INDIAN FINANCIAL SYSTEM

CIA COMPONENT-1
Submitted by
SACHITH.C
(Register Number – 1920225)
Under the Guidance of
Prof. Issac P Elias
In Partial Fulfilment of the Requirements for the Award of the Degree of
BACHELOR OF BUSINESS ADMINISTRATION
 INVESTING AVENUES IN INDIA
I) MUTUAL FUNDS:
A mutual fund is a professionally-managed investment scheme, usually run by an asset
management company that brings together a group of people and invests their money in
stocks, bonds and other securities. They can be actively managed or passive funds. In active
funds, the fund manager plays a vital role in choosing scrips to generate return, while passive
funds or exchange traded funds (ETFs) invest the money based on the underlying
benchmarked indices. Equity schemes are categorized according to market-capitalization or
the sectors in which they invest.
ADVANTAGES OF MUTUAL FUND INVESTMENT:
i)Tax-efficiency:
we can invest up to Rs 1.5 lakh in tax-saving mutual funds which is covered under Section
80C of the Income Tax Act, 1961. Though a 10% tax on Long-Term Capital Gains (LTCG) is
applicable for returns above Rs.1 lakh after one year, they have consistently delivered higher
returns than other tax-saving instruments like FD in recent years.

ii)Invest in smaller denominations:

By investing in smaller denominations (SIP), we can get exposure to the entire stock (or any
other asset class). This reduces the average transactional expenses we can benefit from the
market lows and highs. Regular (monthly or quarterly) investments, as opposed to lumpsum
investments, give you the benefit of rupee cost averaging.
iii) Diversification:
Mutual funds have the share of risks as their performance is based on the market movement.
Hence, the fund manager always invests in more than one asset class (equities, debts, money
market instruments, etc.) to spread the risks. This way, when one asset class doesn’t perform,
the other can compensate with higher returns to avoid the loss for investors.

iv) Cost-efficiency:
We have the option to pick zero-load mutual funds with fewer expense ratios. we can check
the expense ratio of different mutual funds and choose the one that fits in our budget and
financial goals. Expense ratio is the fee for managing our fund. It is a useful tool to assess a
mutual fund’s performance.

v) Quick & painless process:

we can start with one mutual fund and slowly diversify. These days it is easier to identify and
handpicked fund(s) most suitable for us. Tracking mutual funds will not take any extra effort
from your side. The fund manager will decide when, where and how to invest. Their job is to
beat the benchmark and deliver maximum returns consistently.
DISADVANTAGES OF MUTUAL FUND INVESTMENT:
i)Costs to manage the mutual fund:
The salary of the market analysts and fund manager comes from the investors. Total fund
management charge is one of the first parameters to consider when choosing a mutual fund.
Higher management fees do not guarantee better fund performance.

ii)Lock-in periods:
Many mutual funds have long-term lock-in periods, ranging from five to eight years. Exiting
such funds before maturity can be an expensive affair. A specific portion of the fund is
always kept in cash to pay out an investor who wants to exit the fund. This portion cannot
earn interest for investors.
iii)Dilution:
While diversification averages risks of loss, it can also dilute the profits. Hence, one should
not invest in more than seven to nine mutual funds at a time.
II) Fixed Deposits:
Fixed Deposits (FDs) are a type of investment offered by banks, post offices, and even
corporates. Fixed deposits are considered to be one of the safest modes of investment. Fixed
deposits are also known to generate high and guaranteed returns and set high-interest rates as
compared to savings accounts. Fixed deposits have been a great avenue for those who are
seeking ways to receive assured corpus with low levels of risks. Fixed deposits are a one-time
mode of investment.
ADVANTAGES OF FIXED DEPOSITS:
i)Assured rate of return:
The major reason why people prefer investing their funds in a fixed deposit is the assured rate
of return. Once you invest your funds in a fixed deposit account, you can be guaranteed of
receiving the stated rate of return. Banks publish the fixed deposit rate of interest on their
website and in bank branches which makes it easy for a customer to ascertain how much
return he will get. Banks also have a fixed deposit interest calculator on their websites where
a customer can calculate the interest he will receive on investing a particular sum of money
for a particular period of time.

ii)Tax threshold for interest:

