1

FINANCIAL
MARKET
(BEGINNER
MODULE)

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 CONTENTS

1. Basics For Financial Literacy............................................................04

2. INVESTMENT BASICS...................................................................16
3. SECURITIES MARKETS ................................................................24
4. DEPOSITORIES................................................................................43
5. ISSUE OF SECURITIES..................................................................50
6. MUTUAL FUNDS.............................................................................58
7. BANKING..........................................................................................62
8. TAX PLANNING...............................................................................71
9. INSURANCE......................................................................................85
3
3
10.INTERESTS.......................................................................................89
 Basics For
Chapter - 1 Financial Literacy
Financial Literacy An overview.

4
 Financial literacy refers to the ability
to understand and application of
different financial skills effectively,
including personal financial
management, budgeting, and saving.
Financial literacy makes us become
self-Reliant, so that financial
stability can be achieved.
1.1)What Is Financial
Literacy?

Financial literacy helps to reach

Financial Independence which can
be achieved with the knowledge and
skill in Tax Planning, Banking,
Investments, etc.

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 FINANCIAL LITERACY

FINANCIAL MAKING ENDS MANAGING

KNOWLEDGE MEET FINANCIAL
PRODUCTS

FINANCIAL
6
CAPABILITY
 Budgeting: Budgeting is the process to create a plan on
1.2) spending and investing your earned money wisely to
achieve your personal and financial goals in life.
Fundamental
Components of
Financial Investment: Investment is primarily to obtain an
additional source of income or gain profit from the
Literacy: investment over a specific period of time.

Banking: Banking helps business through a variety of

services like providing long-term and short-term finance,
arranging remittance of money, collection of cheques and
bills etc., helping in raising of capital by acting as
underwriters etc.
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 Investment:
● Investment is primarily to obtain an additional source of income or gain profit from the investment over a
specific period of time.

Where To Invest? :
1) Stocks:
A stock (also known as “shares” or “equity”) is a type of investment that implies a part of ownership in
the issuing company. This entitles the stockholder to that proportion of the company’s assets and
profits. Essentially, it’s like owning a small part of the company. Owning stock gives you the right to
vote in shareholder meetings, receive dividends, if and when they are distributed, and transfer your
shares to somebody else. The price of a stock fluctuates throughout the day and can depend on many
factors, including the company’s day to day performance, the domestic economy, the international
economy, the day’s news, and more. Stocks can rise in value, fall in value, or even become worthless,
making them more volatile and potentially riskier than many other types of investments.
2) Mutual funds:
A mutual fund is a type of investment consisting of a portfolio of shares, bonds, or other securities.
Mutual funds give small or individual investors access to diversified portfolio, generally professionally
managed portfolios at a low commission. There are many categories of mutual funds, representing the 8

kinds of securities in which they invest, their investment objectives, and the desired return that they seek.
 SIP (SYSTEMATIC INVESTMENT PLANNING):

MEANING:

A SIP is a systematic approach to investing and involves investment of a small pre-determined amount of
money in the market at regular intervals (usually every month)
The SIP route is the preferred way of investing in stocks and Mutual Funds because it allows you to enter
in the market while managing risk better.

Compounding:

Saving a small amount of money regularly for long period of time can have an significant impact on your
investment because of the effect of compounding. The following examples show that:
‘A’ starts investing for his 65th birthday at the age of 45
Assuming returns of 10% and a monthly investment of Rs. 1000, his total corpus at the end of 20 years
will be Rs. 7,59,369.
‘B’ starts investing for his 65th birthday at the age of 25.
Assuming returns of 10% and an investment of Rs. 1000 per month, his total corpus at the end of 40 years
will be a staggering Rs. 63,24,080.. -- almost 5 times the corpus accumulated by A. 99
Regular investments spread over longer durations yield greater returns and profits.
 ADVANTAGES OF INVESTING IN SIP
Financial Discipline: The regularity of SIPs creates financial discipline. It encourages forced savings
and helps you build a corpus without sacrificing your lifestyle.

Flexibility: SIPs provide more flexibility in investing. You can increase or decrease the amount of
investment at any point time.
Convenience: SIPs are a trouble -free mode of investing. You can do it online with a one-day set of
instructions. You SIPs will automatically start getting accumulated and invested.

Lower risk: Lump sum investments may have more capital risk. A SIP diversify your investment over
time and reduces the risk to capital and will help you navigate volatility better.

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 Tax Planning
● Tax Planning means compliance with Taxation provisions wherein full Advantage is taken of all tax
deductions, rebates, exemptions as permissible in accordance to Income tax Act, 1961.Tax Planning
shall not be considered as Tax avoidance or Tax Evasion, it is a planning in such a way to attract
minimum tax liability.
● Objectives Of Tax Planning :
a) Reduction in liability of tax
b) litigation Minimization
c) Productive investment.
● Essentials of Tax Planning :
a) Upto date knowledge of tax laws
b) Disclosures and furnishing of information to IT department
c) Planning to be within the framework of law.

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 Personal Finance Management
● Personal finance management is the process of planning and managing personal financial activities such
as income generation, spending, saving, investing, and protection.
● Income Sources: a) Salaries b) Pension c) Dividend.
● Spending : a)Rent b)Mortgage c)Food d) Entertainment.
● Saving: a)Savings Account b) Fixed Deposit.
● Investing: a) Mutual Funds b) Stocks c) Real Estate. Protection: a) Health insurance b) Life Insurance.
● Protection: a) Health insurance b) Life Insurance

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 1.3)
Benefits of Financial literacy
● Better financial decisions. Effective
management of money.
● Reduced financial stress and anxiety
● Increase in ethical decision-making
● Reduction of expenses through better
regulation

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1.4)
The second part of financial literacy is using financial
knowledge to inform financial decisions.

● Financial literacy skill Include:

● Creating a budget.
● Calculating interest.
● Lowering costs by reducing “want” purchases.
● Evaluating loan terms.
● Doing taxes.
● Saving money.

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 COMPONENTS OF INDIAN
FINANCIAL SYSTEM

FINANCIAL
INSTITUTES FINANCIAL MARKETS

BANKING NON BANKING CAPITAL MARKET MONEY MARKET

COOPERATIVE
COMMERCIAL BANKS
BANKS

PUBLIC SECTOR
TREASURY BILLS
PRIVATE SECTOR PRIMARY MARKET
NBFCs COMMERCIAL PAPERS
FOREIGN BANKS SECONDARY MARKET
DERIVATIVE MARKET
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 INVESTMENT
Chapter - 2 BASICS

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 2.1) WHAT IS INVESTMENT?
● An investment is “something you spend money on that
you expect will fetch a financial return." While we will
focus on financial market investments like shares,
bonds,debentures, and investment funds, you could buy
many more types of investments with the expectation of
generating additional income.
How Do Investments Work?
● Investments are a significant part of the economy and of
personal finance. For individual investors, investments
can allow you to increase your wealth over different
periods. One of the most important parts of investments
is compounding. Compounding is an important term
for how your investments grow in value over time.

