii) Business and statistical information: Banks collect arid classify information

regarding possibilities of trade, commerce and industry and provide the same to
their customers. Some banks also publish bulletins of information for use by the
general public.

Q9. What is 'Insurance"? What are the basic characteristics of insurance?

Ans. Insurance is a contract, represented by a policy, in which a policyholder receives

financial protection or reimbursement against losses from an insurance company.
The company pools clients' risks to make payments more affordable for the insured.

Insurance policies are used to hedge against the risk of financial losses, both big and
small, that may result from damage to the insured or their property, or from liability
for damage or injury caused to a third party.

Insurance is a method of risk transfer. In insurance the losses of the unfortunato few
are shared by fortunate many. The loss of an individual is shared by all those who are
likely to face the same situation of loss. In other words, Insurance is the pooling of

future unexpected losses by transfer of such risks to the insurers who agree to
indemnify insured for such losses, to provide other preliminary benefits on their
occurrence or to render services connected with the risk.

Basic characteristics of insurance: These are as follows-

(i) Risk pooling: Insurers pool the risk i.e. the spreading of losses of unfortunate few
over the entire group. In process actual loss is substituted by average loss.

(ii) Risk Transfer: Risk transfer takes place when an insurer agrees to pay loss that
may occur and the uncertainty of financial result has been transferred to insurer from
insured. For this insured pays premium to the insurer.

(ii) Indemnification: Insured is re-established to his or her approximate financial

position prior to the occurrence of the loss.

An individual pays a premium while purchasing a policy and can make a claim if
insured event occurs. The main functions of insurance are risk transfer by creation of

common pool whereby losses of the few are met by the contributions of many.

And charging equitable premiums i.e. the premium charged to each risk must reflect
the severity of risk brought to the pool. If it is set too low losses will be made and if

too high, business will lose competitive edge. Insurance policies are contracts

whereby Insurance companies (Insurers) promise the insureds that they will pay the
financial loss suffered by the insured in the event of occurrence of insured event and
to get this promise insured pays premium (consideration) to the insured.
Q10. What are different kinds of insurance companies in India? Briefly explain
functions of Life Insurance companies and General Insurance companies.

Ans. Different kinds of insurance companies that are working in India, are as follows:

(i) Life Insurance Companies

(ii) General Insurance Companies
(iii) Health Insurance Companies
(iv) Reinsurance Companies

Functions of Life Insurance Companies:

Life Insurance: Life insurance is designed to be an effective and efficient means of

planning for adverse financial consequences in the event of untimely death of

income earner for the average family. During the life span of an individual his needs

may vary. At different stages of life cycle his needs are different. Also changes in the
economic and social environment greatly influence the needs, choices and
expectations of customers. To make a product marketable, it must satisfy needs and
expectations of customers. Insurers have launched a varied range of products viz.

from traditional highly risk oriented term assurance plan to highly investment
oriented plans. These new plans are becoming increasingly popular because they
offer living benefits such as long-term care, critical illness covers and investment

oriented plans tailored to cater to the ageing population, which helps policyholders
to maintain their standard of living. Insurance company's success results from how
well its products and services meet the needs of customers. In order to reach the

maximum possible customers having diverse needs, products must be differentiated.

Product features that are used to differentiate them include, maximum and minimum

face values i.e. sum assured, principal and supplementary benefits of the policy,
embedded or in built options available under the policy, the possible riders being

included to increase death benefits and flexibility, premium paying modes available,

policy term, settlement of the policy may be arranged and the other provisions under
the policy. All these product features constitute Life insurance product design.
Under the purview of this class of insurance, the risks associated with human life in
general can be covered up to the limit specified called sum assured. A person can

insure his or her life and his health against the contingencies like death, disability,
surviving too long. In event of his death, his dependents will be reimbursed to the

full amount that he was insured for. Or if the insured I person meets with an accident
or suffers from an illness that cripples him forever, he will be compensated with the

complete sum assured anyway since he may not be able to lead a normal life again.
In case, the accident is not that severe, he should be able to recover after medical
treatment and rehabilitation. If he has opted for medical cover, then his medical

expenses, treatment and medication will be paid for by his insurance policy.

Non-Life Insurance (General Insurance): The scope of Commercial lines of

insurance has been extended to the following categories and offer covers for:
Cottage Industry and Small Sector

Traders and Shopkeepers

(i) Professionals and specific professions.

(ii) Industries and commercial organizations.
(iii) Rural industries and rural prospects

Personal Line of Insurance:

(i) Property Insurance.

(ii) Health Insurance.

(iii) Accident Insurance .

(iv) Liability Insurance Covers .

Property Insurance business may be classified under three broad heads viz. Fire,
marine or Miscellaneous Insurance. General insurance business are generally

contracts of indemnity and are totally different from Life insurance contracts. Within
the framework of the policy of the general insurance the insured is indemnified or
provided with compensation in the event of operation of an insured peril. The
essentials of normal contract are equally applicable to general insurance contracts.

