SEBI Investor Certification Examination - Financial Education Booklet PDF

Disclaimer Financial Education initiatives of SEBI are for providing general information to the public. For specific information on securities law, rules, regulations, guidelines and directives framed there under, please refer to the same at www.sebi.gov.in. Published by: Securities and Exchange Board of India (SEBI) SEBI BHAVAN Plot No. C4-A, G-Block, Bandra Kurla Complex, Bandra (East), Mumbai 400051. Tel: +91-22-2644 9000 / 4045 9000 / 9179/ 9188 Fax: +91-22-2644 9027 / 4045 9027 E-mail: [email protected] Every effort has been made to avoid errors or omissions in this publication. Nevertheless, any mistake, error or discrepancy noted may be brought to the notice at the above mentioned address which shall be rectified in the next edition. It is notified that the publisher shall not be held responsible for any damage or loss to any one, of any manner from use of this material. 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November 2020 Table of Contents CHAPTER 1 – INTRODUCTION....................................................................................................................... 4 CHAPTER 2 - KEY CONCEPTS IN PERSONAL FINANCE........................................................................... 5 CHAPTER 3 - FINANCIAL PLANNING...........................................................................................................10 CHAPTER 4 - SAVINGS RELATED PRODUCTS..........................................................................................17 CHAPTER 5 - INVESTMENT IN SECURITIES MARKET..............................................................................23 CHAPTER 6 - INSURANCE RELATED PRODUCTS.....................................................................................38 CHAPTER 7 - PENSION, RETIREMENT AND ESTATE PLANNING...........................................................40 CHAPTER 8 – BORROWING-RELATED PRODUCTS..................................................................................45 CHAPTER 9 - GOVERNMENT SCHEMES FOR VARIOUS SAVINGS & INVESTMENT OPTIONS...........48 CHAPTER 10 – TAX SAVING OPTIONS........................................................................................................53 CHAPTER 11 - CAUTION AGAINST PONZI SCHEMES AND UNREGISTERED INVESTMENT ADVISERS........................................................................................................................................................55 CHAPTER 12 - GRIEVANCE REDRESSAL MECHANISM...........................................................................60 CHAPTER 13 - GRIEVANCE REDRESSAL AGENCIES...............................................................................65 CHAPTER 14 - ABOUT SEBI..........................................................................................................................66 CHAPTER 15 - CONTACT DETAILS OF SEBI OFFICES, EXCHANGES AND DEPOSITORIES IN INDIA...........................................................................................................................................................................67 Financial Education Booklet Chapter 1 – Introduction Financial literacy assumes much significance in today's world. Financial literacy, as a life skill, is to be imparted to every individual for management of their personal finances. People face various issues like complexity of financial products, prevalence of fraudulent and Ponzi schemes, need for funds to get a better quality of life after retirement, etc. These issues have generated need for a better management of personal finances with proper management of income and expenditure. Financial education helps people in being financially literate and develop a positive attitude towards managing their income, expenditure, assets and liabilities properly, which would lead them to a situation of better financial well-being. Financial planning is must for every household. Financial planning goes beyond savings. It is an investment with a purpose. It is a plan to save and spend future income and should be carefully budgeted. This literature provides a fair understanding of the personal finance world, explaining the concept of financial planning, key concepts in financial literacy, various investment options, savings and investment products, insurance and pension products, retirement planning, caution against Ponzi schemes, tax saving options, investor protection measures, do’s and don’ts of investing, etc. This booklet is meant for the general investors and at the end of completion of this module, it is expected that the target participants will get better understanding and better management of their personal finances to achieve better financial well-being. 4|Page Financial Education Booklet Chapter 2 - Key Concepts in personal finance Some important concepts in personal finance which an individual should be aware of while managing their personal finances are mentioned as below: What are Savings? Savings are the surplus of income over expenditure. a. Income- Money earned from various sources like Salary, Wages, etc. b. Expenditure- Money spent on various items which include essential and non- essential items. People usually meet their short term goals with savings. Money in savings account of a bank earns a small amount of interest and it is easy to withdraw it whenever needed. People can save in savings bank accounts, Post Office savings accounts, etc. What are Investments? Investment is the act of deployment of money out of savings into financial or non-financial products with the expectation of earning higher returns over a period of time. The various products in which investments may be done are financial products viz. fixed deposit in bank, buying shares in stock market, investing in Mutual funds, etc. and non-financial products viz. purchase of land, gold, silver, etc. The investments may be done for short term, medium term or long- term. While investing one should always remember that return on investments may rise or fall over time and it is quite normal for that to happen. Difference between Savings and Investments is mentioned in the table below: Savings in Bank Investment in Fixed Deposits Accounts and other financial products Meaning A portion of one’s income Putting your money in various which is not used for investment products to make expenses. money grow. Purpose Savings are made to maintain Investments are made to make the liquidity to meet short term or money grow by creating assets that urgent requirements. can generate income in the future/increase value of assets. Risk Low or negligible Depends upon the asset in which investment is done. Liquidity Highly liquid Comparatively less liquid 5|Page Financial Education Booklet What is the importance of saving and investing? Investing money makes it grow for you. Any increase in the value of the investment over a period of time, or investment income/returns that you receive, gets you that much closer to your financial goals. One should start saving and investing early in his or her life. The earlier you start, the better you will be placed in meeting your goals like owning a house, financing your child's education, funding for your retirement, etc. What are Assets and Liabilities? Items that you own and have economic value are your assets and items which you owe to others or have borrowed from others are your liabilities. For example, if you save and then invest in a fixed deposit, it is your asset. On the other hand, if you borrow funds/ take a loan from a bank or any individual, it is your liability. What is Debt? Money borrowed to meet shortfall of money when expenses are more than the funds available in hand is called debt. What is the Time Value of Money? As time passes, you will realize that if 10 years back you could afford to purchase a full lunch for a particular amount of money, then today you could afford to get only a portion of the lunch in that amount of money. This means that the value of a five-hundred-rupee note would be higher today than after five years. Although the note is the same, you can do much more with the money if you have it now because over a period, you can make the money grow by earning interest on the money. By receiving ₹500/- today, you can increase the future amount of your money by investing the money and gaining interest or capital appreciation over a period of time. At the most basic level, the time value of money shows that time literally is money, i.e. the value of the money you have now is not the same as it will be in the future and vice versa. What is Inflation and its effect on Investments? Inflation refers to rise in prices of goods and services. Over a period of time, as the cost of goods and services increases, the ability of a unit of money, say one rupee, to buy goods and services keeps declining. In other words, the Purchasing Power of money, i.e. ability of money to buy anything, decreases. It is important to take into account the effects of inflation on your investments during financial planning. Investors greatly fear inflation since it reduces the value of their investment. How does inflation affect my investment decision? A Vada Pav costing ₹2/- five years ago would now cost ₹7/-. This increase in the price is not as a result of higher quantity or a better quality of the Vada Pav, but due to inflation impacting the prices of the ingredients and finally the end product. 