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 2.2) Types of Investments:

● While nearly anything of value can be an investment, these are some of the most common financial
market investments that all investors in the U.S. should know about
● Stocks:
When many people hear the word “investment,” the first thing that comes to mind is the stock market.
A share of stock is a small part of ownership in a company. If the company is profiting, its share price
will likely increase. Some companies also make cash payments to shareholders, called dividends.
● Bonds:
Bonds are a type of debt issued by governments and businesses. Bonds typically provide an interest
payment called a “coupon,” in addition to paying back the principal. Bonds are safe investments.
● Mutual Funds:
A mutual fund is a type of investment through which you can buy a part of a pool that owns many shares
bonds, or other investments. For example, if you buy shares of an HDFC index mutual fund, your
investment rupees are combined with the money of other investors to buy a portfolio of stocks that
mirrors the HDFC index. Mutual funds typically charge fees but give you diversified portfolio,
investment exposure to an index or a professionally managed portfolio.
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2.3) Alternatives to Common Investments:

● Options:
Options are a riskier type of alternative investment that is not
always suitable for everyone. Originally created to hedge existing
market risks in the underlying instruments that they are based on,
options can also be used to speculate or take multi directional
positions. Options essentially give you a contract that allows you
to purchase (or sell) a specific investment at a specific price on a
specific date in the future. Options prices can be highly volatile, so
they are best practiced by experienced investors who understand
the knowledge of options contracts.
● Futures:
Futures are similar to options in that they are focused on a
specific asset price on a specific future date. But unlike options,
futures contracts require the owner to exercise, meaning buy or
sell, based on the agreement. This makes them even riskier than
options and appropriate only for expert traders.
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● Commodities:

Commodities are an asset you can own, like a share. However, instead of representing a share of
ownership in a business, they represent a physical commodity, like corn, gold, cattle, or coffee. Many
investors trade commodities through options and futures, as explained above. These assets are often
highly volatile and bring a risk that’s not appropriate for most individual investors.

● Foreign Exchange (Forex):

Foreign exchange, or forex,, is an investment in another country’s currency. For example, you could
trade in U.S. Dollars for Rupees, Japanese yen, British pounds, or other major world currencies.
Forex is considered a volatile and risky market place for many investors.

● Cryptocurrencies:

Bitcoin, Ethereum, and Litecoin are examples of cryptocurrencies. These are digital currencies not
backed by any government or business. They only derive value from the community that operates them.
Cryptocurrencies are only loosely regulated, if at all, and are very high-risk.

● Other Investment Alternatives:

While cryptocurrencies, commodities, and forex don’t belong in the typical long-term investor
portfolio, there are some investment alternatives that may make be fruitful depending on your goals. 20
Those may include real estate, peer-to-peer lending, and other assets outside of major investment
markets.
2.4) SHORT TERM INVESTMENT v/s LONG TERM INVESTMENT
BASIS SHORT TERM INVESTMENT LONG TERM INVESTMENT

MEANING INVESTMENTS HELD FOR INVESTMENTS HELD FOR

SHORT DURATION LONG DURATION

TIME PERIOD SHORTER PERIOD TIME LONGER PERIOD TIME

MARKET RISK LOW TO MODERATE HIGH RISK

LIQUIDITY HIGH DEGREE OF USUALLY NOT LIQUID

LIQUIDITY

LOSS COVERAGE DON’T PROVIDE ENOUGH PROVIDES OPPORTUNITY

TIME TO COVER LOSS IN TO WAIT FOR CORRECT
CASE INVESTMENT GOES TIME TO SELL AND MAKE
NEGATIVE PROFITS

RATE OF RETURN LOWER RATE OF RETURN HIGHER RATE OF RETURN

INVESTORS ACTIVE INVESTORS PASSIVE INVESTORS

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 INVESTMENT FLOW CHART:

INVESTMENT

GUARANTEED DIVERSIFIED EQUITY SECTORAL EQUITY

NON GUARANTEED
RETURN INVESTMENT FUND FUND
RETURN INVESTMENT

POST OFFICE SCHEME MUTUAL FUND STOCK MARKET

EQUITY
SCHEME INVESTMENT

PPF
GOLD INVESTMENT PHYSICAL FORM

FIXED DEPOSIT
REAL ESTATE
INVESTMENT 22
 Features and importance of investing :
2.5) FEATURES OF INVESTING:
● Capital Appreciation
● Expectation of Return
● Marketability
● Legality

2.6) IMPORTANCE OF INVESTING:

● Generates Income
● Wealth Creation
● Tax Benefits
● Economic Development
● Meet Financial Goals
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 SECURITIES
Chapter - 3 MARKETS

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 3.1) SEBI- Securities Exchange Board Of India
● SEBI is a statutory regulatory body established on the 12th of April, 1992. It monitors and regulates the
Indian capital and securities market while ensuring to protect the interests of the investors, formulating
regulations and guidelines. The head office of SEBI is at Bandra Kurla Complex, Mumbai.

● Functions of SEBI:

● SEBI is primarily set up to protect the interests of investors in the securities market.
● It promotes the development of the securities market and regulates the business.
● SEBI provides a platform for stockbrokers, sub-brokers, portfolio managers, investment advisers,
share transfer agents, bankers, merchant bankers, trustees of trust deeds, registrars,
underwriters, and other associated people to register and regulate work.
● It regulates the operations of depositories, participants, custodians of securities, foreign portfolio
investors, and credit rating agencies.
● It prohibits insider trading, i.e. fraudulent and unfair trade practices related to the securities market.
● It ensures that investors are educated on the intermediaries of securities markets.
● It monitors substantial acquisitions of shares and take-over of companies. SEBI takes care of research
and development to ensure the securities market is efficient at all times.
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 3.2) FUNCTIONS OF SEBI:

1) REGISTRATION AND REGULATION OF SECURITIES MARKET.

2) REGULATION OF SELF-REGULATING ORGANIZATIONS

3) POWER TO PROHIBIT FRAUDULENT ACTIVITIES IN SECURITIES MARKET

4) PROHIBITING INSIDER TRADING IN SECURITIES MARKET

5) REGULATING TAKEOVERS AND SUBSTANTIAL ACQUISITION OF SHARES

6) PROHIBITING UNFAIR TRADE PRACTICES IN SECURITIES MARKET

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 3.3) What is stock exchange?