Property Insurance covers insurances of building, motor vehicles, marine & aviation,
boilers machinery, furniture, fixtures, cash in transit, crop, cattle, etc.; whereas Liability
insurance covers public liability (Third Party liability), Product Liability and

Professional Indemnity.

Property insurance is designed to indemnify the insured for loss or damage to

buildings, furniture or other personal property due to different ways in which

property can be damaged. Property may be damaged due to fire, theft, engineering,
breaking glasses, etc. The standard cover used by almost all the business and
households is of Fire Insurance.

Q11. What is the importance of Mobile app?

Ans. Mobile apps have changed the way people do business and how people live
their lives. It has opened the door to a new era of flexibility and ease. For example,
technologies like blockchain are making banking and financial apps safer. Blockchain

eliminates intermediaries for financially independent parties.

Importance of Mobile Apps -

(i) Fast Services- Apps and the internet allow us to complete our work more quickly

and efficiently.

(ii) Trusty worthy- Financial mobile apps are safer from unlawful transactions since
users must authorize transactions through the app.

(iii) At all hours- During this Covid value-added mobile apps were discovered. As a
result, users can maintain control and avoid many unpleasant outcomes even in a
global pandemic.

(iv) Scheduling- Intelligent mobile apps enable users to handle finances, insurance,
and postal services through transparent transactions.
Mobile App for Banking Sectors- The rapid spread of the mobile phone era has
helped banks use this mode for transactions. It cuts paperwork and lines. SBI, ICICI,

and others offer mobile banking. In addition, *99# USSD (Unstructured

Supplementary Service Data) allows mobile banking for non-smartphone users.

Mobile apps offer:

(i) Checking balance.

(ii) Transferring funds,
(iii) Paying bills, and
(iv) Ordering cheque book.

(iv) Bharat Interface for Money (BHIM) is an app that uses Unified Payments Interface
to make it easy and quick to send and receive money (UPI). It lets you send money
directly from bank to bank and get money back using a Mobile number or Payment

address. The Bharat Interface for Money app is currently available for smart phones
that run on Android and can be downloaded from the Google Play store.

(v) Financial technology companies are making it possible for people in rural
areas to use their cell phones to apply for loans or open bank accounts.
Some people in rural India have access to mobile internet, so they can use
fintech services to get reliable financial services.
 CHAPTER – 3

FINANICAL PLANNING AND BUDGETING

Q12. What are the characteristics of a national budget?

Ans. Characteristics of a national budget- The basic characteristics of government

budgeting are as follows-.

(i) There is a strong emphasis on expenditure control with itemised ceilings and
sanctions. The French system of budgeting is largely based on this principle,
viz. -a strong financial control system. For historical and administrative
reasons, Indian budgetary system is also set in a framework of strong financial

control. Although, after Independence, this feature has become diluted

through various schemes of delegation powers and decentralisation.

(ii) Another characteristic is the tendency towards incrementalism. The bulk of

ongoing activities is left untouched. Only marginal adjustments are made in
raising and allocating resources from one year to the other. In spite of various
budgetary innovations, budgetary systems the world over are essentially

incremental in nature.
(iii) There is usually no attempt to relate inputs to outputs or expenditure to
performance and benefits. Any such attempt, if at all it is made, is limited to

the economic function and the largest component of government activities,

per se, are mainly expenditure- oriented.
(iv) Generally budgets are prepared for a time span of one year. Since budgeting

presupposes planning it must, therefore, adopt a longer time frame.

(v) Some of the budgetary systems (Netherlands) reflect application of

commercial Principles to budget, including provision of depreciation

allowances and in some systems, accrual-based accounting. The Italian

budgetary system shows the of availability funds beyond the financial year

with parallel operation of the preceding and current year's budgets.

Q13. What do you mean by financial Planning. What are objectives of financial
planning? What are it's importance?

Ans. Financial planning is the process of estimating the capital required and
determining its competition. It is the process of framing financial policies in relation
to procurement, investment and administration of funds of an enterprise.

Financial planning is the process of taking a comprehensive look at ones financial

situation and building a specific financial plan to reach her/his goals. As a result,
financial planning often delves into multiple areas of finance, including investing,

taxes, savings, retirement, estate, insurance and more. Financial planning is the
practice of putting together a plan for future, specifically around how one will
manage his/her finances and prepare for all of the potential costs and issues that
may arise. The process involves evaluating his her current financial situation,

identifying his/her and then developing and implementing relevant her

recommendations.

Financial planning is holistic and broad, and it can encompass a variety of services.
Rather than focusing on a single aspect of one finances, it views clients as real people
with a variety of goals and responsibilities. It then addresses a number of financial
realities to figure out how to best enable people to make the most of their lives are-

Objectives of financial planning-

Financial Planning has got many objectives . Some of them

(i) Determining capital requirements-This will depend upon factors like cost of

current and fixed assets, promotional expenses and range planning. Capital
requirements have to be looked with both aspects-short-term and long-term
requirements.
(ii) Determining capital structure -The capital structure is the composition of

capital, pE thth the relative kind and proportion of capital required in the
 business. This includes decisions of debt- equity ratio-both short-term and
long-term.