Banks are not mandated to deduct tax on any interest until it crosses Rs. 10,000. This means
unless the total interest earned by a customer on different fixed deposits totals Rs. 10,000, the
bank will not deduct any tax. This provides comfort to small deposit holders.

iii)Flexible tenure:
The tenure for a fixed deposit is flexible and depends on the deposit holder. Each bank has
their own minimum tenure rules however, the final decision can be taken by the deposit
holder. It is also possible to decide whether to redeem the fixed deposit or to extend it for the
same period of time.

iii)Easy liquidation:
It is relatively easy to liquidate a fixed deposit. For FDs booked online, they can be liquidated
online via net banking as well. Otherwise, most bank branches have a form to liquidate the
FD.

iv)Loans against fixed deposit:

An FD is a dependable instrument to keep in case of financial emergencies. Taking a loan

against a fixed deposit is very easy. You can take a loan up to 95% of the fixed deposit
amount depending on the bank. This makes it a dependable investment.

DISADVANTAGES OF FIXED DEPOSITS:

i)Reducing interest rates:

Even though fixed deposits have a lot of advantages, the interest rates do not move in line
with inflation. This means in some cases, they may actually earn less than the inflation rate.
The interest rates for fixed deposits have been falling in recent times which has reduced the
attractiveness of this investment.

ii)Locked in funds:
Fixed deposits lock in your funds for a fixed duration. These funds are not available for you
to use unless you withdraw the funds prematurely. Fixed deposits are not at all liquid and
cannot be converted into cash easily.

iii)No tax benefit:

The interest earned on fixed deposit is added to the taxable income of the deposit holder.
There is no deduction on any interest earned. However, senior citizens get a deduction up to
Rs. 50,000 on interest.

III) PUBLIC PROVIDENT FUND:

The Public Provident Fund, popularly known as PPF is the long-term saving scheme
introduced by the Ministry of Finance (MoF) in 1968. The purpose of the PPF is to mobilize
the small savings of individual by offering them investments that carry a reasonable return
along with the income-tax benefits.
ADVANTAGES OF PUBLIC PROVIDENT FUND

i)Safest Investment Avenue:

The biggest benefit of public provident fund is that it is backed by the government. This means
that there are no chances of defaults of losing our principle amount . In other forms of
investment such as equities, our initial investment may reduce. While the probability of loss
reduces in the long term, many investors want a secure investment option that is fully backed
by the government.

ii)Assured returns

The rate of interest is revised every quarter and you can easily know the prevailing rate of
interest. This gives comfort and helps you to sleep peacefully at night as you know that your
investments are safe and it is giving you a certain interest rate.
Also, the returns are compounded annually.

iii)Tax benefits

PPF is one of the investment options that fall under Exempt-Exempt-Exempt (EEE) category.
For investments up to Rs.1.5 lakh per year, we can avail tax deductions under section 80C of
the Income Tax law. Also, the accumulated amount and interest is also exempted from tax at
the time of redemption.

iv)Options to invest in PPF

we can invest in public provident fund by putting a standing instruction of auto-debit from your
savings account. This will allow us to invest in a systematic manner without facing any trouble
to invest a large amount near the financial year end. Also, lumpsum investment is also available
and we can invest as per our wish.

DISADVANTAGES OF INVESTING IN PUBLIC PROVIDENT FUND:

i)Accumulated Corpus may not high

While PPF gives assured interest, the accumulated corpus may not be as high compared to
other equity investment options like equity-linked saving scheme. Past data shows that equity
mutual funds have outperformed other asset classes in the long run.

ii)Longer lock-in period

Provident fund investment has a longer lock-in period of 15 years. Thus, it is not liquid like
other investment options like mutual funds that do not have any lock-in. Also, equity-linked
saving scheme (ELSS) a tax saving mutual fund under Section 80C has the lowest lock-in
period of 3 years.
iii)Upper limit:

PPF has an upper investment limit of Rs.1.5 lakh. Investments above this limit do not fetch any
returns. Other investment options do not have any upper limit.

IV)EQUITY INVESTMENT
An equity share, normally known as ordinary share is a part ownership where each member is
a fractional owner and initiates the maximum entrepreneurial liability related to a trading
concern. These types of shareholders in any organization possess the right to vote.

