NOTES FOR SKILL ENHANCEMENT COURSE

ALL UNITS

1.What is money ?
Before the development of a medium of exchange—that is, money—people
would barter to obtain the goods and services they needed.
Definition : "money is what money does”- walker

2.What is present value of money ?

Present value (PV) is the current value of a future sum of money or stream of
cash flows given a specified rate of return. Future cash flows are discounted at
the discount rate, and the higher the discount rate, the lower the present value of
the future cash flows.
Formula: Present Value=FV/(1+r)n
where:FV=Future Value ,r=Rate of return, n=Number of periods

3.What is future value ?

Future value (FV) is the value of a current asset at a future date based on an
assumed rate of growth. The future value is important to investors and financial
planners, as they use it to estimate how much an investment made today will be
worth in the future.
Formula : FV=I×(1(R×T))
where: I=Investment amount R=Interest rate T=Number of years

4.What is simple interest ?

Simple Interest (S.I) is the method of calculating the interest amount for some
principal amount of money
Formula : SI = PTR/100
Where SI = simple interest P = principal, R = interest rate (in percentage) ,
T = time duration (in years)
5.what is compound interest ?

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

Formula : P(1 + R/100) t

• P = principal
• r = rate of interest
• n = number of times interest is compounded per year
• t = time (in years)

6.Explain Rule of 72

The Rule of 72 is a quick, useful formula that is popularly used to estimate the
number of years required to double the invested money at a given annual rate of
return. Alternatively, it can compute the annual rate of compounded return from
an investment, given how many years it will take to double the investment.

The Rule of 72 could apply to anything that grows at a compounded rate, such
as population, macroeconomic numbers, charges, or loans. If the gross domestic
product (GDP) grows at 4% annually, the economy will be expected to double
in 72 / 4% = 18 years.
With regards to the fee that eats into investment gains, the Rule of 72 can be
used to demonstrate the long-term effects of these costs. A mutual fund that
charges 3% in annual expense fees will reduce the investment principal to half
in around 24 years. A borrower who pays 12% interest on their credit card (or
any other form of loan that is charging compound interest) will double the
amount they owe in six years.
The rule can also be used to find the amount of time it takes for money's value
to halve due to inflation. If inflation is 6%, then a given purchasing power of the
money will be worth half in around 12 years (72 / 6 = 12). If inflation decreases
from 6% to 4%, an investment will be expected to lose half its value in 18 years,
instead of 12 years.
Is there a rule of thumb which dispenses with the use of the future value
interest factor table? Yes, there is one and it is called the rule of 72. According
to this rule of thumb, the doubling period is obtained by dividing 72 by the
interest rate. For example, if the interest rate is 8 percent, the doubling period is
about 9 years (72/8). Likewise, if the interest rate is 4 percent the doubling
period is about 18 years (72/4). Though somewhat crude, it is a handy and
useful rule of thumb.
7.investment alternatives / avenues

