Understanding Financial Products

Financial Services Marketing (303) Mrs. Charu Rastogi, Asst. Proff.

Agenda
• • • • •
What are Financial Products? What are Financial Services? Financial System, its functions Indian Financial System Financial Products
o Banks
o Money market o Capital market o Asset / Fund based o Fee based

How are financial products managed?
o Financial Planning Process o Individual Financial Plan o Customer needs and product solutions

Financial Product

A financial product is a facility (arrangement or intangible property) through which, or through the acquisition of which, a person

o makes a financial investment  the investor gives money to another person and the person uses the contribution to
generate a financial return, or other benefit, for the investor

 

the investor has no day-to-day control over the use of the contribution to generate the return or benefit Eg: a person paying money to a company for the issue of shares (the company uses the money to generate dividends for the person and the person, as a shareholder, does not have control over the day-to-day affairs of the company)

o manages financial risk  manage, avoid or limit the financial consequences to them of particular
circumstances happening

Eg. taking out insurance and hedging a liability by acquiring a futures contract or entering into a currency swap

o makes non-cash payments  by ways other than making physical delivery of a domestic or foreign currency in
the form of notes / coins

Eg: facility for direct debit of a deposit account, a facility for the use of cheques

Financial Service

A person provides a financial service if they o provide financial product advice  to influence a person in making a decision in relation to a particular financial
product

o deal in a financial product  acquiring/issuing/varying/disposing a financial product  underwriting the securities or interests o make a market for a financial product  through a facility, at a place or otherwise, the person regularly states the prices at
which they propose to acquire or dispose of financial products on their own behalf

o provide a custodial or depository service  a financial product, or a beneficial interest in a financial product, is held by the
provider in trust for the client

Financial System

• Financial system supplies the necessary • •
financial inputs for the production of goods and services which in turn promotes the well being and standard of living of the people of a country Efficient functioning of the financial system facilitates free flow of funds to more productive activities and thus promotes investment It the intermediation between savers and investors and promotes faster economic development

Functions of Financial System

• • • • •

It serves as a link between savers and investors. It channelizes flow of saving into productive investment. It provides payment mechanism for exchange of goods and services. It provides a mechanism for the transfer of resources across geographic boundaries It provides a mechanism for managing and controlling the risk involved in mobilizing savings and allocating credit. It promotes the process of capital formation by bringing together the supply of saving and the demand for investible funds.

Financial System in India

Constituents of Indian Financial System

• •

Financial Institutions
o facilitate smooth functioning of the financial system and act as middlemen or intermediaries between savers and borrowers

Financial Markets
o Centers and arrangements which facilitate buying and selling of financial assets, claims and services o Unorganized market and Organized market;  Capital Market: Market for financial assets with long or indefinite maturity period Industrial Securities Market (Primary and Secondary) Government Securities Market Long term loans market (Term loans, mortgages)  Money Market: Market for short term liquid assets

• • •

Constituents of Indian Financial System

• Financial Instruments / Assets / Securities
o represent a claim against the future income and wealth of others o Can be classified as per marketability  Marketable (shares, bonds, g-sec)  Non-marketable (FDR, PF, Pension funds, NSCs) o As per type: Cash, debt, stock assets o As per maturity: Short term, long term assets
o Fund / Asset based o Non-fund / Fee based

• Financial Services

Financial products: Banks
Corporate
◦Business Loan ◦Capital raising (Equity, debts) ◦Mezzanine financing (subordinated debt or preferred equity instrument, superior only to equity shares) ◦Project finance ◦Revolving credit (No fixed number of payments. eg. Credit cards) ◦Risk management (commodities, interest rate derivatives) ◦Term loan ◦Cash management services ◦Agency services

Retail
◦Current account ◦Savings account ◦Money market account ◦Certificate of deposit ◦Individual retirement account ◦Credit card / debit card ◦Mortgage ◦Personal loan (Home, auto, education) ◦Time deposit ◦Depository services ◦Credit Cards

Financial Products: Money Market

• •


• •

Treasury bill: short term borrowings of the government (14 days, 91 days, 182 days, 364 days) Commercial bills: banks make advances to customers against these Inter bank call money: source for banks for getting overnight and short term funds Commercial paper: short term unsecured instrument issued by a company via promissory notes with fixed maturities Certificate of Deposit: issued by commercial banks at a discount on face value

Financial Products: Capital Market

• • • •

Derivatives: forwards, futures, options, swaps Shares, right, bonus, preference Debentures Bonds
o o

Euro convertible bonds Deep discount bonds

Financial Products: Fund based
o Underwriting (shares, debentures, bonds, etc.) of new issue o Equipment Leasing o Hire Purchase o Bill discounting o Venture capital o Housing finance o Insurance services o Factoring, etc

Financial Products: Fee Based
o o o o o o o o Corporate advisory services Merchant banking Issue management Loan syndication Credit rating Stock Broking M&A Capital restructuring

How are financial products managed?

Financial Planning Process
o Financial planning is the process of managing your funds to achieve your desired goals in the required time frame. o It involves analyzing your existing financial position, expected future cash flows, inflation and identified financial objectives to develop a comprehensive financial planning roadmap. o This is aimed at making available the right amounts of funds at the right time in the future o Insurance planning is an integral part of financial planning. An insurance plan takes care of the unforeseeable demands on your finances. o For instance, an unfortunate illness requiring a surgery can be covered under a medical insurance plan and you need not dig into your savings and other investments to pay for it. o In effect, insurance helps to keep your financial plan on track.

Financial Planning Process

Mrs. Charu Rastogi, Asst. Proff.

How an Individual Manages Financial Products?

An individual investor will undertake comprehensive financial planning: o Determine his current financial situation  income, savings, living expenses, and debts o Develop financial goals  Retirement, Child’s Education, Child’s Marriage, Asset purchase, Insurance,
Investment, Tax planning

o Identify alternative courses of action  Consider investment options wrt his risk return profile (conservative, moderate,
aggressive)

 Mutual funds, equities, bonds, bank deposits o Create and implement financial plan o Sources of information:  Family, spouse  Printed materials, Internet, provider website  Co-workers  Seminars, meetings  Financial Advisor

Individuals Financial Plan
3. Growth Opportunities

2. Controllable Priorities

1. Non-controllable Events

Customer needs and product solutions
Customer Need
Secure depository for readily accessible cash managing receipts and payments Secure depository for cash that pays interest Secure depository for cash that pays interest

Financial Product Solution
Current Account Deposit Account / Saving Account Corporate bonds Government bonds Growth funds Income funds Annuities Pension schemes General Insurance Life Assurance Disability insurance Critical illness insurance Permanent Health insurance

Means of investing lump sum for long term growth

Means of investing lump sum to generate income Means of protecting tangible assets from fire, theft, accidentl damage, etc. Means of protecting human assets from risks associated with death, illness and medical conditions

Possible Questions

• •

Discuss various Financial Products and how these products are being managed? Explain different Financial Products? How are they managed? How Financial Planning of Individual is done through Financial Products? How it is managed?

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