FINANCIAL SECTORS

-By Vyapak Arora

INTRODUCTION TO FINANCIAL SECTORS
• The financial sector is a section of the economy made up of firms and
institutions that provide financial services to commercial and retail
customers. This sector comprises a broad range of industries including banks,
investment companies, insurance companies, and real estate firms.
• A large portion of this sector generates revenue from mortgages and loans,
which gain value as interest rates drop.
• The health of the economy depends, in large part, to the strength of its
financial sector. The stronger it is, the healthier the economy. A weak
financial sector typically means the economy is weakening.
TYPES OF FINANCIAL SECTORS
• Public Provident Fund (PPF)
• Real Estates
• Gold
• Mutual Funds
• Insurance
• Banking Sector (FDs)
• Share Market
• Government Bonds
• Post Office Accounts
PUBLIC PROVIDENT FUND(PPF)
Merits:-
• Tax-free earnings upon maturity
• Guaranteed returns as set by the government every year
• Complete capital protection
• Facility to make partial withdrawals and loans
• Easy to open an account from banks or post offices
• Minimum investment of Rs 500 only per year
• Option to extend tenure with or without contributions
Demerits:-
• Interest rate may not be able to beat inflation
• Lock-in period of 15 years
• NRIs and HUFs cannot open an account
• Only one account allowed for every citizen
• The account cannot be closed until maturity
REAL ESTATE
Real estate investing is an investment strategy where an investor purchases
property in order to earn a profit. In most cases, the investor will either rent out
the property, or improve on it in order to resell it at a higher cost than it was
purchase for. Real estate investing can be riskier than other investments since
property cannot usually be sold quickly.
Merits:-
• Security
• Self Occupation
• Tax Shelter
• Income Stream
Demerits:-
• Legal Difficulties
• Maintenance Cost
• Property Taxes
GOLD
The gold standard is when a country ties the value of its money to the amount
of gold it possesses. Anyone holding that country's paper money could present
it to the government and receive an agreed upon amount of gold from the
country's gold reserve. That amount of gold is called “par value.”
Merits:-
O Fixed asset backs the money's value.
O Provides a self-regulating and stabilizing effect on the economy.
O Discourages inflation, which is too much money chasing too few goods.
O Also discourages government budget deficits and debt, which can't
exceed the supply of gold.
Demerits:-
O Size and health of a country's economy are dependent upon its supply of
gold. The economy is not reliant on the resourcefulness of its people and
businesses.
O The gold standard makes countries obsessed with keeping their gold that is,
they ignore the more important task of improving the business climate.
MUTUAL FUNDS
Mutual funds are investment vehicles that pool money from many different
investors to increase their buying power and diversify their holdings. This allows
investors to add a substantial number of securities to their portfolio for a much
lower price than purchasing each security individually.
Types:-
1. Actively Managed Funds
2. Index Funds
Merits:-
• Diversification
• Expert Management
• Liquidity
• Convenience
• Reinvestment of income
• Range of investment options and objectives
• Affordability
Demerits:-
• No control over portfolio
• Capital gains
• Fees and expenses
• Over-diversification
• Cash drag
INSURANCE
Insurance is mainly an arrangement by which a company or the state
undertakes to provide a guarantee of compensation for specified loss,
damage, illness, or death in return for payment of a specified premium.
Types:-
1. General
2. Life
Merits:-
O Provides economic protection
O Shares risks
O Maintains a standard of living
O Encourages saving
O Eliminates dependency
O Grants loans
O Creates employment opportunities
O Promotes foreign trade
O Helps to operate business smoothly
O Helps to reduce inflation
O Helps to develop the economy
Demerits:-
• Does not compensate all types of losses
• Lengthy and a time consuming process
• Does not provide same facilities as banks
• Focuses on their own profit maximization rather than on compensating the
sufferer
• May lead to crimes in the society
• Total amount of premium might be higher than the policy amount
receivable on maturity
BANKING SECTOR (BANK FDS)
Fixed deposit is a financial instrument that pays a fixed rate of interest until a
given maturity date. FDs provide investors with a higher rate of interest than a
regular savings account and also have many other advantages which make
them a preferable option for investment.
Merits:-
• Assured returns
• Provides flexibility
• Risk managing instrument
• Helps in liability crunch
• Easily accessible
Demerits:-
• Taxable
• Does not curb inflation
• Limited flexibility
• Low investment returns
• Money is locked up for a certain time period
SHARE MARKET
A market in which securities are bought and sold; a stock exchange.
Merits:-
• Chances of exceedingly good returns in a short span of time
• Minority ownership
• Right to vote
Demerits:-
• Volatile investments
• Brokerage commissions kills the profit margin
• Time consuming
GOVERNMENT BONDS
Government bonds allow federal, state and local governments to accomplish
critical projects. Municipal bonds are issued by city and county governments
for public works projects like schools, highways and hospitals. The federal
government issues treasury bonds that mature between 10 and 30 years.
Consumers also can purchase treasury inflation protected securities (TIPS) that
are bonds that protect against inflation. Historically, government bonds have
been low-risk investments, but they carry interest rate risk and don't have the
same earnings potential as higher-risk investments.
In layman terms, “A government bond is a bond issued by a country's
government, promising to repay borrowed money a fixed rate of interest at a
specified time.”
Merits:-
• Secure investments
• Practical projects
• Tax benefits
Demerits:-
• Lower rate of return
• Interest rate risk (locking same rate of interest for 10, 20 or may be 30 years)
POST OFFICE ACCOUNTS
The Post Office Savings Account is the deposit scheme offered by the
department of post on which fixed interest is paid. The individual investors
deposit a good portion of their financial assets in a postal savings account in
order to earn a fixed rate of interest on the investments.
The post office savings account is similar to a saving bank account (a portion
of financial assets deposited in the savings account in a bank).
Merits:-
• A post office savings account requires a minimum balance of Rs. 20 to open
the account.
• The cash can be withdrawn either partly or completely if need be.
• The risk exposure is very less to the account holders because they can avail
an assured return on all the investments.
• The account can be transferred from one post office to another.
• Core banking post offices also provide the facility of ATM/Debit cards.
• An account can be opened in the name of minor who is below the age of
10 years. It will be managed and operated by the parent or guardian.
• An account holder can nominate a person to whom the funds will be
provided in case of any demise to the account holder.
• Post office savings account does not have any maturity period. Hence, the
account opening process is hassle-free and quick.
• An individual account can be converted into joint account and vice-versa.
• Every person residing in a rural area can open a savings account.
Demerits:-
• Post office savings schemes are linked to place of investment
• Less rate of interest (till 4.5%)
• Post office savings schemes are like currency notes, that is, if your investment
documents are stolen (specially NSC or Kisan Vikas Patra), then anyone with
little brains can withdraw your investment easily.
• Post office savings schemes are not digitized
• Unprofessional post office staff
THANK YOU