● A stock exchange, securities exchange, or bourse, is an exchange where stockbrokers and traders can buy and
sell securities, such as shares of stock, bonds and other financial instruments.
● Stock exchanges may also provide facilities for the issue and redemption of such securities and instruments
and capital events including the payment of income and dividends Securities traded on a stock exchange
include stock issued by listed companies, unit trusts, derivatives, pooled investment products and bonds.
● Stock exchanges often function as “continuous auction” markets with buyers and sellers consummating
transactions via open outcry at a central location such as the floor of the exchange or by using an electronic
trading platform. To be able to trade a security on a certain stock exchange, the security must be listed there.
● Usually, there is a central location at least for record keeping, but trade is increasingly less linked to a
physical place, as modern markets use electronic communication networks, which give them advantages of
increased speed and reduced cost of transactions.
● Trade on an exchange is restricted to brokers who are members of the exchange.
● Initial public offerings of stocks and bonds to investors is done in the primary market and subsequent trading
is done in the secondary market.
● A stock exchange is often the most important component of a stock market. Supply and demand in stock
markets are driven by various factors that, as in all free markets, affect the price of stocks..There is usually no
obligation for stock to be issued through the stock exchange itself, nor must stock be subsequently traded on an
exchange. Such trading may be off exchange or over-the-counter. This is the usual way that derivatives and
bonds are traded. Increasingly, stock exchanges are part of a global securities market. 27
● Stock exchanges also serve an economic function in providing liquidity to shareholders in providing an
efficient means of disposing of shares.
 3.4) Functions of Stock Exchange:
Following are some of the most important functions that are performed by stock exchange:
1. Role of an Economic Barometer: Stock exchange serves as an economic barometer that is indicative of the
state of the economy. It records all the major and minor changes in the share prices. It is rightly said to be the
pulse of the economy, which reflects the state of the economy.
2. Valuation of Securities: Stock market helps in the valuation of securities based on the factors of supply and
demand. The securities offered by companies that are profitable and growth-oriented tend to be valued higher.
Valuation of securities helps creditors, investors and government in performing their respective functions.
3. Transactional Safety: Transactional safety is ensured as the securities that are traded in the stock exchange are
listed, and the listing of securities is done after verifying the company’s position. All companies listed have to
adhere to the rules and regulations as laid out by the governing body.
4. Making the public aware of equity investment: Stock exchange helps in providing information about
investing in equity markets and by rolling out new issues to encourage people to invest in securities.
5. Offers scope for speculation: By permitting healthy speculation of the traded securities, the stock exchange
ensures demand and supply of securities and liquidity.
6. Better Capital Allocation: Profit-making companies will have their shares traded actively, and so such
companies are able to raise fresh capital from the equity market. Stock market helps in better allocation of
capital for the investors so that maximum profit can be earned.
7. Encourages investment and savings: Stock market serves as an important source of investment in various
securities which offer greater returns. Investing in the stock market makes for a better investment option than 28

gold and silver.

 3.5) NATIONAL STOCK EXCHANGE (NSE)

INTRODUCTION:

The National Stock Exchange of India Limited (NSE) is India's largest financial market and the fourth
largest market by trading volume.
The National Stock Exchange of India Limited was the first exchange in India to provide modern, fully
automated electronic trading.

NSE Functions:
● To establish a trading facility for debt, equity, and other asset classes accessible to investors across
the nation.
● To act as a communication network providing investors an equal opportunity to participate in the
trading system.
● To meet the global standards set for financial exchange markets.
● To provide a shorter trade settlement period and enable the book-entry settlement system.
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 3.6) HOW TO BUY AND SELL IN STOCK MARKETS

● Indian Stock Market Overview: The Bombay Stock Exchange (BSE) and the National Stock
Exchange of India Ltd (NSE) are the two primary exchanges in India.
● In addition, there are 22 Regional Stock Exchanges. However, the BSE and NSE have established
themselves as the two leading exchanges and account for about 80 percent of the equity volume traded
in India.
● Most key stocks are traded on both the exchanges and hence the investor could buy them on either
exchange.The primary index of BSE is BSE Sensex comprising 30 stocks. NSE has the S&P NSE 50
Index (Nifty) which consists of 50 stocks.
● The BSE Sensex is the older and more widely followed index.
● Both these indices are calculated on the basis of market capitalization and contain the heavily traded
shares from key sectors.Both the exchanges have switched over from the open outcry trading system to a
fully automated computerized mode of trading known as BOLT (BSE On Line Trading) and
NEAT (National Exchange Automated Trading) System.
● It facilitates more efficient processing, automatic order matching, faster execution of trades and
transparency.
● The key regulator governing Stock Exchanges, Brokers, Depositories, Depository participants, Mutual
Funds,FIIs and other participants in Indian secondary and primary market is the Securities and
Exchange Board of India (SEBI) Ltd. 30
 PRIMARY MARKET

ISSUER SECURITIES INVESTOR

● An initial public offering, or IPO, is an example of a primary market.

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 3.7) Primary Market

● Whenever an issuing company desires to raise funds for investment or for discharging some obligation ,
the issuer company makes a sale of new securities in the primary market. Also, the trading of such
previously issued securities are made in the secondary market.

● A primary market is a place where the company's resources are mobilised by issuance of a new securities.
The company maybe desirous to raise such funds for expansion modernisation or upgradation of an
existing projector for a new project.

● The IPO process of primary market is vital for the economy of the country. This provides the flow of
capital from the investors to the entrepreneurs for productive projects.

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Examples of popular secondary markets are the National Stock Exchange (NSE), the New
York Stock Exchange (NYSE), the NASDAQ, and the London Stock Exchange (LSE).

SECONDARY MARKET

SECURITIES INVESTOR A SECURITIES

INVESTOR B SECURITIES INVESTOR C

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 3.8) Secondary Market
● Whenever the investors need to adjust their holdings due to the variations in, assessment of risk and
return for the securities they hold it can be enabled by the secondary market. Also, whenever the
investors have liquidity needs they can sell these securities in the secondary market for cash. All the
information regarding the issuers business such as associated risk the market price signals the same
in the secondary market.

● For the trade of securities, the investors have a platform called as stock exchange
essentially comprised in the secondary market. The brokers access the trading platform of stock
exchange and such trading gets confirmed through the stock exchanges.

● The nerve centre of the capital market is the stock market due to the reasons such as granting free
marketability and negotiability which reflects the economic trend and investor's apprehensions.

● The secondary market is divided into two main components, first , spot market where the securities
are bought and sold immediately with a delivery and payment. Other is futures market where
securities are bought and sold for future delivery and payment. Another component, where securities
are traded for a conditional future delivery is called as the options market. There are two types of
namely, put option and call option.
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 BOUGHT/SOLD
ISSUES FIRST TIME
ORIGINAL ISSUER STOCKS INVESTOR

SALE
PURCHASE OR
FURTHER
LIST STOCK FOR
PRIMARY MARKET

FURTHER
BUY/SELL
STOCKS
INVESTORS STOCK EXCHANGE

35
35
SECONDARY MARKET
● 3.9)Securities Market
The Securities Market, refers to the market for those
financial instruments/claims/obligations that are commonly
and readily transferable by sale. The Securities Market has
two inter-dependent and inseparable segments, the new
issues (primary) market and the stock (secondary) market.

