Financial Literacy PDF
Document Details
Uploaded by Deleted User
University of Delhi
2024
Tags
Summary
This document is a compilation of learning materials for a financial literacy course. The course content covers financial planning, banking products, investment opportunities, and insurance. It is likely part of a distance learning program in the School of Open Learning, University of Delhi.
Full Transcript
FINANCIAL LITERACY Compiled by Department of Commerce School of Open Learning For Limited Circulation only as SLM is under Development Process Department of Distance and Continuing Education,...
FINANCIAL LITERACY Compiled by Department of Commerce School of Open Learning For Limited Circulation only as SLM is under Development Process Department of Distance and Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi, Delhi-110007 FINANCIAL LITERACY Printed at: Taxmann Publications Pvt. Ltd., 21/35, West Punjabi Bagh, New Delhi - 110026 (4000 Copies, 2024) © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Contents PAGE UNIT-I Lesson 1: Financial Literacy and Financial Planning 1.1 Learning Objectives 3 1.2 Introduction 4 1.3 Savings 8 1.4 Time Value of Money 10 1.5 Management of Spending and Financial Discipline 13 1.6 Summary 17 1.7 Answers to In-Text Questions 18 1.8 Self-Assessment Questions 18 1.9 References 18 1.10 Suggested Readings 18 UNIT-II Lesson 1: Banking Products and Services 1.1 Learning Objectives 21 1.2 Introduction 22 1.3 Types of Banks 22 1.4 Banking Products and Services 25 1.5 Types of Bank Deposit Accounts 26 1.6 Documentation 28 1.7 Various Types of Loans 29 1.8 Summary 32 1.9 Answers to In-Text Questions 33 PAGE i © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Prelims.indd 1 22-Feb-24 4:26:42 PM FINANCIAL LITERACY PAGE 1.10 Self-Assessment Questions 33 1.11 Reference 34 1.12 Suggested Readings 34 Lesson 2: Digitisation of Financial Transaction, Ponzi Scheme and Online Frauds 2.1 Learning Objectives 35 2.2 Introduction 36 2.3 Digitisation of Financial Transactions 36 2.4 Ponzi Schemes 46 2.5 Online Frauds 48 2.6 Protection Against Online Frauds 50 2.7 Handling Banking Complaints 54 2.8 Summary 54 2.9 Answers to In-Text Questions 55 2.10 Self-Assessment Questions 55 2.11 References 55 2.12 Suggested Readings 55 UNIT-III Lesson 1: Investment Opportunity and Financial Products 1.1 Learning Objectives 59 1.2 Introduction to Investment 60 1.3 Direct and Indirect Investing 64 1.4 Investment in Equity and Debt Instruments 66 1.5 Financial Derivative 67 1.6 Mutual Funds 77 1.7 Latest Developments Regarding Mutual Funds 83 1.8 Summary 85 1.9 Answers to In-Text Questions 85 ii PAGE © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Prelims.indd 2 22-Feb-24 4:26:42 PM CONTENTS PAGE 1.10 Self-Assessment Questions 86 1.11 References 86 1.12 Suggested Readings 86 Lesson 2: Insurance Planning 2.1 Learning Objectives 87 2.2 Introduction 88 2.3 Concept of Insurance 88 2.4 Principles of Insurance 91 2.5 Life Insurance 95 2.6 &RPSDULVRQ RI 3ROLFLHV 2൵HUHG E\ 9DULRXV /LIH ,QVXUDQFH &RPSDQLHV 2.7 Term Insurance 105 2.8 Endowment Policy 107 2.9 Summary 109 2.10 Answers to In-Text Questions 110 2.11 Self-Assessment Questions 110 2.12 References 110 2.13 Suggested Readings 111 Lesson 3: Insurance Product 3.1 Learning Objectives 112 3.2 Introduction 113 3.3 Health Insurance 113 3.4 Property Insurance 120 3.5 Postal Life Insurance 123 3.6 Rural Postal Life Insurance 125 3.7 Pension Plan 128 3.8 Unit Linked Insurance Plan 130 3.9 Summary 135 3.10 Answers to In-Text Questions 135 PAGE iii © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Prelims.indd 3 22-Feb-24 4:26:42 PM FINANCIAL LITERACY PAGE 3.11 Self-Assessment Questions 136 3.12 References 136 3.13 Suggested Readings 136 UNIT-IV Lesson 1: Personal Tax 1.1 Learning Objectives 141 1.2 Introduction to Basic Tax Structure in India for Personal Tax 142 1.3 Aspects of Personal Tax Planning 143 1.4 Exemption 147 1.5 Deductions 153 1.6 e-Filing 161 1.7 Summary 162 1.8 Answers to In-Text Questions 163 1.9 Self-Assessment Questions 163 1.10 References 163 1.11 Suggested Readings 163 Glossary 165 iv PAGE © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Prelims.indd 4 22-Feb-24 4:26:42 PM UNIT - I PAGE 1 © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 1 22-Feb-24 6:08:02 PM Financial Literacy.indd 2 22-Feb-24 6:08:02 PM L E S S O N 1 Financial Literacy and Financial Planning Dr. Sonia Kangra Guest Faculty School of Open Learning, University of Delhi Email-Id: [email protected] STRUCTURE 1.1 Learning Objectives 1.2 Introduction 1.3 Savings 1.4 Time Value of Money 1.5 Management of Spending and Financial Discipline 1.6 Summary 1.7 Answers to In-text Questions 1.8 Self-Assessment Questions 1.9 References 1.10 Suggested Readings 1.1 Learning Objectives Develop a basic understanding of saving. Brief introduction to time value of money. Management of spending and financial discipline. PAGE 3 © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 3 22-Feb-24 6:08:02 PM FINANCIAL LITERACY Notes 1.2 Introduction 1.2.1 Financial Literacy Financial literacy refers to the knowledge and skills that enable indi- viduals to make informed decisions about managing their finances. It involves understanding concepts such as budgeting, saving, investing, and managing debt. Having a good level of financial literacy is essential in today’s world, where financial decisions can have a significant impact on an individual’s life. It can help individuals make informed decisions about spending, saving, and investing their money. Unfortunately, many people lack financial literacy, which can lead to poor financial decisions. This can result in financial stress, debt, and even bankruptcy. To improve financial literacy, it is important to educate individuals on basic finan- cial concepts and provide them with the tools they need to manage their finances effectively. This can include financial literacy classes, online resources, and financial counseling services. In conclusion, financial lit- eracy is a critical skill that everyone should have. By improving financial literacy, individuals can make informed decisions about their finances, reduce financial stress, and achieve their financial goals. The S&P Global FinLit Survey indicates that there is a significant lack of financial awareness among 76% of Indian adults. “Only 24% of Indian respondents adequately understand key financial concepts, including risk diversification, inflation and compound interest” - S&P Global FinLit Survey (2014).1 There are several reasons for this low level of financial literacy in India. One reason is the lack of access to formal financial services in many parts of the country, particularly in rural