6|Page Financial Education Booklet What are the steps that you can take to avoid the adverse effects of inflation? Try to determine your "real rate of return”, or the return you can expect after factoring in the effects of inflation. To reduce the risk of decrease in the value of money, you can invest the money available to you today at a rate equal or higher than the rate of inflation. What is Power of Compounding? With simple interest, you can earn interest only on the principal (that is, the amount you initially invested); while with compounding interest, you earn interest on the principal as well as, previously earned interest. Let us understand the magic of compounding with the help of an example. Rate of Maturity Year Principal Return earned return value 1 1 ,000 9% 90 1,090 1 ,090 2 9% 98 1,188 (1000+ interest earned of 90) 1,188 3 9% 295 1295 (1,000+interest earned 90+98) 10 2,172 9% 195 2,367* 20 5,142 9% 463 5,604 40 28,816 9% 2,593 31,409 *Principal amount is changing at the end of every year on account of addition of return earned for that year to the principal. As principal is increasing every year, the return earned on increased principal also is increasing. The above example shows how an initial investment of ₹1,000/- grows to ₹31,409/- over a period of 40 years. When the return is reinvested, you earn a return on the previously earned return and so on. Whereas in case of simple interest, the principle amount remains at ₹1,000/- only for all the 40 years and with annual interest of ₹90/-, the amount grows to only ₹4,600/-. Note: - Principal + return from the first year collectively becomes the principal for the second year. - Principal + return from the second year collectively becomes the Principal for the third year and so on. 7|Page Financial Education Booklet The Rule of 72 Mathematicians say that you can find out how long it will take you to double your money simply by dividing the number 72 by the interest rate. So let's say your parents give you ₹200/- for your birthday and you plan to invest it. If you put the money into an account that earns 6 percent (6%) interest a year, how long will it take to grow to ₹400/-/? Divide the rule number (72) by the annual 72 / 6% interest = 12 years interest rate (R) to find out the approximate time So in 12 years, your money will have doubled to ₹400/-. (T) required for doubling your money. Rupee Cost Averaging Rupee cost averaging is the process in which you invest a fixed amount of money at regular intervals irrespective of market fluctuations. For example, you buy more units when unit prices are low and less units when unit prices are high. By investing according to a schedule, you avoid the complex or even impossible duty of trying to figure out the exact best time to invest. The rupee cost averaging effect averages out the costs of your units and hence lessens the impact of short-term market fluctuations on your investments. For example, look at the table below: Number of units bought Month Amount Paid Cost per unit (Amount paid / Cost) Jan 2000 50.00 40 Feb 2000 41.67 48 Mar 2000 47.62 42 Apr 2000 58.82 34 May 2000 71.42 28 Jun 2000 66.67 30 8|Page Financial Education Booklet Jul 2000 40.00 50 Aug 2000 47.62 42 Sep 2000 45.45 44 Oct 2000 62.50 32 Nov 2000 55.55 36 Dec 2000 50.00 40 Total 24,000 466 units From the above, it can be seen that with a total investment of ₹24,000/- over a period of twelve months, an investor received 466 units of Mutual fund. The average price per unit comes to ₹51.50/- (i.e. ₹24,000/466 = ₹51.50/-). 9|Page Financial Education Booklet Chapter 3 - Financial Planning A. Financial Planning Financial planning is the process of estimating financial needs of a person and implementing a comprehensive plan to meet those financial needs during his or her lifetime through investment. For instance, birth of a child, education, purchasing house, marriage, meeting emergency situations like an illness, to meet the impact of an accident, death, or natural calamities like flood, etc. B. Financial Planning Process Determine Your Current Financial Situation If you want to plan for the future, you need to understand your current financial position. You need to understand what your incomes, expenses, assets and liabilities/debts are? Your net worth is simply assets you own minus liabilities you owe. The net worth is calculated as under: - Assets Liabilities Particulars Amount in Rupees Particulars Amount in Rupees Car 25,000 House Loan 20,00,000 Bank 5,00,000 Car Loan 10,000 Balance House 50,00,000 Total Assets 55,25,000 Total Liabilities 20,10,000 Net Worth (Assets- 35,15,000/- (55,25,000-20,10,000) Liabilities) 10 | P a g e Financial Education Booklet Your net worth indicates your capacity to achieve your financial goals, such as buying a home, paying for university education, future medical expenses, repayment of loan, etc. Develop Financial Goals Your financial goals can range from acquiring assets, saving for emergency as well as making investments for your future financial security. The financial goals of an individual can be categorized as below: a. Basic financial goals (food, clothing, shelter, etc.) b. Secondary or advanced financial goals (education, house, marriage, etc.) c. Retirement planning d. Estate planning Individuals can use a variety of investment, risk management and tax planning strategies to meet their financial goals. These goals change over an individual's lifetime and accordingly the financial plan should be reviewed on a regular basis for any modification as per change in the circumstances. TIP: While making financial plans, one should first ensure a planned savings amount and then plan for meeting expenses. Mr. Warren Buffett, one of world’s successful investor, has said: - “Don’t save what is left after spending; spend what is left after saving.” Therefore, the basic concept that everyone should focus upon while utilising his income is as follows: Income – Savings = Expenditure Wealth is not built overnight. One needs to set specific financial goals. A good financial goal should be SMART i.e. Specific, Measurable, Achievable, Realistic and Time- bound. Description Incorrect Approach Right Approach Specific You need to know I need to set aside I need to set aside ₹ exactly what you money for my grand 10,000/- for my grand want to achieve daughter's birthday daughter's birthday next and when you want next year. year. it. Measurable A goal should be I will pay off most of my In the next six months, I measurable so that credit card dues soon. will pay off all my credit you know when you card bills in full. will achieve it. 11 | P a g e Financial Education Booklet Achievable Your goal should be I will save money. I will save ₹ 48,000/- within a reasonable every year by setting reach. aside ₹ 4,000/- every month. Realistic Your goals need to By saving regularly, I By saving regularly, I be based on will become a will be debt free by resources and millionaire. January next year. If I tasks that you can continue saving reasonably regularly after clearing achieve. all my debt, by next December I will be saving the sufficient amount to fund six months of my living expenses. Time-bound Goals with timelines I will save money for I will save ₹ 50,000/- allow you to track my daughter's every year for next 10 your progress and marriage. years for my daughter's encourage you to marriage. keep going until you reach your goal. Goal-based investing focuses on meeting goals that are personal and specific. The focus of this approach is to arrive at future value of different goals and then pursuing these goals through asset allocation made for investments according to each individual’s financial goal. To adopt this strategy while investing, one must plan as per one's age, risk appetite (ability to take risk), financial situation and investment horizon. Five-Step Approach to Achieve Financial Goals STEP 1: Identify specific financial goals It is important to prepare a proper plan to fix each investment with a specific goal. It is very important to identify one’s financial goals and aspirations and estimate the amount of money it would be needed to fulfil them. STEP 2: Classify goals into Short-term, Medium term or Long term Short-term goals are typically financial requirements that are expected to arise in time period ranging from a few months to one year. Medium-term goals may have a time horizon of one year to eight years. Goals like buying a property, starting your own venture, getting enrolled in a professional course, etc. can be medium-term financial goals. Long-term goals may have a time horizon of eight years or more for example child's marriage, retirement planning, etc. 12 | P a g e Financial Education Booklet STEP 3: Decide upon asset-allocation Asset-Allocation is a strategy for investing your money into various asset classes such as equity and debt that would suit an investor's income and risk appetite. Asset Classes may be referred to groups of financial instruments which have similar financial characteristics. Asset Allocation refers to an investment strategy that aims to balance risk and reward - in the form of returns - by dividing the assets of an individual’s portfolio according to his/her financial goals, risk tolerance and investment horizon. Asset Allocation Allocate assets depending on your age, lifestyle, family commitments and your financial goals. While allocating your funds, distribute your investments across various asset classes such as equity, bonds, real estate, etc., to benefit from diversification, which helps reduce risk and increases the possibility of earning moderate to high returns on your investments. For example: An individual’s portfolio when he/she invests in various asset classes (depending upon his financial goals, risk appetite, investment horizon, etc.) may look like any of the following: Debt: Debt: Debt: Equity: 15% Equity: 50% Equity: 25% 70% 40% 60% Gold: Gold: Gold: 15% 10% 15% Total Portfolio Total Portfolio Total Portfolio STEP 4: Choose the right investments with diversification (within asset classes) Arriving at the right risk-return combination and choosing the right asset allocation can seem difficult. For a longer term goal, it is advisable to focus on maximizing returns with diversified asset allocation. Diversification It refers to the process which reduces risk by making investments into various financial instruments, industries and other categories. It aims to minimize loss on return by investing in different asset classes (debt, equity, gold, real assets, etc.) that would react differently to the same event, such as those relating to the economy or markets. Although diversification does not provide guarantee against loss, it is the most important component for reaching long-term financial goals while minimizing risk. 13 | P a g e Financial Education Booklet TIP:  Don't put all eggs (invest all your money) in one basket (asset class).  