● 3.10)FUNCTIONS OF SECURITIES MARKET:

Securities Market –
1)Is a link between & savings.
2) Mobilises & channelises savings
3) Provides Liquidity to investors
4) Is a marketplace for purchases and sale of securities

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 3.11)Participants in the Securities Markets:

1.Stock Exchange
2.Issuer
3.Underwriter
4.Commercial Bank
5.Investment Company
6.Dealer
7.Speculator
8.Broker-dealer (B/D)
9.Investor
10.Commission Broker
11.Floor Broker
12.Registered Trader
13.Specialist

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 1. ROLE OF STOCK EXCHANGE:

SEBI

STOCK
EXCHANGE

NATIONAL REGIONAL
EXCHANGE EXCHANGE

21 OTHER
BSE NSE REGIONAL
EXCHANGES

38
 2) ROLE OF ISSUER:
An issuer is said to be a legal entity that develops, registers, and sells securities to raise funds
for its operations. Issuers can be corporations, investment trusts, or domestic/foreign
governments.

3) ROLE OF MERCHANT BANKER:

ASSISTING CLIENTS IN FUNDRAISING

COORDINATING WITH ALL COMPANIES WHO ARE PART OF TRANSACTION IN IPO

ASSISTING MANAGEMENT OF COMPANIES FOR THEIR IPO,FPO,RIGHT ISSUE AND FUND RAISING
ACTIVITIES.

HANDLING COMPANIES PUBLIC ISSUE

MANAGING PORTFOLIO OF CLIENTS

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5) Role of Brokers:
The role of a stock broker is to facilitate the buying and selling of stocks at the stock markets, on
behalf of investors.

4) Role of investment company:

While investment banks facilitate the issue of bonds and shares in the primary market, they
accelerate the sales and trading of issued debts and equities between buyers and sellers in the
secondary market.
STOCK
STOCK
BROKER
BROKER
TRANSMITS
TRANSMITS 1.
SELL ORDER
BUY ORDER TO STOCK
1. 2. 2. TO STOCK
STOCK EXCHANGE
EXCHANGE
EXCHANGE EXECUTES INVESTOR
INVESTOR ORDER AND PLACES
PLACES SENDS 4. SELL ORDER
BUY CONFIRMATI STOCK
STOCK ON TO BROKER
ORDER
BROKER 3. STOCK 3. SENDS
4.
SENDS ORDER BROKER ORDER
CONFIRMATION CONFIRMATI
40
TO INVESTOR ON TO
INVESTOR
6) ROLE OF UNDERWRITER:

In the securities market, underwriting involves determining the risk and price of a particular
security. It is a process seen most commonly during initial public offerings, wherein investment
banks first buy or underwrite the securities of the issuing entity and then sell them in the market.

UNDERWRITERS GUARANTEE:

The underwriter usually provides a guarantee to the firm to sell a specific quantity of stock during the
IPO process. Should the underwriter fail to convince prospective investors to buy this many shares, it
must buy the surplus itself.

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 MAIN PARTICIPANTS IN
CAPITAL MARKET INVESTMENT
INVESTORS: MANAGERS:
PENSION FUNDS, ASSET MANAGERS,
INVESTMENT FIRMS, WEALTH
INDIVIDUALS. MANAGERS,HEDGE
FUNDS.

INVESTMENT
BANKS:
BANKS, INVESTMENT
BANKS, BROKERS

ISSUERS: INFRASTRUCTURE:
USERS OF CAPITAL STOCK EXCHANGE,
MARKET INCLUDES ECOSYSTEM
COMPANIES,BANKS, AROUND CAPITAL
GOVERNMENTS MARKETS(LAWYERS
,CONSULTANTS) 42
 DEPOSITORIES
Chapter - 4

43
 4.1) Depositories

● Just like a central bank a depository is an organization where the securities are held in an electronic
form of a shareholder through the medium of depository participant at a request of shareholder.
● The investor shall open an account through the depository participant with the depository to utilise
the services offered by the depository. There are two depositories functioning in India, namely National
Securities Depository limited(NSDL) and Central Depository Services limited (CDSL).
● The depositories provides various services in the capital market such as stock exchange,
banks, clearing members, etc. To the investors and other participants in accordance to the provisions of
depositories act.
● The basic facilities of account opening , dematerialisation are also included.
● The securities shall be dematerialised and in fungible form which are held by the depository.
● The investor must open an account through depository participant with the depository just like opening
an account with any bank in order to utilise the services of such bank's branch.

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● 4.2) Depository Participant:
In order to avail, depository services for the investors depository
participants plays an important market intermediary role.
DP provides financial services banks, brokers, financial
institutions in accordance to the SEBI regulations.
To reach a wide cross section of investors spread across a large
geographically area a depository gets help from the existing
distribution channel(mainly consisting of DPs).

● 4.3) WHAT IS DEMATERIALIZATION?

Demat is the short form of dematerialization.

Dematerialization is a process of converting of physical
certificates of the investor into the electronic form maintained by
the Depository Participant.
However, dematerialization can only be done on the share
certificates of the investors held in their name and in the list of
securities admitted for dematerialization. 45
 4.4)Procedure of Opening a Demat account:

Step 1: You have to select Depository Participant (DP)

Step 2: Fill out and submit the Demat Account Opening Form.
Step 3: Comply with KYC (Know Your Customer) requirements.
Step 4: Complete the Verification Procedure.
Step 5: Sign Copies of the Agreement.
Step 6: Get Your BENEFICIARY OWNER ID Number after the above processes are done.

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 DP DEPOSITARY
6) STATUS INTIMATION

1)
DRF 4) DEMAT
+ REQUEST 5)
CERTIFICATE CONFIRMATION/
REJECTION

ISSUER/RTA

CLIENT
7) STATEMENT OF ACCOUNT

DRF- DEMATERIALISATION REQUEST FORM.

DRN - DEMAT REQUEST NUMBER

47
DEMATERIALIZATION PROCESS
 4.6) BENEFITS OF DEPOSITORY SYSTEM:

In order to get rid of dangers related to handling of papers the depository system was introduced.
The transfer of securities in the depository system takes place by the electronic means.

● The system provides numerous direct and indirect benefits, like:

1. Elimination of bad deliveries

2. Elimination of all risks associated with physical certificates
3. Immediate transfer and registration of securities
4. Faster disbursement of non cash corporate benefits like rights, bonus, etc.
5. Elimination of problems related to change of address of investor, transmission, etc.
6. Elimination of problems related to selling securities on behalf of a minor

48
 INDIAN COMPANY DESIROUS OF RAISING FUNDS

DOMESTIC SOURCES FOREIGN SOURCES

PREFERENTIAL
PUBIC ISSUE RIGHT ISSUE ADR/GDR ECB FCCB
ISSUE

IPO FPO
49
 ISSUE OF
Chapter - 5 SECURITIES

50
● 5.1) INTRODUCTION:

Generally, companies are started by their promoters privately. However, the fund from their capital
and the borrowings may not be as much sufficient for building up or smooth running of the business
for a long period of time, which is quite common when business wants to grow and expand.
At such times, the companies go to the public for their contribution in the form of investment against
the issue of equity shares.
The root to invite such investment from public is through a public issue, in other words an offer made
to the public to subscribe the share of a company against their investment is called a public issue.
● 5.2) MEANING OF EQUITY SHARES:

● Equity shares are the main source of finance of a firm. It is issued to the general public.
● Equity shareholders do not enjoy any preferential rights with regard to repayment of capital and
dividend.
● They are entitled to residual income of the company, but they enjoy the right to control the affairs
of the business and all the shareholders collectively are the owners of the company.