areas. Another reason is the limited availability of financial education and resources. However, in recent years, there have been efforts to improve financial literacy in India. The government and various financial institutions have launched initiatives aimed at educating people about financial concepts and products. For example, the RBI has launched a national financial education campaign to raise awareness about financial literacy and improve financial inclusion. In addition, there has been a significant increase in 1 See 3313-Finlit_Report_FINAL-5.11.16.pdf (gflec.org) 4 PAGE © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 4 22-Feb-24 6:08:02 PM FINANCIAL LITERACY AND FINANCIAL PLANNING digital financial services in India, which has made it easier for people to Notes access financial products and services. This has led to an increased focus on digital financial literacy. Overall, while there is still a long way to go, there are positive signs that financial literacy in India is improving. With continued efforts to educate people about financial concepts and increase access to financial services, it is hoped that financial literacy in India will continue to improve in the coming years. 1.2.1.1 Importance of Financial Literacy Financial literacy helps individuals make informed decisions about managing their money Financial literacy helps protect individuals from fraud and scams Financial literacy can promote economic stability and growth Financial literacy can reduce the burden on social welfare systems Financial literacy can improve overall societal well-being 1.2.2 Financial Planning Financial Planning provides you with a blueprint which helps you realize all your dreams in life in a very systematic and planned manner without causing you any sleepless nights. Remember, financial planning is a pro- cess, not a product. It gives you the confidence that you know you are on the right track and in safe hands and that you will have the money when you need it - when you want to buy a house or a car or when you want to get your daughter married or send her off for education. Or when you retire. Financial Planning combines the elements of risk management, investment planning, tax planning and retirement planning to comprehensively plan for your future needs. 1.2.2.1 Need for Financial Planning. Need for personal financial planning to look at your complete financial situation, including your assets, liabilities, cash flows, financial goals, risk appetite, life situation, family background, etc. To plan systematically for your financial goals and objectives, including life insurance, health insurance, retirement, child planning – education & marriage, house purchase, estate planning, investment planning, etc. PAGE 5 © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 5 22-Feb-24 6:08:02 PM FINANCIAL LITERACY Notes To make your financial life better and secured for yourself and your family and ensuring that all financial goals are achieved. To better understand and learn about your financial situation and understand the reasoning and logic behind all recommendations made. Also, to better understand the different asset classes and financial products and their suitability to you. To regularly review the progress of financial plans and/or to revise the financial plans to accommodate any major change in personal life or financial situation. 1.2.3 Financial Goals/Personal Finance Financial planning involves analysing the current financial position of indi- viduals to formulate strategies for future needs within financial constraints. Personal finance is specific to every individual’s situation and activity; therefore, financial strategies depend largely on the person’s earnings, living requirements, goals, and desires. Individuals must save for retirement, for example, which requires saving or investing enough money during their working lives to fund their long-term plans. Personal financial planning provides you with a long-term strategy for your financial future, taking into consideration every aspect of your financial situation and how each affects your ability to achieve your goals and objectives. For example Buying a family health cover Managing debt Planning for retirement Investing to save taxes in efficient manner Creating wealth for future generation Saving to buy your favourite vehicle Saving for purchasing dream home Investing for higher education of children, marriage and other purpose 1.2.4 Financial Planning Strategy A good financial planner should express verbally and in written form the detail financial plan to the client so that he/she is aware of how that 6 PAGE © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 6 22-Feb-24 6:08:02 PM FINANCIAL LITERACY AND FINANCIAL PLANNING person will achieve his/her financial plan. Some of the points of strategy Notes are as follows: (a) Risk Management: This involves minimizing the risk involve finances like health insurance, life cover, investment cover, income protection in order to provide income security to oneself and family. (b) Proper Asset Allocation: This involves investment in proper asset in order to achieve financial goals like debt, equity, mutual fund, bond, commercial paper. Thumb rule for this is investment in debt should be equal to one’s age and remaining amount should be in equity. For example, a 30-year-old person should invest 30% in debt and the remaining 70% in equity. It also dependent upon the risk appetite and income level of client. Adequate amount of money should be kept as liquid asset like cash to meet unexpected expenses. (c) Tax Consideration: assessing proper tax planning so as to reduce tax burden effectively. It will help in accumulation of wealth. Following taxes should be considered: - Wealth tax, entertainment tax, Property tax, Income tax, Gift tax, Corporate tax, Security transaction tax. Debt which attracts more tax should be reduced. All details of financial plan should be made clear to the client. (d) Estate Planning: Estate planning is the preparation of tasks that serve to manage an individual’s asset base in the event of their incapacitation or death. The planning includes the bequest of assets to heirs and the settlement of estate taxes. Most estate plans are set up with the help of an attorney experienced in estate law. Assets that could make up an individual’s estate include houses, cars, stocks, artwork, life insurance, pensions, and debt. Individuals have various reasons for planning an estate, such as preserving family wealth, providing for a surviving spouse and children, funding children’s or grandchildren’s education, or leaving their legacy behind to a charitable cause. The most basic step in estate planning involves writing a will. Other major estate planning tasks include the following: (i) Limiting estate taxes by setting up trust accounts in the names of beneficiaries. (ii) Establishing a guardian for living dependents. PAGE 7 © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 7 22-Feb-24 6:08:03 PM FINANCIAL LITERACY Notes (iii) Establishing annual gifting to qualified charitable and non-profit organizations to reduce the taxable estate. (iv) Setting up a durable power of attorney (POA) to direct other assets and investments. 