Diversification is doing investment in various financial instruments or asset classes.  Goal is to find an appropriate balance between risk and return. STEP 5: Review and revise financial plans To stay on track, regularly review the progress towards your goals and investments. Review your investments like stocks and mutual funds in your portfolio. Certain products may seem tailor-made for specific needs, but they may not be actually useful for one's portfolio. Be aware of such investment options. C. Choosing Investment Options & Understanding Risk The investment products available for an investor are fixed income securities, equity investments, mutual funds, etc. Every asset class has its own risk and return. Investments in equities are considered as high risk investments as their returns are subject to performance of individual companies and general economic scenario. On the other hand, investments in the debt instruments are considered having relatively low risk. For instance, Government bonds are considered to be effectively "risk free" due to the trust that government will not default on the repayment to investors. Three pillars of investment - The investment decision by an individual is influenced by safety, liquidity and return. They are called the three pillars of investment. i. Safety: This is about how well protected the principal and return on the investment is. For Safety instance, if you lend ₹100/- to someone, will it be repaid on time? Or, is your capital of ₹100/- safe? Safety means your money invested is Liquidilty Return protected and there is every possibility that on the agreed date, or maybe even before, it would be returned whenever needed. ii. Liquidity: This pillar of investment is the degree of ease with which you can en- cash or liquidate your investment at fair value. In the above example, it will be about how soon will you get your money back if you need it immediately? iii. Return: What is the return you will get on your investments? It could be in the form of income, appreciation of capital invested or both. Income means an investment's earnings in the form of interest or dividend payment. Capital appreciation means the increase in market value of investment over a period of time. 14 | P a g e Financial Education Booklet For example, if the present market value is higher than the value at the time of investment, it is called appreciation or gain. In case the market value is lower than the value at the time of investment, it is called depreciation or loss. D. Returns from Investment Returns from Investment can be described as money made by an investor on his/ her investment. The returns can be in two ways as explained below: Regular Income Equity Investment: You get dividend when you buy and hold equity shares of a company and units of equity mutual fund. Fixed Income Investment: In debt securities, you receive fixed interest on interest bearing Investments Capital Appreciation When the value of initial investment increases over a period of time and the investor benefits by selling part or whole of the investment at the increased value, it is called Capital Appreciation. Example of Capital Appreciation: An investor bought 100 shares of company XYZ Ltd. at ₹50/- per share by paying ₹5,000/- in total. When the value of XYZ share increases to ₹65/- per share, and the investor sells 100 shares in the market, he or she will get 6,500 (100 Shares at ₹65/- per share). The investor stands to gain ₹1500/- from the initial investment that he has made. This is called capital appreciation/capital gain. E. What are Risks and Returns? Risk can be defined as the probability or likelihood of a loss occurring in relation to your expected returns from any particular investment. It is a measure of the level of uncertainty of achieving the returns as per investor expectations. Risk V/S Return Risk and investing go hand in hand. The good news is that "risk" comes with the potential for "rewards" from investing — which is what makes the whole process worthwhile. 15 | P a g e Financial Education Booklet Tips:  Once you invest in any asset class you should monitor your investments on a regular basis and keep yourself updated about various market happenings to take corrective action.  Always check the potential risks and do proper due diligence when promised returns are usually high. 16 | P a g e Financial Education Booklet Chapter 4 - Savings Related Products In this chapter, we will discuss about the various savings related products available to the public. These include deposit schemes offered by banks, government deposit schemes, public deposits issued by companies, etc. A. Why to keep money in banks? Drawbacks of keeping cash at home are mentioned as below: Unsafe – Money can be stolen or lost due to natural calamities Loss of growth opportunities - Loss of interest income No/Low credit eligibility - Deposit in banks creates eligibility for taking loans Therefore, it is beneficial to keep money in banks rather than at home in cash. B. Banking Commercial banks are regulated financial institutions as they deal with public money and trust. Commercial banks in India are regulated by Reserve Bank of India. Banks are required to go through mandatory inspection and audits at various intervals and are also audited by the Reserve Bank of India every year. Bank deposits are comparatively lower risk investments. Banks offer various types of deposits, depending on the needs of the customers. Bank deposits are preferred more for their liquidity and safety than for the returns. It is also possible to get loans from banks against fixed deposits up to 75 to 90 % of the deposit amount. Central Government deposit insurance scheme ensures that all deposits are insured by the Government up to a limit of ₹5 lakhs per customer in that particular bank. So, even in case of a failure of a bank, depositors are assured that the Government will step in and return up to ₹5 lakhs of their savings in that bank. For complete details on the scheme, one can refer the website of Reserve Bank of India, from time to time. C. Account Opening Process — Know Your Client (KYC) Norms For opening any type of bank account, customers need to undergo the process of complying with KYC norms. KYC Stands for "Know Your Customer". The objective of KYC is to enable banks to know and understand their customers better and help them manage their risks prudently. The KYC documents generally accepted by banks are: Photograph, Document for proof of identity (copy of PAN Card, Aadhaar Card, etc.) and Document for proof of address (copy of electricity bill, driving license, passport, Aadhaar card, etc). 17 | P a g e Financial Education Booklet D. Types of Bank Accounts Types of Bank Deposit and their Key Features Savings Bank (SB) Account  Low interest, however, highly liquid.  Facilitates payment mechanism through Automated Teller Machines (ATMs).  No Tax deducted at Source (TDS) on interest on SB account balance, but taxable in the hands of depositor.  Account can be opened in single name or joint names. In the case of joint account, the operation of the account can be done by any one account holder or jointly.  Minors of any age can also open a savings bank account through their natural or legally appointed guardian. Minors above age of 10 years can also avail additional banking facilities like internet banking, ATM/ debit card, cheque book facility, etc. Basic Savings Bank Deposit Account (BSBDA)  Introduced to promote financial inclusion.  Zero balance savings account without any requirement of an initial deposit can be opened for individuals and also minors (through their guardian).  Relaxed conditions for number of deposits/ withdrawals in a month.  ATM Card, passbooks are issued free of charge.  BSDBA account holders are not eligible for opening any other savings bank deposit account in that bank. Fixed Deposit (FD) Account  Involves placing funds with the bank for a fixed term at a certain interest rate.  Interest accrued or earned on FD is subject to Tax Deducted at Source (TDS) beyond a stipulated amount.  Senior citizens may get extra benefits on the interest rate.  Tenure and rate of interest on FDs varies from bank to bank. Recurring Deposit (RD) Account  A fixed amount is deposited at monthly intervals for a predetermined term.  Earns higher interest than savings bank account.  TDS applicable on interest accrued or earned beyond a stipulated amount.  Senior citizens may get extra benefits on the interest rate.  Tenure and rate of interest on RDs varies from bank to bank. Special Bank Term Deposit Scheme  Tax savings scheme available with banks.  Relief under Section 80C of the Income Tax Act, 1961.  Term deposit with 5 years lock in period.  No premature withdrawal/loan allowed. 