(iii) Framing financial policies with regards to cash control, lending, borrowings,
etc.

(iv) A finance manager ensures that the scarce financial resources are maximally
utilized in the best possible manner at least in order to get maximum returns

on investment.
(v) Importance of Financial Planning-Financial planning is process of framing
objectives, policies, procedures, programmes and budgets regarding the

financial activities of a concern. This ensures effective and adequate financial

and investment policies.

The importance of financial planning can be outlined as –

(i) Adequate funds have to be ensured.

(ii) Financial planning helps in ensuring a reasonable balance between
outflow and inflow of funds so that stability is maintained.
(iii) Financial planning ensures that the suppliers of funds are easily

investingin companies which exercise financial planning.

(iv) Financial planning helps in making growth and expansion programmes
which helps in long-run survival of the company.

(v) Financial planning reduces uncertainties with regards to changing

market trends which can be faced easily through enough funds.
(vi) Financial planning helps in reducing the uncertainties which can be a
hindrance to growth of the company. This helps in ensuring stability

and profitability in concern.

Q14. What is Sukanya Samriddhi Account ? Explain in detail.

Ans. Sukanya Samriddhi Yojana (SSY)-Sukanya Samriddhi is a savings scheme

launched by the Government of India, for the financial betterment of the girl child.
The scheme enables parents to build capital for the future education and marriage
expenses of their female child and provides an attractive interest rate on the

investment.

1. Opening of the Account-It can be opened by-

(i) The guardian in the name of girl child below the age of 10 years.

(ii) The interest shall be calculated for the calendar month on the lowest balance in

the account between the close of the fifth day and the end of the month.

(iii) Interest shall be credited to the account at the end of each Financial year.

(iv) Interest shall be credited to the account at the end of each FY where account
stands at the end of FY (i.e. in case of transfer of account from Bank to PO or vice
versa)

(v) Interest earned is tax free under Income Tax Act.

4. Operation of Account - Account will be operated by the guardian till the girl child
attains the age of majority (i.e. 18 years).

Withdrawal-

(i) Withdrawal may be taken from account after girl child attains age of 18 or passed
10th standard.

(ii) withdrawal may be taken up to 50% of balance available at the end of preceding
F.Y.

(iii) withdrawal may be made in one lump sum or in instalments, not exceeding one
per year, for a maximum of five years, subject to the ceiling specified and subject to
actual requirement of fee/other charges.
5. Premature Closure-

(1) Account may be prematurely closed after 5 years of account opening on the

following conditions:

 On the death of account holder, (from date of death to date of payment PO

Savings Account interest rate will be applicable).
 On extreme compassionate grounds.

(ii) Life threatening decease of a/c holder.

(iii) Death of the guardian by whom account operated.

(iv) Complete documentation and application required for such closure.

(v) For premature closure of account submit prescribed application form along with
pass book at concerned Post Office.

6. Closure on Maturity-

(i) After 21 years from the date of account opening.

(ii) or at the time of marriage of a girl child after attaining age of 18 years (1 month
before or 3 month after date of marriage).

Q15. Write a note on Indian Postal Order.

Ans. Indian Postal Order- Indian Postal Order provide a convenient means of

transmitting small sums of money by post. Denominations are- Rs. 1, Rs. 2, Rs. 5, Rs.
7, Rs. 10, Rs. 20, Rs. 50, and Rs.100. The Postal Orders can be crossed like bank
cheques. If a Postal Order be crossed, will be made only through that Bank. Validity

of Postal Orders is 24 months. If an payment Indian Postal Order is not presented for
payment within six months from the last day of the month of issue a second
commission at the rates prescribed will be charged which must be paid in postage

stamps affixed to the back of the order. Those authorized to use them may pay the
second commission in Service Postage Stamps. Indian Postal Orders presented for
payment more than twelve months after the last days of the month of issue will not
be paid but will be forfeited.

Repayment to Purchaser: The purchaser of an Indian Postal Order can obtain

repayment of its value (but not the commission) on presenting the order and the
counter-foil at the post office from which the order was purchased within six months

from the last day of the month of issue. He will also be entitled to repayment of its
value after six months, but not after twelve months, from the last day of the month of
issue provided a second commission at the rates prescribed is paid. Should the order
have been crossed for payment through a Bank the purchaser must first cancel the

crossing by writing across the face of the order the words, "Please pay cash" and add

in his initials.
 CHAPTER – 4

INTRODUCTION TO BANKING AND INSURANCE

Q16. Define Insurance. What are characteristics of Insurance?

Ans. Definition: "Insurance is a plan by which, large number of people associate

themselves and transfer to the shoulders of others all risks that attach to individuals”.

"Insurance may be defined as a social device providing financial compensation for

the effects of misfortune, the payment being made from the accumulated
contributions of all parties participating in the scheme":

Characteristics of Insurance

Agreement Enforceable in Law: Insurance is an agreement which is enforceable in

law, it cannot be otherwise. It is non-transferable. Such an agreement which must
satisfy all the essentials of a contact, that is, the parties in contact should be
competent to enter into contract, they must freely agree and give their consent, they
must agree for legal consideration and lawful objectives and all legal formalities must

have been completed.

