Professional Documents
Culture Documents
S.Y.B.Com. (Hons.)
Financial Services and Production Management
Content Index
No. Particulars
1 Financial Services
Concepts
Objectives
Characteristics
Growth of financial Services in India
2 Merchant Banking
Meaning
Concept
Significance
3 Venture Capital
Nature and Scope
Venture Capital in India
4 Mutual Funds
Nature
Significance
Types of Mutual Funds
5 Micro Finance
Meaning
Micro Finance Services
Micro Financial Service Providers
6 Credit Rating
Meaning
Significance
Credit Rating Agencies
7 Case Studies & Presentations
Chapter
Financial Services
1
Financial services are the economic services provided by the finance industry, which
encompasses a broad range of businesses that manage money, including credit unions, banks,
credit-card companies, insurance companies, accountancy companies, consumer-finance
companies, stock brokerages, investment funds, individual managers, and some government
sponsored enterprises.
Financial services refer to services provided by the banks and financial institutions in a
financial system. In general, all types of activities which are of financial nature may be
regarded as financial services. In a broad sense, the term financial services mean mobilization
and allocation of savings. Thus, it includes all activities involved in the transformation of
savings into investment.
1. Raises Fund: Financial services serve as an efficient tool for raising funds in an economy.
It provides various financial instruments to individuals, investors, corporations, and
institutions where they can invest their money thereby raising funds from them.
4. Minimizes Risk: Risk minimization is an important role played by financial services. These
services help in diversifying the risk and protect people against damages by providing
insurance policies.
5. Economic Growth: Financial services help the government in attaining the overall growth of
the economy. The government can easily raise both short-term and long term funds for its
various needs. It helps in improving overall infrastructural facilities and employment
opportunities in a country.
1. Customer-centric: Financial services are usually customer focused. Financial Services are
provided, depending on the need of customer for example, leasing finance service may be
needed by an industrial customer, while merchant banker’s services may be needed by a
company issuing new equity share in the market.
4. Perishable in nature: Like other services, financial services also require a match between
demand and supply. Services cannot be stored. They have to be supplied when customers
need them.
5. Dominance of human element: Financial services are dominated by human element. Thus,
financial services are labour intensive. It requires competent and skilled personnel to
market the quality financial products.
6. Advisory: Financial services can be of three types i.e. a fund based or a fee-based or both.
In case of fee-based services, the advisory function is dominant. Issue management,
registrar of issue, merchant banking, pricing of securities etc. are few examples of
advisory financial services.
7. Heterogeneity: Financial services are customized services. It cannot be uniform for all
clients. Financial services vary from one client to other. Institutional client requirements
differ from individual client. After analysing the needs of the clients, financial institutions
offer customised financial services to the clients.
The growth of financial sector in India at present is nearly 8.5% per year. The rise in the
growth rate suggests the growth of the economy. The financial policies and the monetary
policies are able to sustain a stable growth rate.
The reforms pertaining to the monetary policies and the macro economic policies over the last
few years has influenced the Indian economy to the core. The major step towards opening up
of the financial market further was the nullification of the regulations restricting the growth
of the financial sector in India. To maintain such a growth for a long term the inflation has to
come down further.
The financial sector in India had an overall growth of 15%, which has exhibited stability over
the last few years although several other markets across the Asian region were going through
a turmoil. The development of the system pertaining to the financial sector was the key to the
growth of the same. With the opening of the financial market variety of products and services
were introduced to suit the need of the customer. The Reserve Bank of India (RBI) played a
dynamic role in the growth of the financial sector of India.
The growth of financial sector in India was due to the development in sectors:
These banks are experts in international trade, which makes them experts in dealing with
large corporations and industries. Merchant banking provides funds to the multinational
businesses and large business entities in the country which helps to boost the country’s
economic strength.
Merchant banks do not provide services to the general public; their services are limited
to business entities and large business corporations.
Merchant banker is a person who provides assistance for the subscription of securities.
The merchant banker plays an important role and carries a lot of responsibilities like, private
placement of securities, managing public issue of securities, stock broking, international
financial advisory services, etc.
The functions & Significance of merchant banking in India are governed by Securities and
Exchange Board of India (SEBI) regulations, 1992.
