FINACIAL EDUCATION AND INVESTMENT AWARENESS

UNIT 1: FOUNDATIONS FOR FINANCE 10 Hrs.

 Introduction to Basic Concepts of Finance:

o Money and its need,
o Meaning and need for Financial Planning;
o Life goals and financial goals of an individual;
o Format of a sample financial plan for a young adult.
 Time value of Money:
o Meaning, need,
o Concepts of Compounding – Simple and Compound Interest and Discounting- Present
value of Single Cash Inflow,
o Series of Cash Inflow,
o Annuity, Perpetuity- Problems.
 Valuation Of Securities:
o Meaning,
o Need for valuation of securities,
o Valuation of fixed income Securities- debentures and preference shares,
o Valuation of Equity Shares,
o Dividend Capitalization Approach,
o Earnings Capitalization Approach-Problems.

Chapter 01 : Introduction to Finance

A) Introduction To Basic Concepts Of Finance.

Money:
A current medium of exchange in form of coins and bank notes. Money is any object that is generally
accepted as payment for goods and services and repayment of debts in a given country or socio-economic
context.

Importance or Need for Money:

1.Medium of exchange:
The use of money as a medium of exchange overcomes the drawbacks of barter. Thus, money provides
the most efficient means of satisfying wants.
2.A Measure of Value:
Under the barter system, it is very difficult to measure the value of goods. Money is the measuring rod of
everything. By acting as a common denominator it permits everything to be priced, that is, valued in
terms of money.
3. A Store of Value:
Money is used as a store of purchasing power. It can be held over a period of time and used to
finance future payments. More-over, when people save money, they get the assurance that the money
saved will have value when they wish to spend it in the future.
4.The Basis of Credit:
Money facilitates loans. Borrowers can use money to obtain goods and services when they are needed
most.
5.A Unit of Account:
An attribute of money is that it is used as a unit of account. The implication is that money is used to
measure and record financial transactions as also the value of goods or services produced in a country
over time.
6. A Standard of Postponed Payment:
When goods are bought on hire-purchase, they are given to the buyer upon payment of a deposit, and he
then pays the remaining amount in a number of instalments.
Definition of Finance
The word finance is derived from old French word “Finer” means “to pay”, settle. Thus finance means
money or provision of fund as and when needed. Definition According to “Calvin Potter” Business
Finance concerned with ' how the finance of business enterprise should be manage'.
Meaning of Financial Plan:
It is the process of determining the income, expenses, assets and liabilities of house hold to take care of
both current and future need for the fund.
Need/Benefits for Financial plan:
1. Increase your savings
It may be possible to save money without having a financial plan. But it may not be the most
efficient way to go about it. When you create a financial plan, you get a good deal of insight into
your income and expenses. You can track and cut down your costs consciously. This
automatically increases your savings in the long run.
2. Enjoy a better standard of living
Most people assume that they would have to sacrifice their standard of living if their monthly bills
and EMI repayments are to be addressed. On the contrary, with a good financial plan, you would
not need to compromise your lifestyle. It is possible to achieve your goals while living in relative
comfort.
3. Be prepared for emergencies
Creating an emergency fund is a critical aspect of financial planning. Here, you need to ensure
that you have a fund that is equal to at least 6 months of your monthly salary. This way, you don’t
have to worry about procuring funds in case of a family emergency or a job loss. The emergency
fund can help you pay for varied expenses on time.
4. Attain peace of mind
With adequate funds at hand, you can cover your monthly expenses, invest for your future goals
and splurge a little for yourself and your family, without worry. Financial planning helps you
manage your money efficiently and enjoy peace of mind. Don’t worry if you have not yet reached
this stage. If you are on the path of financial planning, the destination of financial peace is not
very far away.
 Meaning Of Life Goals:
Life goals are all the things you want to accomplish in your life . Often your life goals are very
meaningful to and can make a lasting impact on your life .
Financial Goals of An Individual:
It is a scientifically defined financial milestone that you plan to achieve or reach. Financial goals
comprise earning, saving, investing and spending in proportions that match your short term, medium
term, and long term plans.

TYPES OF FINANCIAL GOALS

a) Short-Term Goals: 12 to 24 months - Short-term goals are something you want to achieve in the
foreseeable future over the next few months. These are required for your more immediate expenses.
These expenses are generally smaller in scope and easier to project and predict.
 Saving for vacations
 Christmas gift savings
 Planning a wedding
 Home Improvement/Renovation
 Building an emergency fund
 Paying off debt
b) Medium-Term Goals: 2 to 5 years- Medium Term lies between short term and long term. Short-term
goals have a typical timeline of a year whereas long-term goals are planned for a decade or more. You
may have to achieve a series of short-term goals to reach your medium-term goals. Clearing outstanding
dues on your credit card or personal loan can be classified under medium-term goals.
 Saving for a home down payment
 Paying for a car in cash
c)Long-Term Goals: 5+ Years - Long-term goals require more deliberation, and in most cases, money.
Retirement, buying a house, and funding a child’s higher education are typical long-term goals.
 Saving for a child’s college education
 Investing for retirement etc.