18 | P a g e Financial Education Booklet E. Digital Banking In the modern era, transactions including payments, fund transfers and buying goods, all take place on digital platforms, such as mobile phones. Customers can perform transactions from any place. The various digital modes of transferring funds are as follows: Mode of Transfer and Key Features NEFT (National Electronic Fund Transfer) - Transfer of funds from one Bank account to another. - No restrictions on the minimum/ maximum amount for transfer. - Transfer is done using beneficiary's account number and IFSC Code (Indian Financial System Code, a unique code assigned to each bank branch) - Charges for transfer may differ from bank to bank. - Transfer of funds can be initiated any time during the day and it takes few hours to get credited in the beneficiary account. RTGS (Real Time Gross Settlement) - Transfer of funds from one Bank account to a different account of another bank on a real time basis. - Used to make high value transactions. - Transfer is done using beneficiary's account number and IFSC Code (Indian Financial System Code, a unique code assigned to each bank branch). - Charges for transfer may differ from bank to bank. - Transfer of funds can be initiated during the specified period on working day and is completed instantly on a real time basis. IMPS (Immediate Payment Service) - Transfer of funds from one Bank account to another facilitating instant fund transfer. - For fund transfer through internet banking, beneficiary's account number and IFSC Code (Indian Financial Services Code, a unique code assigned to each bank branch) are needed. - For fund transfer through mobile banking, beneficiary's MMID (Mobile Money Identifier is a 7 digit number issued by bank to the customer) is needed. Unified Payment Interface (UPI) - Instant transfer of funds through any smart phone using VPA (Virtual Payment Address). - 24 x 7 fund transfer facility on a real time basis. - One needs to download UPI-enabled bank app and login using bank details. ** Complete details regarding different modes of funds transfer, may be accessed at www.rbi.org.in and https://www.npci.org.in. New Categories of Banks and Business Correspondents: - Reserve Bank of India (RBI) has introduced certain new categories of banks and Business Correspondents whose key features are detailed as below: 19 | P a g e Financial Education Booklet Title Key Features Payment Bank - Provides savings account/ current account facilities. - Can accept demand deposit but not recurring/ fixed deposit. - Can issue ATM/ Debit Cards but not credit cards. - Cannot give loans/ advances. - Offer payment and remittance service through various channels. Small Finance - Provides features like taking small deposits and Bank disbursing small amount loans. - Instrument to save funds primarily to unserved and underserved sections of population. - Extend loans of small amount to small business units, micro and small enterprises, small and marginal farmers and entities in the unorganized sectors. Business - Representative of a bank who goes to customers Correspondent (usually in remote locations/ villages) to help them with their banking needs/ transactions. - Can provide services like opening of bank accounts, deposits, transfer of funds, collection of loan deposits, disbursal of small value credit, collection of payment/ fees, etc. F. Digital Payments - Do's and Don'ts DO’S DON'Ts  Use a password for your computer,  Never save your mobile banking login laptop and mobile so that no one else ID and password on the phone. Either can access your systems without your memorize it or write it down consent. Change your passwords and somewhere else that is safe and not security settings regularly. accessible to anyone.  Always visit your bank's secure Internet  Never leave your handset unattended Banking website directly. Avoid using and logged into a mobile banking app Internet Banking on unsecured WI-FI or internet banking account or while networks such as railway stations, carrying out any financial transaction. airports, cybercafés, etc.  Log out of your Internet Banking/ Mobile  Never ignore your account balance Banking application immediately after statements and transaction history. you have completed your transaction and before closing the window.  Update the mobile banking app as and  Don't keep your PC or laptop lying when a new version/ or upgrade is around when not in use or trust a released. Also update your phone with stranger to use it. latest security systems and software. 20 | P a g e Financial Education Booklet  If you suspect unauthorized  Never download apps from transactions in your account, report it to untrustworthy and unreliable sources. your bank immediately or at least within three working days, so that your complaint or grievance is addressed in your favour. G. What is a Credit card and a Debit card? Credit card gives the card holder the benefit of availing credit facility for a certain period of time for example making payments without having immediate money in hand in the form of credit card transactions. Debit card, on the other hand, is a card issued to a bank account holder for withdrawing money at ATMs from his account as well as to make payment at point of sale. All the merchant establishments accept debit cards in settlement of transactions. Both credit and debit cards can be used for withdrawal of cash from ATMs as well as for digital transactions. Comparison between a credit card and a debit card are listed as below: Particulars Credit Card Debit Card Source of funds Lending bank provides the Linked to one's own savings/ credit facility current account maintained with the same bank Interest If outstanding amount is not Not applicable paid on time, interest is levied. Credit History Relevant for issuing a credit Not relevant for issuance of the card debit card. Relationship No compulsion to have Having an account with the issuing with the issuer account with issuing bank bank is a pre-requisite Things to keep in mind while transacting through ATM card:  Change the PIN immediately when the card is received from bank.  Don't write down your PIN number anywhere. Memorize it. Don't disclose your PIN number to any third person.  Preferably use an ATM within bank premises or premises which are manned 24*7 by a security guard. Use it personally. Bank has no liability in case the ATM card has been handed over for transaction to any other person except the account holder.  While using the online transaction, use the virtual keyboard.  Register yourself with bank for getting SMS alerts on transactions. However, banks may charge customers for providing SMS or e-mail alerts related to their bank accounts. 21 | P a g e Financial Education Booklet  Change your PIN numbers as often as convenient.  If the card is lost, immediately inform the bank.  Do not allow anyone to access or use your card. H. Customer Liability for unauthorized banking transactions RBI has specified that a customer has no liability when an unauthorized transaction happens on account of fraud, contributory negligence or deficiency on part of the bank. Similarly, even when neither the customer nor the bank is at fault, but the problem lies elsewhere in the system, the customer does not have any liability, provided he/she notifies the bank about the unauthorized or illegal operation within three days of receiving an alert from the bank. And the bank shall credit the amount involved in such transaction to the customer's account within a specified time period. However, in cases where such fraud takes place on account of the negligence of the customer, the entire loss, until the date of reporting the unlawful transaction, will be borne by the customer. RBI has emphasized banks that they need to send SMS and e-mail alerts to the customers immediately after a transaction is carried out in their account. They have been instructed to ensure that such messages are enabled to carry the customer's reply too, so that a customer can report any such fraud immediately. I. Reserve Bank of India (RBI) Reserve Bank of India (RBI), the central bank of India, was established on April 1, 1935, under the Reserve Bank of India Act. The Reserve Bank of India uses monetary policy to create financial stability in India, and it is charged with regulating the country's currency and credit systems. The main purpose of RBI is to conduct consolidated supervision of the financial sector in India, which is made up of commercial banks, financial institutions and nonbanking finance companies. It formulates, implements and monitors India's monetary policy. The central bank's management objective is to maintain price stability and ensure that credit is flowing to productive economic sectors. RBI acts as a regulator and supervisor of the overall banking system and it is also the banker to the Government of India. RBI is also the lender of last resort for all commercial banks. J. Grievance Redressal For redressal of any grievance regarding banking industry products/ schemes, please refer to Chapter 12 of this booklet. K. Government Schemes in Banking Industry For information on various government schemes in banking industry, please refer to Chapter 9 of this booklet. 22 | P a g e Financial Education Booklet Chapter 5 - Investment in Securities Market Before investing in securities, it is better to understand the market and be fully aware of the risks involved. Be aware of your capacity to handle risk and invest accordingly. Generally, you can evaluate a potential investment by analysing seven key risks as mentioned below: Types of Risks Liquidity Risk Inflation Risk Business Risk Unsystematic Volatility Risk Risk Types Systematic Risk of Currency Risk Risks i. Market risk or Systematic Risk An investor may experience losses due to factors affecting the overall performance of financial markets and macroeconomic factors. Stock market bubbles and crashes are good examples of heightened market risk. ii. Unsystematic Risk Unsystematic risk can be described as the uncertainty inherent in a particular company or industry. Examples of unsystematic risk include a new competitor in the marketplace with the potential to take significant market share from the company an investor is invested in, a regulatory change, such as one that could drive down company sales, a shift in management, a product recall, etc. iii. Inflation risk Inflation risk, also called as purchasing power risk, is the chance that the cash flows from an investment won't be worth as much in the future as they are today because of a decline in its purchasing power due to inflation. iv. Liquidity risk Liquidity risk arises when an investment cannot be bought or sold or converted into cash quickly enough to prevent or minimize a loss or to meet any immediate 23 | P a g e Financial Education Booklet expense. You can minimize this risk to a great extent by diversifying your investments. v. Business Risk It refers to the risk that a business might stop its operations due to any unfavourable market or financial situation. vi. Volatility Risk It refers to the risk when the stock prices of a company may fluctuate, even when those companies aren't in danger of failing. vii. Currency Risk Currency risk arises when there is a possibility of losing money due to unfavourable movements in exchange rates. It may happen from change in price of one currency in relation to other and investors who have assets across national borders are exposed to this risk. How to mitigate the risk? The investors can try to mitigate the risk by different means. Asset allocation is one strategy through which an investor can benefit from diversification of their investments into various sectors and