1. Portfolio Management
Merchant banking provides investment advice to the investors to make the investment
decisions. The merchant bank provides portfolio managing assistance to the investors
by trading securities on their behalf.
3. Promotional activities
The merchant bank also helps in the promotion of the business institute in its initial stages.
It helps the organisation to work on their business idea and to get the approval from the
government.
4. Loan Syndication
This is the service provided by merchant banks to its clients for raising credit from banks
and financial institutions.
5. Project Management
Merchant bankers use several ways to render their service to the client in financial related
project management.
6. Leasing Services
Merchant banks also provide leasing services to their customers.
Merchant banking provides a lot of support and opportunities for new businesses. This in
turn also has a positive effect on the country’s economic growth.
Venture Capital investment is also referred to risk capital or patient risk capital, as it
includes the risk of losing the money if the venture doesn’t succeed and takes medium to long
term period for the investments to fructify.
Venture Capital typically comes from institutional investors and high net worth individuals
and is pooled together by dedicated investment firms.
Venture Capital is the most suitable option for funding a costly capital source for
companies and most for businesses having large up-front capital requirements which have no
other cheap alternatives. Software and other intellectual property are generally the most
common cases whose value is unproven. That is why; Venture capital funding is most
widespread in the fast-growing technology and biotechnology fields.
The top 10 most active Venture Capitals alone contributed to 32% of the total deal
count. Venture Capital investment is also referred to as risk capital or patient risk capital, as
it includes the risk of losing the money if the venture doesn’t succeed and takes a medium to
long term period for the investments to fructify. The Indian startups secured over $12.1
billion from venture capitalists in the first 6 months of 2021, which is $1 billion more than the
overall funding that they received last year. Venture Capital (VC) investment in India more
than doubled from its previous quarterly high of $6.7 billion in Q2 2021 to $14.4 billion
during Q3 2021, according to a recent report by KPMG. Therefore, raising funds from
venture capitalists is the way to go for Indian startups.
1. Sequoia Capital
2. Accel
3. Blume Ventures
4. Elevation Capital
5. Tiger Global Management
6. Kalaari Capital
7. Matrix Partners
8. Nexus Venture Partners
9. Indian Angel Network
10. Omidyar Network India
Mutual fund is a financial instrument that pools money from different investors. The
pooled money is then invested in securities like stocks of listed companies, government bonds,
corporate bonds, and money market instruments.
As an investor, you don’t directly own the company’s stocks that mutual funds purchases.
However, you share the profit or loss equally with the other investors of the pool. This is how
the word “mutual” is associated with a mutual fund.
You get the advantage of the expertise of the fund manager and regulatory safety of the
Securities Exchange and Board of India (SEBI). The professional fund manager ensures a
maximum return to investors.
Mutual fund investment is simple. You invest in a fund consisting of several assets. Thus,
you need not risk putting all eggs in one basket. Additionally, the headache of tracking market
movements is not there. The mutual fund house takes care of the research, fund management,
and market tracking. This makes the mutual fund a highly popular investment option for all
types of investors.
A mutual fund is managed by the asset management company (AMC). Mutual fund investment
starts with the pooling of money from several investors. The pooled money is invested in a
meticulously built portfolio of different asset classes like equity, debt, money market
instruments, and other funds. Hence, you have the advantage of diversification, the time
tested market mantra. Additionally, your money is invested in instruments like Government
bonds, that you wouldn’t be able to afford individually.
The best part about mutual funds is that a team of experts along with the fund manager picks
all the investments to build a portfolio. The investments are made according to the defined
objective of the mutual fund. Expert and professional fund management help you outperform
the returns of traditional investment vehicles like a bank savings account and fixed deposits.
As an investor, you are allotted units for your contribution to the pooled fund. The portfolio
value depends on the price movements of the underlying assets. The portfolio value is net
assets divided by the number of outstanding units which is called the net asset value or NAV.
The gains are reflected in higher NAV and lower NAV indicates a loss in portfolio value.
Equity Funds
Equity funds primarily invest in stocks, and hence go by the name of stock funds as well. They
invest the money pooled in from various investors from diverse backgrounds into
shares/stocks of different companies. The gains and losses associated with these funds
depend solely on how the invested shares perform (price-hikes or price-drops) in the stock
market. Also, equity funds have the potential to generate significant returns over a period.