B. Time Value Of Money .

Meaning of Time Value Of Money (TVM):

It means that sum of money is worth more now than the same sum means that it can grow only through
investing. So a delayed investment is a lost opportunity. OR Amount available now is not equivalent to
amount received after a year . The value associate with the same sum of money received at various points
on the timeline is called Time Value of Money.

Importance of time value of money:

1. Compounding: The investor earns interest on the principal amount and on all the interest on previous
years. In order to get the maximum benefit, you have to stay invested for a long time and enjoy the
benefits of compounding.
2. Financial Management: Since the money is worth more now than the same money in the future,
therefore TVM is important for financial management. You can always use the funds to make an
investment and receive interest.
3. Capital Budgeting: TVM is very useful in capital budgeting as it helps management get an idea of
their cash flows. In capital budgeting, discount the future cash flows to their present value to determine
whether the project is worthy of investment or not.
4. Personal Finance Decisions: TVM concept will help you see the financial impact of every financial
decision you make. It would help you plan your financial goals and help you meet financial challenges. It
would also help you compare and evaluate two or more investment options.
5. Investing: The money you have is worth more today than in the future. Therefore, it is very important
that you invest the money instead of keeping it in yourself or in a normal bank account. And the TVM
helps you make the better investment decision .
Components of TVM
The key components are as mentioned below –
1.Interest/Discount Rate:
It’s the rate of discounting or compounding that we apply to an amount of money to calculate its present
or future value.

2.Time Periods
It refers to the whole number of time periods for which we want to calculate the present or future value of
a sum. These time periods can be annually, semi-annually, quarterly, monthly, weekly, etc.
3.Present value
The amount of money that we obtain by applying a discounting rate on the future value of any cash flow.
4.Future value
The amount of money that we obtain by applying a compounding rate on the present value of any cash
flow.
5.Installments
Installments represent payments to be paid periodically or received during each period. The value is
positive when payments have been received and become negative when payments are made.

C)Valuation Of Securities.

Meaning of Security:
A certificate or other financial instrument that has monetary value and can be traded. Securities are
generally classified as either equity securities, such as stocks and debt securities, such as bonds and
debentures.
Meaning of Valuation of Securities:
Valuation of securities is the process of estimating the worth of a security. This is done by looking at the
cash flows that will be generated by the security.

Types of securities
1.Debenture:
Debenture is a marketable security that businesses can issue to obtain long-term financing without
needing to put up collateral or dilute their equity.
 2.Equity share:
Equity shares are popular investment options among investors. Equity shares offer fraction ownership of
the company. Therefore, equity shareholders are considered as owners. Equity shares are issued to the
general public for the first time through an Initial Public Offering (IPO)
3.Preference share: Preference shareholders have a preferential right or claim over the company’s profits
and assets.
4.Bonds:
A bond is a debt security, similar to an IOU. Borrowers issue bonds to raise money from investors willing
to lend them money for a certain amount of time.
5.Hybrid securities:
Hybrid securities are securities that have a combination of debt and equity characteristics. The original
hybrid security was preferred stock, representing ownership in a company (like equity) but having fixed
payments (like bonds).

Importance or Need for Valuation of Shares

1. At the time of amalgamation and absorption.

2. When unquoted shares are to be bought or sold.
3. At the time of converting preference shares and debentures into equity shares.
4. Where a portion of shares is to be given by a member of proprietary company to another member as a
member cannot sell it in the open market it becomes necessary to certify the fair price.
5. For the valuation of the assets of a finance or investment trust company.
6. At the time of assessment by the income tax authorities for the purpose of estate duty, capital gain,
wealth tax and gift tax.
7.When a company is nationalised and the compensation is payable by the government.
8.When a company acquires majority of the shares of another company for the purpose of acquiring a
controlling interest in another company.
9.When shares are pledged as a security against a loan.
10.For satisfying dissentient shareholders in the case of reconstruction of a company under section 494.

TYPES OF VALUATION OF SECURITIES

Investment process invariability requires the valuation of securities in which the investments are
proposed. The value of a security may be compared with the price of the security to get an idea of a
particular security is overpriced, under-priced or correctly priced. A number of concepts of valuation have
been used in the literature. Some of these are:
1. Book Value (BV).
BV of an asset is an accounting concept based on the historical data given in the balance sheet of the firm.
BV of an asset may either be given in the balance sheet or can be ascertained on the basis of figures
contained in the balance sheet.
2. Market Value (MV).
 MV of an asset is defined as the price for which the asset can be sold. MV of a financial asset refers to the
price prevailing at the stock exchange.
3. Going Concern Value (GV).
This is the value which a prospective buyer of a business may be ready to pay. Going concern value may
be less than or more than the market value or book value of the total business. It depends upon the ability
to generate sales and profit in future.
4. Liquidation Value (LV).
It refers to the net difference between the realizable value of all assets and the sum total of the external
liabilities. This net difference belongs to the owners/shareholders and is known as liquidation value.
5.Capitalized Value (CV).
CV of a financial asset is defined as the sum of present value of cash flows from an asset discounted at
the required rate of return. In order to find out the CV, the future expected benefits are discounted for
time value.