1.3 Savings Savings is the money a person has left over when they subtract their con- sumer spending from their disposable income over a given time period. Savings can be used to increase income through investing. The extent to which individuals save is affected by their preferences for future over present consumption, their expectations of future income, and to some extent by the rate of interest. There are two ways for an individual to measure his savings for a given accounting period. One is to estimate his income and subtract his current expenditures, the difference being his savings. The alternative is to examine his balance sheet (his property and his debts) at the beginning and end of the period and measure the increase in net worth, which reflects his savings. Total national saving is measured as the excess of national income over consumption and taxes and is the same as national investment, or the excess of net national product over the parts of the product made up of consumption goods and services and items bought by government expenditures. Thus, in national income accounts, saving is always equal to investment. An alternative measure of saving is the estimated change in total net worth over a period of time. For example: Saving is the amount left after a person met his/her expen- diture for example if you have 10, 000 after incurring an expenditure of 8,000 you are left with 2,000. This 2,000 will be termed as your savings. Benefit of Savings: 1. It acts as a Safety net 2. Less Stress 3. Enables you to Travel 4. Financially Independent 5. No worry from Unexpected Expenses 6. Comfortable Retirement 8 PAGE © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 8 22-Feb-24 6:08:03 PM FINANCIAL LITERACY AND FINANCIAL PLANNING Safety Net: It helps you to meet the unexpected expenses like car repair, Notes expensive medical bills, or a sudden job loss. If you were to lose your job, you’d be thankful you socked away a good amount of money into your emergency fund to tide you over until you found a new job. There by acting as safety net. Saving should ideally be equivalent to three to six months of expenses. Less Stress: Savings helps to get rid of your tensions like will I be able to pay my educational expenses on time, or will I be able to meet my medical expenses? stop worrying as now you have good amount of savings to meet your obligation, thereby saving reduces your stress level. Enable you to Travel: Your savings account isn’t only for things you need—it can be for things you want, too. Saving up for a big purchase beforehand means you won’t pay extra in finance costs such as interest and fees, you can also use that money to plan your desired vacation like visit to Paris, France - the city of lights, Peru, the Grand Canyon etc. Financially Independent: Freedom gives us the ability to pursue our dreams, so it is equally important to create such independence in our finances too, this is accomplished by saving and investing. As all of us have desire to have material possession like house, car white goods and spend lifestyle like watches jewellery and clothes it is important to save and invest in return that are higher than rate of inflation. We should understand the difference between nominal and real returns. When you invest in a 6 percent fixed deposit, the return that you get is “nominal”. If inflation is 4 percent, the “real” return is just 2 percent. And, in higher tax brackets, even this 2 percent may go away in taxes. Therefore, not taking risks at all may be alright to protect your savings but it may not allow your savings to grow after adjusting for inflation and taxes. To achieve financial independence, it is therefore paramount that you invest in high yielding assets. But, with small sums of money at our disposal, the only viable option is to invest in equity markets through institutional vehicles like mutual funds. Creating financial independence requires a lot of discipline. As a thumb rule, one should save at least 25 to 30 percent of one’s monthly earnings. Also, the younger you are, the higher percentage should be allocated towards equity investments. Comfortable Retirement: Retirement is an important reality for everyone. When planning for retirement, it’s always better to start as early as PAGE 9 © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 9 22-Feb-24 6:08:03 PM FINANCIAL LITERACY Notes possible for best compounding returns and not to rely heavily on one source of savings. Because there are always emergencies in old age. So, having a sufficient corpus to deal with all these is crucial. You can opt for unit linked insurance plan (ULIPs), ULIP are designed in a way that offers you both protection and investment benefit, till the age of 99 to 100 years. These are the plans which not only take care of providing your beneficiaries with death benefit but also take care of your living needs, during your retirement. You have the flexibility to enter into Whole Life ULIPs at any age between 18 and 100 years and can exit at any age. You can also choose till what age you want to save money or accumulate money. This could be till your retirement. 1.4 Time Value of Money Time Value of Money: The time value of money (TVM) is the concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received. Time value of Money in Personal Finance: Here the person wants to receive money today rather than in the near future. Now the question arises why? This is simply because the person is aware of the time value of money. If the person has money today in hand, then he can earn interest by investing that money, this is referred to as earning capacity of money. Say, if you invest Rs. 100 today – the returns will be more compared to the same investment made 2 months from now. Moreover, there is always a risk that the borrower might delay even more or not pay at all in the future. Example: if a friend of yours offers you to lend 20,000 today and 20,500 after 2 years and you have option to choose the one. Then clearly the second option i.e., 20,500 may or may not fructified and with first option you would have money today and you could invest and earn return or interest on that money. 