UNIT-4

Mutual Funds and Pension Funds ( NPS):- “A mutual fund is a financial service
organization that receives money from shareholders, invests it, earns returns on it, attempts to
make it grow and agrees to pay the shareholder cash on demand for the current value of his
investment”. SEBI (Mutual Funds) Regulations, 1996 defines mutual funds as a “fund
established in the form of a trust to raise moneys through the sale of units to the public or a
section of the public under one or more schemes for investing in securities, including money
market instruments”.

Features of mutual funds

1. Mutual funds are the companies that mobilize the savings of individuals in the form of units.
2. Each person who contributes his savings into mutual funds is allocated units of mutual fund
3. These savings are invested in the securities, bonds, money market instruments and other
assets.
4. The portfolio of investments is planned and managed by financial experts
5. The income earned in the form of dividend on shares, interest on securities and capital gain
that arise on account of trading of securities by the mutual fund companies is distributed to the
unit holders

Advantages of mutual funds

1. Channelizing the savings for investment – Mutual funds channelize the savings of small
investors by
offering various schemes suitable to the various classes of investors. These savings are directed
towards capital formation and thus enables the development of the economy as a whole.

2. Benefit of wide portfolio of investment – Mutual funds offer the benefit of wide portfolio of
investment through diversification of investment. This is in accordance with the maxim ‘not to
keep all eggs in one basket’. Diversification of investment refers to investing in a number of
different stocks of many different industries so as to minimize the impact of loss in one asset.
Investing in hundreds of different stocks in many different industries would not be possible for
a small investor. Mutual funds can invest in a large number of stocks of different industries so
that the risk spreads over a large number of assets. This minimizes the impact of loss in one
asset through gains in other assets.

3. Economies of scale – As a mutual fund buys and sells large number of securities at a time,
the per unit transaction costs become lower than what a small investor would incur for such
transactions. Thus, mutual funds reap the benefit of economies of large scale business.

4. Professional management at low cost – The primary advantage of mutual funds is that the
money of small investors is professionally managed. Generally the small investors do not
possess the necessary expertise and also time to analyze the suitable security to invest in. A
mutual fund provides an inexpensive way for them to get a full time expert manager to plan and
monitor their investments.

5. Better yields – Mutual funds command large funds at their disposal and are able to strike any
deal at lower rates of brokerage. They also enjoy the economies of large scale transactions and
professional management at low cost. This results in better yield to the unit holders.

Disadvantages of mutual funds

1. Professional management – Many small investors are of the opinion that the so called
professionals
are no better than individual investors in picking up stocks. Moreover, the professionals have no
direct impact of loss or gain on the investments. Even if the fund loses money, the managers are
still paid their salary.

2. Costs – Running a mutual fund is a costly affair. Creating, maintaining and distributing units
of
mutual fund involves a lot of expenses. These expenses are actually passed on to the small
investors.

3. Dilution – As the mutual funds have small holdings in a number of stocks of different
companies,
high returns from a few investments are diluted due to the small returns from other investments.

4. Compulsion – Successful mutual fund attracts large savings from the small investors and
makes
the mutual funds compelled to find new avenues for investment. This may affect the overall
profitability of the funds.

5. Taxes – When a security is sold, it may attract capital gains tax. Investors who are concerned
about the impact of taxes need to keep these things in mind while investing in mutual funds.

Types of Mutual Funds:-

A. On the basis of Operation

1. Close ended funds: Under this type of fund, the size of the fund and its duration are fixed in
advance. Once the subscription reaches the predetermined level, the entry of investors will be
closed. After the expiry of the fixed period, the entire corpus is disinvested and the proceeds are
distributed to the unit holders in proportion to their holding.

2. Open-ended funds: This is the just reverse of close-ended funds. Under this scheme the size
of the fund and / or the period of the fund is not fixed in advance. The investors are free to buy
and
sell any number of units at any point of time.

Difference between Open-ended and Close-ended Schemes

1. The close-ended schemes are open to the public for a limited period, but the open-ended
schemes are always open to be subscribed all the time.
2. Close-ended schemes will have a definite period of life. But he open-ended schemes are
transacted in the company
3. Close-ended schemes are transacted at stock exchanges, where as open-ended schemes are
transacted (bought and sold) in the company.
4. Close-ended schemes are terminated at the end of the specified period. Open-ended schemes
can be terminated only if the total number of units outstanding after repurchase fall below 50%
of the original number of units.

B. On the basis of return/ income

1. Income fund: This scheme aims at generating regular and periodical income to the members.
Such funds are offered in two forms. The first scheme earns a target constant income at
relatively
low risk. The second scheme offers the maximum possible income.
Features of Income Funds
(a) The investors get a regular income at periodic intervals.
(b) The main objective is to declare dividend and not capital appreciation

2. Growth fund: Growth fund offers the advantage of capital appreciation. It means growth
fund
concentrates mainly on long run gains. It does not offers regular income. In short, growth funds
aim at
capital appreciation in the long run. Hence they have been described as “Nest Eggs”
investments
or long haul investments.
Features of Growth Funds
(a) It meets the investors’ need for capital appreciation.
(b) Funds are invested in equities with high growth potentials in order to get capital
appreciation.
(c) It tries to get capital appreciation by taking much risk.

3. Conservative fund: This aims at providing a reasonable rate of return, protecting the value
of
the investment and getting capital appreciation. Hence the investment is made in growth
oriented
securities that are capable of appreciating in the long run.

C. On the basis of Investment

1. Equity fund: it mainly consists of equity based investments. It carried a high degree of risk.
Such funds do well in periods of favourable capital market trends.
2. Bond fund: It mainly consists of fixed income securities like bonds, debentures etc. It
concentrates mostly on income rather than capital gains. It carries lower risk. It offers secure
and steady income. But there is no chance of capital appreciation.
3. Balanced fund: It has a mix of debt and equity in the portfolio of investments. It aims at
distributing regular income as well as capital appreciation. This is achieved by balancing the
investments between the high growth equity shares and also the fixed income earning
securities.
4. Fund of fund scheme: In this case funds of one mutual fund are invested in the units of other
mutual funds.
5. Taxation fund: This is basically a growth oriented fund. It offers tax rebates to the investors.
It is suitable to salaried people.
6. Leverage fund: In this case the funds are invested from the amounts mobilized from small
investors as well as money borrowed from capital market. Thus it gives the benefit of leverage
to the mutual fund investors. The main aim is to increase the size of the value of portfolio. This
occurs when the gains from the borrowed funds are more than the cost of the borrowed funds.
The gains are distributed to unit holders.
7. Index bonds: These are linked to a specific index of share prices. This means that the funds
mobilized under such schemes are invested principally in the securities of companies whose
securities are included in the index concerned and in the same proportion. The value of these
index linked funds will automatically go up whenever the market index goes up and vice versa.
8. Money market mutual funds: These funds are basically open ended mutual funds. They
have
all the features of open ended mutual funds. But the investment is made is highly liquid and
safe securities like commercial paper, certificates of deposits, treasury bills etc. These are
money market instruments.
9. Off shore mutual funds: The sources of investments for these funds are from abroad.
10. Guilt funds: This is a type of mutual fund in which the funds are invested in guilt edged
securities like government securities. It means funds are not invested in corporate securities
like shares, bonds etc.

What is a pension fund?

Pension funds, which are also known as retirement funds, is a kind of savings scheme where
you (as an employee) invest a small portion of your income/salary into a designated savings
plan. The main objective of this plan is to get a steady flow of income after you complete your
active years of service.

Considering the fact that inflation in the county is growing, the pension fund has become a
necessity for all. Even if you have a considerable amount of savings in the bank, you may still
opt for a pension scheme because you never know when an emergency may arise.
  A pension fund is a pool of money that is to be paid out as a pension when employees
retire.
 Pension funds invest that money to multiply it, which will potentially provide more
benefit to the retirees.
 Pension payout amounts are dependent on the percentage of the average salary of an
employee for the last few years of their employment.