The valuation of debentures and preference shares, which are specific types of fixed income securities,
involves considerations that are distinct from other types of fixed income instruments. Here's an overview
of the valuation methods for debentures and preference shares:

Debentures:
Debentures are long-term debt instruments issued by corporations to raise capital. They usually have
fixed interest payments (coupons) and a predetermined maturity date. Valuing debentures typically
involves estimating their present value based on the following factors:

1. Coupon Rate: The fixed interest rate or coupon rate associated with the debenture determines the
periodic interest payments to bondholders. The coupon rate is applied to the face value of the debenture to
calculate the coupon payments.

2. Market Interest Rates: Changes in market interest rates impact the valuation of debentures. If the
market interest rates rise, the value of existing debentures decreases, and vice versa. The relationship
between the coupon rate of the debenture and prevailing market interest rates determines its attractiveness
to investors.

3. Credit Risk: The creditworthiness of the issuer affects the valuation of debentures. Higher credit risk
leads to higher yields demanded by investors, thereby reducing the value of the debentures. Credit ratings
assigned by rating agencies provide insights into the issuer's creditworthiness.

4. Maturity Date: The time to maturity of the debenture influences its valuation. Generally, debentures
with longer maturities tend to have higher price volatility compared to those with shorter maturities.

The valuation of debentures is typically performed using discounted cash flow (DCF) analysis. This
method involves discounting the expected future cash flows (coupon payments and principal repayment at
maturity) to their present value using an appropriate discount rate, which is typically based on market
interest rates and the issuer's credit risk.

Preference Shares:
Preference shares, also known as preferred stock, are a type of equity security that has a fixed dividend
payment, similar to a fixed income instrument. Valuing preference shares entails considering the
following factors:
1. Dividend Rate: Preference shares provide a fixed dividend rate, typically expressed as a percentage of
the face value or par value of the shares. This fixed dividend rate is an essential component in the
valuation of preference shares.

2. Market Dividend Rates: The prevailing market dividend rates for similar preference shares influence
the valuation. If the market dividend rates rise, the value of existing preference shares decreases, and vice
versa. Comparing the dividend rate of the preference shares to the prevailing market rates helps determine
their relative attractiveness.

3. Equity Risk Premium: Unlike debentures, preference shares have an equity component and are
considered hybrid securities. As such, their valuation requires consideration of the equity risk premium,
which reflects the additional return demanded by investors for bearing the risk associated with equity
investments.

The valuation of preference shares is typically performed using dividend discount models (DDM), which
estimate the present value of expected future dividends. The DDM considers the fixed dividend rate,
expected dividend growth, and the equity risk premium.

It's important to note that the valuation of debentures and preference shares involves assumptions and
market conditions, and actual market prices may vary. Therefore, market participants and investors often
use various valuation models and techniques to make informed investment decisions and assess the
relative attractiveness of these fixed income securities in the market.

Valuation of equity shares refers to the process of determining the fair value or intrinsic value of a
company's common stock or ordinary shares. It involves assessing the financial and qualitative factors
that contribute to the value of the shares. The valuation of equity shares is important for various reasons,
including:
1. Investment Decision-Making
2. Mergers and Acquisitions
3. Fundraising
4. Financial Reporting
5. Shareholder Disputes

Dividend Capitalization Approach

The Dividend Capitalization Approach, also known as the Dividend Discount Model (DDM), is a
valuation method used to estimate the value of an investment, particularly equity shares, based on the
present value of expected future dividends. It assumes that the value of an investment is equal to the
present value of its future cash flows, specifically dividends in the case of equity shares.

Earnings Capitalization Approach

The Earnings Capitalization Approach, also known as the Earnings Capitalization Model (ECM), is a
valuation method used to estimate the value of an investment or a company based on the capitalization of
its earnings. This approach assumes that the value of an investment is determined by the capitalization
rate applied to its expected earnings.