Two Parties - The Insurer and the Insured: An insurance contact, like others, must
have two parties-the insurer who agrees to compensate whenever specified event or

events take place and the insured who agrees to pay the consideration as agreed
upon and abide by all the terms and conditions of the insurance contract.

Utmost Good Faith - In insurance contact, the insured is legally liable to disclose all
the material facts (which may affect the very nature of the contact) to the insurer. It is

on this basis the insurer agrees to compensate, thereby, cover the risk. Nothing
should be concealed. If however, something is concealed, the insurer may back-out
on the place that the principle of utmost good faith was not adhered to by the

insured.
Premium - The insured agrees to pay either a single premium or a periodical
premium for which, the insurer covers and in case the specified event, happens he

agrees to pay the compensation specified therein.

Promise of Indemnity from Specified Risk - The insurer agrees to compensate

when the specific events take place. This is a promise of indemnity from a specific

risk by the insurer.

Advantages of Insurance :

1. Investment of Funds - In the course of business, insurance by the way of

premiums collect vast sums. Especially in life business much of it can be invested
profitably over long periods. This benefits the nation as a whole because insurers are
required by law to invest the major portion in government securities and other
approved investment, out of which nation-building activities are undertaken.

2. Reduction of Cost Insurance-Income earned by investment of accumulated

funds further increases the fund and goes to reduce the cost of insurance for
otherwise the premiums would have to be higher to next extent.

3. Effect of Prices-Manufacturers pass on the consumer, the cost of insurance along

with other production cost. Still it is beneficial to the consumers because without
insurance the cost would have been much more.

4. Invisible Export-Providing insurance service overseas is our invisible export, like

export of material goods and the profit brought in is contribution to the favourable

balance of trade .

5. Reducing cost of social services - No victim or heirs of a deceased victim of

motor accidents now – a days goes without compensation from insurance funds built
out of compulsory insurance of motor vehicles and this is no small benefits social
relief .
Q17. Write a note on Life Insurance Corporation of India (LIC).

Ans. Life Insurance Corporation of India (LIC): The LIC of India was set up under the

LIC Act, 1956 under which the life insurance was nationalised. As a result, business of
243 insurance companies was taken over by LIC on 1-9-1956.

It is basically, an investment institution, in as much as the funds of policy holders are

invested and dispersed over different classes of securities, industries and regions, to
safeguard their maximum interest on long term basis.

The main features of LIC are given below:

1. Saving Institution-Life insurance both promotes and mobilises saving in the

country. The income tax concession provides further incentive to higher income
persons to save through LIC policies.

The total volume of insurance business has also been growing with the spread of
insurance consciousness in the country. The total new business of LIC during the year
1995-96 was around Rs. 51815 crores, sum assured under almost 10.20 lakh policies.

The LIC business can grow at still faster speed if, the following improvements are
made:

The organisational and operational efficiency of the LIC should be increased.

(i) New types of insurance covers should be introduced.

(ii) The services of LIC should be extended to smaller places.

(iii) The message of life insurance should be made more popular.

(iv) The general price level should be kept stable so that the insuring public does not
get cheated of a large amount of the real value of its long-term saving through
inflation.

2. Term Financing Institution - LIC also functions as a large term financing

institution (or a capital market) in the country. The annual net accrual of investible
funds from life insurance business (after making all kinds of payments liabilities to
the policy holders) and net income from its vast investment are quite large. During

1994-95, LIC's total income was around Rs. 18,102.92 crores, consisting of premium
income of almost Rs.1,152.80 crores investment income of Rs. 6,336.19 crores, and

miscellaneous income of almost Rs. 238.33 crores.

3. Investment Institutions

LIC is a big investor of funds in government securities Under the law, LIC is required
to invest at least 50% of its accruals in the form of premium income in government

and other approved securities.

LIC funds are also made available directly to the private sector through investment in
shares, debentures, and loans. LIC also plays a significant role in developing the
business of underwriting of new issues.

4. Stabiliser in Share Market-LIC acts as a downward stabiliser in the share market.

The continuous inflow of new funds enables LIC to buy shares when the market is
weak. However, the LIC does not usually sell shares when the market is overshot. This

is partly due to the continuous pressure for investing new funds and partly due to
the disincentive of the capital gains tax.

Role of LIC:

1. To carry on capital redemption business, annuity certain business or reinsurance

business in so far as such reinsurance business relating to life insurance business;

2. To invest the funds of the Corporation in such manner as the Corporation may

think fit and to take all such steps as may be necessary or expedient for the

protection or realisation of any investment; including the taking over of and

administering any property offered as security for the investment until a suitable
opportunity arises for its disposal;

3. To acquire, hold and dispose of any property for the purpose of its business;
4. To transfer the whole or any part of the life insurance business carried on outside
India to any other person or persons, if in the interest of the Corporation it is

expedient so to do;

5. To advance or lend money upon the socurity of any movable or immovable

property or otherwise;

6. To borrow or raise any money in such manner and upon such security as the
Corporation may think fit;

7. To do all such things as may be incidental or conducive to the proper exercise of

any of the powers of the Corporation.