1.4.1 Present Value Present value is the current value of future payments in lump sum, or several part payments discounted at certain interest rate. Present value 10 PAGE © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 10 22-Feb-24 6:08:03 PM FINANCIAL LITERACY AND FINANCIAL PLANNING of one-time investment: To calculate the present value of a one-time in- Notes vestment, you’ll need to know the amount of the investment, the interest rate, and the number of years until the investment matures. The formula to calculate present value when future value is given. PV = FV/(1 + R)n, where: FV = future value, R = rate of return, n = number of periods. For example, let’s say you’re considering investing $10,000 in a bond that matures in 5 years and has an interest rate of 4%. Using the present value formula, you can calculate that the investment’s present value is approximately $8,557. This means that the investment is worth $8,557 today, taking into account the time value of money and potential inflation. 1.4.2 Future Value Future value is the sum of money that any saving scheme with a com- pounded interest will build to by a pre-decided future date. It applies to both lumpsum as well as recurring investments like SIP. Future investment for one-time investment- The formula for calculating future value where investment earning simple interest: FV = I × (1 + (R × T)) and where investment earning compound interest: FV = I × (1 + R)T where: I = Investment amount, R = Interest rate, T = Number of years Questions based on future value. Q.1. You are scheduled to receive Rs. 14000 in two years. When you receive it, you will invest it for six more years at 8 percent per year. How much will you have in eight years? Ans. FV = I × (1 + R)T = 14000 × (1 + 8%)6 = 22,216.240 Q.2. You invest Rs. 10,000. During the first year the investment earned 20% for the year. During the second year, you earned only 4% for that year. How much is your original deposit worth at the end of the two years? Ans. For 1st yr : 10000(1 + 20%)1 = 12000 For 2nd yr:12000(1 + 4%)1 = 12800 Worth at the end of 2 yr = 4643.28 PAGE 11 © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 11 22-Feb-24 6:08:03 PM FINANCIAL LITERACY Notes 1.4.3 Effective Annual Interest Rate The effective annual interest rate is the real return on a savings account or any interest-paying investment when the effects of compounding over time are considered. It also reveals the real percentage rate owed in in- terest on a loan, a credit card, or any other debt. Effective Annual Interest Rate = (1 + i/n)n – 1 where: i = Nominal interest rate, n = Number of periods For example, consider these two offers: Investment A pays 10% interest, c ompounded monthly. Investment B pays 10.1% compo unded s emi- annually. Which is the better offer? I n both cases, the advertised interest rate is the nominal interest rate. The effective annual interest rate is calculated by adjusting the nominal interest rate for the number of compounding periods the financial product will experience in a period of time. In this case, that period is one year. The formula and calculations are as follows: For investment A, this would be: 10.47% = (1 + (10%/12))12 – 1 And for investment B, it would be: 10.36% = (1 + (10.1%/2))2 – 1 Investment B has a higher stated nominal interest rate, but the effective a nnual interest rate is lower than the effective rate for investment A. This is because Investment B compounds fewer times over the course of the year. IN-TEXT QUESTIONS 1. The money you have now is worth more than the identical sum in the (a) Future (b) Present (c) Past (d) None of the above 2. ____________ is the current value of future payments in lump sum or several part payments discounted at certain interest rate. (a) A Present Value (b) Future Value (c) Compounded Value (d) None of the above 12 PAGE © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 12 22-Feb-24 6:08:03 PM FINANCIAL LITERACY AND FINANCIAL PLANNING 3. Mr. Ram borrowed 10,00,000 from a bank on a one year 16% Notes term loan, with interest compounded quarterly. Determine effective annual interest rate on loan? (a) 12% (b) 16.9% (c) 13% (d) 14% 4. The formula for calculating future value where investment earning simple interest = I × (1 + (R × T), here I represents: (a) Interest rate (b) Investment (c) Index value (d) None of the above 1.5 Management of Spending and Financial Discipline 1.5.1 Management of Spending Management of spending can easily be achieved by following the financial planning strategies. This involves following steps: 1. Devising a budget. 2. Cutting down of unnecessary expenditure. 3. Retirement planning. 4. Find ways to save: Mode of savings. 5. Track your spending. 6. Make plan to pay off your debt. 7. Pay your bills timely. Devising a Budget Budgeting and saving money don’t come naturally to many people for obvious reasons. Spending money on nonessentials is so easy, even if you’re committed to a well-laid spending plan. Budget, which can help you reorganize your finances, prioritize spending, and manage debt, thus allowing you to make progress toward your long-term financial goals. Making a budget involves the following: List all your income after taxes—for example, employee and freelance income, investment income, and interest earned on any savings PAGE 13 © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 13 22-Feb-24 6:08:03 PM FINANCIAL LITERACY Notes accounts. Then list all expenses—for example, rent or mortgage payments, credit card payments, instalment loan payments, grocery receipts, and utility bills. Subtract the expense from the income to get a general picture of your financial health. If your income total is larger than your expense total—congratulations—you just found more money for saving, investing, and paying down your debt. But If your expense total is larger than your income total, all is not lost, but you’ll have to make some choices about where you spend some of your money going forward if you want to balance your budget. Reduce your expenditure by categorising them into fixed expenses, discretionary expenses and variable expenses. Fixed expenses are those which have to be incurred like rent, medical expenses, you can do nothing with them, they remain constant. The variable expenses can be controlled to an extent by bringing behavioural changes like turning of light can reduce electricity bills. Discretionary expenses can effectively be controlled and generate opportunity for savings. Adopt a 50-20-30 approach where 50% of your after-tax income on housing, food, and other necessities. 20% on paying down debt or increasing savings. 