Hence, the risk associated with these funds also tends to be comparatively higher.
Debt Funds
Debt funds invest primarily in fixed-income securities such as bonds, securities and treasury
bills. They invest in various fixed income instruments such as Fixed Maturity Plans (FMPs), Gilt
Funds, Liquid Funds, Short-Term Plans, Long-Term Bonds and Monthly Income Plans, among
others. Since the investments come with a fixed interest rate and maturity date, it can be a
great option for passive investors looking for regular income (interest and capital
appreciation) with minimal risks.
Hybrid Funds
As the name suggests, hybrid funds (Balanced Funds) is an optimum mix of bonds and stocks,
thereby bridging the gap between equity funds and debt funds. The ratio can either be
variable or fixed. In short, it takes the best of two mutual funds by distributing, say, 60% of
assets in stocks and the rest in bonds or vice versa. Hybrid funds are suitable for investors
looking to take more risks for ‘debt plus returns’ benefit rather than sticking to lower but
steady income schemes.
Growth Funds
Growth funds usually allocate a considerable portion in shares and growth sectors, suitable for
investors (mostly Millennials) who have a surplus of idle money to be distributed in riskier
plans (albeit with possibly high returns) or are positive about the scheme.
Income Funds
Income funds belong to the family of debt mutual funds that distribute their money in a mix
of bonds, certificate of deposits and securities among others. Helmed by skilled fund
managers who keep the portfolio in tandem with the rate fluctuations without compromising on
the portfolio’s creditworthiness, income funds have historically earned investors better
returns than deposits. They are best suited for risk-averse investors with a 2-3 years
perspective.
Tax-Saving Funds
ELSS or Equity Linked Saving Scheme, over the years, have climbed up the ranks among all
categories of investors. Not only do they offer the benefit of wealth maximisation while
allowing you to save on taxes, but they also come with the lowest lock-in period of only three
years. Investing predominantly in equity (and related products), they are known to generate
non-taxed returns in the range 14-16%. These funds are best-suited for salaried investors
with a long-term investment horizon.
Many investors choose to invest towards the of the FY ends to take advantage of triple
indexation, thereby bringing down tax burden. If uncomfortable with the debt market trends
and related risks, Fixed Maturity Plans (FMP) – which invest in bonds, securities, money
market etc. – present a great opportunity. As a close-ended plan, FMP functions on a fixed
maturity period, which could range from one month to five years (like FDs). The fund manager
ensures that the money is allocated to an investment with the same tenure, to reap accrual
interest at the time of FMP maturity.
Pension Funds
Putting away a portion of your income in a chosen pension fund to accrue over a long period to
secure you and your family’s financial future after retiring from regular employment can take
care of most contingencies (like a medical emergency or children’s wedding). Relying solely on
savings to get through your golden years is not recommended as savings (no matter how big)
get used up. EPF is an example, but there are many lucrative schemes offered by banks,
insurance firms etc.
Based on Structure
Mutual funds are also categorised based on different attributes (like risk profile, asset class,
etc.). The structural classification – open-ended funds, close-ended funds, and interval funds –
is quite broad, and the differentiation primarily depends on the flexibility to purchase and sell
the individual mutual fund units.
Open-Ended Funds
Open-ended funds do not have any particular constraint such as a specific period or the
number of units which can be traded. These funds allow investors to trade funds at their
convenience and exit when required at the prevailing NAV (Net Asset Value). This is the sole
reason why the unit capital continually changes with new entries and exits. An open-ended
fund can also decide to stop taking in new investors if they do not want to (or cannot manage
significant funds).
Closed-Ended Funds
In closed-ended funds, the unit capital to invest is pre-defined. Meaning the fund company
cannot sell more than the pre-agreed number of units. Some funds also come with a New Fund
Offer (NFO) period; wherein there is a deadline to buy units. NFOs comes with a pre-defined
maturity tenure with fund managers open to any fund size. Hence, SEBI has mandated that
investors be given the option to either repurchase option or list the funds on stock exchanges
to exit the schemes.
Based on Risk
Low-Risk Funds
In the event of rupee depreciation or unexpected national crisis, investors are unsure about
investing in riskier funds. In such cases, fund managers recommend putting money in either
one or a combination of liquid, ultra short-term or arbitrage funds. Returns could be 6-8%, but
the investors are free to switch when valuations become more stable.
