NAME Arvind R
ROLL NUMBER 2214507776
PROGRAM MASTER OF BUSINESS ADMINISTRATION (MBA)
SEMESTER III
COURSE CODE AND DBFI304 - Financial Services
NAME
Assignment Set – 1
1.What do you understand by financial services? Explain its objectives.
Answer : -
Financial services refer to a variety of business activities provided by financial institutions
and intermediaries for the purpose of facilitating the management, investment and
distribution of funds. These services play an important role in the functioning of the economy
by connecting savers and borrowers, ensuring the efficient allocation of capital and
promoting economic growth. Financial services cover a wide range of activities, including
banking, insurance, investment management and various financial transactions.
The main purpose of financial services can be understood from their important role in
business development, risk management and wealth creation. First, financial services
contribute to economic growth by increasing the amount of savings available to those in
need. Financial institutions enable businesses and individuals to invest in productive
activities, foster innovation, create jobs and expand their businesses through methods such as
lending and borrowing. In this way, financial services contribute to people's health and well-
being.
Second, financial services play an important role in risk management. In a dynamic business
environment, individuals and businesses face many risks such as economic fluctuations,
natural disasters, and emergencies. Insurance programs offered by financial institutions help
reduce these risks by providing assurance against financial losses. This reduction in risk not
only protects investors and businesses, but also supports the economy as a whole.
Furthermore, financial services aim to promote wealth creation and capital formation. These
institutions help individuals and organizations build and manage their financial resources by
providing resource, asset management and financial planning assistance. Good management
of financial resources leads to wealth over time, forming the basis of financial stability,
retirement planning, and diversification of financial resources.
In addition to these broad goals, financial services also help promote financial inclusion and
improve financial services. To ensure the integrity and stability of literacy and finances.
Fiscal measures include bringing the poor into the financial market and providing them with
jobs, credit and other services. Financial education teaches people how to manage their
money effectively; It enables them to make informed decisions about saving, investing and
borrowing.
In summary, financial services include many activities that are important for the operation of
the business. Its goals include promoting economic growth, managing risk, promoting wealth
creation, improving financial inclusion and ensuring financial stability. By achieving these
goals, financial services play an important role in driving the economy and improving the
overall well-being of people and society.
2.Mutual funds come in various types, each designed to meet different investment
objectives and risk tolerance levels. What are some common products of mutual funds?
Explain.
Answer : -
Mutual funds offer a diverse range of investment products designed to cater to various
investor needs, risk appetites, and financial goals. These funds pool money from multiple
investors to invest in a diversified portfolio of stocks, bonds, and other securities.
Here are some common types of mutual funds and their common products:
Equity Funds:
These funds primarily invest in stocks, providing investors with the opportunity to participate
in the potential growth of individual companies or sectors.Categories include large-cap, mid-
cap, small-cap, and sector-specific equity funds.
funds are suitable for investors with a higher risk tolerance seeking capital appreciation over
the long term.
Bond Funds:
Bonds invest in fixed income securities such as government bonds and corporate bonds.
They know how to earn regular income by paying interest.
Debt funds are considered inferior to equity funds, making them suitable for investors or
investors seeking income.
Money Market Funds:.
These funds invest in short-term, highly liquid instruments such as Treasury bills and
commercial papers.
The money market offers less profit and provides stability to investors who want to save
capital and money.
They are often used as a temporary parking lot for funds awaiting future investment.
Balanced or Hybrid Funds: Balanced funds invest in a mix of equities and fixed-income
securities to achieve a balance between growth and income.
They cater to investors looking for a middle ground between the potential returns of stocks
and the stability of bonds.
Index Funds:
Index funds are designed to mimic the performance of a specific market, such as the S&P 500
Index.
They offer business expansion at a lower cost than actively managed funds.
Index funds are designed for investors looking for investment returns with the lowest
management fees.
Sector Funds:
These funds focus on specific sectors of the industry, such as technology, healthcare or
energy.
Industry funds allow investors to focus on specific sectors of the industry that they believe
will be the best.
Target-Date Funds:
Fund Day Target is designed for investors considering a specific holiday.
Based on the target date, asset allocation will become more conservative to adapt to investors'
changing risks over time.
Specialty Funds:
Special or thematic funds focus on a specific issue, diversification or investment, such as
environmental security or disruptive technologies.
They help investors who want to increase their investments with certain values or models.
Investors should carefully consider their investment objectives, risk tolerance and time
horizon before selecting an investment fund. Diversification, professional management and
facilities make mutual funds a good choice for many investors looking to enter the financial
market.
3.Elaborate the different types of Portfolio Management Services and mention the
strategies used by portfolio managers as a part of effective portfolio management.