companies to mitigate risk. Volatility risk can be managed by investing through Systematic Investment Plan of Mutual Funds or buying equities directly from the market in smaller lots over a period of time. A good understanding of the fundamentals of a company can help one make an appropriate judgment about the health of a company. Of course, investors should ignore the rumours and unsolicited messages for investing in securities market. Investments in securities market are done through primary market as well as secondary market. The difference between primary market and secondary market is that in the primary market, investors are allotted securities directly by the company, while in the secondary market investors buy securities from the existing investors through their stock brokers. Investments in securities market are subject to taxation, which includes short term and long term tax on capital gains as well as dividend pay-outs. What are the pre-requisites to invest in securities? In order to invest in equity shares, an investor should have three accounts: Savings Account – Saving bank account with a commercial bank Trading Account - Trading account with a SEBI registered stock broker of a recognized stock exchange to buy or sell securities on the Stock Exchange Demat Account - Demat account with a SEBI recognized Depository Participant (DP) of Depository for holding securities in dematerialized/electronic form 24 | P a g e Financial Education Booklet The Demat account can be opened with depository participant (DP) of any of the Depository. National Securities Depository Ltd. (NSDL) and Central Depository Services (India) Ltd. (CDSL) are two SEBI registered depositories in India. The list of SEBI registered stock brokers and depository participants may be obtained from SEBI’s official website (www.sebi.gov.in) or from the websites of the respective stock exchanges & depositories. Primary Market When a company publicly issues new stocks and bonds for the first time, it does so in the primary market. In many cases, this takes the form of an initial public offer (IPO). SEBI examines the prospectus issued to the public for subscription of shares to see that it meets with the requirements of the SEBI Regulations. Companies issuing securities via the primary market hire merchant bankers who, on behalf of the company, prepare the prospectus and ensure related compliance for the issue of shares viz. finalization of allotment process, listing of shares in the stock exchanges, etc. Application Supported by Blocked Amount (ASBA) for Shares An investor can now apply for shares in the primary market through ASBA. In public issues w.e.f. May 01, 2010 all the investors can apply through ASBA. ASBA is an application by an investor containing an authorization to the bank to block the application money in his/ her bank account, for subscribing to an issue. Blocked amount continues to earn interest. If an investor is applying through ASBA, his application money shall be debited from the bank account only if his/her application is selected for allotment, after the basis of allotment is finalized. The investor need not have to bother about refunds as money to the extent required for allotment of securities, is deducted from the bank account and in case the securities are not allotted to the investor, then the blocked amount in his/ her bank account is released and made available to use. Unified Payment Interface (UPI) in ASBA A new feature of utilizing Unified Payment Interface (UPI) while making payment in ASBA, has also been introduced recently. This feature may be used for the purpose of blocking of funds and making payments in the public issue process. This requires the investors to create a UPI ID and PIN using any of the UPI enabled mobile application. Usage of UPI in public issue process brings in comfort, ease of use and reduces the listing time for public issues. 25 | P a g e Financial Education Booklet Secondary Market Secondary market is the market where securities are traded after the company has issued the stocks and bonds in the primary market. The shares are listed and traded on the stock exchanges which facilitates the buying and selling of stocks in the secondary market. Major SEBI recognized stock exchanges in India are BSE Ltd. (formerly Bombay Stock Exchange Ltd.) and the National Stock Exchange of India Ltd. (NSE). Anyone can purchase securities on the secondary market as long as they are willing to pay the price at which the securities are being traded. Investment in securities market should be done after carrying out research on the background of the company, future prospects and financial strength of the company. Know Your Client (KYC) For the purpose of opening of Demat and trading account with a Depository Participant (DP)/Stock broker, the investor has to complete Know Your Client (KYC) process with the respective DP/Stock Broker. KYC is mandatory under the Prevention of Money Laundering Act, 2002 and Rules framed there under. Investor has to submit Officially Valid Documents (OVDs) as proof of identity and proof of address such as PAN card / Unique Identification (UID) (Aadhaar)/ Passport/ Voter ID card/ Driving license, etc. KYC process may be done online through Aadhaar based E- KYC mechanism or offline by visiting or sending the documents to the registered address of the intermediary. 26 | P a g e Financial Education Booklet Once you have opened an account with a stock broker, you can buy or sell shares of a company through a stock broker of the recognized stock exchange where the shares are listed and traded. You can place order to buy or sell securities with your broker using the online trading account by visiting broker's website, mobile trading app of broker, through the phone using Call & Trade facility or physically visiting their office. Modes of Placement of Order Word of Caution Buying or selling of shares shall always be done through a SEBI registered stock broker. 27 | P a g e Financial Education Booklet Trading days and Trading & Settlement Cycle Trading on the stock exchange takes place on all days of the week (except Saturdays and Sundays and holidays declared by the Stock Exchange in advance). In case of purchase of shares, investors are required to make payment to the bank account of your stock broker prior to the pay-in day for the relevant settlement. Once payment is made by the investor, the broker would credit the shares in the Demat account of investor after pay-out day. Similarly, in case of sale of shares, investors are required to deliver the shares to Demat account of broker prior to the pay-in day for the relevant settlement. Once the shares are delivered by the investor, the broker would credit the funds in the bank account of investor after pay-out day. What is the pay-in day and pay-out day? Pay-in day is the day when the brokers shall make payment of funds (in case of purchase of shares) or delivery of securities (in case of sale of shares) to the stock exchange. Pay- out day is the day when the stock exchange makes payment of funds (in case of sale of shares) or delivery of securities (in case of purchase of shares) to the broker. Settlement cycle is on T+2 rolling settlement basis w.e.f. April 01, 2003 (where T stands for the trade day). For example, trades executed on a Monday are typically settled on the following Wednesday (considering 2 working days from the trade day). The funds and securities pay-in and pay-out are carried out on T+2 day. The exchanges have to ensure that the pay-out of funds and securities to the clients is done by the broker within 24 hours of the pay-out. Margin and Pledging / Re-pledging of securities When an investor buys a stock, he has two options, i.e.  to pay the entire price of the stock upfront, called early pay in or  to pay only a certain percentage of the price of the stock and borrow money from the broker to finance the rest. The percentage of the price of the stock paid upfront is called margin. The payment of the remaining amount can be made by the designated pay-out time. Similarly, when an investor desires to sell his stocks he has the option to either pay in the shares to be sold or can give a margin upfront. Margin can be provided in the form of cash or instruments like fixed deposits, bank guarantee, securities, units of mutual funds, government securities and treasury bills in demat form. Margin is provided in the form of securities, in favour of the broker only in the form of pledge. A pledge is a deposit of some personal property as collateral for a debt. Stock Brokers can accept securities (viz shares) as collateral only in the form of margin pledge created on the securities held in client’s demat account. Investor (client) needs to give 28 | P a g e Financial Education Booklet instructions to create margin pledge on securities. This instruction can be in physical form or electronically through “SPEED-e” (for NSDL) and “Easiest” (for CDSL). Contract Note A Contract Note is evidence of trade done by the stock broker given to the investor and is a legal document which contains details of the transaction such as securities bought/sold, traded price, time of trade, brokerage, etc. Contract Notes can be issued in physical form or in electronic form. In case investor opts for electronic contract note, a specific authorization needs to be given to the stock broker along with the details of email of the investor. Such electronic contract notes shall be digitally signed and encrypted which would make them difficult to be tampered. Basic Services Demat Account (BSDA) SEBI with a view to achieve wider financial inclusion, encourage holding of demat accounts. In order to reduce the cost of maintaining securities in demat accounts for retail individual investors, SEBI has made available a Basic Services Demat Account" (BSDA) to investors. Benefits of BSDA  Nil/Low Annual Maintenance Charges (AMC)  Free of charge periodic Transaction and Holding statements of the Demat account.  2 physical statements free of charge during the billing cycle.  