ADVANTAGES OF EQUITY INVESTMENT:

i)Dividend:

An investor is entitled to receive a dividend from the company. It is one of the two
main sources of return on his investment.

ii)Limited liability:

Liability of shareholder or investor is limited to the extent of the investment made. If

the company goes into losses, the share of loss over and above the capital investment
would not be borne by the investor.

iii)Exercise control:

By investing in the company, the shareholder gets ownership in the company and
thereby he can exercise control. In official terms, he gets voting rights in the
company.

iv)Claim over Assets and Income:

An investor of equity share is the owner of the company and so is the owner of the
assets of that company. He enjoys a share of the incomes of the company. He will
receive some part of that income in cash in the form of dividend and remaining capital
is reinvested in the company.

V)Rights Shares:

Whenever companies require further capital for expansion etc, they tend to issue
‘rights shares. By issuing such shares, ownership and control of
existing s harehol ders are preserved and the investor receives investment priority
over other general investors. Right Shares are issued at a price lower than current
market price of the equity share. So, existing investor can take that advantage or
otherwise can renounce right in some one’s favour to get value of right.
DISADVATAGES OF EQUITY INVESTMENT:

i)Dividend:

The dividend which a shareholder receives is neither fixed nor controllable by

investor. The management of the company decides how much dividend should be
given. If there is a loss, there is no question of dividend. If there is a profit, unless
Board of Directors propose dividend, investors will not receive dividend.

ii)High Risk:

Equity share investment is a risky investment as compared to any other investment

like debts etc. The money is invested based on the faith an investor has in the
company. There is no collateral security attached with it.

iii)Residual Claim:

An equity shareholder has a residual claim over both the assets and the inc ome.
Income which is available to equity shareholders is after the payment of all other
stakeholders’ viz. debent ure holders etc

V)REAL ESTATE INVESTMENT:

Real estate, sometimes referred to as real property, is technically land plus any other tangible
improvement that might rest upon it or be installed in it. The improvement might be a
building that's been erected there, or a roadway. It can be something that's been inserted into
the ground, such as a septic system. Land with any of these structures is said to be improved.
It's unimproved when it lacks them.2

ADVANTAGES OF REAL ESTATE INVESTING:

i)Income Stream:

If the property is easily convertible to rental units, the owner of the property can earn a steady
income stream in the form of rent. Depending on the geographical location the property is
located in, the earnings can be quite significant. For example, urban city centers or towns
with colleges and universities tend to offer the highest income streams because the demand
for rental units is always high.

ii)Security:

Owning property can offer the investor a sense of security because the value does not tend to
fluctuate as much as other assets such as stocks and bonds. However, this does not mean that
the investor will always break even or earn a profit on their investment. Although housing
prices do not tend to fluctuate in the short term, they may increase or decrease in value in the
longer term. Therefore, it is important for the investor to thoroughly research the area before
making a purchase.

iii)Self-Occupation:

Another reason why many investors are attracted to investing in real estate is because the
property can be utilized by the investor. They can either live on the property while they fix it
up, or they can be a live-in landlord and earn an income stream at the same time by renting
out the other rooms.

iv)Tax Shelter:

Since tax laws on income properties vary depending on your jurisdiction, you should always
be sure to thoroughly research it beforehand. However, it is very common for taxes on any
gains to be deferred until you sell the property. For example, if a house appreciates in value
from $250,000 to $300,000, the investor will not be required to pay the taxes on the extra
$50,000 until the property is sold.

DISADVANTAGES OF REAL ESTATE INVESTING :

i)Legal Difficulties:

Investing in real estate has the potential of being very confusing because it requires that you
are fully aware of the laws in each jurisdiction that you own property. Some jurisdictions may
even enforce land ceilings which can make the investment risky. The legal difficulties can
become much more complex if the investor is investing in commercial real estate.

ii)Maintenance Cost:

The cost of maintaining the property can cause the investor to lose money on the investment.
In larger cities, property taxes can be so high that it will be very difficult to resell the house at
a higher value.