CHAPTER 02 :

INVESTMENT AVENUES
 Introduction to Investment: Meaning, Need, Essentials of investment, Investment and
speculation, Basic investment objectives, Diversification- Need for diversification.
  Investment Avenues for a Common Investor: Bank deposits; Corporate securities-Equity
shares, Preference shares, debentures, bonds, company deposits; Post Office savings schemes,
Government securities, Real Estate, Gold and Bullion, Chit and Nidhi Companies, Life Insurance,
Retirement and Pension Plans - National Pension System, Atal Pension Yojana etc. (Features if all
Investment Avenues with its Income Tax benefits); Risk and return relationship (Theory only).
 Stock Markets: Primary Market and Secondary Market, Stock Exchanges, Stock Exchange
Operations – Trading and Settlement, DEMAT Account, Depository and Depository Participants;
Investor Protection.

Investment:

An investment is an asset or item acquired with the goal of generating income or appreciation.
Appreciation refers to an increase in the value of an asset over time. When an individual purchases
a good as an investment, the intent is not to consume the good but rather to use it in the future to
create wealth.

An investment always concerns the outlay of some resource today—time, effort, money, or an
asset—in hopes of a greater payoff in the future than what was originally put in. For example, an
investor may purchase a monetary asset now with the idea that the asset will provide income in the
future or will later be sold at a higher price for a profit.

Need for investment

1. It is a great source of passive income

2. 2. Brings financial Independence
3. It lets you follow your passion
4. Helps to beat inflation
5. Get tax benefits

Meaning of Speculation:
Speculation relies upon future expectations of market changes. Examiners or speculators attempt to get
profited from the high points and low points of market variances. In any case, this approach is unsure, and
the likelihood of misfortune is high. Market variances are the premise of speculations.

Meaning of investment:

Investment relies upon profound statistical surveying, business experience, reasonable business
procedure, and investigation of a marketable strategy. Investment is supported by the security of the head
and explicit profit from contributed capital. Every one of the exchanges or ventures not after these
variables fall under the class of speculations.

Differences between Investment and speculation

SPECULATION INVESTMENT

Meaning
Executing a dangerous monetary exchange or venture Purchasing of a share or an asset or anything
or investment with the assumption for high benefit for getting steady returns or benefits.
making that can go wayward.

Investors’ Point of View

Indiscreet and forceful conduct. Wary and helpful.

Presumption of the Returns

An undeniable degree of profits and benefits with high Unassuming and nonstop with a low likelihood
disappointment is the likelihood. of disappointment.

Level of Risk

The risk and likelihood of disappointment are high in The gamble level is moderate in contributing.
speculation.

Similitude

The reason for speculating is additionally to acquire The principal point of putting is to acquire
high benefits. benefits later on.

Time Horizon or Duration

Speculations are like shortcuts and take less time to Venture takes significant stretches to give
give outcomes. But these outcomes can go one way or results.
another.

Examples

Betting, momentum contributing, development stocks, The financial exchange, saving accounts,
foreign monetary standards, digital forms of money. Government securities, factor contributing,
shared assets, and so on.

Objectives of Investment

The need for investment will grow as you move ahead in life. Growing responsibilities will demand
an increase in investment. The primary objectives of investment are listed below:

1. Safeguard your Money

Investing keeps your money safe from immediate and unnecessary expenditures. It also helps you
keep your money safe from inflation effects. Inflation erodes the value of your money unless it is
invested in an interest-earning asset. Thus, investing will help you automatically keep up with
inflation.

2. Grow your Savings

 Investment is the only way to start growing your invested money. It allows your money to earn
interest and if you keep the interest invested it will also start to earn interest.

3. Build Funds for Emergencies

Life is usually a series of ups and downs. Few times you are earning decent and saving money
while other times you need a large sum for an emergency. Building investment pools help you on
such rainy days.

4. Secures your Retired Life

Retired life is where you don’t have a source of income to sustain your life. Once you have built a
retirement corpus, you can experience the freedom that comes with it.

5. Save Tax
Investment in tax-saving instruments like life insurance plans, ULIPs, PPF, NPS, etc allows you to
claim deductions on your taxable income. Thus, investing in specific assets can help you reduce
your tax liability. Many of these investments also help you reduce your future tax with tax-free
maturity values.

6. Fund Bigger Life Goals

Your monthly income will not be enough to purchase your next car or build a house for your
family. However, if you invest a small sum in a few years both could be possible.

What Is Diversification?
Diversification is a risk management strategy that mixes a wide variety of investments within a
portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in
an attempt at limiting exposure to any single asset or risk.
The rationale behind this technique is that a portfolio constructed of different kinds of assets will,
on average, yield higher long-term returns and lower the risk of any individual holding or security.

Need for diversification

1. Reduced Impact on Market Volatility

It helps to reduce the overall risk when you have portfolio diversification, and it is made across
different asset classes and sectors, which brings down the impact of the market volatility. When
you own investments with different funds, you will also be ensured that industry-specific and
enterprise-specific risks are low.

2. Advantages of Different Investment Instruments

Diversification balances your risk and returns that are associated with different funds. For
example, if you are investing in mutual funds, you enjoy debt and equity. When you invest in
fixed deposits, you would be taking advantage of returns and low risk. This is the case with a
diversified portfolio, and you can enjoy the benefits of different instruments.