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● 5.3) FEATURES OF EQUITY SHARES:

1. They are permanent in nature.

2. Equity shareholders are the actual owners of the company and they bear the highest risk.
3. Equity shares are transferable, i.e. ownership of equity shares can be transferred with or without
consideration to other person.
4. Dividend payable to equity shareholders is an appropriation of profit.
5. Equity shareholders do not get fixed rate of dividend.
6. Equity shareholders have the right to control the affairs of the company.
7. The liability of equity shareholders is limited to the extent of their investment.

5.4) ADVANTAGES OF EQUITY SHARES:

Equity shares are amongst the most important sources of capital and have certain advantages which are
mentioned below:
i. Advantages to the Shareholders
(1) Equity shares are very liquid and can be easily sold in the capital market. (2) In case of high profit, they get
dividend at higher rate. (3) Equity shareholders have the right to control the management of the company. (4)
The equity shareholders get benefit in two ways, yearly dividend and appreciation in the value of their
investment.

Ii. Advantages to the Issuing Company: (1) They are a permanent source of capital and as such; do not involve 52
any repayment liability. (2) They do not have any obligation regarding payment of dividend.(3) Larger equity
capital base increases the creditworthiness of the company among the creditors and investors.
 PUBLIC ISSUE OF EQUITY SHARES:
● 5.5) Meaning:
When a company raises funds by selling or issuing its shares to the public through issue of offer
document/prospectus, it is called a public issue.
There are two forms of public issue:
1) Initial Public Offer (IPO): When a company makes a public issue for the first time, the public issue is
called as initial public offer (IPO).
2) Further public offer (FPO): When a company makes another public issue to raise capital, it is called
further public /follow-on offer (FPO).

● 5.6) INTERMEDIARIES IN IPO:

Many intermediaries are involved in connection with the public issue. Following are the intermediaries
who have to be registered with SEBI and must have valid certificate from SEBI to act as an
intermediaries:

● Merchant Bankers
● Registrar & Share Transfer Agents
● Bankers to the issue
● Underwriters
● Stock Brokers and sub-brokers 53
● Depositories
 5.7) Difference between face value and market value:
FOLLOWING ARE THE DIFFERENCES BETWEEN FACE VALUE AND MARKET VALUE:

FACE VALUE MARKET VALUE

1)Market conditions does not affect face value. 1)Fluctuates according to market conditions. Changes in
price can be because of changes in macroeconomic
indicators, government policies and international events.
2)Company decides the price. 2)Market value changes when trading starts and it is a
price at which the stocks are bought and sold in stock
exchange.
3)It is the nominal value of stocks at the time of 3)It is the current price of the stocks as quoted in stock
issuance. exchange.

4)It cannot be calculated as the face value is determined 4)Market value can be calculated by dividing the total
by the company. value of the company in the market with total number of
shares issued. 54
54
 PROSPECTUS

5.8) MEANING:
The prospectus is a legal document, which outlines the company's financial securities for sale to the
investors. According to the companies act 2013, there are four types of the prospectus, abridged
prospectus, deemed prospectus, red herring prospectus, and shelf prospectus.

5.9) REQUIREMENTS AS TO ISSUE OF PROSPECTUS OF A COMPANY:

There are some requirements that a company has to comply with before issuing it. Those are:-

● Material information should be disclosed.

● Prospectus must be dated.
● Company must file a duly signed copy of the prospectus to Registrar of companies(ROC) for its
registration.
● Company shall also file this with various agencies such as SEBI, Stock exchanges and other
agencies.
● SEBI examines the draft of Prospectus to ensure disclosures and compliances.
55
5.10) OBJECTIVES OF ISSUING THE PROSPECTUS:

● To inform the public that a new company has been formed.

● To maintain an authentic record of the terms and allotment on which the public have been
invited to buy its shares or debentures.
● To know the investment strategies and objective of the company
● To make the directors of the company accept responsibility for the statements in the prospectus.

56
5.11) PROMOTER:
DEFINITION:

“A promoter is the person conscious of the possibility of transforming an idea into a business capable of
yielding a profit; who brings together various persons concerned and who finally, superintendents the
various steps necessary to bring the new business into existence.”

5.12)Characteristics of a Promoter:
Following are characteristics or features of a promoter:

1. A promoter develops an idea for the setting-up a business.

2. He makes preliminary inspections and ensures about the future prospects of the business.

3. He brings together various persons who agree to associate with him and share the business
responsibilities.

4. He prepares various documents and incorporates the company.

5757

5. He raises the required capital.

 MUTUAL
Chapter - 6 FUNDS

58
6.1) MEANING:
A Mutual Fund is a company that brings toga there the savings of different
investors and invest the same in a diversified financial instruments or
securities. The investors enjoys capital appreciation and income in
proportion to the number of units owned by them. Therefore, mutual funds
can be considered as financial intermediary who gathers the sum from the
investors and invests the same in a market.

6.2) What is an NAV ?

NAV or Net Asset Value of the fund is the cumulative value of the assets
of the fund net of its liability. NAV per unit is simply the net value of the
assets divided by the number of the units outstanding. Buying and selling
into funds is done on the basis of NAV related prices.

NAV = Market value of fund’s investments + Receivables + Accrued

Income – Liabilities & accrued expenses
Number of outstanding units.

6.3) What is an Entry / Exit Load ?

The AMC may charge a fee during the time of buying or selling of the fund
known as Entry / Exit load.
This generally covers the one time processing fee charged by the AMC.
59
However, some mutual fund schemes may not have Entry / Exit load.
PASSED
POOL IN THEIR
BACK TO INVESTORS MONEY

MUTUAL
RETURNS FUND
FUNDS MANAGERS

SECURITIES INVEST IN
GENERATES SECURITIES

60
6.4) Redemption:
Selling under the open ended scheme is known as Redemption.

6.5) Switch:
Some mutual funds schemes allows the investor to change his
investment from one scheme to another scheme within that fund.
For such allowance the mutual fund may charge a switching fee.
Such allowance gives the investor an opportunity for transferring
of his investments to different schemes to meet their new needs
on investments and financial goals or changing scenarios during
their lifetime.