8. To carry on either by itself or through any subsidiary any other business in any
case where such other business was being carried on by a subsidiary of an insurer

whose controlled business has been transferred to and vested in the Corporation by
this act;

9. To carry on any other business which may seem to the Corporation to be capable
of being conveniently carried on in connection with its business and calculated

directly or indirectly to render profitable the business of the Corporation;

10. In the discharge of any of its functions the Corporation shall act so far as may be
on business principles.

Objectives of LIC of India :

 Main objective of LIC is to cover the death at reasonable cost to all Indians,
particularly in backward areas where more need and safety required .

 LIC tries to generate maximum investment habit with life term risk cover.
 LIC is the Government undertaking department, creates trust of the investor
and gives the best return on premium or investment with best policy plans

 LIC's objective to safety of fund, do best for the economy as a whole.

  LIC's plans introduce for the insurance policy holders as per individual need
with the benefits for society and public interest.

 Expert in area of Insurance, LIC performs best with change in environment .

 promotes amongst all agents and employees of the Corporation a sense of

participation, pride and job satisfaction through discharge of their duties with
dedication towards achievement of Corporate Objective.

Advantages of Life Insurance :

1. Covers Risk of Death - The insurance scheme covers the risk of death. In case of

death, insurance company pays full sum assured, which would be several times larger
than the total of the premium paid. Thus, it saves the family from the financial strain
due to unforeseen and pre-mature death.

2. Encouragement of Compulsory Savings - After taking an insurance policy, if the

premium is not paid, the policy lapses. So, it becomes compulsory for the insured to
pay the premium. This builds the habit of long-time savings thereby, developing the
attitude of savings.

3. Facilitation of Liquidity - Insurance facilitates and maintains liquidity. If the policy

holder is not able to pay the premium, he can surrender the policy for a cash sum. 4.
Provision of Profitability - Insurance is a source of investment. The money paid as

premium is an investment with assured returns. The element of investment i.e.

regular saving, capital formation, and return of the capital along with certain
additional return are perfectly observed in life insurance.

5. Assistance in Odd Situations - Life insurance is a necessity for a person having

responsibilities of the family. Middle aged people with children have potential

expenses of their children's education, settling them and their marriage. It assists the
family in case of sudden illness, death or accident of the bread earning member of

family and helps the dependents of insured by providing for education, housing,
medical treatment and marriage of children.
6. Easy Settlement and Protection against Creditors-The procedure of settlement
of claims is very simple and easy. After the making of nomination or assignment, a

claim under the life insurance can be settled in a simple way. The policy money
becomes a kind of security which cannot be taken away even by the creditors.

7. Facilitation of Loan - Policy holders have the option of taking loan against their

policy. This helps them to meet their unplanned life stages needs without adversely
affecting the benefits of the policy they have bought.

8. Tax Relief - Life insurance plans provide attractive tax benefits under most of the

plans, both at the time of entry and exit. Tax benefits are also available on the
premiums paid and also on the claim proceeds according to the tax laws in force.

9. Mental Peace - Insecurity and uncertainty in life is the main cause of mental
worries. Life insurance helps in reducing this uncertainty and security as it is known

that insurance company will come to his rescue in case the risk feared occurs.

10. Awareness Towards Good Health - Life insurance creates awareness towards
maintenance of good health in the society. Insurance companies have started health

improvement movement throughout the world, by distributing usefull materials for

health education.

Q18. Describe any three Pension Plans.

Ans. Three Pension Plans: These are given below :

1. LIC Jeevan Akshay 6 Plan: The LIC Jeevan Akshay 6 policy plan is an immediate
annuity plan, which can be bought by paying a lump sum amount as a single

premium. The ension starts immediately after buying the plan.

Features and Benefits:

(i) Premium paid in lump sum.

(ii) Pension/annuity payment can be received either monthly, quarterly, half-

yearly or yearly.
 (iii) No medical examination required to avail of this plan.
(iv) Minimum purchase price of Rs 1 lakh for offline distribution channels and

Rs 1.50 lakh for online distribution channels.

(v) No maximum limits for purchase price, annuity etc.

(vi) Minimum entry age is 30 years and maximum entry age is 85 years.
(vii) Age proof is mandatory.

(viii) Premium paid is exempt from tax.

2. LIC Jeevan Nidhi Plan: The LIC Jeevan Nidhi plan is a with profits pension
plan. The accumulated amount of LIC Jeevan Nidhi plan is used to generate

pension for the policyholder based on his or her survival past the policy term.

Features and Benefits:

(i) Premium paid are exempt under section 80CC of the Income Tax Act.