Answer : -
Portfolio Management Services (PMS) refer to professional investment services offered by
financial institutions or portfolio managers to manage an individual's or an entity's investment
portfolio. PMS is tailored to meet specific investment objectives and risk profiles. There are
various types of Portfolio Management Services, each offering distinct features to cater to
diverse investor needs. Additionally, portfolio managers employ various strategies to ensure
effective portfolio management.
Types of Portfolio Management Services:
Discretionary Portfolio Management:
In discretionary PMS, the portfolio manager has the authority to make investment decisions
on behalf of the client without seeking prior approval for each transaction.
This type of service is suitable for investors who prefer a hands-off approach, relying on the
expertise of the portfolio manager.
Non-Discretionary Portfolio Management:
Non-discretionary PMS requires the portfolio manager to recommend investment decisions to
the client, who retains the final authority to approve or reject them.
Investors who want more control over their investment decisions often opt for non-
discretionary PMS.
Advisory Portfolio Management:
Advisory PMS involves the portfolio manager providing investment advice and
recommendations to the client, who then executes the transactions independently.
This service is suitable for investors seeking guidance but wish to actively manage their
portfolios.
Strategies Used in Effective Portfolio Management:
Diversification:
Diversification involves spreading investments across various asset classes, sectors, and
geographical regions to reduce risk.
Portfolio managers aim to create well-diversified portfolios to mitigate the impact of poor
performance in any single investment.
Asset Allocation:
Asset allocation is the process of distributing investments among different asset classes, such
as equities, bonds, and cash.
Portfolio managers determine the optimal mix based on the client's risk tolerance, financial
goals, and market conditions.
Risk Management: Portfolio managers assess and manage various types of risks, including
market risk, credit risk, and liquidity risk.Risk management strategies involve setting stop-
loss levels, using derivatives for hedging, and employing other risk mitigation techniques.
Active and Passive Strategies:
Active portfolio management involves frequent buying and selling of securities with the goal
of outperforming the market.
Passive strategies, such as index investing, aim to replicate the performance of a specific
market index with lower management fees.
Market Timing:
Market timing involves making investment decisions based on predictions of future market
movements.
Portfolio managers may adjust asset allocation or shift investments between sectors based on
their outlook for economic and market conditions.
Bottom-Up and Top-Down Approaches:
Bottom-up analysis focuses on evaluating individual securities based on their fundamental
characteristics.
Top-down analysis involves considering macroeconomic factors and market trends to make
broad asset allocation decisions.
Value and Growth Investing:
Value investing aims to identify undervalued securities with the potential for price
appreciation.
Growth investing targets stocks expected to have above-average earnings growth.
Assignment Set – 2
4.What is merchant banking? Explain the key roles and functions of merchant banks in
the financial industry?
Answer : -
Merchant banking refers to a specialized form of financial service that combines banking and
advisory functions, primarily catering to the needs of businesses, corporations, and
governments. Merchant banks, also known as investment banks or corporate banks, play a
crucial role in facilitating complex financial transactions and providing a range of financial
services beyond traditional banking activities.
The key roles and functions of merchant banks in the financial industry can be outlined
as follows:
Corporate Finance Advisory:
Merchant banks offer strategic financial advice to corporations on issues such as mergers and
acquisitions, capital structuring, and divestitures.
They help raise capital by issuing stocks and bonds and guide companies through initial
public offerings (IPOs) and other fundraising activities.
Underwriting Services:
Merchant banks act as underwriters for securities issuances, assuming the financial risk
associated with the sale of new stocks or bonds.
They buy shares from the company's launch and then sell it to investors, helping the
company's financial process.
Project Financing:
Merchant banks provide project financing by structuring and arranging funds for large-scale
projects, such as infrastructure development, real estate ventures, and industrial projects.
They evaluate the feasibility of the project and help obtain financing from a variety of
sources, including equity and debt.
Loan Syndication:
Merchant banks assist in arranging and syndicating loans for corporations, especially in cases
of large-scale financing needs..
They lead a team of lenders to consolidate loans, spread risk and facilitate access to capital.
Portfolio Management:
Merchant banks often offer portfolio management services to high-net-worth individuals,
institutions, and corporations.
They help clients manage investment opportunities, make sound investment decisions and
achieve maximum returns.
Risk Management:
Business firms facilitate cross-border trade by providing advice on international finance,
foreign exchange management and investment, and global capital.
International Finance:
Business firms facilitate cross-border trade by providing advice on international finance,
foreign exchange management and investment, and global capital.
They assist clients with complex international laws and regulations.
Credit Syndication:
Merchant banks participate in credit syndication, where they collaborate with other financial
institutions to extend credit facilities to large corporate clients.
This indicates risk and allows the customer to get more credit.
Research and Analysis:
Investment Bank conducts financial research and analysis to gain insight into business,
marketing and investment matters.
This information helps consumers make informed decisions about their financial strategies.