30% on whatever you want—discretionary spending. Put your budget to work, means you must strictly follow the budget prepared by you in order to achieve financial goal. Cutting Down Unnecessary Expenses Start by cutting spending on items you don’t need. For example, do you need a $5 coffee every morning? Could you make do with a smaller, older car? Instead of an expensive vacation, would you be willing to try a stay-at-home vacation (staycation)? These types of choices are very personal, so there’s no right or wrong answer. But laying them out on the table can at least help you understand your priorities and some of the options you may not have realized you had for saving money. 14 PAGE © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 14 22-Feb-24 6:08:03 PM FINANCIAL LITERACY AND FINANCIAL PLANNING Retirement Planning Notes Saving for retirement always sounds like a good idea in theory, but it isn’t always easy in practice. It involves following steps: Start saving early, Sign up for your retirement plan as soon as you’re able to. The sooner you start taking advantage of this benefit, the more you’ll start to save. For example, if you save at 25 v/s you save at 35, the earlier you start, your savings will be benefited of the power of compounding. Know your Retirement Goal: Your expenses during retirement might not be the same as they are when you’re working. But that doesn’t mean you won’t have any expenses. You’ll probably need somewhere between 70% to 90% of your current income to cover yourself in retirement. It’s a good idea to plan now for what you need later. If you’d like to maintain your current living standards, try to make sure you’re contributing enough to cover those costs later in life. If you think you won’t have as many expenses in retirement, you’ll still need to save, but you can adjust your goals accordingly. Tax Efficacy: Once you reach retirement age and begin taking distributions, taxes become a big problem. Most of your retirement accounts are taxed as ordinary income tax. That means you could pay as much as 37% in taxes on any money you take from your traditional 401(k) or IRA. That’s why it’s important to consider a Roth IRA or a Roth 401(k), as both allow you to pay taxes upfront rather than upon withdrawal. If you believe you will make more money later in life, it may make sense to do a Roth conversion. An accountant or financial planner can help you work through such tax considerations. Insurance: A key component of retirement planning is protecting your assets. Age comes with increased medical expenses, and you will have to navigate the often-complicated Medicare system. Many people feel that standard Medicare doesn’t provide adequate coverage, so they look to a Medicare Advantage or Medigap policy to supplement it. There’s also life insurance and long-term-care insurance to consider. PAGE 15 © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 15 22-Feb-24 6:08:03 PM FINANCIAL LITERACY Notes Find ways to Save: Mode of Savings Savings Schemes are investment options for Indian citizens launched by the government as well as other public sector financial institutions. These saving schemes were introduced as an incentive to cultivate healthy saving and investing habits in India. This is also a way to increase the inflow of money into the Indian economy. In earlier times Indians used to keep their money with themselves and this caused poor circulation as well as stagnation of wealth. By means of saving schemes, which are backed by the government, Indian citizens can allow their wealth to appreciate at higher interest rates and reap benefits such as tax exemption that certain savings schemes offer. Savings schemes cater to a wide demographic and encourage individuals to invest for various milestones of life such as retirement, children’s higher education, their marriage etc. They are ideal for long-term wealth creation as they come with a certain lock-in period and offer good returns. Since they are not impacted by market volatility, they are safer investment options, ideal for the conservative investor. Furthermore, the interest rates on various saving schemes are revised on a quarterly or half yearly basis, keeping up with the rising costs of living and inflation. Different saving schemes are depicted in the flow chart given below: Figure 1.1 16 PAGE © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 16 22-Feb-24 6:08:03 PM FINANCIAL LITERACY AND FINANCIAL PLANNING Notes 1.5.2 Financial Discipline Financial discipline involves control of money, inculcating the habit of saving and avoiding excessive expenditure. One should consider following steps to harness financial discipline to achieve our financial goal. Prepare a monthly spending budget and stick to it. Invest with a goal. Goals give direction and help you in selecting right product. Avoid loans for your desires. Better do a financial planning check before going in for a big purchase. Invest monthly to become regularise in your savings and this will also help you maintain consistency. Motivate yourself by visualising the goals and the end result for which you are working for. 1.6 Summary In this chapter, we delve into the intricacies of financial planning and management. We discussed the importance of setting financial goals and creating a budget that aligns with those goals. We also discuss the vari- ous types of savings accounts, investment options, and retirement plans available. Furthermore, we explore the concept of time value of money, which is the idea that the value of money changes over time due to infla- tion and interest rates. This gives a brief outline of how to calculate the present and future value of your money, and how to use this knowledge to make informed financial decisions. In addition, this chapter provides you with useful tips on how to manage your spending effectively and achieve financial discipline. You also learn about different methods of budgeting, how to prioritize your expenses, and how to avoid common financial pitfalls. This chapter gives a comprehensive understanding of financial planning and management and is equipped with the knowledge and skills necessary to make smart financial decisions that will help you achieve your goals. PAGE 17 © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 17 22-Feb-24 6:08:03 PM FINANCIAL LITERACY Notes 1.7 Answers to In-Text Questions 1. (a) 3. (b) 2. (a) 4. (b) 1.8 Self-Assessment Questions 1. Briefly explain about the time value of money. 2. Discuss the benefits of savings. 3. Explain the management of spending. 4. What is financial planning? 