3. Benefit of Compounding Interest

 If you are selecting a mutual fund, it allows you to avail of the benefits of compounding interest.
This implies that each investment generates interest on both the principal amount and the
cumulative interest over the previous invested years.

4. Capital is Always Kept Safe

When diversifying your portfolio, some of your capital is kept safe because of the different types
of investments you have taken up. While some of your investments are tied to high-risk
investments, some of them can be tied to low-risk investments that always secure your capital,
which means you won’t face a complete loss on market volatility.

5. Shuffle Among Investments

When you stick to a single investment, you give it a large amount of time, and a loss means you
take the loss on the fund as a whole. It is a practical approach to shuffle and take advantage of the
market movement. It will let your spread your investment across different asset classes and
increases your annual returns over it.

6. It Offers you Peace of Mind

It is one of the biggest advantages, no doubt. When you have your total investments divided into
segments among various asset classes, you would not be stressed about the performance of the
portfolio.

7. Spend Less Time Monitoring the Portfolio

Let us say you have only invested in equity funds. You will spend a large amount of time
monitoring the market and analyzing your next step. But when it comes to diversification, you will
be spending much lesser time on the same, and your portfolio would not actually require that
much maintenance time.

INVESTMENT AVENUES FOR A COMMON INVESTOR

Bank deposits

Bank deposits consist of money placed into banking institutions for safekeeping. These deposits are
made to deposit accounts such as savings accounts, checking accounts, and money market accounts at
financial institutions.

Retail savings and deposits represent the most stable and typically cheapest form of funding for a
bank. They are the basic building blocks of a bank's funding and liquidity profile. Although banks do
many things, their primary role is to take in funds—called deposits—from those with money, pool
them, and lend them to those who need funds. Banks are intermediaries between depositors (who lend
money to the bank) and borrowers (to whom the bank lends money).

Corporate securities-Equity shares, Preference shares, debentures, bonds, company deposits:

Investment securities are a category of securities—tradable financial assets such as equities or fixed
income instruments—that are purchased with the intention of holding them for investment. As
opposed to investment securities, in general, securities are purchased by a broker-dealer or other
intermediary for quick resale.

Equity shares are long-term financing sources for any company. These shares are issued to the general
public and are non-redeemable in nature. Investors in such shares hold the right to vote, share profits
and claim assets of a company. The value in case of equity shares can be expressed in various terms
like par value, face value, book value and so on.

Investing in best equity shares have the following benefits, such as –

 High Income
 Hedge Against Inflation
 Portfolio Diversification
DEBENTURE:

A debenture is a debt instrument issued by companies and governments to borrow funds for a
specified period. Investors buying debentures act as the issuer’s creditors; therefore, the issuer needs
to repay the principal after the end of that period. Plus, issuers also need to pay interest to debenture
holders.

Debentures are generally an attractive investment opportunity because they often pay higher interest
rates than other types of bonds. Debentures are not secured by collateral, but they're secured by assets
if there are enough of them to do so. Debentures can be bought on the secondary market (like bonds).

Post Office savings schemes:

The post office savings account is like a savings bank account. This post office savings scheme is
applicable throughout India and is especially popular in rural areas. An individual can open only one
with one post office but may transfer the account from one post office to another.

The post office savings account earns interest fixed on the deposit amount. Therefore, it is suitable for
risk-averse individuals intending to earn a fixed investment return. You can open a savings account in
the post office for as low as Rs. 20. Under the non-cheque facility, the minimum balance is Rs. 50.
Depositors can withdraw the deposits at their convenience.

Government securities:

Government securities in India are sovereign bonds issued by the Indian government to raise capital
from the market. Since these bonds are backed by the government, they are considered risk-free. But
unlike equalities, government bonds have tenure and don't allow investors to redeem before a lock-in
period.

Types of Government securities are Treasury Bills (Short term) and Dated securities.

Government bonds carry lower risk compared to other assets like equities, as the returns are
guaranteed by the government. There are some market-related risks, but by simply holding on to the
bonds until maturity, you can nullify the risk.
Real Estate:

Real estate investing involves the purchase, management and sale or rental of real estate for profit.
Someone who actively or passively invests in real estate is called a real estate entrepreneur or a real estate
investor. Some investors actively develop, improve or renovate properties to make more money from
them.

It is a safe investment option.

Compared to other investments like the stock market, gold, cryptocurrencies, and even banks, a real estate
investment can be a lot safer.

Gold and Bullion

Gold investment can be done in many forms like buying jewellery, coins, bars, gold exchange-traded
funds, Gold funds, sovereign gold bond scheme, etc.

Though there are times when markets see a fall in the prices of gold but usually it doesn’t last for long
and always makes a strong upturn. Once you have made your mind to invest in gold, you should
decide the way of investing meticulously.