(ii) For the first five years, the policyholder will receive guaranteed additions
@Rs.- per thousand sum assured for each completed year.
(iii) The policy will participate in profits of the corporation from the sixth year
onwards based on terms determined by the Corporation.
(iv) Minimum basic sum assured is Rs 1 lakh under regular premium a Rs. 1.50
lakhs under single premium policies.
(v) No maximum limit for basic sum assured.
(vi) Policy term ranges from 5-35 years.
(vii) Minimum vesting age of 55 years and maximum of 65 years.

3. SBI Life Saral Pension Plan: The SBI Life Saral Pension plan is an individual

participating, non-linked, traditional pension plan, which offers the policyholder

protectio from market fluctuation and volatility.

(i) Guaranteed bonuses for the first 5 years, @ 2.50% of the sum assured for the

initial three years and 2.75% of the sum assured for the following two years.
(ii) The policyholder is assured of vesting bonuses on maturity of the plan.
(iii) The minimum policy term is 10 years and the maximum term is 40 years.
(iv) Minimum annualised premium amount starts at payment of Rs 7,500

per annum with no maximum limit.

(v) Minimum entry age is 18 years and maximum is 65 years.

(vi) Minimum maturity age of 40 years and maximum of 70 years.

(vii) Minimum sum assured of Rs. 1 lakh with no maximum limit.

(viii) You can opt for single, monthly, yearly and half-yearly premium modes.
 CHAPTER – 5

Some Market : Some Basic Concepts

Q19. What are the principal steps of a Public Issue?

Ans. Principal Steps of a Public Issues - The process of a public issue starts with the
preparation of a draft prospectus which gives out details of the company, promoters

background, management, terms of the issue, project details, modes of financing,

past financial performance, projected profitability and others. Additionally a Venture
Capital Firm has to file the details of the terms subject to which funds are to be

raised in the proposed issue in a document called the 'placement memorandum'.

(i) Appointment of Underwriters - The underwriters are appointed who commit

to shoulder the liability and subscribe to the shortfall in case the issue is

under- subscribed. For this commitment they are entitled to a maximum

commission of 25% on the amount underwritten.
(ii) Appointment of Bankers-Bankers along with their branch network act as the
collecting agencies and process the funds procured during the public issue.

The Banks provide temporary loans for the period between the issue date and
the date the issue proceeds becomes available after allotment, which is
referred to as a bridge loan.

(iii) Appointment of Registrars- Registrars process the application forms,

tabulate the amounts collected during the Issue and initiate the allotment
procedures.

(iv) Appointment of the Brokers to the Issue- Recognised members of the

Stock They are eligible for a maximum brokerage of 1.5%.

(v) Filing of Prospectus with the Registrar of Companies- The draft prospectus
along with the copies of the agreements entered into with the Lead Manager,

Under- writers, Bankers, Registrars and Brokers to the issue is filed with the

Registrar of Companies of the State where the registered office of the

company is located.
(vi) Printing and Dispatch of Application forms- The prospectus and
application forms are printed and dispatched to all the merchant bankers,

underwriters, brokers to (vii) Filing of the Initial Listing Application-A letter is

sent to the Stock exchanges where the issue is proposed to be listed giving

the details and stating the intent of the issue getting the shares listed on the
Exchange.

(vii) Statutory Announcement-An abridged version of the prospectus and the

Issue start and close dates are published in major English dailies and
vernacular newspapers.

(viii) Processing of Applications- After the close of the Public issue all the
application forms are scrutinized, tabulated and then shares are allotted
against these applications.
(ix) Establishing the Liability of the Under- writer-In case the issue is not fully

subscribed to, then the liability for the subscription falls on the underwriters
who have to subscribe to the shortfall, in case they have not procured the
amount committed by them as per the Underwriting agreement.

(x) Allotment of Shares- After the issue is subscribed to the minimum level, the
allotment procedures prescribed by SEBI is initiated.
(xi) Listing of the Issue-The shares, after having been allotted, have to be listed
compulsorily in the regional stock exchange and optionally at the other stock

exchanges.

Q 20. What is 'Mutual fund'? What are its various schemes?

Ans. A Mutual Fund is a company that pools money from many investors and invests

the money in securities such as stocks, bonds, and short term debt. The combined

holdings of the mutual fund are known as its portfolio. Investors buy shares in
mutual funds. Each share represents an investor's part ownership in the fund and the
income it generates. Mutual funds are a popular choice among investors because
they generally offer the following features:
(i) Professional Management - The fund managers do the research for you. They
select the securities and monitor the performance.

(ii) Diversification or "Don't put all your eggs in one basket -" Mutual funds
typically invest in a range of companies and industries. This helps to lower your risk if
one company fails.

(iii) Affordability- Most mutual funds set a relatively low dollar amount for initial
investment and subsequent purchases.

(iv) Liquidity - Mutual fund investors can easily redeem their shares at any time, for

the current net asset value (NAV) plus any redemption fees.

Types of Mutual Funds - Most mutual funds fall into one of four main categories -
money market funds, bond funds, stock funds, and target date funds. Each type has

different features, risks, and rewards.

(1) Money market funds have relatively low risks. By law, they can invest only in
certain high-quality, short-term investments issued by U.S. corporations, and federal,
state and local governments.