1.9 References Introduction to Financial Planning (4th Edition 2017) – Indian Institute of Banking & Finance. Sinha, Madhu. Financial Planning: A Ready Reckoner July 2017, McGraw Hill. 1.10 Suggested Readings Halan, Monika. Lets Talk Money: You’ve Worked Hard for It, Now Make It Work for You, July 2018, Harper Business. Pandit, Amar. The Only Financial Planning Book that You Will Ever Need, Network 18 Publication Ltd. 18 PAGE © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 18 22-Feb-24 6:08:03 PM UNIT - II PAGE 19 © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 19 22-Feb-24 6:08:03 PM Financial Literacy.indd 20 22-Feb-24 6:08:03 PM L E S S O N 1 Banking Products and Services Mr. Alok Anand Bharati College University of Delhi Email-Id: [email protected] STRUCTURE 1.1 Learning Objectives 1.2 Introduction 1.3 Types of Banks 1.4 Banking Products and Services 1.5 Types of Bank Deposit Accounts 1.6 Documentation 1.7 Various Types of Loans 1.8 Summary 1.9 Answers to In-Text Questions 1.10 Self-Assessment Questions 1.11 Reference 1.12 Suggested Readings 1.1 Learning Objectives Recall the different types of banks. Understand and distinguish the different types of services by banks. Get knowledge on the different types of bank deposit accounts. Explain the various types of loans. PAGE 21 © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 21 22-Feb-24 6:08:03 PM FINANCIAL LITERACY Notes 1.2 Introduction Another important topic that you would have gained knowledge on would be the meaning, importance and need for financial planning along with learning about the budget and its different types and the various terms associated worth it. In this unit you will be given detailed classification about the types of banks and the kinds of service that banks offer to their customers. After going through this Unit, you will also be able to identify the different types of bank deposits and gain knowledge about the different types of loans. 1.3 Types of Banks In the previous unit you have been made aware of the term bank and its different functions. There are different types of banks, some of which are discussed below: Reserve Bank of India (RBI): It is the Central bank of the country and is also called as the Banker’s bank. Its functioning is regulatory in nature as it regulates the functioning of all other banks operating in India. Hence supervises the functioning of the entire banking sector in India. It has a key role to perform information of monetary policies and foreign exchange mechanism. Some of the key issues it has assay in are related to customer care, disclosure of financial position etc. There are no dealings with the general public unlike all the other banks. Only RBI is entrusted with issuing currency. Commercial Banks: According to the traditional definition of a commercial bank, it is a financial institution that primarily engages in the acceptance of deposits from individuals and offers various lending and financial services. Commercial banks offer fundamental banking services to their customers, including consumers and enterprises of small to medium scale. A commercial bank is a type of financial institution that offers a range of services to its customers, including loans, certificates of deposits, savings bank accounts, and bank overdrafts. These financial institutions generate revenue by providing loans to individuals and charging interest on the borrowed amounts. A commercial bank 22 PAGE © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 22 22-Feb-24 6:08:03 PM BANKING PRODUCTS AND SERVICES offers a range of lending products, including company loans, vehicle Notes loans, housing loans, personal loans, and school loans. In other sense these are companies established under special Acts. These can be domestic or foreign in nature. Primarily commercial banks can be divided into two categories: Scheduled Banks and Non-Scheduled Banks. Scheduled Banks: Banks mentioned in the list in the 2nd Schedule of the Reserve Bank of India Act, 1934 are scheduled banks. These are further categorised into Private, Foreign and Multinational banks. Cooperative banks too fall in this category if they fulfil certain criteria. Non-Scheduled Banks: Those that are not listed in the above are obviously non-scheduled banks. There are a total of 1458 non- scheduled banks in India as per the latest information available at the time of preparing this lesson. Regional Rural Banks (RRBs): Regional Rural Banks (RRBs) in India are financial institutions that have been designated as scheduled commercial banks. These banks are specifically established to cater to the banking needs of rural areas within each state. The Regional Rural Banks (RRBs) are financial institutions that specifically address the financial requirements of those residing in rural areas and those who are socioeconomically disadvantaged. These banks operate at a regional level, serving several states within the country. These are established by the Govt- be it national, state or at the union territory level. Their operations are limited and local to the state or UT in which they are established. Hence their area of operation is predefined. Public Sector Banks: Public sector banks (PSBs) are financial institutions characterized by majority government ownership, with the government holding more than 50% of the bank’s capital. The government regulates the financial standards of these institutions. The general view among depositors is that their funds are more secure when trusted by public sector banks, mostly due to their government ownership. Consequently, a significant proportion of public sector banks possess a substantial number of customers. The State Bank of India (SBI) is recognized as India’s largest public sector bank. PAGE 23 © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 23 22-Feb-24 6:08:03 PM FINANCIAL LITERACY Notes Private Sector Banks: In addition to 3 and 4 above are private sector banks, owned and managed privately. Unlike public sector banks, their priority is not the economic welfare but their own profitability and the objective of formation of such banks. Nevertheless, they too have to follow the RBI rules and regulations in force. Some of them are ICICI, HDFC etc. Cooperative Banks: The word cooperative means autonomous association of people aspiring to meet their own economic, social and/or cultural objectives through an entity jointly controlled and owned. The binding factor is mutual trust. These banks operate on the same lines as other banks but on no profit no loss basis. These are registered under Cooperative Societies Act, 1912 and these too are RBI regulated. These can be rural or urban in nature. As these are often backed by different states in India the word cooperative is often fixed before the word cooperative. Rajasthan State Cooperative Bank and Maharashtra State Cooperative bank are some examples. Foreign Banks: As the name suggests, these banks re incorporated in foreign land. The big difference is that they have to abide by the rules and laws of their home country as well as those in force in India (RBI). In a nutshell. They are neither govt owned nor registered in India e.g., HSBC, Barclay’s Standard Chartered etc. Development Banks: Immediately after independence the need was felt to promote the lagging sectors of the economy and hence Development Banks came into being. There are 4 types- Industrial, Agricultural, Export Import and Housing. Thus, they are known as Specialised Financial Institutions. Development banks are financial institutions that provide extended funding for projects that need significant capital investment and have extended repayment periods. These projects typically include the development of irrigation systems, mining and heavy industry, as well as urban infrastructure. Export-Import Bank: These banks came into existence for the sole purpose of providing finance specifically for promotion of foreign trade. Export-Import Bank of India was established as an apex bank to finance entities in the field of export and import through commercial banks. 24 PAGE © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 24 22-Feb-24 6:08:03 PM BANKING PRODUCTS AND SERVICES Housing Bank: These provide finance for the housing sector and related Notes activities associated with the housing sector like construction of houses, plots, house repairs, etc. National Housing Bank was established to provide housing finance through commercial banks and other agency. IN-TEXT QUESTIONS 1. ____________ is authorized to print currency notes by Government of India. 2. ____________ is established by Special Act. 1.4 Banking Products and Services The main task of the scheduled banks is attracting deposits from investors and utilising it to run their organisations. Let us See an Example: A person deposits some money with a bank and gets interest on it. Another takes a loan from the bank and pays interest on it. The difference of the interest becomes the primary income for that bank. So primarily the bank is the custodian of other people’s money. Over the last few years, the banks have redeveloped themselves and are offering a wide range of services, some of which are mentioned below: Facility of Loans: Other than accepting deposits for different time durations, banks deal in advancing loans to different types of entities ranging from individuals to large multinational companies. The interest that they earn from giving these loans in their main source of income. They fulfil the requirement of funds of the different sections of the society. Overdraft Facility: The provision of an overdraft facility within a Current Account allows the account holder to make withdrawals even in cases where the account balance is low. Overdraft is a financial arrangement provided by banks that allows customers to exceed a predetermined limit, resulting in a negative balance referred to as an overdrawn amount. Discounting of Bills: Bill discounting is a viable alternative that allows businesses to speed up payment for their services and fulfil operational obligations without relying on outside sources for funding. PAGE 25 © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 25 22-Feb-24 6:08:04 PM FINANCIAL LITERACY Notes Encashing Cheques: Banks extend this service to both savings and current account holders. Cheques can today be encashed across any bank branch esp. in case where the bank offers Core Banking Solution or CBS which is usually written on the face of the cheque. Some banks offer the facility of multi-city cheque books to their account holders. Collecting and Paying Instruments of Credit: Services like collecting Credit instruments such as promissory notes and bills, As mentioned earlier the bank provides this facility as a custodian on behalf of its customers. Exchange of Foreign Currency: Another service offered by banks is to convert local foreign currency to local currency needed for account holders dealing in trade outside India. Consultancy: It started off as a service provided to High-Net-worth Individuals or HNIs and today most banks offer financial consultancy service to those customers who are interested in enhancing their wealth by investment in different instruments, stock market, bank assurance and even tax management. Utility Bills Payment: The bank may facilitate payment of bills and even taxes such as telecom bills, water and electricity bills. ACTIVITY How many public sector banks, private sector banks, foreign banks, regional rural banks, urban cooperative banks and rural cooperative banks are there in India? 1.5 Types of Bank Deposit Accounts There are various types of accounts that banks offer for different types of customers. Some of them are discussed below: 1.5.1 Savings Bank Account It is the nest account for Indian individuals with limited income but striving for a better and secure future. This can be opened with a limited initial amount. A minimum balance in this account needs to be 26 PAGE © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 26 22-Feb-24 6:08:04 PM BANKING PRODUCTS AND SERVICES maintained. The account holder also earns a quarterly interest which Notes varies from one bank to another and also per the directive’s issues by the RBI from time to time. Savings account is a basic account type that lets you deposit money safely with a bank. It ensures safety and access to your money whenever you need. You can withdraw your funds, either digitally or in person, at any point in time. Even foreign individuals can open an account but in joint capacity with an Indian. KYC norms need to be fulfilled. 1.5.2 Term Deposit A term deposit is another name for fixed deposit that includes funds deposited into an account at a bank for a fixed period. Term deposit investments usually carry short-term maturities ranging from one month to about 3 years and will have varying levels of required minimum deposits. These deposits can be made by people who wish to save funds for lon- ger periods. Hence a higher interest rate as compared to that applicable for savings account is given by the bank because the bank is reasonable sure that the specific fixed amount cannot be withdrawn by the depositor. During this time no withdrawals are allowed. These deposits are utilised by the bank to lend to other entities. 