Medium-risk Funds
Here, the risk factor is of medium level as the fund manager invests a portion in debt and the
rest in equity funds. The NAV is not that volatile, and the average returns could be 9-12%.
High-Risk Funds
Suitable for investors with no risk aversion and aiming for huge returns in the form of
interest and dividends, high-risk mutual funds need active fund management. Regular
performance reviews are mandatory as they are susceptible to market volatility. You can
expect 15% returns, though most high-risk funds generally provide up to 20% returns.
Sector Funds
Sector funds invest solely in one specific sector, theme-based mutual funds. As these funds
invest only in specific sectors with only a few stocks, the risk factor is on the higher side.
Investors are advised to keep track of the various sector-related trends. Sector funds also
deliver great returns. Some areas of banking, IT and pharma have witnessed huge and
consistent growth in the recent past and are predicted to be promising in future as well.
Index Funds
Suited best for passive investors, index funds put money in an index. A fund manager does not
manage it. An index fund identifies stocks and their corresponding ratio in the market index
and put the money in similar proportion in similar stocks. Even if they cannot outdo the market
(which is the reason why they are not popular in India), they play it safe by mimicking the
index performance.
Funds of Funds
A diversified mutual fund investment portfolio offers a slew of benefits, and ‘Funds of Funds’
also known as multi-manager mutual funds are made to exploit this to the tilt – by putting
their money in diverse fund categories. In short, buying one fund that invests in many funds
rather than investing in several achieves diversification while keeping the cost down at the
same time.
Global Funds
Aside from the same lexical meaning, global funds are quite different from International
Funds. While a global fund chiefly invests in markets worldwide, it also includes investment in
your home country. The International Funds concentrate solely on foreign markets. Diverse
and universal in approach, global funds can be quite risky to owing to different policies, market
and currency variations, though it does work as a break against inflation and long-term returns
have been historically high.
trades. Returns, however, may not be periodic and are either based on the performance of the
stock company or the commodity itself. Gold is the only commodity in which mutual funds can
invest directly in India. The rest purchase fund units or shares from commodity businesses.
Inverse/Leveraged Funds
While a regular index fund moves in tandem with the benchmark index, the returns of an
inverse index fund shift in the opposite direction. It is nothing but selling your shares when
the stock goes down, only to repurchase them at an even lesser cost (to hold until the price
goes up again).
Exchange-traded Funds
It belongs to the index funds family and is bought and sold on exchanges. Exchange-traded
Funds have unlocked a new world of investment prospects, enabling investors to gain extensive
exposure to stock markets abroad as well as specialised sectors. An ETF is like a mutual fund
that can be traded in real-time at a price that may rise or fall many times in a day.
Why Microfinance?
Around two thirds of the world population is cut off from the conventional financial
market. Low-income people typically have no collateral and therefore no chance to take out a
loan, to save money or to invest for the future. Women especially are often considered as
not credit-worthy by banks.
The purchase of a small plot of land, a sewing machine or a market stand for example
would help many people to put their ideas into practice and to escape poverty. Often, the
only alternative are local moneylenders, so called “loan sharks”, who charge extortionate
interest rates of up to several hundred percent a month.
Despite being excluded from banking services, however, those who live on as little as Rs. 100 a
day do attempt to save, borrow, acquire credit or insurance, and they do make payments on
their debt. Thus, many poor people typically look to family, friends, and even loan sharks (who
often charge exorbitant interest rates) for help.
Microfinance allows people to take on reasonable small business loans safely, and in a
manner that is consistent with ethical lending practices. Although they exist all around the
world, the majority of micro financing operations occur in developing nations, such as Uganda,
Indonesia, Serbia, and Honduras. Many microfinance institutions focus on helping women in
particular.
Micro financing organizations support a large number of activities that range from providing
the basics—like bank checking and savings accounts—to startup capital for small business
entrepreneurs and educational programs that teach the principles of investing. These
programs can focus on such skills as bookkeeping, cash-flow management, and technical or
professional skills, like accounting. Unlike typical financing situations, in which the lender is
primarily concerned with the borrower having enough collateral to cover the loan, many
microfinance organizations focus on helping entrepreneurs succeed.