What is NPS

National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme
designed to enable the subscribers to make optimum decisions regarding their future through
systematic savings during their working life. NPS seeks to inculcate the habit of saving for
retirement amongst the citizens. It is an attempt towards finding a sustainable solution to the
problem of providing adequate retirement income to every citizen of India.

Under NPS, individual savings are pooled in to a pension fund which are invested by PFRDA
regulated professional fund managers as per the approved investment guidelines in to the
diversified portfolios comprising of Government Bonds, Bills, Corporate Debentures and
Shares. These contributions would grow and accumulate over the years, depending on the
returns earned on the investment made.

At the time of normal exit from NPS, the subscribers may use the accumulated pension wealth
under the scheme to purchase a life annuity from a PFRDA empaneled Life Insurance Company
apart from withdrawing a part of the accumulated pension wealth as lump-sum, if they choose
so.

Benefits of NPS

 Flexible- NPS offers a range of investment options and choice of Pension Funds (PFs)
for planning the growth of the investments in a reasonable manner and monitor the
growth of the pension corpus. Subscribers can switch over from one investment option to
another or from one fund manager to another.
 Simple – Opening an account with NPS provides a Permanent Retirement Account
Number (PRAN), which is a unique number and it remains with the subscriber
throughout his lifetime. The scheme is structured into two tiers:
o Tier-I account: This is the non-withdrawable permanent retirement account into
which the regular contributions made by the subscriber are credited and invested as
per the portfolio/fund manager chosen of the subscriber.
o Tier-II account: This is a voluntary withdrawable account which is allowed only
when there is an active Tier I account in the name of the subscriber. The
withdrawals are permitted from this account as per the needs of the subscriber as
and when required.
  Portable- NPS provides seamless portability across jobs and across locations. It would
provide hassle-free arrangement for the individual subscribers while he/she shifts to the
new job/location, without leaving behind the corpus build, as happens in many pension
schemes in India.
 Well Regulated- NPS is regulated by PFRDA, with transparent investment norms,
regular monitoring and performance review of fund managers by NPS Trust. The account
maintenance costs under NPS are the lowest as compared to similar pension products
across the globe. While saving for a long-term goal such as retirement, the cost matters a
lot as the charges can shave off a significant amount from the corpus over 35-40 years of
investment period.
 Dual benefit of Low Cost and Power of compounding: Till the retirement, pension
wealth accumulation grows over the period of time with a compounding effect. The
account maintenance charges being low, the benefit of accumulated pension wealth to the
subscriber eventually become large.

Insurance Services:- Insurance is defined as a contract, which is called a policy, in which an

individual or organisation receives financial protection and reimbursement of damages from the
insurer or the insurance company. At a very basic level, it is some form of protection from any
possible financial losses.

The basic principle of insurance is that an entity will choose to spend small periodic amounts of
money against a possibility of a huge unexpected loss. Basically, all the policyholder pool their
risks together. Any loss that they suffer will be paid out of their premiums which they pay.

Functions of an Insurance Company

1] Provides Reliability:- The main function of insurance is that eliminates the uncertainty of an
unexpected and sudden financial loss. This is one of the biggest worries of a business. Instead
of this uncertainty, it provides the certainty of regular payment i.e. the premium to be paid.

2] Protection:- Insurance does not reduce the risk of loss or damage that a company may suffer.
But it provides a protection against such loss that a company may suffer. So at least the
organisation does not suffer financial losses that debilitate their daily functioning.

3] Pooling of Risk- In insurance, all the policyholders pool their risks together. They all pay
their premiums and if one of them suffers financial losses, then the payout comes from this
fund. So the risk is shared between all of them.

4] Legal Requirements:- In a lot of cases getting some form of insurance is actually required by
the law of the land. Like for example when goods are in freight, or when you open a public
space getting fire insurance may be a mandatory requirement. So an insurance company will
help us fulfil these requirements.
5] Capital Formation:- The pooled premiums of the policyholders help create a capital for the
insurance company. This capital can then be invested in productive purposes that generate
income for the company.

Principles of Insurance

As we discussed before, insurance is actually a form of contract. Hence there are certain
principles that are important to ensure the validity of the contract. Both parties must abide by
these principles.

1] Utmost Good Faith:- A contract of insurance must be made based on utmost good faith ( a
contract of uberrimate fidei). It is important that the insured disclose all relevant facts to the
insurance company. Any facts that would increase his premium amount, or would cause any
prudent insurer to reconsider the policy must be disclosed.

If it is later discovered that some such fact was hidden by the insured, the insurer will be within
his rights to void the insurance policy.

2] Insurable Interest:- This means that the insurer must have some pecuniary interest in the
subject matter of the insurance. This means that the insurer need not necessarily be the owner of
the insured property but he must have some vested interest in it. If the property is damaged the
insurer must suffer from some financial losses.

3] Indemnity:- Insurances like fire and marine insurance are contracts of indemnity. Here the
insurer undertakes the responsibility of compensating the insured against any possible damage
or loss that he may or may not suffer. Life insurance is not a contract of indemnity.

4] Subrogation:- This principle says that once the compensation has been paid, the right of
ownership of the property will shift from the insured to the insurer. So the insured will not be
able to make a profit from the damaged property or sell it.

5] Contribution:- This principle applies if there are more than one insurers. In such a case, the
insurer can ask the other insurers to contribute their share of the compensation. If the insured
claims full insurance from one insurer he losses his right to claim any amount from the other
insurers.

6] Proximate Cause:- This principle states that the property is insured only against the incidents
that are mentioned in the policy. In case the loss is due to more than one such peril, the one that
is most effective in causing the damage is the cause to be considered.

NEED OF INSURANCE
(a) To provide Security and Safety
The Life Insurance provides security against premature death and payment in old age to
lead the comfortable life. Similarly in general Insurance, the property can be insured
against any contingency i.e. fire, earthquake etc.
(b) To provide Peace of Mind
The uncertainty due to fire, accident, death, illness, disability in the human life, it is
beyond the control of the human beings. By way of Insurance, he may be compensated
financially but not emotionally. The financial compensation provides not only peace of
mind but also motivates to work more and more.

(c) To Eliminate Dependency

On the death of the breadwinner, the consequences need not be explained. Similar to the
destruction of property and goods the family would suffer a lot. It could lead to reduction
in the standard of living or begging from relatives, friends or neighbours. The economic
independence of the family is reduced. The Insurance is the only way to assist and
provider them adequate at the time of sufferings.

(d) To Encourage Savings

Life Insurance provides protection and investment while general Insurance provides only
protection to the human life and property respectively. Life Insurance provides systematic
saving because once the policy is taken then the premium is to be regularly paid
otherwise the amount will be forfeited.

(e) To fulfill the needs of a person

a) Family needs
b) Old age needs
c) Re-adjustment needs
d) Special needs: Education, Marriage, health
e) The clean up needs: After death, ritual ceremonies, payment of wealth tax and income
taxes are certain requirements, which decreases the amount of funds of the family
members

Types of Insurance

After having gone through the following points, one can get an answer to the question of how many types of
insurance are there?

Health Insurance:- Health insurance is a contract that is formed between a health insurer and a
policyholder. This policyholder is also known as the insured person. In this contract, the health
insurer agrees to pay the full medical cost of the insured or just a portion of it.

Car Insurance:- Vehicle insurance covers cars, motorcycles, trucks and all the other vehicles
running on the road. This insurance is meant for giving protection against any physical damage
or bodily injury that the vehicle suffers from recklessness or an accident. All the cost incurred to
repair the vehicle is met by the insurance company.