If the owner of the property is renting out the units, maintenance costs can take large chunks
out of the income stream. If the owner does not personally know the tenants before renting
out the units, they run into the risk of renting the space out to someone who will not take care
of the unit, causing the owner to put large sums of money into repairs. Furthermore, other
costs such as electricity and heating will also add up.

iii)Property Taxes:

Before investing in real estate, the investor should always factor property taxes into their
valuation of the property. In larger urban cities, property taxes can be significant and may
cause the investor to lose a big chunk of their profit. Property taxes will vary depending on
which city or state the property is purchased in. Therefore, the investor should always consult
with city officials before investing in property.

LATEST DEVLOPMENTS IN INDIAN FINACIAL SYSTEM:

Past financial events always play a significant role in shaping our future financial
situation. Likewise, several financial developments of 2019 will have a major impact on
your personal finances in 2020. Let us discuss about some of them in detail:
Repo-linked loans:
Under the base rate and MCLR system, there were concerns over banks not immediately
transmitting the benefit of interest rate cuts to the borrowers. Whenever the Reserve
Bank of India used to cut the repo rate, loan interest rates were not reduced to that
extent. In fact, the central bank has cut repo rate by 135 basis points in 2019 with many
economists opining there’s room for further cuts in February 2020. So, to ensure
customers get the benefit of such rate cuts, the RBI directed the banks to link their retail
lending rates to an external benchmark like the repo rate and update their interest rate at
least once in three months.
The move to link loans to repo rate will allow borrowers to get the quick benefit of any
rate cut by the RBI. However, at the same time, when the interest rate trend is upward,
the borrower would be required to pay a higher interest rate on his loans. So, in 2020,
the borrowers should keep a strict watch on the interest rate trends and try to repay their
loan quickly or prepay as much possible when the rates are low.
Also, having a good credit score has become superlatively significant in the repo rate
loan regime as the best rates are being offered to those with a good score. Conversely, a
poor score will likely lead to higher loan rates even if our lender transmits repo rate cut
benefits to its loan offers. As such, you’ll be well-advised to track your credit score
regularly in 2020 and take quick, effective steps, like repaying credit card and personal
loan dues, to improve your score if it’s less than 750.
Digitisation push:
Promoting digitisation has been one of the government’s core emphasis areas in 2019
and things are likely to remain the same in 2020 as well. For example, toll payments on
highways is now linked to the Fast tag system to promote non-cash payments. The RBI
has also waived charges on NEFT and RTGS transactions, and has directed the banks to
pass on the benefits to customers. The central bank has also announced to extend NEFT
facility on a 24x7 basis to the customers.
. A plethora of card issuers and other companies offer countless incentives for digital
payments like extra cashback and reward points. As such, to avail the benefits on offer
and to make our transactions safer and more convenient, go digital in 2020.
Rising home inventory:
Various research reports on the realty sector released in the second half of 2019
indicated that there is an increase in the inventory handover of the developers across
different cities in the country. It showed developers are finding it difficult to sell their
homes at the current pricing. However, the interest rate on the home loan has fallen to a
very attractive level from a home buyer’s perspective.
Tax benefits on home loan availed in FY 2019-20
The government announced this year an additional tax deduction benefit under Section
80EEA of up to Rs 1.5 lakh against interest payment of home loan (sanctioned between
1st April 2019 t0 31st March 2020). The value of a property shouldn’t be more than Rs
45 lakh (the basis of stamp duty calculation), and the carpet area of property should not
exceed 645 sqft in metros and 968 sqft in other cities. Other conditions also apply to get
this tax deduction benefit. So, if we want to own a home, we may want to do it before
March 2020 to avail the additional tax benefit.
New investment opportunities
The government recently has introduced Bharat Bond ETF. An investor can start
investing in this product with as little as Rs 1,000. The unit of ETFs can be bought and
sold on the stock exchange platform. Bharat Bond ETF will consist of debt of 12 to 13
PSUs for 3-year and 10-year tenure products, respectively. The NAV of this ETF will
fluctuate with the change in the interest rate in the market; however, if we hold these
products till maturity, our redemption value won’t get affected. So, if we are looking for
a safe investment product like FDs and a small savings scheme, especially when deposit
rates have seen a dip in recent months, we can explore the opportunity in Bharat Bond
ETF in 2020.