Finance For Everyone PDF

ENGLISH FINANCE FOR EVERYONE B.A. Prog./ (Hons.), B. Com. (Hons.) Semester 1st Important Questions with Answer NOTES Where every problem is solved of your study. Manish Verma Notes, EduTech Private Limited provides notes and guidance for students to prepare for CBSE, NIO...

ENGLISH FINANCE FOR EVERYONE B.A. Prog./ (Hons.), B. Com. (Hons.) Semester 1st Important Questions with Answer NOTES Where every problem is solved of your study. Manish Verma Notes, EduTech Private Limited provides notes and guidance for students to prepare for CBSE, NIOS, DU, SOL, NCWEB, IGNOU & All Universities. the sole aim to initiate, enable and empower individuals to grow up to be extraordinary professionals. Mr. Manish Verma (M.A, B.Ed., Teaching experience of DU, SOL, NCWEB, IGNOU Students through my YouTube channel more than 8 years ago We Help you Dream, Achieve & Succeed. Joined us millions of students. Manish Verma YouTube Channel - The Fastest, Easiest, and most fun way to study From Class 9th to 12th CBSE, NIOS, & Graduation DU SOL, IGNOU, NCWEB ( UGC Syllabus ) Vision: Helping DU, SOL, NCWEB, IGNOU Students pass their degree in the fastest time possible with great marks. 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Love to all - By Manish Verma +91- 8368259468 [email protected] New Delhi manishvermanotes.com MANISH VERMA BEST AWARD  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.