6.6) Dividend Reinvestment plan:

In this scheme, there is an added benefit to the investor for re-
investment of the dividend received this is called as Dividend
Reinvestment plan. In this plan the units held by the investor
would be increased as the dividend declared by the fund gets
reinvested on behalf of the investor.

61
 BANKING
Chapter - 7

62
 BANKING- AN OVERVIEW

7.1)Introduction:
Bank is a Financial Institution. Bank is one of the important aids to trade. Bank plays an important role
in the economic development of the country by providing financial services.
The primary functions of commercial banks include - Accepting deposits and lending funds.
Correspondence with banks is essential for every business organization.

7.2)Meaning and Definition:

A bank is a Financial Institution, in which those people, who have idle or surplus cash, deposits it in the
bank and those who require funds (Loan), borrow from banks.
Banks promote saving habit among the people and channelize these savings into profitable investments.
According to cairns Cross: “A bank is an institution which deals in money and credit. “

7.3)Functions of commercial Bank:

The commercial bank performs two types of Functions namely:
A) primary function 63

B)Secondary function
 FUNCTIONS OF
BANK

PRIMARY SECONDARY
FUNCTIONS FUNCTIONS

ACCEPT GRANTING AGENCY UTILITY

DEPOSITS ADVANCES FUNCTIONS FUNCTIONS

● SAVING ● OVERDRAFT ● TRANSFER OF ● DRAFTS

DEPOSITS ● CASH CREDIT FUNDS ● LOCKERS
● CURRENT ● LOANS ● COLLECTION OF ● UNDERWRITING
DEPOSITS ● DISCOUNTING CHEQUES
● RECURRING OF BILLS ● OTHER AGENCY
DEPOSITS 64
FUNCTIONS
● FIXED DEPOSITS
 A. Primary Function: The primary functions of a bank include - 1) Accepting Deposits 2) Lending
Money
1. Accepting Deposits: Accepting deposits from the public is the basic or primary function of
commercial bank. The bank pays interest on deposits at a lower rate and charges interest on loan at
a higher rate.
People, who have surplus funds & savings deposit the amount with banks in different types of deposits.

The bank accepts two types of deposits from the public:

● Demand Deposits: The deposits which are repayable on demand are called Demand Deposits.
The banks accepts the demand deposits in the following forms:

a. Savings Deposits: To encourage saving habit among people, bank allows depositors to open
savings A/c. There are certain restrictions on the frequency & the amount of withdrawals from
savings bank A/c. E – Statement is available on demand. Pass book is issued to the depositor.
b. Current Deposits; This account is normally opened by business man, firms or companies. There
is no limit on the account or number of withdrawals Generally, interest is not payable on this
account. Overdraft facility is given only to current depositors, after following the prescribed
procedures of the bank.
65
● Time Deposits: The deposits which are not repayable on demand are called ‘Time Deposits’.
These deposits are repayable after a specific period. The banks accept the Time deposits in the
following forms:
a. Fixed Deposits: Fixed Deposits are the deposits received for a fixed period. It carries specified rate
of interest, which depends on the period of deposits. The rate of Interest is high for fixed deposits.
Interest is paid either on periodic basis or on maturity of deposits. Fixed Deposit Receipt (F.D.R) is
issued to the depositor. Loan facility is also given against fixed deposits
b. Recurring Deposits: In order to encourage customers to make more savings, banks receive
deposits in the form of Recurring Deposits. A customer is required to deposit a fixed sum of money
for a specified period of time. The money is deposited periodically. Rate of interest is more than
Savings Deposits. Pass book is issued to the depositor. E – statement is issued on demand.

66
2. Lending Money: Out of the deposits accepted, after keeping certain cash reserved, commercial
banks grant loans and advances to the needy borrowers.
Commercial banks accepts deposits at a lower rate of interest and gives it as loans and advances at a
higher rate of interest.
Generally, banks grant loans and advances to the borrowers in the following forms–
● Loans: A loan granted for a specific time period against personal security, gold and silver and
other movable and immovable assets is called term loan. It is credited in borrowers account.
Types of Term Loans are as under:
a. Short Term Loans: These loans are provided for the period of not more than one year. The rate of
interest is not higher than call loans and lower than medium term loans. It is required by
businessman in order to fulfill their requirement of working capital.
b. Medium Term Loans: These loans are provided by commercial banks for the period from 1-year
upto to 5 years. The rate of interest charged by bank is higher than short term loans and lower than
the long term loans.
c. Long Term Loans: When Commercial Banks give loans for a period of more than 5 years, they
are referred as Long Term Loans. The rate of interest charged by the Commercial banks is highest
as compared to other types of loans. It is required for growth and development of the business.
67
● Advances: An advance is a credit facility provided by the bank to its customers. It differs from
loans, in the sense that, Loans may be granted for longer period, but advances are normally
given for shorter period. The purpose of granting advances is to meet day- to- day requirements
of a business. Interest is charged only on amount withdrawn and amount not sanctioned.
a. Overdraft: Overdraft is a credit facility granted by bank to current account holders. Under
overdraft facility the bank allows its customer to overdraw an amount, upto a particular limit, i.e.
to withdraw more than the amount of credit balance in his current Account. The collateral
securities usually accepted for overdraft facility are- Shares, Government Securities, F.D.R.,
L.I.C.> Policy, etc. Rate of interest charged by commercial bank for overdraft is low.
b. Cash Credit: A separate cash credit Account is to be opened to avail this facility. Securities like
stock of raw material, finished goods etc. are required to avail this facility. Under Cash Credit
facility, a bank allows the borrower to amount upto a specific limit. It is a separate account
where bank credits the sanctioned amount. The borrower can withdraw the amount as an when
he needs. Interest is charged on the amount actually withdrawn.
c. Discounting of Bills: A bill of exchange is a Negotiable Instrument. Banks can provide short -
term finance by discounting bills, i.e. provide financial assistance before due date of bill.
Note: Bills of exchange: It is a written unconditional order by Seller (drawer) to
the Buyer (drawee) to pay a certain sum of money on a future fixed date for
68
payment of goods or services received.
B. Secondary Functions: The secondary functions of a bank can be divided into two parts:-

1. Agency Function: Banks perform various functions on behalf of their Customers or account
holders such as:
2. Collection of cheque and bills.
a. Collection of Dividend, Interest and Salary.
b. Payment of Rent, Insurance premium, Electricity Bill etc.
c. Purchase and sale of Securities (Banks play role as Depository participant i.e. DP).
d. Remittances (transfer) of money.
e. Fulfil standing instructions of Depositors.
f. Act as trustees, executor of will and attorney.
g. Act as Banker to the issue, Lead Manager, etc. for Companies.