Life Insurance:- Life insurance is a contract in which the beneficiary is paid a fixed amount of
money by the insurer after the death of the insured. The beneficiary uses this money to clear out
the debts of the insured and also to meet his/her financial expenses after the death of the
insured. The beneficiary is usually the spouse of the deceased. The beneficiary name is
mentioned in the contract.

Homeowners Insurance:- Homeowners' insurance protects one's house from the uncertainty of
any damages. The insurance covers the house the insured person resides in and other associated
structures connected to the house such as the balcony, garage and porch. The insurer will
provide the amount incurred to repair any damage in the house or its associated structures.

Umbrella Insurance:- Umbrella insurance is also known as liability insurance. It covers the
cost that is incurred in excess of other insurance policies. It gives a person extra coverage on
another type of insurance policy that he/she is in.

Renters Insurance:- Renters insurance is meant for tenants who use it to protect their personal
property from any damage or theft. The insurance covers all the assets owned by the tenants.
This is done because the landlord doesn’t take any responsibility for the assets of the tenant.
Nowadays, landlords are not allowing tenants who don't have renters insurance.

Travel Insurance:- Travel insurance is good for those people who travel a lot. It covers trip
cancellations, lost or misplaced luggage, travel accidents and even medical expenses.

Bancassurance:- Bancassurance is an arrangement between a bank and an insurance

company allowing the insurance company to sell its products to the bank's client base. This
partnership arrangement can be profitable for both companies. Banks earn additional revenue by
selling insurance products, and insurance companies expand their customer bases without
increasing their sales force.

Key Takeaways

 Bancassurance is an arrangement between a bank and an insurance company, through

which the insurer can sell its products to the bank's customers.
 The insurance company benefits from increased sales and a broader client base without
having to expand its sales force.
 The bank benefits by receiving additional revenue from the sale of insurance products.
Bancassurance in India – Overview

To begin with, let us have a quick idea about the insurance sector in India. The Insurance
Regulatory and Development Authority (IRDA) suggested regulating the registration of
insurance companies in India. Hence the government of India issued a notification stating that
“Insurance” is a permissible form of business that can be undertaken by the banks as per
Section 6 (1) (o) of the Banking Regulation Act, 1949.

However, it was also clarified that any bank intending to take up such a business would be
required to seek specific approval prior from the Reserve Bank of India (RBI). Therefore, all
commercial scheduled banks have been allowed to undertake the business of insurance on
behalf of the insurance company without any risk participation on a fee basis.

Hence, the banking and the insurance sector in India comes under the purview of both the IRDA
and RBI regulations.

Types of Bancassurance Services

 Life insurance
o Term insurance plans (with accidental and death claims)
o Endowment plans
o Unit Linked Insurance Plans (ULIPs)
 Non-Life insurance
o Health insurance
o Marine insurance (for cargo shipments)
o Property insurance (against natural calamities)
o Key Man insurance (top executives of companies, partnership firms, etc.)

 Distribution Agreement

o It is the most commonly used bancassurance model in India.
o The insurer is able to leverage the bank’s infrastructure and provides a source of
fee income for banks.
o There is a low level of integration of product management and distribution
channels.
o For instance, the Indian Overseas Bank works as a distributor of the LIC of India
Ltd.
 Strategic Alliance

o The insurer is able to leverage the bank’s infrastructure and provides a source of
fee income for banks.
o Sharing of the database of customers with the insurance company.
o There is a low level of integration of product and distribution channel
management.
 o For instance, the HDFC bank works with the HDFC Life Insurance Company and
HDFC ERGO general insurance company.

 Joint Venture

o The bank is responsible for both product and distribution design.
o Joint decision-making and high system integration for infrastructure utilization.
o For instance, India First Life Insurance Co. Ltd. is a joint venture among Bank of
Baroda (44%), Andhra Bank (30%), and the UK’s financial and investment
company called ‘Legal and General’ (26%)

 Financial Services Group is a one-stop shop for all financial products and services.

 Mixed Models:

o Marketing is conducted by the insurer’s staff and the bank is responsible only for
the generation of leads.
o The database of the bank is handed over to the insurance company.
o It requires very little technical investment.

Advantages of Bancassurance

In the past years, Bancassurance has emerged as a very important route for the distribution of
insurance products and services both for the banks as well as the insurance companies. If
implemented in a well-planned and structured manner, this partnership can be beneficial for all
the parties involved – that is, the banks, insurers, and the customers as well. Following are the
advantages of bancassurance to banks, insurers, and customers:

To Banks

 Bancassurance is the best way to offer another source of income for the banks with little
or no capital outlay. A minor capital outlay in turn results in a high return on equity.
 An addition to the product portfolio
 An easy source of additional fee-based profits
 Increased manpower efficiency – as existing bank staff can be trained easily
 Possibility of a high degree of product sales alignment in a customized way and support
services
 Selling financial services of wide range to clients and increment in customer retention
 Optimization of manpower utilization to increase productivity efficacy

To Insurance Companies

 Increase in turnover
 Increased penetration in both rural as well as urban markets using existing customer
database of the bank
  Very cost-effective as the route and network are already set up by the banks
 Insurance companies may utilize the currently existing branches and outlets of the banks
in the rural and/ or urban areas to market their products.

To Customers

 A purpose to provide one-stop service to all the customers. Presently, convenience is one
of the major concerns in managing a customer’s day-to-day activities. Hence, the bank
marketing insurance products provides them a competitive edge over others. It is possible
for the customers to avail complete f financial planning services under one roof.
 Builds high degree of trust
 It is very simple to make claims
 Easy payment of premium, as it can be linked directly to the bank account
 Easy access to a myriad of products within a bank
 Assured services and advice by the bank as customers get professional experts and
trained staff to guide them through finances.

Disadvantages of Bancassurance

 There are greater chances of customers’ data security being compromised upon by the
banks and/ or the insurance companies
 The customers might get confused regarding where to invest in case of a conflict of
interest between the other products of the bank and the insurance companies (like money-
back policies)
 There is a hope that a better approach and services will be provided by the banking
institutions to the customers. That’s because many banks in India are not known to
provide good customer service. It may turn otherwise as banks are also responsible for
the sale of insurance products.

Reinsurances:- Reinsurance is insurance of insurance, where one or more insurance

companies agree to indemnify the risk, partially or altogether, for the policy issued by another
one or more insurance companies.

Reinsurance is also known as insurance for insurers or stop-loss insurance. Reinsurance is the
practice whereby insurers transfer portions of their risk portfolios to other parties by some form
of agreement to reduce the likelihood of paying a large obligation resulting from an insurance
claim.

The party that diversifies its insurance portfolio is known as the ceding party. The party that
accepts a portion of the potential obligation in exchange for a share of the insurance premium is
known as the reinsurer.
How Reinsurance Works:- Reinsurance allows insurers to remain solvent by recovering some
or all amounts paid to claimants. Reinsurance reduces the net liability on individual risks and
catastrophe protection from large or multiple losses. The practice also provides ceding
companies, those that seek reinsurance, the capacity to increase their underwriting capabilities
in terms of the number and size of risks.

Types of Re-Insurances:

1. Facultative Re-Insurance:

These type of re-insurance policy are commonly known as optional policies. It is up to re-
insurance companies to issue or not any re-insurance policy. These type of policies are issued
on an individual analysis of the situation and facts of the policy under consideration.

The policy may or may not cover all or part of the said policy. Such type of policies depend on
the risk associated with them. These policies are used by the reinsured to reduce the chance of
risks/losses associated with particular policy.

2. Treaty Re-Insurance:

It is particular type of policy which is issued by the re-insured. When we talk about a treaty
policy it envisages the meaning of an agreement or negotiations like a treaty. In such type of
reinsurance mostly is a written agreement to cover a particular class of policies issued by the
reinsured.

A particular class means policies covering similar type of reinsurance such as all property
insurance policies or accident or other type of casualty insurance policies. The important feature
of treaty insurance is that it passes the risk to the insurer for all policies which are covered
under the treaty agreement and not just one particular policy.