(ii) Bond funds have higher risks than money market funds because they typically aim
to produce higher returns. Because there are many different types of bonds, the risks
and rewards of bond funds can vary dramatically.

(ii) Stock funds invest in corporate stocks. Not all stock funds are the same. Some
examples are

(a) Growth funds focus on stocks that may not pay a regular dividend but have

potential for above-average financial gains.

(b) Income funds invest in stocks that pay regular dividends.

(c) Index funds track a particular market index such as the Standard & Poor's 500
Index.
(d) Sector funds specialize in a particular industry segment.

(iv) Target date funds hold a mix of stocks, bonds, and other investments. Over time,

the mix gradually shifts according to the fund's strategy. Target date funds,
sometimes known as lifecycle funds, are designed for individuals with particular
retirement dates in mind.

Benefits and risks of mutual funds - Mutual funds offer professional investment
management and potential diversification. They also offer three ways to earn money-
(i) Dividend Payments- A fund may earn income from dividends on stock or interest

on bonds. The fund then pays the shareholders nearly all the income, less expenses.
(ii) Capital Gains Distributions - The price of the securities in a fund may increase.
When a fund sells a security that has increased in price, the fund has a capital gain.
At the end of the year, the fund distributes these capital gains, minus any capital

losses, to investors.

(iii) Increased NAV - If the market value of a fund's portfolio increases, after
deducting expenses, then the value of the fund and its shares increases. The higher
NAV reflects the higher value of your investment.

All funds carry some level of risk. With mutual funds, you may lose some or all of the
money you invest because the securities held by a fund can go down in value.

Dividends or interest payments may also change as market conditions change.

A fund's past performance is not as important as you might think because past
performance does not predict future returns. But past performance can tell you how
volatile or stable a fund has been over a period of time. The more volatile the fund,
the higher the investment risk.

Q21. Write a note on National Stock Exchange of India (NSE).

Ans. The National Stock Exchange is the latest, most modern and technology driven

It started operations in 1994, with trading on the wholesale debt market segment.
Subsequently, it launched the capital market segment in November 1994 as a trading
platform indirectly for equities and the futures and options segment in June 2000 for
various derivative instruments. NSE has set up a nationwide fully automated screen

based trading system. The NSE was setup by leading financial institutions, banks,
insurance companies and other financial intermediaries. It is managed by

professionals, who do not directly or trade on the exchange. The trading rights are
with the trading members who offer their services to the investors. The board of NSE

comprises senior executives from promoter institutions and eminent professionals,

without having any representation from trading members. NSE was set up with the
following objectives:

(a) Establishing a nationwide trading facility for all types of securities.

(b) Ensuring equal access to investors all over the country through an appropriate
communication network.

(c) Providing a fair, efficient and transparent securities market using electronic
trading system.

(d) Enabling shorter settlement cycles and book entry settlements.

(e) Meeting international benchmarks and standards.

Q22. Discuss the main features of Bombay Stock Exchange.

Ans. The Bombay Stock Exchange (BSE) is an Indian stock exchange located at Dalal
Street, Kala Ghoda, Mumbai (formerly Bombay), Maharashtra, India.

Established in 1875, the BSE is Asia's first stock exchange. It claims to be the world's
fastest stock exchange, with a median trade speed of 6 microseconds. The BSE is the

world's 11th largest stock exchange with an overall market capitalization of more
than $2 Trillion as of July, 2017. More than 5500 companies are publicly listed on the
BSE. Of these, as of November 2016, there are only 7,800 listed companies of which

only 4000 trade on the stock exchanges at BSE and NSE. Hence the stocks trading at
the BSE and NSE account for only about 4% of the Indian economy.
Main Features of the Bombay Stock Exchange: The vision of the Bombay Stock
Exchange is "Emerge as the premier Indian stock exchange by establishing global

benchmarks." That means the exchange is thinking big in terms of customer service
and trading activity.

The exchange has launched indices such as the BSE 100, BSE 500, BSEPSU,

BSEMIDCAP, BSESMLCAP, and BSEBANKEX.

Protecting the interests of investors dealing in securities is one of the primary

objectives of the exchange. The exchange provides this additional security by

ensuring remedy of grievances whether this is against member companies or

member/brokers.

The exchange is regulated by the guidelines issued from the Securities and Exchange
Board of India (SEBI).

The exchange is operated through a unique and propriety computer system known
as the "BSE on Line Trading System" or BOLT.

The exchange has also received ISO 9001 2000 certification in the areas of

surveillance and clearing settlement functions:

It is managed professionally by Board of Directors comprising eminent professionals,

representatives of Trading Members and the Managing Director. The Board exercises

complete control and formulates larger policy issues. The day-to-day operation of
BSE is managed by the Managing Director and its school of professional as a

management team. The Exchange reaches physically to 417 cities and towns in the

country.

Q23. What do you mean by Risk? Describe different types of Risk. How will you
manage risk?