Money Market : Instruments Debt instruments which have a maturity of less

than one year at the time of issue are called money market instruments – these
instruments are highly liquid and have negligible risk.
The major money market instruments are:
1. Treasury bills
2. Certificates of deposit,
3. Commercial paper
4. Repos
Bonds or Debentures :
Bonds or debentures represent long-term debt instruments. The issuer of a bond
promises to pay a stipulated stream of cash flow.
Bonds may be classified into the following categories:
1. Government securities
2. PSU bonds
3. Debentures of private sector companies
4. Preference shares2
Equity Shares :
Equity shares represent ownership capital. As an equity shareholder, you have
an ownership stake in the company. This essentially means that you have a
residual interest in income and wealth. Perhaps the most romantic among
various investment avenues, equity shares are classified into the following
broad categories by stock market analysts:
1. Blue chip shares
2. Growth shares
3. Income shares
4. Cyclical shares
5. Speculative shares
Mutual Funds : Instead of directly buying equity shares and / or fixed income
instruments, you can participate in various schemes floated by mutual funds
which, in turn, invest in equity shares and fixed income securities.
There are three broad types of mutual fund schemes:
1. Equity schemes
2. Debt schemes
3. Balanced schemes
Life Insurance : In a broad sense, life insurance may be viewed as an
investment. Insurance premiums represent the sacrifice and the assured sum, the
benefit.
The important types of insurance policies in India are:
1. Endowment assurance policy
2. Money back policy
3. Whole life policy
4. Term assurance policy
Retirement Products: The important retirement products are :
 1. Employees’ Provident Fund (EPF) Scheme,
2. 1952 Employees’ Pension Scheme(EPS),
3. 1952 New Pension Scheme,
4. 2004 Pension schemes of insurance companies and mutual funds
Real Estate : For the bulk of the investors the most important asset in their
portfolio is a residential house. In addition to a residential house, the more
affluent investors are likely to be interested in the following types of real estate:
1. Agricultural land
2. Semi-urban land
3. Commercial property
4. A resort home
5. A second house
8. Criteria for evoluation of investment alternatives
Criteria for Evaluation For evaluating an investment avenue, the following
criteria are relevant.
1. Rate of return,
2. Risk ,
3. Marketability
4. Tax shelter
5. Convenience
9.what is fixed income?
Fixed income is an investment approach focused on preservation of capital and
income. It typically includes investments like government and corporate bonds,
CDs and money market funds.

10.what is product method?

The Product method is also known as the output method or value-added
method. Using the product method, GDP is calculated by summing the gross
value added of all industries (resident sectors) during the various stages of
production. With the help of this method, GDP is estimated at the production
level.

11.what is insurance ?
Insurance is a contract in which the individual or an entity gets the financial
protection, in other words, reimbursement from the insurance company for the
damage (big or small) caused to their property.
12.Listout the importance of LIC
• LIC aims to promote the importance of life insurance to people living in
rural areas and those who are socially and economically disadvantaged.

• It aims to meet the diverse life insurance needs of residents who face
changes in the social and economic environment.

• It aims to operate economically while considering that the money belongs

to the policyholder.

• It aims to maximize the liquidity of people’s savings through attractive

insurance-linked savings.

13.what is medical insurance ?

Health insurance or medical insurance policy is an assurance which provides

immediate financial help in case when any medical emergency arises. It is a
contract between a policyholder and the insurance company which covers
medical expenses that might occur due to illness, injury or accident.

14.brief introduction about LIC

• LIC is a Government Insurance and Investment Company incorporated

under the Indian Life Insurance Act.
• It’s a statutory body.
• It was founded in 1956.
• Its headquarters is in Mumbai
• It aims to provide its citizens, through its services and products, with
greater economic security than most other investment players in the
market, thereby building an exceptional quality of life and enabling
economic development.
• LIC is 100% owned by the government.
• Motto of LIC is ‘Yogakshemam Vahamyaham’, which means ‘Your
welfare is our responsibility.
• The Chairman of Indian Life Insurance is M. R. Kumar.
15.what are the pros and cons of investing in real asset ?
• Allure of Real Estate Investment
Appreciation Real estate – land or building, residential or commercial – has
helped investors grow their wealth. The pressures of population, development,
and inflation will ensure the appreciation in the value of real estate.
Inflation – Indexed Income Real estate produces regular monthly income in
the form of rentals. Typically, rentals increase over time to provide a reasonable
protection against inflation.
Tax Break on Financing- If you take a loan for buying a house for self-
occupation, you can deduct interest up to Rs. 1.5 lakh per year for tax purposes.
If it is a joint loan in two names, each person can claim a deduction of Rs. 1.5
lakh. If you take a loan for buying a house that is rented out, the entire interest
becomes tax-deductible.
• Problems in Real Estate Investment