At least 2 Delivery Instruction Slips (DIS) shall be issued at time of account opening. Value of Debt holdings Value of Equity Annual Maintenance in BSDA holdings in BSDA Charges (AMC) Up to ₹1,00,000/- Up to ₹50,000/- NIL From ₹1,00,001/- to From ₹50,001/- to Maximum AMC ₹100/- ₹2,00,000/- ₹2,00,000/- Charges as applicable to More than ₹2,00,000/- More than ₹2,00,000/- regular DEMAT accounts. Annual Maintenance Charges (AMC) It refers to the charges collected by Depository Participants (DPs) towards maintenance of Demat accounts of the beneficiary owners (Account Holders), depending upon the value of holdings in the Demat account. Mutual Fund A mutual fund pools in money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some 29 | P a g e Financial Education Booklet combination of these investments. All mutual funds are required to be registered with SEBI before they launch any scheme. Salient features of mutual funds are:  Professional management - Money is invested through fund managers with proven expertise in the field of investment.  Diversification - Diversification is an investing strategy that can be summed up as investing small amounts of your money in different investment options like different schemes of mutual funds and holding shares of multiple companies.  Economy of scale - A mutual fund buys and sells large amount of securities at one go. This makes its transaction cost lower than what an individual would pay for securities transactions.  Liquidity - Just like individual shares, mutual fund units can be converted into money through sale in the market or through redemption.  Simplicity - Buying a mutual fund unit is simple and the minimum investment amount required is small.  Tax Benefits - Different mutual fund categories are subjected to different tax treatments. It is important to understand the tax benefits of a fund before you invest in it. Mutual funds are segregated in different categories based on the objectives of the mutual fund scheme. The schemes are designed to keep in mind the needs of various types of investors, risk averse investors (basically a conservative Investor who does not want to take high risk), moderate investors (investors who can take some amount of risk) and aggressive investors (investors who are willing to take risk in search of higher returns). Categorization of Mutual Funds Mutual funds are broadly categorized into five schemes mentioned as below: 30 | P a g e Financial Education Booklet Debt Schemes Equity Schemes Mutual funds which Hybrid Schemes Mutual funds which principally invest in fixed Mutual funds which invest in principally invest in stocks income securities like bonds & two or more asset classes treasury bills Solution Oriented Schemes Mutual fund schemes which make their investments as per Other Schemes the goals of individuals like retirement & child education planning, etc. Product Labelling of Mutual Funds As per SEBI guidelines, mutual funds are to be labelled according to the level of risk involved and the same is to be depicted on the risk-o-meter. The different labels and risk- o-meter are mentioned as below: Risk-o-meter Low to Moderately Moderate: Very High: Low: Moderate: High: High: Principal at Principal at Principal at Principal at Principal at Principal at moderate very high low risk moderately moderately high risk risk risk low risk high risk What is Systematic Investment Plan (SIP)? An SIP or a Systematic Investment Plan allows an investor to invest a fixed amount of money regularly in a mutual fund scheme. It lets you set aside a fixed sum of money at regular intervals (weekly, monthly or quarterly) with an objective to gain capital appreciation in the longer run. SIP investment inculcates the habit of savings. Instead of trying to time the market, by investing on a regular basis, the investor benefits from the 31 | P a g e Financial Education Booklet rupee-cost averaging factor. As the investments are done over different market cycles, the investor benefits from the market volatility by getting to buy more units of the same fund when the markets are low and buying less units when the prices are high. An investor can invest a pre-determined fixed amount as low as ₹500/- in a scheme every month or quarter, depending on his/her convenience through post-dated cheques, through Standing instruction (SI) facility or through ECS (Electronic Clearing Service) facility. Investors need to fill up an application form and SIP mandate form on which they need to indicate their choice for the SIP date (basically when the pre-determined amount will be invested). Subsequent SIPs may be auto-debited through a standing instruction, electronic clearing service or post-dated cheques. Advantages of SIP Disciplined No need to time Rupee Cost approach to the market Averaging – investments Benefit from Volatility Power of Compounding– Lighter on the Small investments create wallet Big Kitty over time In order to further ease out the investment procedure for the investors, Mutual Funds also offer the following options: Systematic Withdrawal Plans Systematic Transfer Facility to withdraw fixed Plans amounts from a particular scheme at regular intervals Facility to transfer funds from one scheme to another at regular intervals Commodity Derivatives Market What are commodities? Commodities are goods with economic value. They are earth's natural products which are produced and traded. They are usually raw materials for further processing. The broad types of commodities are as under:  Agricultural commodities: Food & non-food crops.  Non-Agricultural commodities: Metals, Energy, Polymers, etc.  Others: cattle head, processed foods like juices, etc. 32 | P a g e Financial Education Booklet Major commodities are: Edible oilseed Groundnut, Mustard seed, Cottonseed, Soy oil, Crude Palm Oil, etc. Food grains Wheat, Gram, Bajra (Pearl Millet), Maize, etc. Bullion Gold, Silver Metals & Energy Natural Gas, Crude Oil, Copper, Zinc, Aluminium, Lead, Nickel, Steel etc. Spices Turmeric, Pepper, Cumin seed, Cardamom, etc. Fibres Cotton, Jute, etc. Others Castor Seed, Guar seed (Cluster Bean), Guar gum, Rubber, etc. What is Commodity Price Risk? Commodity price risk is the price uncertainty that adversely impacts the financial position of those who both use and produce commodities. For example, as the price of steel rises, this increases the cost of automobile production and can negatively impact that producer's profit margins. Similarly, commodity price risk can equally impact producers of a commodity, not just users. If crop prices are low one year, a farmer may plant less of that crop. If prices subsequently rise next year, the farmer will miss out on a potentially profitable crop. This is called commodity price risk. The factors that can affect commodity prices include political and regulatory changes, seasonal variations, weather, technology and market conditions. Risk Faced by Various Stakeholders Various stakeholders face many risks in commodity trading, especially farmers, such as:  Price volatility and price risk  Lack of quality storage facilities  Need for finance at the time of sowing of crops  Dependence on local middlemen and agents for selling their crops  Small farm holdings — no bargaining power  Opaque/manipulated prices at Mandis How to protect against price risk in commodities? A producer of a commodity is at risk of prices moving lower. Conversely, a consumer of a commodity is at risk of prices moving higher. The producers and consumers of commodities can participate in the commodity derivatives exchange to protect against adverse price movements. The process of protecting against financial loss or price risk is called "Hedging''. A hedge will guarantee a consumer the supply of a required commodity at a set price and a producer the known price for commodity output. Benefits of Commodity Derivative Exchange Commodity derivative exchange offers following benefits to producers and consumers of commodities: 33 | P a g e Financial Education Booklet  Price discovery: Helps producers / sellers and consumers / buyers and also exporters & importers of a commodity to discover price for a future date and helps them take informed decision.  Price risk management: Helps hedge price risk or insure against adverse price movement and locks-in profit margin. Commodity Derivative Exchanges A commodity derivative exchange is an organized, regulated market that facilitates the purchase and sale of contracts whose values are linked to the price of commodities (e.g., wheat, barley, crude oil, gold, etc.). Typically, the buyers of these contracts agree to accept delivery of a commodity at a price on a future date, and similarly, the sellers agree to deliver the commodity at a price on a future date. For example, in case of Agricultural commodities, Commodity Derivatives Exchange helps in reducing the price risk, both for the farmers (seller of crop) and the consumer (buyers of crop /food processors) by helping them decide a price today (i.e. at the time of sowing or at the time of harvesting of the crop) for the crop to be delivered in the future. The transaction in the exchange is done through commodity brokers. The settlement of contract to buy and sell is guaranteed by the commodity derivatives exchange. The trading rules and procedures of recognized Commodity Derivatives Exchanges and Commodity Brokers are regulated by Securities and Exchange Board of India (SEBI) — a statutory body established under SEBI Act, 1992. In India, major commodity derivative exchanges are as follows:  Multi Commodity Exchange of India Ltd (MCX) — predominantly non-agricultural products like gold, silver, aluminium, copper, nickel, lead, zinc and energy products like crude oil and natural gas are traded on this exchange.  National Commodity and Derivative Exchange (NCDEX) — predominantly agricultural products like pulses, cereals, sugar, etc. are traded on this exchange. There are three types of contracts in commodity derivatives market. These are Forward Contracts, Futures Contract and Options. Forward contract is an agreement between two parties to sell or buy a certain commodity at a fixed price in the future. This contract hedges the risk for the buyer against price fluctuations and the seller can get a guaranteed price for his product at a specified date. Forward contracts are traded over the counter, while futures contracts are traded on the commodity derivatives exchanges. Forward contracts can be privately negotiated. Futures contract have a standardized way of execution and the transaction is guaranteed by the clearing house of a recognized commodity derivative exchange which minimizes the risk of defaults on the settlement of transaction. 