2. Utility Function: The commercial banks also provide following general utility services as:
a. Safe Deposit vaults (Locker Facility)
b. Letter of Credit
c. Dealing in Foreign Exchange
d. A.T.M. Credit cards, Debit cards.
e. Financial position status Report
f. Buying and selling of securities.
g. Travellers cheque
h. R. T. G. S (Real Time Gross Settlement), NEFT (National Electronic Funds Transfer) NACH 69
(National Automated Clearing House) and ECS (Electronic Clearing Service)
 BANK ACCOUNT

DEMAND
TERM DEPOSIT
DEPOSIT
ACCOUNT
ACCOUNT

RECURRING
SAVING CURRENT FIXED DEPOSIT
DEPOSIT
ACCOUNT ACCOUNT ACCOUNT
ACCOUNT

70
 TAX
Chapter - 8 PLANNING

71
 8.1) MEANING
● Tax planning means compliance with the taxation provisions in such a manner that full advantage
is taken of all tax exemptions, deductions, concessions, rebates and reliefs allowable under the
Income tax Act-1961 so that the liability of tax is the least.
● Tax planning should neither be considered as tax evasion nor as tax avoidance.
Example: For the salaried individuals investment made in PPF, National Saving Certificate,
Life insurance premium paid.

8.2) OBJECTIVES OF TAX PLANNING:

a. Reduction of tax liability

b. Minimisation of litigation
c. Productive Investment
d. Healthy growth of economy
e. Economic stability

8.3)ESSENTIALS OF TAX PLANNING:

a. Upto date knowledge of tax laws

b. Disclosure and furnishing of information to Income-tax department
c. Planning to be within framework of law 72
d. Capability to achieve desired objectives and amenable to changes
 REDUCTION
OF TAX
LIABILITY

MINIMIZATIO
ECONOMIC
N OF
STABILITY
LITIGATION

TAX PLANNING
OBJECTIVES

HEALTHY
GROWTH OF PRODUCTIVE
ECONOMY INVESTMENT

73
 8.4)TYPES OF TAX PLANNING:

a. Short range and long range tax planning -

• Short-range planning means planning made annually to fulfill the limited or specific objectives.
An individual may invest in NSCs (National savings certificate) or PPF (Public Provident Fund)
within the prescribed limit when income is increased.
• Long term planning does not help immediately, for example transfer of assets without
consideration to minor child. In this case, the income will be combined to transferor up to the child
in minor but once the child turns 18, this will be the child’s income.
a. Permissive tax planning -
Permissive tax planning refers to the plans which are permissible under various provisions of the law,
for example planning of earning income covered by Section 10, Section 10(1), planning of taking
advantage of various deductions, incentives for getting benefit of different tax concessions etc. In
other words, it means planning made as per provision of the taxation laws.
a. Purposive tax planning -
Tax planning with a purpose of getting the maximum benefit by making suitable program for
replacement of assets, correct selection of investment, varying the residential status and
diversifying business activities and income.
74
 WHAT IS HEAD OF INCOME
As per Income tax act 1981, Income of any person is taxed under 5 categories –
1) Income from Salaries- This head includes income of employees or salaried person.
2) Income from House Property- This head includes income from renting of own house or other
similar in nature.
3) Income from Business and Profession- Any profits or gains derived from business or
profession of a person will be covered under this.
4) Income from Capital Gain- Any gain derived from sale of an asset whether long term or short
term will taxed under this head.
5) Income from other sources- Any other income which is not covered under any other above
heads will be taxed here. Example- income from dividend.

75
 For Salaried person

House rent allowance- The tax is exempt part of HRA is the minimum of the following
amount-
● Actual HRA component of salary
● 50% of basic salary if Delhi, Chennai, Kolkata or Mumbai and 40% of basic salary if
from other city.
● Actual rent paid – 10% of basic salary

76
House property

● 30% of the net annual value.

● Deductions allowed from NAV
a) If let out- interest on borrowed capital – Fully allowed.
b) If self occupied – interest on borrowed capital – Repair, renewal or reconstruction
max- 30000- loan for acquisition or construction- acquisition completed within 5 years
from capital borrowed max 2,00,000.

77
 Slab rates

Individual till 60 years –

Upto 2,50,000 Nil
2,50,000- 5,00,000 5%
5,00,000- 10,00,000 20%
Above 10,00,000 30%

78
Capital gains

● Section 54 Capital gains on sale of residential house-

Eligibility – (a) Individual and HUF
(b) Transfer of residential house
(c) Long term capital asset
Amount of Capital Gain > 2 crore
One residential house purchased within 1 year before or after 2 year, or construction
within 3 years.
Exemptions – Cost of new residential house more than or equal to LTCG, Entire LTCG –
exempt
Cost of new residential house < LTCG

Entire cost

79
 1. Exemptions of LTCG on sale of residential house

● Section 54 - Investment in 1 or more resident – Purchase within 1 year before or 2 year

after and construction within 3 years after date of transfer.
cost of new house or capital gain which ever is lower.
● Section 54 F – Investment in bonds NHAI/RECL or any other notified bond – Invest
within 6 months of date of transfer.
capital gain or amount invested which ever is lower, exemption maximum 50 lakhs.

80
 8.5) AREAS OF TAX PLANNING:

1. At the time of setting up of new entity:

a. Ownership pattern
b. Locational aspects
c. Nature of business

2. For the business entities already in existence:

a. Tax planning in respect of corporate reconstruction;

b. Tax planning in respect of financial management;
c. Tax planning in respect of employees remuneration;
d. Tax planning in respect of specific managerial decisions;
e. Tax planning in respect of Foreign collaborations and Joint Venture Agreements;
f. Tax planning in respect of various Double taxation Avoidance (DTAA)

81
81
 8.6) FOLLOWING ARE THE DEDUCTIONS ON SECTION 80:

Section Deduction on Allowed Limit (maximum)

80C Investment in PPF
– Employee’s share of PF contribution
– NSCs
– Life Insurance Premium payment
– Children’s Tuition Fee
– Principal Repayment of home loan
– Investment in Sukanya Samridhi Account
– ULIPS
– ELSS
– Sum paid to purchase deferred annuity
Rs. 1,50,000
– Five year deposit scheme
– Senior Citizens savings scheme
– Subscription to notified securities/notified deposits
scheme
– Contribution to notified Pension Fund set up by Mutual
Fund or UTI.
– Subscription to Home Loan Account scheme of the
National Housing Bank
– Subscription to deposit scheme of a public sector or
company engaged in providing housing finance
– Contribution to notified annuity Plan of LIC
– Subscription to equity shares/ debentures of an
approved eligible issue
– Subscription to notified bonds of NABARD

80CCC For amount deposited in annuity plan of LIC or any other - 82

insurer for a pension from a fund referred to in Section
10(23AAB)
80CCD(1) Employee’s contribution to NPS account -
(maximum up to Rs 1,50,000)

80TTA(1) Interest Income from Savings account Maximum up to 10,000

80TTB Exemption of interest from banks, post office, Maximum up to 50,000

etc. Applicable only to senior citizens

80GG For rent paid when HRA is not received from Least of :
employer – Rent paid minus 10% of total income
– Rs. 5000/- per month
– 25% of total income