Big Ticket Long-Term Investment- While financing is available for real

estate investment, down payment can still represents a significant amount and
loan servicing will entail substantial commitment over a long time.
Cumbersome Paper Work - Real estate deals tend to be cumbersome and
time consuming. Apart from the grind of the search for the property, you have
the arduous task of paperwork and loan financing. Buying a property involves
entering into a purchase and sell agreement and registering the title of the
property in your name in the office of the sub-registrar of assurances (or its
equivalent). For registration you have to pay a specified stamp duty and the
registration fees. After completing the registration formalities, you have to
apply to the local authority to get the title of the property mutated in your
favour, by submitting documents such as the sale deed, stamp duty receipt, and
registration fee certificate. On the basis of this, the local authority assigns the
property value for levying property tax and then issues a letter of mutation in
your favour.
High Transaction Costs -The transaction cost associated with buying equity
shares is less than 30-50 basis points, whereas the transaction cost associated
with buying real estate is quite high. Stamp duty, registration charges,
brokerage, legal fees, and so on associated with a real estate transaction can be
upward of 10 percent.
Legal Hassles - In many parts of the world, a title deed confers certain rights
and privileges to the owner of the property. However, the opaque Indian real
estate market is littered with legal disputes relating to land. Fly-by-night
operators seem to thrive due to deficient regulation, making real estate
investment a risky proposition. The problem of illegal encroachment and
recalcitrant tenants cause additional risks. So real estate investment requires
continual vigilance and monitoring.
16.explain types of real estate investment .
Residential real estate: Any property used for residential purposes. Examples
include single-family homes, condos, cooperatives, duplexes, townhouses, and
multifamily residences.
Commercial real estate: Any property used exclusively for business purposes,
such as apartment complexes, gas stations, grocery stores, hospitals, hotels,
offices, parking facilities, restaurants, shopping centers, stores, and theaters.
Industrial real estate: Any property used for manufacturing, production,
distribution, storage, and research and development.
Land: Includes undeveloped property, vacant land, and agricultural lands such
as farms, orchards, ranches, and timberland.
Special purpose: Property used by the public, such as cemeteries, government
buildings, libraries, parks, places of worship, and schools.
17.what is equity shares ?
Equity Shares : Equity shares represent ownership capital. As an equity
shareholder, you have an ownership stake in the company. This essentially
means that you have a residual interest in income and wealth. Perhaps the most
romantic among various investment avenues
18.listout the features of fixed deposits .
• Secure Investment
Most market-led investments are subjected to changes over time. Conversely,
Fixed Deposits are more secure and reliable. This is because the returns
generated by FDs are fixed. They are not affected by market volatility and
remain static, at least for the investment tenure.
 • Rate of Interest
The rate of interest offered better depends upon your principal amount and
chosen tenure. Typically, the interest rates are higher for long-term FDs and
lower for short-term FDs.
• Flexible Tenure and Renewal
FDs can be held for tenures lasting for a week to 10 years. You can choose your
preferred term at the time of opening the FD. You can just as conveniently
renew the FD on maturity, but remember to check the interest rates, as they may
be different.
• Tax Deduction
The interest earned on the principal amount is subjected to a tax deduction
under the Income Tax Act,1961. You can calculate FD interest income in the
'other income sources' category while filing your returns.

19.List out the saving scheme of post office .

1. Post Office Savings Account
2.National Savings Recurring Deposit Account
3. National Savings Time Deposit Account
4. National Savings Monthly Income Account
5. Senior Citizens Savings Scheme Account
6. Public Provident Fund
7. Sukanya Samriddhi Account
8. National Savings Certificate
9. Kisan Vikas Patra
10. PM Cares for Children Scheme, 2021

20.explain public provident fund scheme [PPFS].