34 | P a g e Financial Education Booklet For example, if A has the machinery that produces 10 bales of cotton, he can secure an agreement with B to sell the bales at a certain price after a year irrespective of the price that is trending. This is called hedging the risk. "A" hedges the risk by securing the price and "B" transacts by pre-booking the price expecting that prices would go up in the near future which would benefit him. The payment and delivery of the asset is made on the future date termed as the delivery date. The buyer in the futures contract is known to hold a long position. The seller in the futures contracts is said to be having short position. An options contract refers to the financial instrument which gives the buyer of the option the right but not the obligation to exercise the option at a predetermined date at a predetermined price. Options contracts are of two types as explained below:  Call Option: Call option gives one the right to buy the underlying security  Put Option: Put option gives one the right to sell the underlying security Investors are charged a premium when they buy an options contract. On expiry of the contract, generally the transaction is cash settled instead of actually buying/selling the underlying security unlike in the cash market. Hence, many investors find Futures & Options (F&O) cheaper to trade, however, it is riskier than the cash segment because F&O is time dependent and you cannot hold on to the contract till the desired time i.e. when the market is favourable to earn positive returns. On the expiry of the contract, even if you cash settle the contract instead of taking delivery, the change in value of the underlying will be either credited or debited to your account. How does a farmer do trading in Commodity Derivatives Market?  To deal with the legal/ logistics/ quality requirements of Derivatives Markets farmers would have to form a society/ trust/ Farmers Producing Organization (FPO), etc.  Collectively they would have to deposit their produce in the warehouse of the Exchange.  Quality of the produce for the purpose of standardization to be assayed (checked / tested) by Exchange recognized assayers.  Exchange would issue a warehouse receipt (Loans can be obtained from banks against these receipts). Exchanges assume responsibility for maintaining the quality of the product for a certain period of time.  The depositors now have time to check the prices (on the exchange) at which they can profitably sell the produce.  When the desired price is likely to be realized, the bid is placed at the exchange. Once the order matches with the purchaser's bid, the trade is concluded.  Farmers have to give delivery on the Exchange platform.  Funds are given to the farmers upon satisfactory delivery of the commodity. 35 | P a g e Financial Education Booklet Do's and Don'ts for investing / trading in securities market Do's  Always consult a SEBI registered Investment Advisor for your investment needs in securities market.  Invest in a scheme/product depending upon your investment objective and risk appetite.  Insist on a valid contract note/ confirmation memo for trades done within 24 hours of the transaction. Keep track of your portfolio in your Demat account on a regular basis.  Read all the documents carefully before signing them.  You should carefully note all the charges/ fees/ brokerage that are applicable on your accounts and keep a record of the same.  Keep a record of documents signed, account statements, contract notes received and payments made.  Periodically review your financial needs / goals and review the portfolio to ensure that the same are possible to achieve.  Always pay for your transactions using banking channel, i.e. no dealing in cash.  Always keep your information updated. Inform your stock broker / DP whenever there is change in your address or bank details or email ID or mobile number. Since SIM cards now have the feature of getting ported to different service providers, investors may keep same mobile numbers attached with their respective accounts. (Mobile number is the key to all important transactions.)  Avail nomination facility for all your investments. Multiple nominations are allowed in Demat accounts.  Examine and review your trading account periodically.  Regularly check daily SMS and email from Exchange regarding trades done on that day.  Regularly check Monthly SMS and email from Exchange regarding funds and securities balances of the investors maintained with the Trading Member. Don'ts  Don't borrow money for investment.  Don't deal with unregistered brokers/ other unregistered intermediaries.  Don't pay more than the agreed brokerage/charges to the intermediary.  Don't execute any document with any intermediary without fully understanding its terms and conditions.  Don't sign any blank form or Delivery Instruction Slips.  Don't issue general Power of Attorney (PoA) in favour of the Stock Broker/Depository Participant. Exercise due diligence by issuing a very specific one, if you want to issue a PoA.  In case of disputes, file written complaint to intermediary/Stock Exchange/SEBI within a reasonable time.  Dabba Trading is illegal. Even if it appears that you are saving on costs, do not indulge in Dabba Trading as it offers no benefits of safe and guaranteed trades done on Stock 36 | P a g e Financial Education Booklet Exchanges. Dabba trading is essentially informal trading using cash that takes place directly among traders, who bet on stock price fluctuations.  Do not rely on making your investment decisions on hot tips as a person who wants to offload securities which may not be marketable may be indulging in it. Disseminating hot tips is also an illegal activity which should be reported to SEBI.  Never share your password for online account with anyone. Do change the passwords frequently.  Don't fall prey to Ponzi schemes, unregistered chit funds, unregistered collective investment or unregistered deposit schemes.  Don't forget to strike off blank spaces in your KYC documents.  Don't opt for digital contracts, if you're not familiar with computers. Grievance Redressal For redressal of any grievance regarding securities market, please refer to Chapter 12 of this booklet. 37 | P a g e Financial Education Booklet Chapter 6 - Insurance Related Products Insurance Insurance allows individuals, businesses and other entities to protect themselves against significant potential losses and financial hardship at a reasonably affordable cost. Insurance is a form of risk management, primarily used to manage the risk of an uncertain future loss. Thus, insurance is a promise of compensation for specific potential future losses in exchange for a periodic payment called premium. An entity which provides insurance is known as the insurer. A person who buys insurance is known as an insured or the policy holder. The insured receives a contract called the insurance policy which contains details like the conditions and circumstances under which the insured will be financially compensated along with other details related to the insurance policy. The insurance policies are generally classified into the following: Scheme and Key Features Life Insurance - Term Insurance - In event of your unfortunate demise during the policy term, your nominees will receive the “Sum Assured” which you had selected while purchasing the plan. - Active for a fixed period of time (popularly referred to as the "term of the policy"). Life Insurance - Endowment Insurance - A life insurance contract designed to pay a lump sum amount after a specific term (on the maturity of the policy) or on death of the policy holder (insured). - Typical maturities of insurance policies are ten, fifteen or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness. Life Insurance - Whole Life - Type of life insurance policy which stays active as long as you pay the premiums. Life Insurance – Unit Linked insurance - Combination of insurance and an investment vehicle. - A portion of the premium paid by the policyholder is utilized to provide insurance coverage to the policyholder and the remaining portion invested in equity and debt instruments. Personal Accidental cover policy - Insurance plan which provides monetary compensation in the event of bodily injuries or disability or death caused solely by accident. Motor Insurance - Insurance for cars, trucks, motorcycles and other road vehicles. - Also called as vehicle insurance, car insurance or auto insurance. 38 | P a g e Financial Education Booklet Health Insurance - Insurance coverage that covers the cost of an insured individual's medical and surgical expenses. - The "insured" is the owner of the health insurance policy or the person with the health insurance coverage. Travel Insurance - Insurance for covering against travel risks such as lost or stolen luggage, cancellation cover (if you are not able to travel due to unexpected medical reasons) and most importantly, unexpected medical costs abroad. - Comprehensive travel insurance policy will provide:  Emergency medical cover  Losses incurred due to unforeseen cancellations or having to cut your trip short  Death and disability cover  Personal liability cover  Luggage cover Property Insurance - Policy that provides financial reimbursement to the owner or renter of a structure and its contents in the event of damage or theft. - Property insurance can include homeowner’s insurance, renters insurance, flood insurance and earthquake insurance. Group Insurance - Insurance policy that covers a defined group of people, for example the members of a society or professional association or the employees of a particular employer. Role of IRDAI (Insurance Regulatory and Development Authority of India) Insurance Regulatory and Development Authority of India regulates the insurance sector in India. It aims to protect the interests of the insurance policy holders and ensures systematic growth of the insurance industry. Grievance Redressal For redressal of any grievance regarding insurance sector, please refer to Chapter 12 of this booklet. 