Bullion is gold and silver that is officially recognized as being at least 99.5% and 99.9% pure and is in
the form of bars or ingots. Bullion is often kept as a reserve asset by governments and central banks.

To create bullion, gold first must be discovered by mining companies and removed from the earth in
the form of gold ore, a combination of gold and mineralized rock. The gold is then extracted from the
ore with the use of chemicals or extreme heat. The resulting pure bullion is also called "parted
bullion." Bullion that contains more than one type of metal, is called "unparted bullion."

Although the price of gold can be volatile in the short term, it always has maintained its value over the
long term. Through the years, gold has served as a hedge against inflation and the erosion of major
currencies, and thus is an investment well worth considering.

Chit and Nidhi Companies:

The full form of NIDHI is National Initiative for Developing and Harnessing Innovations.

A nidhi company is a type of company in the Indian non-banking finance sector, recognized under
section 406 of the Companies Act, 2013. Their core business is borrowing and lending money
between their members.

Life Insurance, Retirement and Pension Plans - National Pension System, Atal Pension Yojana etc.
(Features if all Investment Avenues with its Income Tax benefits);

Life Insurance:

Life insurance is a contract between a life insurance company and a policy owner. A life insurance
policy guarantees the insurer pays a sum of money to one or more named beneficiaries when the
insured person dies in exchange for premiums paid by the policyholder during their lifetime.
 Features:

Features of Life Insurance Plans

1. Policyholder

Policyholder is the individual who pays the premium for the life insurance policy and signs a life
insurance contract with a life insurance company.
2. Premium

A premium is the cost the policyholder pays the life insurance company for covering his/her life.

3. Maturity

Maturity is the stage at which the policy term is completed and the life insurance contract ends.

4. Insured
Insured is the individual whose life is secured via the life insurance. After his/her death the
insurance company is accountable to provide a financial amount to the dependents

5. Sum Assured

The amount the insurance company pays the dependents of the insured if those events occur which
are specified in the life insurance contract.

6. Policy Term

Policy term is the specified duration (listed in the life insurance contract) for which the insurance
company provides a life cover and the time period during which the contract is active (listed in the
life insurance contract).

7. Nominee

A nominee is an individual listed in the life insurance contract who is entitled to receive the

predetermined compensation, as a part of the policy.

8. Claim

On the insured's demise, the nominees can file a claim with the insurance provider in order to
receive the predetermined payout amount.

TAX BENEFITS

Generally, you can claim an income tax deduction on your life insurance premiums under Section
80C of the Income Tax Act, 1961. Pay-outs for death claims are tax-free under Section 10(10D)

of the Income Tax Act, 1961.

Retirement Pension Plans

1. Deferred Annuity

You can accumulate a corpus for your retirement through a single premium payment or regular
premium payment over a policy term. After the policy tenure is over, you will start receiving
pension. One-third corpus is tax-free on withdrawal, while the remaining two-thirds are taxable.

2. Immediate Annuity
Under this plan, you start receiving a pension immediately. You pay a lump-sum amount, and
you start getting the annuity based on the amount you have invested. You can choose from the
range of annuity options under this plan.

3. Pension Plans with Life Cover

The majority of the pension plans offer life insurance cover with annuity option. In case of the
demise of the policyholder, beneficiary will receive the benefits. The primary purpose of the plan is
to offer a sustainable pension to the retiree.

4. National Pension Scheme (NPS)

This plan is one of the two types of pension plans in India which are also used by the Government
of India. The plan gives you an option to invest in equity and debt funds depending on your risk
profile.

5. Atal Pension Yojana

It is social security scheme launched by the Government of India for workers in the unorganized
sector. An Indian citizen in the age group of 18 to 40 years with the valid bank account is eligible
to apply of the scheme.

Risk and Return

It is the relationship between the amount of return gained on an investment and the amount of
risk undertaken in that investment. The more return sought, the more risk that must be
undertaken.
 CHAPTER – 3
MUTUAL FUNDS
Mutual Funds: Meaning and Features of Mutual Funds, History of Mutual Funds in India,
Benefits and drawbacks of investment in mutual fund; Major Fund Houses in India and Types of
Mutual Fund Schemes and plans; SIP, STP, SWP of mutual fund; Net Asset Value- simple
problems.

A mutual fund is a financial vehicle that pools assets from shareholders to invest in securities like stocks,
bonds, money market instruments, and other assets. Mutual funds are operated by professional money
managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's
investors. A mutual fund's portfolio is structured and maintained to match the investment objectives
stated in its prospectus.

Features of Mutual Funds

1. Convenience

With the popularisation of online investment in mutual funds, you do not need to visit a fund house
physically. You can invest in any fund of your choice using your phone or computer. All you need to do
is visit the portal or app of the AMC and log in here to make a purchase.