Public Provident Fund Scheme One of the most attractive investment avenues
available in India, the Public Provident Fund (PPF) Scheme has the following
features :
• Individuals and HUFs can participate in this scheme. A PPF account may
be opened at any branch of the State Bank of India or its subsidiaries or at
specified branches of the other nationalised banks and post offices.
• Though the period of a PPF account is stated to be 15 years, the number
of contributions has to be 16. This is because the 15 year period is
calculated from the financial year following the date on which the
 account is opened. Thus, a PPF account matures on the first day of the
17th year.
• The subscriber to a PPF account is required to make a minimum deposit
of Rs. 500 per year. The maximum permissible deposit per year is Rs
1,00,000.
• Deposits in a PPF account can be deducted before computing the taxable
income under Section 80 C.
• PPF deposits currently earn a compound interest rate of 8.6 percent per
annum, which is totally exempt from taxes.
• The interest, however, is accumulated in the PPF account and not paid
annually to the subscriber.
• The balance in a PPF account is fully exempt from wealth tax. Further, it
is not subject to attachment under any order or decree of a court.
21.explain senior citizen saving scheme .
Senior Citizens’ Saving Scheme (SCSS) Meant for Indian citizens who are 60
years of age or more, the SCSS has the following features:
• It is a 5-year deposit on which interest is paid on a quarterly basis. On
maturity, the tenor can be extended by 3 years.
• The maximum amount that can be invested by an individual, singly or
jointly with another holder, is Rs. 15 lakhs.
• The deposits have to be in lots of Rs. 1,000. SCSS deposits are eligible
for tax deduction under Section 80 C of the Income Tax Act.
• The interest rate is 9 percent, payable quarterly.
• Interest is taxable. SCSS deposits are not transferable, but premature
withdrawal is possible after one year with penalties.
22.KVP kissan vikas pathra
The Kishan Vikas Patra scheme was launched in 1988 as a small saving
certificate scheme. Its main objective was to encourage people to adopt long-
term financial discipline. At the time of launch, this scheme was directed
towards farmers and, therefore, the name. But today, anybody who fulfils its
eligibility criteria can invest in it.

The Kisan Vikas Patra post office scheme comes with a preset tenure of 113
months and extends assured returns to the individuals. Anybody can avail it in
the form of a certification from any branch of India Post Offices and selected
public sector banks.
23.what is treasury bill?

Treasury bills are very popular and enjoy a higher degree of liquidity since they
are issued by the Government. A Treasury bill is nothing but a promissory note
issued for a specified period stated therein. The Government promises to pay
the specified amount mentioned there in to the bearer of the instrument on the
due date. The period does not exceed a period of one year.

24.what is certificate of deposit [CD] ?

Certificate of Deposits are short-term deposit instruments issued by banks and

financial institutions to raise large sums of money. Certificate of Deposits are
issued in the form of usance promissory notes. They
are easily convertible in nature and are in marketable form having particular
face value and maturity. The Certificate of Deposit is
transferable from one party to another. Due to their negotiable feature, they are
also known as negotiable certificate of deposit.

25.what is bond ?
Bonds or debentures represent long-term debt instruments. The issuer of a bond
promises to pay a stipulated stream of cash flows. This generally comprises of
periodic interest payments over the life of the instrument and principal payment
at the time of redemption(s).
26.classifications of equity shares .
• Rights of Equity Shareholders
As owners of the company, equity shareholders enjoy the following rights:
Equity shareholders have a residual claim to the income of the firm. This means
that the profit after tax less preference dividend belongs to equity shareholders.
However, the board of directors has the prerogative to decide how it should be
split between dividends and retained earnings. Dividends provide current
income to equity shareholders and retained earnings tend to increase the
intrinsic value of equity shares. Note that equity dividends are presently tax-
exempt in the hands of the recipient. The company paying the dividend is
required to pay dividend distribution tax.
 • Stock Market Classification of Equity shares
In stock market parlance, it is customary to classify equity shares as follows:
Blue-chip Shares : Shares of large, well-established, and financially strong
companies with an impressive record of earnings and dividends. Growth
Shares : Shares of companies that have a fairly entrenched position in a
growing market and which enjoy an above average rate of growth as well as
profitability.
Income Shares : Shares of companies that have fairly stable operations,
relatively limited growth opportunities, and high dividend payout ratios
Cyclical Shares :Shares of companies that have a pronounced cyclicality in
their operations.