Ans. Risk is a basic component of our lives. Taking risks or not taking risks,
everything depends on our decisions. However, the greatest risk a person can take is
to not take any. The relationship between risk and return in the stock market is
strong. Appropriate risk management strategies reduce losses and provide traders

with insight into future market trends. A trader who has made a lot of money can
lose it all in one trade if they don't have a good risk management plan.

Investing involves making decisions about your money. Risk refers to any uncertainty

in your investments that could have a negative impact on your finances. Market
conditions can affect your investment value (market risk). Corporate decisions, like
whether to expand or merge, can affect investment value (business risk). Events in a
country can affect your overseas investment (political risk and currency risk, to name

two). Other risks also exist. Liquidity risk is the difficulty of selling investment when
needed. Risk is the likelihood of a negative financial outcome that matters to you .

Types of Risk - There are two main types of risk. These are as follows-

(i) Systematic Risk-The term "systemic risk" refers to risks that exist throughout

the system as a whole. This is the type of risk that affects the entire market or

a specific subset of it. Political instability, war, and earthquakes are some
examples of systematic risk. In almost all cases, protecting a portfolio against
this risk is impossible. Systematic risk can't diversify. It is also known as market
risk or the risk that cannot be hedged. For example, there isn't much you can

do as an individual to keep the economy from entering a slowdown. This is

due to the fact that the elements that create recessions and changes in the
market cycle are beyond the scope of any single individual or group. That is

how systematic risk operates. Individuals, on the other hand, can choose how
they react to systemic risk while making investing decisions. For example, if
signals indicate a recession, you should diversify your portfolio to include
investments that are expected to keep their value during a slump. If you

expect interest rates to rise, you may want to alter your bond holdings
accordingly.
(ii) Unsystematic Risk- Unsystematic risk is also known as residual risk, unique
risk, and diversifiable risk. It is unique to a company or particular industry.

Unsystematic risk is made up of risks that are unique to a company, like strikes
and lawsuits. Diversifying can help reduce some of these risks, but not all of

them. For instance, suppose that new regulatory changes are about to be
implemented in the financial services sector. Companies within the industry

could evaluate the potential negative effects of these developments and then
create new standards, norms, or practises to mitigate these effects.

Managing Risk - Risk in investment is unavoidable. Systematic risk and non-

systematic risk can be lessened with two basic investment strategies:

(i) Allocation: By including different asset classes in your portfolio (for example,

stocks, bonds, real estate, and cash), you increase the likelihood that some
investments may generate sufficient returns even if others are flat or losing value.
You reduce the risk of severe losses from over-emphasizing a particular asset type.

(ii) Diversification: Diversification is dividing the money you've allocated to a certain

asset class, such as stocks, among various investment options that belong to that
class. Diversification allows you to spread out your holdings.

Q24. What is the meaning of share? Classify Equity and Preferential shares.

Ans. Meaning of a Share- The capital of the company is divided into different units
of a fixed amount. Each of such unit is called a 'share'. Section2(36) of the Companies

Act defines a share, “as a share in the share capital of the company, and includes
stock except where a distinction between stock and shares is expressed or implied."
This definition is simple but is not exhaustive as it fails to bring out the true nature of
a share.
A share carries along with it certain rights and liabilities in the company. The rights of
a shareholder are proportionate to the number of shares held by him in the

company. The holder of a share is issued a share certificate which shows that the
holder thereof has a proportionate share or interest in the capital of the company.

The share certificate specifies the number of shares held by any shareholder.

Types of Shares- According to Section 86 of the Companies Act. 1956, the share
Capital of a company limited by shares formed after the commencement of the Act
of 1956, or issued after such commencement shall be of two types, namely, (a)
preference share capital and (b) Equity share capital. Thus a public limited company

can issue only two types of shares-

(i) Equity Shares: All shares which are not preference shares are 'equity shares".

These shares carry no special privileges arid their rights and liabilities are governed
by the articles of association of the company. In the eyes of law, equity shareholders
are not the owners of the company, because a company has its own independent
legal entity. Dividend is paid to the holders of these shares after the preference

dividend at a fixed rate has been paid. The rate of dividend payable on these shares
is not fixed and keeps on changing from year to year depending on the amount of
profits available for distribution. On the liquidation of the company, the claims of
equity shareholders are satisfied only after satisfying all other claims. Equity

shareholders have a right to vote on various resolutions in proportion to his share of

the paid up equity capital, whereas I preference shareholders have. generally, no
voting rights.

(ii) Preference Shares- Under Section 85(1) of the Companies Act, a preference
share is one which fulfils the following two conditions:

(a) With respect of dividend, it carries a preferential right to be paid a fixed amount

or an amount calculated at a fixed rate.

(b) With respect of capital, it carries a preferential right to be repaid the amount of
the capital paid-up in the event of winding up of the company. In other words the

amount paid on preference shares must be paid back before anything is paid to the
equity shareholders.

The above two conditions clearly show that the preference shares carry a preferential

right to receive dividend. However, the amount or rate of dividend is fixed. Similarly,
at the time of winding up of the company, the preference shareholders are paid their
amount prior to the payment to equity shareholders. id back before anything is paid
to the equity shareholders.