3. Double Insurance:

By the meaning of double one can easily understand that it twice enhanced benefit. But with
reference to insurance it is a situation of getting two overlapping policies for the same and the
one risk from two different insurance companies. In case of eventuality the insured can claim
from both the insurance companies. Claiming from two companies does not mean that an
insured can earn profits. Any insured cannot claim more than the actual losses or damage
occurred.

All the insurance companies are law bound to share only the actual loss in the same proportion
they share the total premium. For example any insurance policy purchased for a loss of Rs.
100.00 from company (A) and again for one hundred from company (B) and the total loss is Rs.
150.00.
The insured person cannot claim Rs. 100.00 from both companies to aggregate of insurance
recovery of Rs. 200.00 and getting a profit of Rs. 50.00. Both the companies shall share the risk
in proportion of the premium paid to respective company.

4. Duplicate Insurance:

It is always confused the double insurance with duplicate insurance. Duplicate protection is
provided when two companies deal with the same individual and undertake to indemnify that
person against the same losses.

When an individual has double insurance, he or she has coverage by two different insurance
companies upon the identical interest in the identical subject matter. If a Husband and Wife
have duplicate medical insurance coverage protecting one another, they would thereby have
double insurance.

An individual can rarely collect on double insurance, however, since this would ordinarily
constitute a form of Unjust Enrichment and a majority of insurance contracts contain provisions
that prohibit this.

Double Insurance and re-insurance differ in nature. A double insurance is a contract where the
insured makes two insurances on the same risk, and the same interest. It is made by the insured,
with a view to receive a double satisfaction in case of loss, whereas a re-insurance is made by a
former insurer, to protect himself from the risk to which they were liable by the first insurance.
In both cases any insured cannot claim or receive the benefit of actual loss for the extend of
amount insured.

5. Co-Insurance:

Not much prevalent in India the co-insurance as is clear by the meaning of words it is shared by
co-pays of an insurance together that is insured and insurer. In other words this is type of
insurance where the risk is shared between the insurer and the insured with each other. It helps
to reduce the cost of premium for the insured but also benefits other people who are insured
with the same group.

The terms and conditions of co-insurance are somewhat confusing for the reason that one or the
other condition either overlaps or contradicts with each other. It becomes therefore of utmost
importance that fully understand the terms before opting for a co-insurance. In short term we
can say a co-insurance is an insurance generally sharing risk between the insurer and the
insured. In other words it stands for co-pay also.

Importance of Reinsurance Business

The main reason for the practice of reinsurance that it enables a risk to be scattered over a much
wider area and the principle of insurance is taken well care of.
From what has been said so far, the students should be able to grasp the reason as to why
reinsurance is resorted to. However, to sum up, in a systematic, disciplined way, the reasons can
be grouped as under:-

 Risk Minimization by Spreading.

 Risk Transfer.
 Flexibility.
 Accumulation.
 Development.
 Prediction for Rating.
 New Insurer.

Venture Capital:- Meaning of Venture Capital

The term venture capital comprises of two words, namely, ‘venture’ and ‘capital’. The term
‘venture’ literally means a ‘course’ or ‘proceeding’, the outcome of which is uncertain (i.e.,
involving risk). The term capital refers to the resources to start the enterprise. Thus venture
capital refers to capital investment in a new and risky business enterprise. Money is invested in
such enterprises because these have high growth potential.
A young hi-tech company that is in the early stage of financing and is not yet ready to make a
public issue may seek venture capital. Such a high risk capital is provided by venture capital
funds in the form of long term equity finance with the hope of earning a high rate of return
primarily in the form of capital gain. In fact, the venture capitalist acts as a partner with the
entrepreneur.
Venture capital is the money and resources made available to start up firms and small business
with exceptional growth potential (e.g., IT, infrastructure, real estate etc.). It is fundamentally a
long term risk capital in the form of equity finance for the small new ventures which involve
risk.
But at the same time, it a the strong potential for the growth. It thrives on the concept of high
risk- high return. It is a means of equity financing for rapidly growing private companies.

Characteristics of Venture Capital

The important characteristics of venture capital finance are outlined as bellow:
1. It is basically equity finance.
2. It is a long term investment in growth-oriented small or medium firms.
3. Investment is made only in high risk projects with the objective of earning a high rate of
return.
4. In addition to providing capital, venture capital funds take an active interest in the
management of the assisted firm. It is rightly said that, “venture capital combines the qualities
of banker, stock market investor and entrepreneur in one”.
5. The venture capital funds have a continuous involvement in business after making the
investment.
6. Once the venture has reached the full potential, the venture capitalist sells his holdings at a
high premium. Thus his main objective of investment is not to earn profit but capital gain.
Types of Venture Capitalists
Generally, there are three types of venture capital funds. They are as follows:
1. Venture capital funds set up by angel investors (angels): They are individuals who invest
their personal capital in start up companies. They are about 50 years old. They have high
income and wealth. They are well educated. They have succeeded as entrepreneurs. They are
interested in the start up process.
2. Venture capital subsidiaries of Corporations: These are established by major corporations,
commercial banks, holding companies and other financial institutions.
3. Private capital firms/funds: The primary source of venture capital is a venture capital firm.
It
takes high risks by investing in an early stage company with high growth potential.

Methods or Modes of Venture Financing (Funding Pattern)/Dimensions of Venture

Capital:-

Equity: All VCFs in India provide equity but generally their contribution does not exceed 49
per cent of the total equity capital. Thus, the effective control and majority ownership of the
firm remain with the entrepreneur. They buy shares of an enterprise with an intention to
ultimately sell them off to make capital gains.

Conditional loan: It is repayable in the form of a royalty after the venture is able to generate
sales. No interest is paid on such loans. In India, VCFs charge royalty ranging between 2 and
15 per cent; actual rate depends on the other factors of the venture, such as gestation period,
cost-flow patterns and riskiness.

Income note: It is a hybrid security which combines the features of both conventional loan and
conditional loan. The entrepreneur has to pay both interest and royalty on sales, but at
substantially low rates.

Conventional loan: Under this form of assistance, the enterprise is assisted by way of loans.
On the loans, a lower fixed rate of interest is charged, till the unit becomes commercially
operational. When the company starts earning profits, normal or higher rate of interest will be
charged on the loan. The loan has to be repaid as per the terms of loan agreement.

Other financing methods: A few venture capitalists, particularly in the private sector, have
started introducing innovative financial securities like participating debentures introduced by
TCFC.

Stages of Venture Capital Financing

Venture capital takes different forms at different stages of a project. The various stages in the
venture capital financing are as follows:
1. Early stage financing: This stage has three levels of financing. These three levels are:
(a) Seed financing: This is the finance provided at the project development stage. A small
amount of capital is provided to the entrepreneurs for concept testing or translating an idea into
business.
(b) Start up finance/first stage financing: This is the stage of initiating commercial
production and marketing. At this stage, the venture capitalist provides capital to manufacture a
product.
(c) Second stage financing: This is the stage where product has already been launched in the
market but has not earned enough profits to attract new investors. Additional funds are needed
at this stage to meet the growing needs of business. Venture capital firms provide larger funds
at this stage.
2. Later stage financing: This stage of financing is required for expansion of an enterprise that
is already profitable but is in need of further financial support. This stage has the following
levels:
(a) Third stage/development financing: This refers to the financing of an enterprise which has
overcome the highly risky stage and has recorded profits but cannot go for public issue. Hence
it requires financial support. Funds are required for further expansion.
b) Turnarounds: This refers to finance to enable a company to resolve its financial difficulties.
Venture capital is provided to a company at a time of severe financial problem for the purpose
of turning the company around.
(c) Fourth stage financing/bridge financing: This stage is the last stage of the venture capital
financing process. The main goal of this stage is to achieve an exit vehicle for the investors and
for the venture to go public. At this stage the venture achieves a certain amount of market
share.
(d) Buy-outs: This refers to the purchase of a company or the controlling interest of a
company’s share. Buy-out financing involves investments that might assist management or an
outside party to acquire control of a company. This results in the creation of a separate business
by separating it from their existing owners

Advantages of Venture Capital

Venture capital has a number of advantages over other forms of finance. Some of them are:
1. It is long term equity finance. Hence, it provides a solid capital base for future growth.
2. The venture capitalist is a business partner. He shares the risks and returns.
3. The venture capitalist is able to provide strategic operational and financial advice to the
company.
4. The venture capitalist has a network of contacts that can add value to the company. He can
help the company in recruiting key personnel, providing contracts in international markets etc.
5. Venture capital fund helps in the industrialization of the country.