5.Explain the key principles that underlie the concept of insurance. What are the
roles/functions of IRDA?
Answer : -
Key Principles of Insurance:
Principle of Utmost Good Faith (Uberrimae Fidei):
This principle requires both the insurer and the insured to disclose all relevant information
truthfully and completely. It establishes a relationship of trust and honesty between the two
parties.
Principle of Insurable Interest:
In order for the insured to believe that the insurance contract will not be subject to
speculation, he must have a real economic interest on the subject of insurance (such as
property or life).
Principle of Indemnity:
The Compensation Principle stipulates that the purpose of insurance is to compensate for the
real economic losses suffered by the insured, rather than making profits.
Principle of Subrogation:
Subrogation allows the insured to file a lawsuit against the third party who caused the
damage in terms of insurance, after resolving the claim for compensation.
Principle of Contribution:
When a person takes out more than one insurance policy with the same risk, the Subsidy
Policy ensures that each insurance company shares the lost money.
Principle of Loss Minimization:
Insured parties are expected to take reasonable steps to minimize the extent of the loss or
damage.
Principle of Causa Proxima (Proximate Cause):
This principle determines the cause of the loss, especially when there is more than one cause
of the damage.
Roles/Functions of IRDA (Insurance Regulatory and Development Authority of India):
Regulatory Oversight:
IRDA is responsible for regulating and supervising the insurance respect business in India.
Ensures insurance companies comply with laws, regulations and ethical standards to protect
the interests of insureds.
Licensing and Authorization:
IRDA issues licenses to insurance companies, brokers and other entities engaged in the
insurance business. It assesses their financial security, capacity and compliance with
regulatory requirements.
Policyholder Protection:
IRDA is committed to protecting the interests of policyholders by ensuring fairness,
transparency and disclosure.
Promoting Market Development:
IRDA supports the growth and development of the insurance industry by encouraging
innovation, competition and introduction of new products and services.
Consumer Education and Awareness:
IRDA plays an important role in educating consumers about insurance products, their
benefits and the importance of making informed decisions.
Policy Formulation and Review:
Authorities create the rules and regulations that govern the insurance industry. It regularly
reviews and updates these policies to adapt to changing business conditions and respond to
emerging issues.
Market Conduct and Surveillance:
IRDA oversees the conduct of insurance companies and intermediaries to ensure ethical
conduct and fair oversight of policyholders.
Financial Stability and Solvency Regulation:
IRDA lays down guidelines for financial stability and resolution of insurance companies. It
creates the resources necessary to protect the interests of policyholders and monitors the
financial health of insurance companies.
6.Elaborate the different types of factoring services. How it is different from forfaiting?
Answer : -
Factoring Services:
In factoring with recourse, the seller company assumes the responsibility for receivables that
are not paid or collected by the customer. If the customer does not pay the shipping fee, the
seller must return the money.
There are different types of factoring services based on the nature of the arrangement:
Recourse Factoring:
In factoring with recourse, the seller company assumes the responsibility for receivables that
are not paid or collected by the customer. If the customer does not pay the shipping fee, the
seller must return the money.
Non-Recourse Factoring:
Factoring without recourse transforms credit risk into good. Even if the customer is not paid,
priority covers the loss and the selling company has no obligation to return the profit.
Maturity Factoring:
Maturity Factoring involves making payments against receivables, but the payment is later
collected by the customer. Status provides financing until payment is received.
Advance Factoring:
In pre-factoring, the factor provides the vendor company with an advance payment, usually a
percentage of the total invoice amount. The remaining balance, i.e. the lower price, is paid
when the customer receives the invoice.
Spot Factoring:
Attended factoring allows businesses to account for special invoices or shipments as needed
without the need for permanent arrangements. It provides businesses with the flexibility to
manage revenue from data.
Full-Service Factoring:
Full service factoring includes not only financing but also credit management and billing
services. Mainly credit management, cost analysis and customer billing.
Difference from Forfaiting:
While both factoring and forfaiting involve the financing of trade receivables, they differ in
several key aspects:
Nature of Transactions:
Factoring is often associated with: Short-term loans with variable interest rates. Fast payment
terms, usually within 90 days. Forfaiting, on the other hand, generally concerns medium and
long-term receivables with payment maturities longer than one year.
Recourse:
In factoring, there is the concept of recourse and non-recourse options. In forfaiting, the
transaction is generally non-recourse, which means forfaiting carries the risk of outstanding
debt.
Complexity and Documentation:
Forfaiting transactions are generally more complex and require more money. The
documentation process for forfaiting is more involved and usually requires a medium-term
contract.
Involvement of Banks:
Forfaiting transactions are generally carried out by banks or specialized banks, and those who
carry out transactions in forfaiting are generally banks. Factoring services can be offered by
financial institutions, trading companies or commercial companies.