2. Flexibility of Investment

This is one of the attractive features that mutual funds have to offer. You can opt for any mode between
SIP or lumpsum to invest your money in mutual funds.

3. Liquidity

You can also withdraw or redeem your funds to meet any emergency. Depending on your scheme, you
will receive the amount within 3-4 business days. Liquid funds transfer this amount to your account in the
following business day. Hence, mutual funds carry decent liquidity as investors can redeem them
anytime.

4. Income Tax Benefits

With a long-term investment in mutual funds, you can pay less taxes due to their high tax efficiency. You
can also get income tax deductions by investing in ELSS funds while earning high returns.

5. Minimal Charges
Mutual funds are also affordable for every earning individual. You need to pay a small amount, known as
the expense ratio, to your fund houses to invest in mutual funds. The expense ratio and other additional
charges might vary between fund houses. However, the costs are less than other managed funds.

6. Regulated by SEBI

Every fund house must register itself under SEBI before launching a mutual fund scheme. SEBI
overlooks the transparency and accountability of fund houses and protects investors. By doing so, SEBI
prevents any arbitrary use of investors’ money. This makes mutual funds safe from fraud and
malpractices.

7. Operated by Professionals

Every fund house employs professionals known as fund managers to operate mutual funds. They study
the market pattern and invest your money in equities or debts according to the scheme’s objectives.

8. Good for Portfolio Diversification

Mutual fund schemes allow you to avoid placing all your eggs in one basket. They uniformly invest in
high and low-risk mutual investments on your behalf to balance your profit and losses. This lets you
access a diversified portfolio, which can deliver profits even during periods of economic downturns.

History of Mutual Funds in India

Traditionally, people used to invest in gold, real estate, fixed deposits, etc to grow their wealth. However,
with the advent of mutual funds, people shifted to invest their hard-earned money in the financial markets
from the traditional mode of investments.

A mutual fund is managed by a company called AMC (Asset Management Company) which invests in
various financial instruments such as equity, bonds, gold, etc. They aim for providing decent returns to
their investors while keeping the risk level at a minimum. However, the AMC should be registered with
SEBI (Securities and Exchange Board of India). SEBI is the regulatory body of the stock market and acts
as a watchdog in the stock market. They make sure that there is no conduct of unfair trade practices in the
market.

Unit Trust of India is the first AMC that dealt in mutual funds and was established in 1963. The goal of
the AMC was to inform uninformed investors about the investment in the share market and other
financial instruments. In those days, investing in the share market was a rare thing in India and it was
considered gambling. Hence, only a few proportions of the Indian population used to invest in the share
market.

Advantages of mutual funds:

1. Liquidity
Unless you opt for close-ended mutual funds, it is relatively easier to buy and exit a mutual fund
scheme. You can sell your open-ended equity mutual fund units when the stock market is high and
make a profit. Do keep an eye on the exit load and expense ratio of the mutual fund.
2. Diversification
Equity mutual funds have their share of risks as their performance is based on the stock market
movements. Hence, the fund manager spreads your investment across stocks of companies across
various industries and different sectors called diversification. In this way, when one asset class
doesn’t perform, the other sectors can compensate to avoid loss for investors.
3. Expert Management
A mutual fund is good for investors who don’t have the time or skills to do the research and asset
allocation. A fund manager takes care of it all and makes decisions on what to do with your
investment.
The fund manager and the team of researchers decide on the appropriate securities such as equity,
debt or a mix of both depending on the investment objectives of the fund. Moreover, the fund
manager also decides on how long to hold the securities.
Your fund manager’s reputation and track record in fund management should be an essential
criterion for you to choose a mutual fund. The expense ratio (which cannot be more than 2.25%
annualised of the daily net assets as per SEBI) includes the fees of the fund manager.
4. Less cost for bulk transactions
You must have noticed how price drops with the purchase of increased volumes. For instance, if a
100g toothpaste costs Rs 10, you might get a 500g pack for say, Rs 40.
The same logic applies to mutual fund units as well. If you buy multiple mutual fund units at a
time, the processing fees and other commission charges will be lesser as compared to buying one
mutual fund unit.
5. Invest in smaller denominations
By investing in smaller denominations of as low as Rs 500 per SIP instalment, you can stagger
your investments in mutual funds over some time. This reduces the average cost of investment –
you spread your investment across stock market lows and highs. Regular (monthly or quarterly)
investments, as opposed to lumpsum investments, give you the benefit of rupee cost averaging.
6. Suits your financial goals
 There are several types of mutual funds available in India catering to investors across all walks of
life. No matter what your income is, you must make it a habit to set aside some amount (however
small) towards investments. It is easy to find a mutual fund that matches your income, time
horizon, investment goals and risk appetite.
7. Cost-efficiency
You can check the expense ratio of different mutual funds and choose the one with the lowest
expense ratio. The expense ratio is the fee for managing your mutual fund.
8. Quick and hassle-free process
You can start with one mutual fund and slowly diversify across funds to build your portfolio. It is
easier to choose from handpicked funds that match your investment objectives and risk tolerance.
Tracking mutual funds will be a hassle-free process. The fund manager, with the help of his team,
will decide when, where and how to invest in securities according to the investment objectives. In
short, their job is to beat the benchmark index and deliver maximum returns to investors,
consistently.
9. Tax-efficiency
You can invest in tax-saving mutual funds called ELSS which qualifies for tax deduction up to Rs
1.5 lakh per annum under Section 80C of the Income Tax Act, 1961. Though a 10% tax on Long-
Term Capital Gains (LTCG) above Rs 1 lakh is applicable, they have consistently delivered higher
returns than other tax-saving instruments in recent years.
10. Automated payments
It is common to delay SIPs or postpone investments due to some reason. You can opt for paperless
automation with your fund house or agent by submitting a SIP mandate, where you instruct your
bank account to automatically deduct SIP amounts when it’s due. Timely email and SMS
notifications make sure you stay on track with mutual fund investments.
11. Safety
There is a general notion that mutual funds are not as safe as bank products. This is a myth as fund
houses are strictly under the purview of statutory government bodies like SEBI and AMFI. One
can easily verify the credentials of the fund house and the asset manager from SEBI. They also
have an impartial grievance redressal platform that works in the interest of investors.
12. Systematic or one-time investment
You can plan your mutual fund investment as per your budget and convenience. For instance,
starting a SIP (Systematic Investment Plan) on a monthly or quarterly basis in an equity fund suits
investors with less money. On the other hand, if you have a surplus amount, go for a one-time
lumpsum investment in debt funds.