Private Equity:- Investors seek out private equity (PE) funds to earn returns that are better
than what can be achieved in public equity markets. But there may be a few things you don't
understand about the industry. Read on to find out more about private equity (PE), including
how it creates value and some of its key strategies.
Key Takeaways

 Private equity (PE) refers to capital investment made into companies that are not publicly
traded.
 Most PE firms are open to accredited investors or those who are deemed high-net-worth,
and successful PE managers can earn millions of dollars a year.23
 Leveraged buyouts (LBOs) and venture capital (VC) investments are two key PE
investment sub-fields.

What Is Private Equity (PE)?

Private equity (PE) is ownership or interest in an entity that is not publicly listed or traded. A
source of investment capital, private equity (PE) comes from high-net-worth individuals
(HNWI) and firms that purchase stakes in private companies or acquire control of public
companies with plans to take them private and delist them from stock exchanges.

3 Types of Private Equity Strategies:-

1. Venture Capital

Venture capital (VC) is a type of private equity investment made in an early-stage startup.
Venture capitalists give the company a certain amount of seed funding in exchange for a share
of it. Venture capitalists typically don’t require a majority share (over 50 percent), which can be
attractive to founders.

Venture capital investing is inherently risky because startups—many of which are little more
than ideas at the time of a pitch—haven’t yet proven their ability to turn a profit. Like with any
investment, venture capital’s return on investment is never a guarantee. Yet, when a startup
turns out to be the next big thing, venture capitalists can potentially cash in on millions, or even
billions, of dollars.

2. Growth Equity:-The second type of private equity strategy is growth equity, which is
capital investment in an established, growing company.

Growth equity comes into play further along in a company’s lifecycle: once it’s established but
needs additional funding to grow. As with venture capital, growth equity investments are
granted in return for company equity, typically a minority share. Unlike venture capitalists,
growth equity investors can research the company’s financial track record, interview clients,
and try the product themselves before deciding if the company is a wise investment choice. Any
investment presents risk, but in the case of growth equity, the company has the chance to prove
it can provide a return before the private equity firm invests.

3. Buyouts:-The final key private equity strategy—and the one that’s furthest along in the
company lifecycle—is buyouts. Buyouts occur when a mature, typically public company is
taken private and purchased by either a private equity firm or its existing management team.
This type of investment makes up the largest portion of funds in the private equity space.

When a buyout occurs, all of the company’s previous investors cash in on their shares and exit.
The private equity firm or management team becomes the sole investor and must hold a
controlling share of the company (more than 50 percent).

There are two types of buyouts:

 Management buyouts, in which the existing management team buys the company’s
assets and takes the controlling share
 Leveraged buyouts, which are buyouts funded with borrowed money

Management Buyouts:-Management buyouts may be a good choice if a public company needs

internal restructuring and wants to go private before embarking on organizational changes. This
allows all investors and stakeholders to cash in on their shares before company management
takes control. The management team may raise the funds necessary for a buyout through a
private equity company, which would take a minority share in the company in exchange for
funding. It can also be used as an exit strategy for business owners who wish to retire.

Leveraged Buyouts:-Leveraged buyouts make sense for companies that wish to make major
acquisitions without spending too much capital. The assets of both the acquiring and acquired
companies are used as collateral for the loans to finance the buyout. An example of a leveraged
buyout is the purchase of Hospital Corporation of America in 2006 by private equity firms
KKR, Bain & Company, and Merrill Lynch.

The Strategic Secret of Private Equity:- Private equity. The very term continues to evoke
admiration, envy, and—in the hearts of many public company CEOs—fear. In recent years, private equity
firms have pocketed huge—and controversial—sums, while stalking ever larger acquisition targets.
Indeed, the global value of private equity buyouts bigger than $1 billion grew from $28 billion in 2000 to
$502 billion in 2006, according to Dealogic, a firm that tracks acquisitions.

The Private Equity Sweet Spot

Clearly, buying to sell can’t be an all-purpose strategy for public companies to adopt. It doesn’t make sense
when an acquired business will benefit from important synergies with the buyer’s existing portfolio of
businesses. It certainly isn’t the way for a company to profit from an acquisition whose main appeal is its
prospects for long-term organic growth.

However, as private equity firms have shown, the strategy is ideally suited when, in order to realize a onetime,
short- to medium-term value-creation opportunity, buyers must take outright ownership and control. Such an
opportunity most often arises when a business hasn’t been aggressively managed and so is underperforming. It
can also be found with businesses that are undervalued because their potential isn’t readily apparent. In those
cases, once the changes necessary to achieve the uplift in value have been made—usually over a period of two
to six years—it makes sense for the owner to sell the business and move on to new opportunities. (In fact,
private equity firms are obligated to eventually dispose of the businesses; see the sidebar “How Private Equity
Works: A Primer.”)

Furthermore, because private equity firms buy only to sell, they are not seduced by the often alluring possibility
of finding ways to share costs, capabilities, or customers among their businesses. Their management is lean and
focused, and avoids the waste of time and money that corporate centers, when responsible for a number of
loosely related businesses and wishing to justify their retention in the portfolio, often incur in a vain quest for
synergy.

Finally, the relatively rapid turnover of businesses required by the limited life of a fund means that private
equity firms gain know-how fast. Permira, one of the largest and most successful European private equity funds,
made more than 30 substantial acquisitions and more than 20 disposals of independent businesses from 2001 to
2006. Few public companies develop this depth of experience in buying, transforming, and selling.

What Public Companies Can Do

As private equity has gone from strength to strength, public companies have shifted their attention away from
value-creation acquisitions of the sort private equity makes. They have concentrated instead on synergistic
acquisitions. Conglomerates that buy unrelated businesses with potential for significant performance
improvement, as ITT and Hanson did, have fallen out of fashion. As a result, private equity firms have faced
few rivals for acquisitions in their sweet spot. Given the success of private equity, it is time for public
companies to consider whether they might compete more directly in this space.

Buy to sell.

Companies wishing to try this approach in its pure form face some significant barriers. One is the challenge of
overhauling a corporate culture that has a buy-to-keep strategy embedded in it. That requires a company not
only to shed deeply held beliefs about the integrity of a corporate portfolio but also to develop new resources
and perhaps even dramatically change its skills and structures.

Flexible ownership.

A strategy of flexible ownership could have wider appeal to large industrial and service companies than buying
to sell. Under such an approach, a company holds on to businesses for as long as it can add significant value by
improving their performance and fueling growth. The company is equally willing to dispose of those businesses
once that is no longer clearly the case. A decision to sell or spin off a business is viewed as the culmination of a
successful transformation, not the result of some previous strategic error. At the same time, the company is free
to hold on to an acquired business, giving it a potential advantage over private equity firms, which sometimes
must forgo rewards they’d realize by hanging on to investments over a longer period.

Investment strategies:- Investment strategies are strategies that help investors choose
where and how to invest as per their expected return, risk appetite, corpus amount, long-term,
short-term holdings, retirement age, choice of industry, etc. Investors can strategies their
investment plans as per the objectives and goals they want to achieve.