Definition:
Credit rating is an analysis of the credit
risks associated with a financial instrument or a
financial entity. It is a rating given to a particular
entity based on the credentials and the extent to
which the financial statements of the entity are
sound, in terms of borrowing and lending that has
been done in the past.
Usually, is in the form of a detailed report based on the financial history of borrowing or
lending and credit worthiness of the entity or the person obtained from the statements of its
assets and liabilities with an aim to determine their ability to meet the debt obligations. It
helps in assessment of the solvency of the particular entity. These ratings based on detailed
analysis are published by various credit rating agencies like Standard & Poor's, Moody's
Investors Service, and ICRA, to name a few.
Credit ratings are used by investors, intermediaries such as investment banks, issuers of debt,
and businesses and corporations.
Both institutional and individual investors use credit ratings to assess the risk related to
investing in a specific issuance, ideally in the context of their entire portfolio.
Intermediaries such as investment bankers utilize credit ratings to evaluate credit risk
and further derive pricing of debt issues.
Debt issuers such as corporations, governments, municipalities, etc., use credit ratings as
an independent evaluation of their creditworthiness and credit risk associated with their
debt issuance. The ratings can, to some extent, provide prospective investors with an idea
of the quality of the instrument and what kind of interest rate they should be expecting
from it.
Businesses and corporations that are looking to evaluate the risk involved with a certain
counterparty transaction also use credit ratings. They can help entities that are looking to
participate in partnerships or ventures with other businesses evaluate the viability of the
proposition.
Following is the list of some of the top credit rating agencies in India.
CRISIL
CRISIL is the abbreviation of Credit
Rating Information Service of India
Limited. The CRISIL credit agency is
one of the oldest agencies in India.
CRISIL was established in the year
1987, which latter went on to go for
public investment in the year 1993. The
headquarters of CRISIL is based in
Mumbai, Maharashtra. CRISIL is one of the most popular credit rating agencies in India that
offers efficient credit ratings for mutual funds ranking, Unit Linked Insurance Plans
(ULIP) rankings, CRISIL coalition index etc.
ICRA
ICRA stands for Information and Credit Rating Agency of India is a public limited credit
rating agency that was established in the year 1991. ICRA has its headquarters in Gurugram.
The company ICRA was previously called Investment Information and Credit Rating Agency of
India Limited. This credit rating company offers comprehensive credit rating system to
corporates through transparent rating system and offers credit rating for -corporate debt,
bank loan rating, financial rating, structured finance, infrastructure, insurance, mutual funds,
project and public finance, SME Rating, issuer rating, market linked debentures and so on.
CARE
CARE (Credit Analysis and Research Limited) agency was launched in the year 1993. CARE
offers credit rating services to areas such as corporate governance, debt ratings, financial
sector, bank loan ratings, issuer ratings, recovery ratings, and infrastructure ratings. The
CARE credit rating agency’s headquartered in Mumbai, Maharashtra. CARE offers two types
of bank loan ratings to its investors namely, long-term debt instrument and short-term debt
instruments. Apart from this, the company also offers ratings for Initial Public Offerings
(IPOs), real estate, renewable energy service companies (RESCO), financial assessment of
shipyards, Energy service companies (ESCO) grades various courses of educational
institutions.
ONICRA
ONICRA Credit Rating Agency is one of the leading private credit rating agencies established
to offer performance and credit ratings. The headquarters of this company is situated in
Gurugram, Haryana. This credit rating agency is responsible to provide credit ratings,
performance rating based on risk assessment and also offers analytical solutions to
individuals, corporates as well as MSMEs (micro, small and medium enterprises). The credit
ratings offered by ONICRA helps various organisations to take informed decisions regarding
lending funds to individuals, MSMEs and other organisations. The company, since its inception,
has been dedicated in providing in-depth research of various parameters related to credit and
creditworthiness.
SMERA
SMERA stands for small and medium enterprise rating agency of India was established in the
year 2005. This credit rating agency was formed by SIDBI, Dun & Bradstreet India and
leading banks in India. SMERA has its headquarters in Mumbai, Maharashtra and offers credit
rating services for various investment instruments like IPO, Non-Convertible Debentures,
Fixed deposits, Bonds, CP etc.