39 | P a g e Financial Education Booklet Chapter 7 - Pension, Retirement and Estate Planning Pension Services Pension may be described as a regular payment which one aspires to receive regularly, once the person retires from his regular occupation/ job or attain a certain age from which he/ she does not want to work. Pension plans provide financial security and stability during old age when people don't have a regular source of income. Retirement planning ensures that people live with pride and without compromising on their standard of living, during later part of their life. Pension schemes give an opportunity to invest and accumulate savings and get lump sum amount as regular income through annuity plan on retirement. Being a Pensioner  No need to open separate account for pension.  Existing account can be used for receiving pension.  Pension account can be transferred to another branch or different bank.  Do remember to submit your ‘Life Certificate’ to your bank branch in November, every year  “Jeevan Pramaan'’ – Digital Life Certificate using Aadhaar and mobile at: www.jeevanpramaan.gov.in. Bank operations for Old/Sick/Incapacitated Persons If you are unwell, old or physically challenged, you can withdraw money using your thumb impression, in the presence of two independent witnesses 1 known to the bank. In the event you cannot even put your thumb impression and also would not be able to be physically present in the bank, a mark can be obtained on the cheque/withdrawal form which should be identified by two independent 2 witnesses. The bank may also ask you to indicate who would withdraw the amount from the bank on the basis of cheque/withdrawal form as obtained above 3 and that person should be identified by two independent witnesses. 40 | P a g e Financial Education Booklet National Pension System (NPS) NPS aims to institute pension reforms and to inculcate the habit of saving for retirement amongst the citizens. With effect from 1st May, 2009, NPS has been provided for all citizens of the country including the unorganized sector workers on voluntary basis. The subscriber will be allotted a unique Permanent Retirement Account Number (PRAN). This unique account number will remain the same for the rest of the subscriber's life. This unique PRAN can be used from any location in India. NPS is a government approved pension scheme for Indian citizens in the 18-60 age groups. PRAN will provide access to two personal accounts - Tier I and Tier Il with features as mentioned below: Tier I (Mandatory Retirement Tier Il (Voluntary Saving Particulars account) Account) Anyone with an active Tier I Eligibility All citizens of India Account Bank Account Not mandatory Mandatory Certain portion is allowed to be Subscriber is free to withdraw Liquidity withdrawn from pension account savings from this account subject to prescribed conditions. whenever the subscriber wants to. Funds can be transferred from Tier Fund Transfer Not possible Il to Tier I account Investments in this account are Investments in this account aren't Tax Benefit eligible for tax benefits eligible for tax benefits Investment Options under the NPS The subscribers to the NPS choose the investment options in which their contributions have to be invested. Following options are offered by the NPS: E (Equity): High Return, High Risk option- Fund invests predominantly in equity- oriented investments. C (Corporate Bonds): Medium Return, Medium Risk option- Fund invests predominantly in fixed income bearing securities other than government securities. G (Government Securities): Low Return, Low Risk option- Fund invests predominantly in pure low risk government fixed income securities. A (Alternative Investments): High risk and High return option- Fund invests in Alternative Investment Schemes including instruments like CMBS (Commercial Mortgage-Backed Securities), MBS (Mortgage Backed Security), REITs (Real Estate Investment Trusts), AlFs (Alternative Investment Funds), InvITs (Infrastructure Investment Trusts), etc. This asset class is not available for investment of contribution made under Tier Il account. 41 | P a g e Financial Education Booklet Active Choice Option - Subscriber can choose the proportion of their funds that may be invested in each of the investment option. This is called the Active Choice. The only restriction is that the proportion invested in asset class E cannot exceed 75 percent and that in asset class A is restricted to 5 percent. Auto Choice Option - Under this choice the subscriber's contribution will be invested in the lifecycle fund. The lifecycle fund is a dynamic allocation of the subscriber's wealth to the different asset classes in a defined proportion determined by the age of the subscriber, with the exposure to equity decreasing and that to the safer corporate bonds and government securities increasing with the age of the subscriber. Exit from NPS Role of PFRDA in Pension Segment Pension Fund Regulatory and Development Authority (PFRDA) is a statutory regulatory body established by an Act of Parliament of India with the charter to promote, develop and regulate pension sector in India. Retirement Planning The transition into retirement is a very unique and dramatic step in life. Yet, the transition into retirement is rarely given the planning or thought it deserves. Everyone wants to lead a comfortable retirement life. Without adequate planning it probably won't happen. Key Features of Retirement Planning  Start early and retire with financial security: If you start saving for retirement at age 25, so that you wish to retire by 60, you can invest over 35 years.  Plan wisely: Set aside some money for medical expenditure and emergency needs after retirement. Allocate your savings towards important financial goals such as children's education and marriage.  Track and review your plan: The financial plan has to be reviewed at regular intervals to make sure that the plan meets its objectives. Also, you need to 42 | P a g e Financial Education Booklet understand and get comfortable with the risks, costs and liquidity of your investments.  Don't dip into your retirement savings: Don't touch this pool of savings pre— retirement. If you spend money from your retirement kitty to fulfil your present needs, you will lose out big in the long run. The corpus for your retirement will be inadequate. Estate Planning Estate planning refers to planning during one's lifetime, earmarking one's assets to beneficiaries, typically family members, loved ones and institutions, so that they can be used/ claimed after one's demise with ease, and without any significant cost. Making a "Will" is an essential part of estate planning. Following are the constituents of estate planning: Will It is a written legal declaration of desires to distribute assets of the deceased after his or her demise. This way one can transfer assets to loved ones, according to his or her preferences. By making a Will, one can avoid any feud among beneficiaries over distribution of assets. Making a Will is a simple process. How to make a Will?  Make a list of movable and immovable items.  Decide which asset shall be given to whom (partially of fully).  Mention the name and details of the person who will execute the Will.  Preferably, get the Will witnessed by a doctor and lawyer as it gives authenticity to the Will.  Registration of Will is not compulsory, but preferable.  You may write the Will on plain paper or take the help of your lawyer in making a Will. Problems Arising in the Absence of a Will  Beneficiaries of the distribution of assets and the quantum of benefits to them don’t happen in the way you would have liked.  Asset distribution happens as per personal laws/relationships.  May lead to expensive litigation among beneficiaries and other claimants.  Succession disputes could take years to resolve and can be costly. Even in the absence of disputes, the resolution process can be costly and reduce the benefits of the assets inherited. Nomination A nominee is a person who receives the right to have custody of the money on the death of the account holder. A nominee is only a custodian of the asset owner's money and 43 | P a g e Financial Education Booklet doesn't have any ownership rights. In the absence of nomination, it could be expensive and time consuming for the legal heirs of the deceased to get their money. Is nomination mandatory in case of a Demat account as well? It is not mandatory but advisable; nomination alleviates the problems faced by legal heirs in case of death of account holder. One should always remember to fill in the nomination details while opening any account. For example, Suresh invests in an FD and nominates his friend, Ramesh as his nominee of his bank FD. On Suresh's death, Ramesh receives the money as his nominee. Ramesh needs to subsequently transfer the entire amount to Suresh's legal heirs; otherwise his heirs will need to claim the amount in the court of Law. Power of Attorney Power of attorney is a legal document that allows another person to act on your behalf. It ensures that important matters are dealt with by someone you trust if you are unable to deal with them yourself. If you aren't able to personally accomplish a task, you may grant someone else — the power to do it for you. This permission can include things like accessing your bank accounts, selling a vehicle, purchasing property or getting a home loan. In fact, your power of attorney can grant your agent the authority to conduct nearly any type of Transaction you could conduct on your behalf. The person who grants power of attorney to an agent is called the principal, and the principal may use either a general power of attorney or special power of attorney to give power to his or her agent. (Agent means many people to whom the power is given by the principal to act on the behalf of the principal). A general power of attorney gives the agent power to ac

SEBI Investor Certification Examination - Financial Education Booklet PDF

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