#1 – Passive and Active Strategies

The passive strategy involves buying and holdingThe term "buy and hold" refers to an investor's
investment strategy in which they hold securities for a long period of time, ignoring the ups and
downs in market price during a short period of time.read more stocks and not frequently dealing
in them to avoid higher transaction costs. They believe they cannot outperform the market due
to its volatility; hence passive strategies tend to be less risky. On the other hand, active
strategies involve frequent buying and selling. They believe they can outperform the market and
can gain more returns than an average investor would.

#2 – Growth Investing (Short-Term and Long-Term Investments)

Investors chose the holding period based on the value they want to create in their portfolio. If
investors believe that a company will grow in the coming years and the intrinsic value of a
stock will go up, they will invest in such companies to build their corpus value. This is also
known as growth investingGrowth Investing refers to capital allocation in potentially high
earning companies such as small caps and startups, which grow much faster than the overall
industry or mature companies. Because the returns on such investments are high, the risk that
such investors face is also higher.read more. On the other hand, if investors believe that a
company will deliver good value in a year or two, they will go for short term holding. The
holding period also depends upon the preference of investors. For example, how soon they want
money to buy a house, school education for kids, retirement plans, etc.

#3 – Value Investing

Value investing strategy involves investing in the company by looking at its intrinsic value
because such companies are undervalued by the stock market. The idea behind investing in such
companies is that when the market goes for correctionMarket Correction is usually referred to
as a fall of 10% or more from its latest high. It happens due to various reasons such as declining
macro-economic factors, intense pessimism across the economy, securities specific factors,
over-inflation in the markets, and so on.read more, it will correct the value for such undervalued
companies, and the price will then shoot up, leaving investors with high returns when they sell.
This strategy is used by the very famous Warren Buffet.

#4 – Income Investing

This type of strategy focuses on generating cash income from stocks rather than investing in
stocks that only increase the value of your portfolio. There are two types of cash income which
an investor can earn – (1) DividendDividends refer to the portion of business earnings paid to
the shareholders as gratitude for investing in the company’s equity.read more and (2) Fixed
interest income from bonds. Investors who are looking for steady income from investments opt
for such a strategy.

#5 – Dividend Growth Investing

In this type of investment strategy, the investor looks out for companies that consistently paid a
dividend every year. Companies that have a track record of paying dividends consistently are
stable and less volatile compared to other companies and aim to increase their dividend payout
every year. The investors reinvest such dividends and benefit from compoundingCompounding
is a method of investing in which the income generated by an investment is reinvested, and the
new principal amount is increased by the amount of income reinvested. Depending on the time
period of deposit, interest is added to the principal amount.read more over the long term.

#6 – Contrarian Investing

This type of strategy allows investors to buy stocks of companies at the time of the down
market. This strategy focuses on buying at low and selling at high. The downtime in the stock
marketStock Market works on the basic principle of matching supply and demand through an
auction process where investors are willing to pay a certain amount for an asset, and they are
willing to sell off something they have at a specific price.read more is usually at the time of
recession, wartime, calamity, etc. However, investors shouldn’t just buy stocks of any company
during downtime. They should look out for companies that have the capacity to build up value
and have a branding that prevents access to their competition.

#7 – Indexing

This type of investment strategy allows investors to invest a small portion of stocks in a market
index. These can be S&P 500, mutual fundsA mutual fund is a professionally managed
investment product in which a pool of money from a group of investors is invested across assets
such as equities, bonds, etcread more, exchange-traded funds.

Advantages of Investment Strategies

Some of the advantages of investment strategies are as follows:

 Investment strategies allow for diversification of risk in the portfolio by investing in

different types of investmentsStocks, bonds, and cash equivalents are the three main
forms of investments. Investment, in general, refers to the purchase of anything for future
use with the goal of generating a regular cash flow or increasing the value of something
over time so that it can be sold for a higher price than it was purchased for, i.e. capital
gains. read more and industry based on timing and expected returns.
 A portfolio can be made of a single strategy or a combination of strategies to
accommodate the preferences and needs of the investors.
 Investing strategically allows investors to gain maximum out of their investments.
 Investment strategies help reduce transaction costs and pay less tax.

Limitations of Investment Strategies

Some of the limitations of investment strategies are as follows:

 Average investors find it difficult to outperform the market. To earn an average return
from investments, it may take them years, whereas professional investors would earn the
same return in weeks or months.
 Even though a lot of research, analysis, and historical data are considered before
investing, most of the decisions are taken on a predictive basis. Sometimes, the results
 and returns may not be as it was anticipated, and it may delay the investors from
achieving their goals.

Hedge Funds:- In Securities and Exchange Board of India (Sebi’s) words, “Hedge funds,
including fund of funds, are unregistered private investment partnerships, funds or pools that
may invest and trade in many different markets, strategies and instruments (including securities,
non-securities and derivatives) and are not subject to the same regulatory requirements as
mutual funds.

Key Takeaways

 Hedge funds are actively managed alternative investments that commonly use risky
investment strategies.
 Hedge fund investment requires a high minimum investment or net worth from accredited
investors.
 Hedge funds charge higher fees than conventional investment funds.
 Common hedge fund strategies depend on the fund manager and include equity, fixed-
income, and event-driven goals.

How do Hedge funds work?

These funds use different types of trading techniques because of the securities and assets they
invest in. They invest in equities, debt and also derivatives.

Examples of derivatives include futures and options. Like with equities and debt securities, the
trading technique could be trading in a stock market or buying it directly from the company in a
private placement.

For example, with futures, there is a right or an obligation to buy or sell an underlying stock at a
pre-determined price, date and time. Options trading are the same but without an obligation.
Investing in such securities automatically diversifies trading techniques.

Hedge mutual funds pool money from larger investors like high networth individuals (HNI),
endowments, banks, pension funds and commercial firms. They fall under the AIF (alternative
investment funds)-category III. This pooled money is used to invest in such securities in
national and international markets.

What are the different types of hedge funds in the market?

There are mainly three types:

 Domestic hedge funds: Domestic hedge funds are open to only those investors that are
subject to the origin country’s taxation.
  Offshore hedge funds: An offshore hedge fund is established outside of your own
country, preferably in a low taxation country.

 Fund of funds: Fund of funds are basically mutual funds that invest in other hedge
mutual funds rather than the individual underlying securities.

What are the different strategies of hedge fund investing?

These funds can also be categorised by the complex strategies their fund managers adopt to
maintain their funds.

 Event driven: There are few event driven hedge mutual funds that invest to take
advantage of price movements generated by corporate events. For example: merger
arbitrage funds and distressed asset funds.

 Market neutral: There are also some market neutral funds that seek to minimise market
risks. This category included convertible bonds, short and long equity funds and fixed
income arbitrage.

 Long/Short selling: By definition, short-selling means that you sell a security without
actually buying it but with the notion of buying it at a predetermined future date and
price. You hope for the share price to drop on this predetermined future date and book
profits.
 Arbitrage: An arbitrage-oriented strategy means buying a security in one market where
the security is trading at a lower price and then selling the same security at a higher price
in another market to book some profit. This can also be used for buying and selling two
very highly correlated securities simultaneously to book profit when markets are moving
sideways. This is called relative value arbitrage. Both the securities could be from one
asset class or multiple ones.
 Market-driven: Hedge mutual funds also take advantage of global market trends before
they make the decision to invest in securities. They look at global macros and how they
will impact interest rates, equities, commodities and currencies.
How are hedge mutual funds different from mutual funds?:-

Things to keep in mind before investing in hedge mutual funds

 Complicated products: These funds in short-selling and derivatives trading. Such

trading techniques are adopted only by larger investors. If you are looking to invest, you
need to be prepared for a whole lot of research and investment tracking from your end.