Disadvantages of mutual funds:

Costs of managing the mutual fund

The salary of the market analysts and fund manager comes from the investors along with the operational
costs of the fund. Total fund management charges are one of the first parameters to consider when
choosing a mutual fund. Higher management fees do not guarantee better fund performance.

Exit Load

You have exit load as fees charged by AMCs when exiting a mutual fund. It discourages investors from
redeeming investments for some time. This indirectly works like a lock-in period that fund houses use to
maintain stability of funds. It also helps the fund manager garner the required funds to purchase the
appropriate securities at the right price and time.

Dilution

While diversification averages your risks of loss, it can also dilute your profits. Hence, you should not
invest in many mutual funds at a time.

Major Fund Houses in India

Top Mutual Fund Houses in India

Several mutual fund houses in India offer a wide range of investment options to cater to the needs of
different investors.

Some of the top mutual fund houses in India are-

S.No. Mutual Fund House

1. SBI Mutual Fund

 2. ICICI Prudential Mutual Fund

3. HDFC Mutual Fund

4. Aditya Birla Sun Life Mutual Fund

5. Kotak Mahindra Mutual Fund

6. Nippon India Mutual Fund

7. Axis Mutual Fund

8. UTI Mutual Fund

9. IDFC Mutual Fund

10. DSP Mutual Fund

MUTUAL FUND SCHEME CLASSIFICATION

Mutual funds come in many varieties, designed to meet different investor goals. Mutual funds can be
broadly classified based on –

1. Organisation Structure – Open ended, Close ended, Interval

2. Management of Portfolio – Actively or Passively
3. Investment Objective – Growth, Income, Liquidity
4. Underlying Portfolio – Equity, Debt, Hybrid, Money market instruments, Multi Asset
5. Thematic / solution oriented – Tax saving, Retirement benefit, Child welfare, Arbitrage
6. Exchange Traded Funds
7. Overseas funds
8. Fund of funds
SIP

A Systematic Investment Plan (SIP), more popularly known as SIP, is a facility offered by mutual funds
to the investors to invest in a disciplined manner. SIP facility allows an investor to invest a fixed amount
of money at pre-defined intervals in the selected mutual fund scheme.

What is a Systematic Transfer Plan?

A systematic transfer plan allows investors to shift their financial resources from one scheme to the other
instantaneously and without any hassles. This transfer occurs periodically, enabling investors to gain
market advantage by changing to securities when they offer higher returns. It safeguards the interests of
an investor during market fluctuations, to minimize the damages incurred.

SWP

What is SWP?

The Systematic Withdrawal Plan or SWP offers investors a regular income and returns money that is left
in the scheme. You may withdraw a fixed or a variable amount on a pre-decided date every month,
quarter, or year. You may customise cash flows to withdraw, either a fixed amount or the capital gains on
the investment.

What Is Net Asset Value (NAV)?

Net Asset Value is the net value of an investment fund's assets less its liabilities, divided by the number of
shares outstanding. Most commonly used in the context of a mutual fund or an exchange-traded
fund (ETF), NAV is the price at which the shares of the funds registered with the U.S. Securities and
Exchange Commission (SEC) are traded.