80E Interest on education loan Interest paid for a period of 8 years

80D Medical Insurance – Self, spouse, children – Rs. 25,000

Medical Insurance – Parents more than 60 years – Rs. 50,000
old or uninsured parents more than 80 years old
83
83
80DD Medical treatment for handicapped dependent – Rs. 75,000
or payment to specified scheme for – Rs. 1,25,000
maintenance of handicapped dependent
– Disability is 40% or more but less than 80%
– Disability is 80% or more

80DDB Medical Expenditure on Self or Dependent – Lower of Rs 40,000 or the amount actually
Relative for diseases specified in Rule 11DD paid
– For less than 60 years old – Lower of Rs 1,00,000 or the amount actually
– For more than 60 years old paid

80U Self-suffering from disability : – Rs. 75,000

– An individual suffering from a physical – Rs. 1,25,000
disability (including blindness) or mental
retardation.
– An individual suffering from severe
disability

80GGB Contribution by companies to political parties Amount contributed (not allowed if paid in
cash

80RRB Deductions on Income by way of Royalty of a Lower of Rs 3,00,000 or income received

Patent
84
84
 INSURANCE
Chapter - 9

85
9.1) MEANING:

• There are two parties in insurance, namely, the insurance company and the insured. Also the
insurance is a legal agreement enforceable by law.
• The insurance company commits to cover for the losses of the insure on happening of a contingent
event depending on the type of insurance selected by the insured person, such as health, car, life and
etc.
• A contingent event, is an uncertain mis happening event which cannot be foreseen.
• The insured person shall pay premium in consideration against the promise made by the insurance
company.

CAR HOUSE
INSURANCE INSURANCE

GENERAL
INSURANCE

HEALTH LIFE
INSURANCE INSURANCE
86
86
9.2) TYPES OF INSURANCE:

1. Life Insurance

Life insurance as the name suggests insures your family for the financial support, during the event of
death. Life insurance is vital if the insured person is the sole bread earner of the family.

2. GENERAL INSURANCE:

i) HEALTH INSURANCE
As the name suggests, Health insurance secures you for the medical cost for the treatments of the
different types of diseases and accidents.
In order to claim health insurance the insured person shall pay the premium for covering the
hospitalization cost.

ii) CAR INSURANCE

During an incident like accident, car insurance policies compensates for the cost of repairing of the
insured persons car. 87
87
It also, insures against flood, earthquake, etc.
iii) HOUSE INSURANCE

During the contingent event of loss such as fire and natural calamities, house insurance plays a vital role
in covering the loss. It also covers other instances like floods, earthquake, etc.

9.3) What are the tax benefits on insurance?

Apart from the safety and security benefits of buying insurance, Following are tax benefits:

Life insurance premium of up to ₹1.5 lakh can be claimed as a tax-saving deduction under Section 80 D.
● Medical insurance premium of up to ₹25,000 for yourself and your family and ₹25,000 for
your parents can be claimed as a tax-saving deduction under Section 80 D.

88
88
 INTERESTS

Chapter - 10

89
SIMPLE INTEREST:

1. Simple interest is a quick and easy method to calculate interest on the money, in the simple
interest method interest always applies to the original principal amount, with the same rate of
interest for every time cycle.
2. When we invest our money in any bank, the bank provides us interest on our amount.
3. The interest applied by the banks is of many types one of them is simple interest.

FORMULA:

Simple Interest = P × R × T
100
where P = Principal,
R = Rate of Interest in % per annum, and
T = Time, usually calculated as the number of years.
The rate of interest is in Percentage. 90
90
EXAMPLE:

Mr. X had borrowed Rs.1,000 from the bank and the rate of interest was 5%.
What would the simple interest be if the amount is borrowed for 1 year?
Similarly, calculate the simple interest if the amount is borrowed for 2 years And 10 years?

SIMPLE INTEREST

YEAR 1 S.I = (1000 ×5 × 1)/100 = 50

YEAR 2 S.I = (1000 × 5 × 2)/100 = 100

YEAR 10 S.I = (1000 × 5 × 10)/100 = 500

91
91
COMPOUND INTEREST:
1. Compound interest is the interest calculated on the principal and the interest accumulated over the
previous period.
2. It is different from simple interest, where interest is not added to the principal while calculating the
interest during the next period.

FORMULA:

A = P(1 + r/n)(nt)

A = the future value of the investment/loan, including interest

P = the principal investment amount (the initial deposit or loan amount)
r = the annual interest rate
n = the number of times that interest is compounded per unit
t = the time the money is invested or borrowed for
92
EXAMPLE:

If an amount of Rs.5,000 is deposited into a savings account at an annual interest rate of 5%,
compounded annually, the value of the investment after 3 years can be calculated as follows.
P = 5000.
r = 5/100 = 0.05 (decimal).
n = 12.
t = 10.
If we plug those figures into the formula, we get the following:
A = 5000 (1 + 0.05 / 1) (1 * 3) = 5,788.125
So, the investment balance after 3 years is Rs.5,788.125.

93
 TIME VALUE OF
MONEY
Chapter - 11

94
INTRODUCTION:

● One of the essential features of a sound appraisal method for capital expenditure proposals is the
consideration of the time value of money.
● A project and many other financial problems involve cash flows occurring at different points of time.
For evaluating such cash flows an explicit consideration of time value of money is required.
● In order to decide whether or not to select the project a mere comparison between the present in flow
and out flow is not sufficient.
● For making a comparison between two variables the main component is the time element in
the calculation
● It is necessary to convert the sums of money to a common time.
● The net inflows of the future periods have to be discounted to ascertain their present values. These
then have to be compared with the present values of investment.
● Thus, for investment decisions time value of money plays an important role.
95
95
This time value of money principle is based on the following four reasons:

● Inflation – during inflation conditions the purchasing power for goods and services will decline
resulting into, decline in value of money.

● Risk – The value of Rs 100, today will be certain, however would not be the same tomorrow due
to time value of money.

● Personal Consumption Preference- In case of personal consumption, many have a preference

for instant consumption rather than deferred consumption.

● Investment opportunities- Money like any other desirable commodity, has a price, given the
choice of RS 500 now or the same amount in one year’s time, it is always preferable to take the Rs
500 now because it could be invested over the next year at (say) 20% interest rate to produce Rs
600 at the end of one year. If 20% is the best risk-free return available, then you would be
indifferent to receiving Rs 500 now or Rs 600 in one year’s time. Expressed another way, the
present value of Rs 600 receivable one year hence is Rs 500.
96
96
The present value of an asset could be shown to be:
PV= FV
(1+i)n
i= DESIRED RETURN
FV= FUTURE VALUE
n= No. of years

97
97
 EXAMPLE:

0 1 year

DESIRED RETURN= 10% Rs. 1,000

HOW MUCH SHALL MR.X INVEST TODAY?

SOLUTION:

P=FV = 1,000 = 1,000 = Rs. 909.09

(1+i)n (1+10%)1 1.1

98
98