 Risky: Dealing in derivatives does make the product risky but what adds to the risk
element is the low level of regulation. Sebi does not require hedge mutual funds to be
registered with them so the fund and their investors are kind of on their own.

 Expensive: The minimum investment ticket size is Rs 1 crore so for a regular investor,
putting in such a huge amount in one investment may not be feasible.
 Returns: Hedge fund returns are volatile so you need to be prepared for dips and upsides
both.

E banking:- Banks give administrations or bank services to draw in clients, from giving
advances, issuing of debit cards and credit cards, computerised monetary services, and
surprisingly personal services or administrations. Even so, some fundamental present-day
administrations are presented by many commercial banks.

Electronic banking has many names like web-based banking, e-banking, virtual banking, or web
banking, and online banking. It is just the utilisation of telecommunications networks and
electronic networks for conveying different financial services and products. Through e-banking,
a client can acquire his record and manage numerous exchanges utilising his cell phone or
personal computer.
Types of e banking:-

Level 1 – This is the basic level of service that banks offer through their websites. Through this
service, the bank offers information about its products and services to customers. Further, some
banks may receive and reply to queries through e-mail too.

Level 2 – In this level, banks allow their customers to submit instructions or applications for
different services, check their account balance, etc. However, banks do not permit their
customers to do any fund-based transactions on their accounts.

Level 3 – In the third level, banks allow their customers to operate their accounts for funds
transfer, bill payments, and purchase and redeem securities, etc.

Services Under E-Banking:

Mobile Banking:

Mobile banking (otherwise called M-banking) is a name utilised for performing account
exchanges or transactions, bill payments, credit applications, balance checks, and other financial
exchanges through a mobile phone like a Personal Digital Assistant (PDA) or cell phone.

Electronic Clearing System (ECS):

The Electronic Clearing System is a creative provision for occupied individuals. With this
provision, an individual’s credit card bill is consequently charged from the same individual’s
savings bank account, so one doesn’t have to stress over missed or late payments.

Smart Cards:

A smart card is a card that stores data on a microchip or memory chip or a microprocessor in
lieu of the magnetic stripe found on debit cards and credit cards. Smart cards are not utilised for
transferring or moving monetary data alone, but also they can be utilised for an assortment of
identification grounds. Exchanges made with smart cards are scrambled or encrypted to shield
the exchange of data from one party to another. Each encoded exchange can’t be hacked and
doesn’t transmit any extra data past what’s required for finishing the single exchange or
transaction.

Electronic Fund Transfers (ETFs):

Electronic fund transfer (EFT) is the electronic exchange of cash starting with an individual
account in the bank to another individual account of the same bank, or within or with other
financial institutions or with multiple institutions, by means of personal computers based
frameworks, without the immediate intercession of bank staff.

Telephone Banking:
Telephone banking is an assistance given by a bank or other monetary foundation or other
financial institutions, that empower clients to perform via telephone a scope of monetary
exchanges which don’t include cash or financial instruments, without the need to visit an ATM
or a bank branch.

Internet banking:

Web-based banking is an assistance presented by banks that permits account holders to get their
record information by means of the web or the internet. Web-based banking or Internet banking
is otherwise called “Web banking” or “Online banking.”

Internet banking through customary banks empowers clients to play out every standard
exchange, for example, bill payments, balance requests, stop-payment requests, and balance
inquiries. Some banks even proposition online credit card and loan applications.

Account data can be acquired day or night, and should be possible from any place.

Home banking:

Home banking is the most common way of concluding the monetary exchange from one’s own
home as opposed to using a bank’s branch. It incorporates making account requests, moving
cash, covering bills, applying for credits, and directing deposits.

Significance of E-Banking:

Importance to clients:

 Lower cost per exchange: Since the client doesn’t need to visit the branch for each
exchange, it saves him both time and cash.
 No topographical hindrances: In conventional financial frameworks, geological
distances could hamper specific financial exchanges. Nonetheless, with e-banking,
geological obstructions are diminished.
 Convenience: A client can get to his record or bank account and execute from any place
at any time.

Importance to Businesses:

Better efficiency: Electronic banking further develops usefulness. It permits the

computerisation of ordinary, regularly scheduled payments and provides further banking
activities to upgrade the efficiency of the business.

Lower costs: Usually, costs in financial relationships and connections depend on the assets
used. Assuming that a specific business needs more help with deposits, wire transfers, and so
on, then, at that point, the bank charges its higher expenses. With internet banking, these costs
are limited.
Lesser errors: Electronic financial diminishes mistakes in normal financial exchanges. Awful
penmanship, mixed-up data or information, and so on can cause mistakes that can be exorbitant.
Likewise, a simple audit of the record or account activity, movement upgrades the precision of
monetary exchanges.

Diminished misrepresentation: Electronic banking gives an advanced impression to all

representatives who reserve the privilege to alter banking exercises. In this manner, the business
has better perceivability into its exchanges, making it hard for any fraudsters from committing
crimes.

Account reviews: Business proprietors and assigned staff individuals can get to the records
rapidly utilising a web-based financial interface. This permits them to audit the record action
and, furthermore, guarantee the smooth working of the account.

Securitization:- securitization, the practice of pooling together various types of debt

instruments (assets) such as mortgages and other consumer loans and selling them as bonds to
investors. A bond compiled in this way is generally referred to as an asset-backed security
(ABS) or collateralized debt obligation (CDO). If the pool of debt instruments consists
primarily of mortgages, the bond is referred to as a mortgage-backed security (MBS). The
holders of such securities are entitled to the receipt of principal and interest payments on the
debts underlying them.

Securitization provides lenders with liquidity and is an effective means of diversifying their
portfolios to reduce risk. The large pool of debt instruments that are securitized are divided and
sold in smaller chunks called tranches, with each tranch representing a claim to a portion of the
receipts from the underlying debt instruments. Tranching gives smaller investors the
opportunity to purchase such instruments and enables lenders to raise more money by selling
them to a broader market.

Securitization Process

The successful execution of a securitization depends on the investor’s uncontested right to

securitized cash flows. Hence, securitized loan need to be separated from the originator of the
loan. In order to achieve this separation, a securitization is structured as a three-step frame
work:

1. A pool of loan is sold to an intermediary by the originator of the loans. This intermediary
(called a special purpose vehicle or SPV) is usually incorporated as trust. The SPV is an
entity formed for the specific purpose of transferring the securitized loans out of the
originator’s balance sheet, and does not carry out any other business.
2. The SPV issues securities, backed by the loan, and by the payment streams associated
with these loans. These securities are purchase by investors. The proceeds from the sale
of the securitized are paid to the originator as a purchase consideration for the loan
receivables.
 3. The cash flows generated by the loans over a period of time are used to repay investors.
There could also be some credit support built into the transaction to protest investors
against possible losses in the pool. However, the investors will typically have no recourse
to the originator.

Summary of process

The process can be summarised as follows –


o Lender sells various types of loans to borrowers
o Out of these loans, he packs certain loans together and sells these to Asset
Reconstruction Company
o The Asset Reconstruction Company makes payment to original lender for loans
purchased
o These loans are converted into a pool of securities by the Asset Reconstruction
Company for purpose of issuing Pass Through or Pay Through Certificates (PTC).
o These PTCs are sold to individual investors [QBs].
o The recoveries from original borrower are obtained by original lender (in case of
Pass Through Certificates) and by Asset Reconstruction Company (in case of Pay
Through Certificates).
o If collection is made by original borrower, he is under obligation to pass on the
money to Asset Reconstruction Company.
o The ARC passes on these amounts to individual investors.

Asset Reconstruction Companies ( ARC):-

An asset reconstruction company is a special type of financial institution that buys the debtors
of the bank at a mutually agreed value and attempts to recover the debts or associated securities
by itself.

The asset reconstruction companies or ARCs are registered under the RBI and regulated under
the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest
Act, 2002 (SARFAESI Act, 2002).