Defensive Shares: Shares of companies that are relatively unaffected by the

ups and downs in general business conditions.

Speculative Shares: Shares that tend to fluctuate widely because there is a lot
of speculative trading in them

• Peter Lynch’s Classification There are different ways of classifying

shares. Here is Peter Lynch’s classification of companies (and, by
derivation, shares).

Slow Growers Large and ageing companies that are expected to grow slightly
faster than the gross national product.

Stalwarts Giant companies that are faster than slow growers but are not agile
climbers.

Fast Growers Small, aggressive new enterprises that grow at 10 to 25 percent a

year.

Cyclicals Companies whose sales and profit rise and fall in a regular, though
not completely predictable, fashion.

Turnarounds Companies which are steeped in accumulated losses but which

show signs of recovery. Turnaround companies have the potential to make up
lost ground quickly.
Asset Plays Companies that have valuable assets which have been somewhat
overlooked by the stock market.

27.explain mutual fund scheme.

If you find it difficult or cumbersome to invest directly in equity shares and debt
instruments, you can invest in these financial assets indirectly through a mutual
fund. A mutual fund represents a vehicle for collective investment. When you
participate in a scheme of a mutual fund, you become a part-owner of the
investments held under that scheme.
Mutual fund schemes invest in three broad categories of financial assets, viz.
stocks, bonds, and cash. Stocks refer to equity and equity-related instruments.
Bonds are debt instruments that have a maturity of more than one year. Cash
represents bank deposits and debt instruments that have a maturity of less than
one year. Depending on the asset mix, mutual fund schemes are classified into
three broad types, viz. equity schemes, hybrid schemes, and debt schemes.
Equity schemes invest the bulk of their corpus, 85-95 percent or even more, in
stocks and the balance in cash. Hybrid schemes, also referred to as balanced
schemes, invest in a mix of stocks and debt instruments. Debt schemes invest in
bonds and cash. Within each of these broad categories, there are several variants
as shown in the accompanying box.
Mutual funds in India are comprehensively regulated under the SEBI (Mutual
Funds) Regulation, 1996. Some of the important provisions of this regulation
are as follows:
1. A mutual fund shall be constituted in the form of a trust executed by the
sponsor in favour of the trustees. The sponsor or, if so authorised by the
trust deed, the trustees shall appoint an asset management company
(AMC).
2. No scheme shall be launched by the AMC unless it is approved by the
trustees and a copy of the offer document has been filed with SEBI, The
offer document and advertisement materials shall not be misleading.
3. Investment Alternatives 2.13 No guaranteed return shall be provided in a
scheme unless such returns are fully guaranteed by the sponsor of the
AMC.
4. The mutual fund shall not borrow except to meet temporary liquidity
needs. The net asset value (NAV) and the sale and repurchase price of
mutual fund schemes must be regularly published in daily newspapers.
 5. The investments of a mutual fund are subject to several restrictions
relating to exposure to stocks of individual companies, debt instruments
of individual issuers, so on and so forth.
28.explain life insurance contracts .

Life Insurance Contract

Definition u/s Section 2(11) in the Insurance Act, 1938

“Life Insurance Business” means the business of effecting contracts of

insurance on human life, including any contract whereby the payment is assured
on death (except death by accident only) and the happening of any contingency
dependent on human life, and any contract which is subject to payment of
premiums for a term dependent on human life and shall be deemed to include –

(a) the granting of disability and double or triple indemnity accident benefits, if
so provided in the contract of insurance;

(b) the granting of annuities upon human life

(c) the granting of superannuation allowances and annuities payable out of any
fund applicable solely to the relief and maintenance of persons engaged or who
have been engaged in any particular profession, trade or employment or of the
dependents of such persons.

There is no formal definition of ‘ life insurance, ‘ but it may be defined as ‘ a

contract in which the insurer, taking into account a certain premium, offers in
return, either in a lump sum or in regular payments, to pay to the insured, or to
the person for whose benefit the policy is made, a given sum of money on the
occurrence of a particular event dependent on the term of the policy.