1.5.3 Current Account This account is utilised by large entities such as business houses, com- panies and other commercial institutions. As there are restrictions on the number of times withdrawals can be made in a savings account, and these above entities need to make multiple withdrawals to run their organisa- tions, therefor the need to have separate accounts, here, using a cheque book or even online, the institution or its authorised representative can make multiple withdrawals and deposits. Due to its nature, there is no interest earned due to the fluidity. The number of transactions that can be performed on current accounts is usually not limited. Other interest- ed parties can get information about the creditworthiness of the account holder. EFT, wire transfer, net banking and even doorstep banking services are offered by the bank to these account holders. PAGE 27 © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 27 22-Feb-24 6:08:04 PM FINANCIAL LITERACY Notes 1.5.4 Recurring Deposit This type of account is most suitable for those who are desirous of earn- ing a fair return on their deposit. The depositor hands over a pre-decided amount monthly for a specified time period. They will get a lump sum amount at the end of the specified period. Interest is calculated on quar- terly compounded based. ACTIVITY Visit a nearby bank branch of any bank and find out the range of products and services on offer. IN-TEXT QUESTIONS 3. Documentation for operating current account is much easier as compared to savings account (True/False) 4. Full form of ATM is Any Time Money. (True/False) 5. Term Deposit is used as synonym for Fixed Deposit (True/False) 1.6 Documentation To make it easy for the banks and their customers specific documents are required be it for opening an account, applying for loans or any other transaction with the bank for the first time, hence it is important that you familiarize yourself with these terms. 1.6.1 PAN Card Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued on a laminated card, by the Income Tax Department, to identify taxpayers in the country. Through these different transactions are tracked and cross verified by the IT authorities. PAN was introduced to facilitate linking of various documents, taxes, assessment, tax demand, tax arrears etc. relating to any entity This has helped to curb tax evasion and to widen the number of people paying taxes. https://incometaxindia.gov.in/booklets%20%20pamphlets/tpi_pan-book.pdf 28 PAGE © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 28 22-Feb-24 6:08:04 PM BANKING PRODUCTS AND SERVICES Notes 1.6.2 Address Proof Prior to opening an account, the bank asks for address proof as one of the conditions to verify the identity of the customer wishing to deal with the bank and avail of its services. Any of the documents mentioned can be furnished as valid address proof.: Passport, Driving License, Voter ID Card, Job card issued by NREGA duly signed by an officer of the State Government, Aadhaar Card issued by UIDAI, Utility Bill, less than two months old, Bank account or Post Office savings account statement for 3 calendar months prior to four months along with Account Opening Cheque, Property Tax bill or Municipal Tax receipt not more than one year old, others. 1.6.3 KYC Norms Short for Know your customer it is a mechanism to verify their customer’s identity prior to opening an account. The genuineness of the customer can be identified through this. It also required frequent updating and the banking sector periodically contacts the customer to get updates. 1.7 Various Types of Loans After accepting deposits from their customers, the banks earn interest subsequently by offering them as loans. You need to get knowledge of some of the popular types: 1.7.1 Education Loan With education in general and higher education in particular becoming expensive, students need to fund their education. Thus, the need to apply for education loan to meet the shortfall in fees and other expenses to fund their education. Financial institutions as well as NBFCs attract borrowers by offering attractive interest rates on repayment. The borrower can also avail tax benefits under 80E. To apply, the borrower needs to submit the loan application along with the above documents to the financial institution and the process of loan disbursal will start if all things are found in order. Normally a grace period of 6 months after the PAGE 29 © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 29 22-Feb-24 6:08:04 PM FINANCIAL LITERACY Notes completion of the course is given before the repayment process of the loan starts. The maximum time allowed for repayment is 8 years from the date of taking the loan. 1.7.2 Consumer Durable Loans A consumer durable loan is a loan offered for the purpose of buying consumer durable products. These are products which have a life of at least 3 years. It is not backed by any security or collateral. The credit history of the borrower is not significant. The ability to payback, i.e., the income of the borrower is more important. Eligibility for this loan: (1) Age: Usually between 21 to 60 years. (2) Credit: as mentioned earlier the borrower’s credit worthiness is not important, the borrower’s income is seen. To qualify for the loan, the individual’s monthly income must range from 18,000–20,000 INR or above. The Rate of Interest on these loans is very high and are quickly approved. The maximum limit is Rs 5 lakhs and the maximum period of 36 months. Types Instalment Loans: These are very common and paid back in periodic instalments according to a present timetable. These can be further divided into Fixed and variable rate consumer durable loans. Secured Consumer Durable Loans: For availing thee, a security or collateral is needed Secured loans are those which are secured against assets as collateral. Unsecured Consumer Durable Loans: For this more common type of loans, no security or collateral needs to be provided. Interest rates for unsecured loans are higher than for the secured loans. 1.7.3 Vehicle Loan These can be classified into personal vehicle loan and commercial vehicle loans. The eligibility conditions and the interest and charges for these vary. Personal Vehicle Loan: Personal vehicle range from new and used 30 PAGE © Department of Distance & Continuing Education, Campus of Open Learning, School of Open Learning, University of Delhi Financial Literacy.indd 30 22-Feb-24 6:08:04 PM BANKING PRODUCTS AND SERVICES bikes, scooters to cars required for personal use by individuals. This type Notes of loan does not need any guarantor. These can be taken from banks and finance companies at attractive and competitive rates, both offline and online options for processing of such loans are available. For filling the form to avail the loan, vehicle make and model, manufacture date and attaching the necessary documents for the same. Such loans are available for up to 60 months. Loan is disbursed on the basis of the value of the personal vehicle be it new or used vehicle.