The ARCs take over a portion of the debts of the bank that qualify to be recognised as Non-
Performing Assets. Thus ARCs are engaged in the business of asset reconstruction or
securitisation or both.

All the rights that were held by the lender (the bank) in respect of the debt would be transferred
to the ARC. The required funds to purchase such such debts can be raised from Qualified
Buyers.
Asset Reconstruction

It is the acquisition of any right or interest of any bank or financial institution in loans, advances
granted, debentures, bonds, guarantees or any other credit facility extended by banks for the
purpose of its realisation. Such loans, advances, bonds, guarantees and other credit facilities are
together known by a term – ‘financial assistance’.

Securitisation

It is the acquisition of financial assets either by way of issuing security receipts to Qualified
Buyers or any other means. Such security receipts would represent an undivided interest in the
financial assets.

Qualified Buyers

Qualified Buyers include Financial Institutions, Insurance companies, Banks, State Financial
Corporations, State Industrial Development Corporations, trustee or ARCs registered under
SARFAESI and Asset Management Companies registered under SEBI that invest on behalf of
mutual funds, pension funds, FIIs, etc. The Qualified Buyers (QBs) are the only persons from
whom the ARC can raise funds.

Working of the ARC

Process of Asset Reconstruction by ABC

The main intention of acquiring debts / NPAs is to ultimately realise the debts owed by them.
However, the process is not a simple one. The ARCs have the following options in this regard:

 Change or takeover of the management of the business of the borrower.

  Sale or lease of such business.
 Rescheduling the payment of debts – offering alternative schemes, arrangements for the
payment of the same.
 Enforcing the security interest offered in accordance with the law.
 Taking possession of the assets offered as security.
 Converting a portion of the debt into shares.

Type of Debts ARC can Take Over

The ARC can take over only secured debts which have been classified as a non-performing
asset (NPA). In case debentures / bonds remain unpaid, the beneficiary of the securities is
required to give a notice of 90 days before it qualifies to be taken over.

Non-performing Assets

Banks and other financial institutions are required to classify the debts owned by them into the
following four categories:

 Standard
 Sub-standard
 Doubtful
 Loss

What do Asset Reconstruction Companies Do?

Asset reconstruction companies are in the business of buying bad loans from banks. For
instance, if a bank lends money to a person or company, they expect to receive periodic
payments of principal and interest. However, when they do not receive those periodic payments
for an extended period of time, (let’s say 90 days) these loans are classified as nonperforming
assets. If these NPA’s are allowed to stay on the bank’s balance sheet, they erode investor
confidence in the bank.

Credit Cards:- A credit card is a simple yet no-ordinary card that allows the owner to make
purchases without bringing out any amount of cash. Instead, by using a credit card, the owner
borrows funds from the issuing company, which is often a bank, to make purchases whether
online or onsite. In exchange for the credit, the card owner has to return the full amount
borrowed within a given period of time to avoid incurring additional charges. Beyond that time,
a percentage of the owed balance amount, interest, needs to be paid, along with the owed
balance amount.

Types of Credit Cards

There are numerous types of credit cards that are available for use. However, we will stick to
the five most commonly used types.
#1 Regular credit cards

Regular credit cards are the simplest type of credit card. They don’t offer perks and rewards.
They are ideal for parents who want to provide their children with the convenience of using a
credit card.

One benefit of regular credit cards that they have a predetermined credit limit, which allows the
user to control their use of the card. Once the purchases have reached the limit, no further
purchases can be made, and they will need to make payments first in order to open up the card
again.

#2 Balance transfer credit cards

This type of card is an option offered to those who have a balance on existing cards. The debt is
paid off with the new card and the owner pays the debt to the new card at ideally lower interest
rates.

#3 Student credit cards

A student credit card is specifically designed for individuals who need a credit card but do not
have a credit history yet. It requires a higher approval rating compared to standard or regular
cards.

#4 Charge cards

Charge cards are beneficial in the sense that they do not charge interest or fees simply because
the balance needs to be paid in full at the end of every month. However, in the event of a failed
payment, charges are made, or the card may be revoked, depending on the terms and conditions
set by the financial company.

#5 Subprime credit cards

This type of card is considered to be among the worst and most scheming type of cards, as it
targets individuals with a bad credit history. Its fees are exorbitant, but people still use them
because of the lack of choices and opportunities to open a credit line elsewhere.

Even if there are already federal laws regulating the fees subprime credit cards can charge, they
seem to find ways and loopholes that let them continue their scheme.

Features of Credit Cards

 Alternative to cash: Credit card is a better alternative to cash. It removes the worry of
carrying various currency denominations to pay at the trade counters. It is quite easy and
way fast to use a credit card rather than waiting for completion of cash transactions.
  Credit limit: The credit cardholder enjoys the facility of a credit limit set on his card.
This limit of credit is determined by the credit card issuing entity (bank or NBFC) only
after analyzing the credit worthiness of the cardholder.

The credit limit is of two types, viz., normal credit limit and revolving credit limit varies
with the financial exposure of the credit cardholder.

 Record keeping of all transactions: Credit card issuing entities like banks or NBFCs
keeps a complete record of all transactions made by their credit cardholders. Such a
record helps these entities to raise appropriate billing amounts payable by their
cardholders, either on a monthly or some periodic basis.
 Grace period: The grace period is referred to those minimum numbers of additional days
within which a credit cardholder has to pay his credit card bill without any incurring
interest or financial charges.
 Additional charges for delay in payment: The credit card payment is supposed to be
made within a due date as mentioned on the bill of a credit card. If payment is not paid on
time, then a credit-card issuer charges some additional costs, which are resulted due to
delay in payment.

Disadvantages of Credit Cards

Following are some disadvantages of credit cards:

Blowing Your Budget

The biggest disadvantage of credit cards is that they encourage people to spend money that they
don’t have. Most credit cards do not require you to pay off your balance each month, so even if
you only have 100, you may be able to spend up to 500 or 1,000 on your credit card. While this
may seem like ‘free money’ at the time, you will have to pay it off — and the longer you wait,
the more money you will owe since credit card companies charge you interest each month on
the money you have borrowed

Credit Card Fraud

Like cash, sometimes credit cards can be stolen. They may be physically stolen (if you lose
your wallet) or someone may steal your credit card number (from a receipt, over the phone, or
from a Web site) and use your card to rack up debts.

High Interest Rates and Increased Debt

Credit card companies charge you an enormous amount of interest on each balance that you
don’t pay off at the end of each month. This is how they make their money

Micro/ Macro Finance:-

Microfinance

Microfinance services include microcredit, microsavings, and microinsurance. Microfinance

aims to make individuals self-sufficient by offering timely funding, helping them learn skills,
and establishing a stable means of livelihood.

Microfinance starts by educating potential borrowers about the basics of how money and credit
work, how to budget and manage debt, and how to best utilize cash flows. Individuals are then
provided access to capital, at generous terms: lower-than-average interest rates, or the waiving
of collateral. Default risk for the lenders is mitigated by pooling borrowers in groups (of, say,
five or 10 people); peer pressure often improves repayment rates. Pooling also builds the
individuals' credit rating and enables assistance among group members.

Microfinance starts with a focus on individuals, while macrofinance starts with a focus on the
regional or national level.

Macrofinance

Macrofinance aims for economic development more broadly, working on a larger scale to
achieve widespread benefits that involve entire populations and multiple entities. For example,
a state or province may offer multi-year tax benefits to businesses, which set up factories or
offices in a city or region, which hire local residents and use local suppliers or services.
Financing for the endeavor is assisted by banks or through public-private partnerships.

Although it will lose some revenue via corporate tax breaks, the government benefits overall:
the newly employed individuals will earn more (taxable) income, as will nearby businesses
(restaurants, etc.). Property values will likely increase, and other companies might be drawn to
the region.