29.explain retirement products.

Mandatory Retirement Schemes The Employees Provident Fund and
Miscellaneous Provisions (EPF & MP) Act of 1952 requires employers covered
under the act to offer the following schemes to the workers:

1. Employees’ Provident Fund (EPF) Scheme, 1952

2. Employees’ Pension Scheme (EPS), 1995
3. New Pension Scheme

Employees’ Provident Fund Scheme:

A major vehicle of savings for salaried employees, the Employees’ Provident

Fund Scheme has the following features:

• Each employee has a separate provident fund account into which both the
employer and employee are required to contribute 12 percent of the
employee's basic wages, dearness allowance, and retaining allowance
every month.
• The employee can choose to contribute additional amounts, subject to
certain restrictions. While the contribution made by the employer is fully
tax exempt (from the point of view of the employee), the contributions
made by the employee can be deducted before computing the taxable
income under Section 80 C.
• The interest rate on the provident fund balance is declared annually.
Interest is totally exempt from taxes.
• The interest however, is accumulated in the provident fund account and
not paid annually to the employee. The balance in the provident fund
account is fully exempt from wealth tax.
• Further, it is not subject to attachment under any order or decree of a
court. Within certain limit, the employee is eligible to take a loan against
the provident fund balance pertaining to his contributions only.

Employees’ Pension Scheme (EPS):

Guaranteed by the government, this scheme is administered by the Employees

Provident Fund Organisation (EPFO). Under this scheme 8.33 percent from the
employer’s contribution of 12 percent to the Employee Provident Fund is
diverted to the Employee Pension Scheme. The central government also
contributes one and one-sixth percent of wages. Under this scheme, pension is
provided to the member (or family) upon retirement
New Pension Scheme:

Effective January 1, 2004, the central government introduced the New Pension
Scheme (NPS) to cover all central government employees who joined service
on or after January 1, 2004. The salient features of the NPS are as follows:

• It will work on defined contribution basis. In a defined contribution

scheme, the payout on the completion of the scheme or retirement
depends on the returns generated from the contributions made by
subscribers.
• It will have two tiers – Tier I and Tier II. Tier I is mandatory for all
government servants joining government service on or after 1.1.2004. In
Tier I, a government servant will have to make a contribution of 10
percent of his Basic Pay, and DA which will be deducted from his salary
every month.
• The government will make an equal matching contribution. Tier I
contribution will be kept in a non-withdrawable Pension Tier I account.
• Tier II will be optional and at the discretion of the government servant.
Tier II contributions will be kept in a separate account that will be
withdrawable at the option of the government servant
• The Pension Fund Regulatory and Development Authority (PFRDA) will
regulate and develop the pension market.

30.what is portfolio?

it is a collection of a wide range of assets that are owned by investors. The said
collection of financial assets may also be valuables ranging from gold, stocks,
funds, derivatives, property, cash equivalents, bonds, etc.
31.Difference between life insurance and general insurance.

BASIS FOR LIFE INSURANCE GENERAL INSURANCE

COMPARIS
ON
Meaning Life insurance can be General insurance refers to the
understood as the insurance insurance, which are not
contract, in which the life risk of covered under life insurance and
an individual is covered. includes various types of
insurance, i.e. fire, marine,
motor, etc.
What is it? It is a form of investment. It is a contract of indemnity.
Term of Long term Short term
contract
Claim Insurable amount is paid, eitherLoss is reimbursed, or liability
payment on the occurrence of the event, incurred will be repaid on the
or on maturity. occurrence of uncertain event.
Premium Premium has to be paid over the Premium should be paid in lump
years. sum.
Insurable Must be present at the time of Must be present, both at the
interest contract. time of contract and at the time
of loss.
Policy It can be done for any value The amount payable under non-
value based on the premium the policy life insurance is confined to the
holder willing to pay. actual loss suffered or liability
uncured, irrespective of the
policy amount.
Savings Life insurance place has a General insurance has no such
component in savings. savings component.