FINANCIAL EDUCATION AND INVESTMENT AWARENESS

Module 1
Foundations for finance
Introduction to basic concepts
Financial Planning
Financial planning is the long-term approach of carefully managing available funds to reach
goals and dreams while overcoming financial obstacles. Financial planning can assist in
managing money as well as the resources of an individual or a family. Without proper
planning, we risk being enslaved by uncertainty regarding how to repay loans and credit, as
well as cover our expenses adequately. Although we may have a job that meets our daily
needs, significant medical bills or other disasters can severely impact our finances. Thus,
financial planning can help us manage our money effectively and secure a prosperous
financial future.

Meaning: Financial planning is the process of defining various financial goals, quantifying
those goals, and developing an investment strategy to achieve them. In simple terms,
financial planning involves organizing the income, expenses, assets, and liabilities of a
household to address both current and future financial requirements.

Key points of financial planning

Financial planning is a fundamental exercise towards securing financial independence. The

following are the key points regarding financial planning:

• It enables better management of personal financial situation

• It works primarily through the identification of key goals

• It puts in place an action plan to realign the finances to meet financial goals.

• It is a holistic approach that considers the existing financial position, evaluates the future
needs, puts a process to fund the needs and reviews the progress.

• It is the exercise of ensuring that a household has adequate income or resources to meet
current and future expenses and needs.
Steps In Financial Planning
The financial planning process is highly personalized. All psychological and financial aspects
that may have an impact on your financial goals and objectives should be included in
financial planning. Personal financial planning is a long-term strategy for your financial
future that takes into account every aspect of your financial situation and how each
influences your capacity to reach your goals and objectives. Financial planning has six
separate steps.

1.​ Examine your current financial situation: Determine your present financial situation,
including your income, expenses, debt, savings, investments, risk attitude, and tolerance
capacity. This is the first step in financial planning because it provides you with a good
understanding of the condition of your finances and opportunities for improvement.
2.​ Develop your financial goals: Determine the various financial goals you intend to
achieve in your life. Don't be afraid to write down any goal because there is no such
thing as a small or big goal. Make sure the goals are clear. The established financial goals
should be practical in nature and feasible within the time limit set for each of the goals.
It delivers satisfaction and acts as a motivator. It serves as a financial planning directing
function.
3.​ Identify financial gaps: A simple formula can help you figure out how much money you'll
need. This is critical since quantifying the income from your investments is required to
determine the best investments to offset the shortfall.
4.​ Draft financial plan: Following goal formulation, plans are developed in such a way that
the goals can be met as soon as possible. The financial plan outlines how to attain
specific financial goals. Whether to cut needless expenses or allocate savings to various
investment avenues. Examine various investment choices such as equities, mutual funds,
debt instruments such as PPF, bonds, fixed deposits, gilt funds, and so on, and determine
which instrument or mix of instruments best meets your needs. The period for your
investment must match the time frame for your goals.
5.​ Implement your financial plan: A financial plan is carried out following the goals
established. The plan should be carried out systematically and consistently. The best
investment option is based on characteristics such as your goals, age, risk tolerance, and
investment amount. Insurance, retirement planning, estate planning, and taxation
should all be included in the financial plan. Above all, begin investing and stick to your
plan.
6.​ Periodically review your plan: The execution of a financial plan, the plans should be
regularly checked and evaluated against the intended goals to ensure successful financial
planning. A successful plan requires considerable dedication and regular assessment
(once in six months or at a major event such as a birth, death, or inheritance). Based on
the performance of your investments, you should be prepared to make small or big
changes to your present financial position, goals, and investment time frame. Thus,
Personal Financial Planning is the process of accomplishing life goals through smart
 financial management. It could be buying a home, saving for higher education, or other
ambitious goals set to enjoy a higher standard of living. It is not limited to a specific class,
but such behaviour should be adopted by all individuals to optimize savings.

Importance and Need for Financial Planning

Financial planning is a systematic strategy to maximizing one's existing financial resources
through sound financial planning to attain one's financial goals and objectives.

1. Income Management: A set plan can help you manage your income more successfully.
This might be as simple as making a budget for planning and monitoring that will assist you
in prioritizing spending, identifying wasteful expenditures, adapting quickly as the financial
situation changes, and achieving your financial objectives.

2. Wealth creation: The term "wealth creation" refers to the process of accumulating money
through investments in a variety of ways. You obtain larger returns when you invest in
financial products for a long time. As a result, it is an important component of your financial
journey to fulfil all of your long-term financial goals, such as buying your dream home,
funding your child's education, and so on.

3. Retirement planning: Retirement planning involves ensuring a continuous flow of income

after retirement. It means putting money away and investing it, particularly for that purpose.
Your retirement plan will be determined by your long-term objectives, income, and age. You
must begin to establish a financial plan now if you want to live a happy and comfortable
retirement life.

4. Family Security: Financial planning helps to provide peace of mind for you and your family
if you have a suitable insurance policy, have invested and saved properly.

5. Managing Debts: A financial plan becomes even more important in order to avoid a
financial disaster. You will be able to focus on other financial goals once you have paid off
your debts. Because a financial plan allows you to track your money, it also helps to prioritize
your expenses so that you can pay off your debt.

6. Choosing an appropriate Investment Avenue: Investing in multiple products is one of the

best financial planning ideas for asset allocation. It will assist the individual in achieving his
financial objectives while minimizing risk. During times of market volatility, the financial plan
will devise a strategy to protect you.

7. Insurance Planning: An appropriate insurance cover proves to be a blessing in the event

of a family member's unfortunate death or a health emergency. Your family member will be
able to pay off the remaining bills and keep a good standard of living if you have the right life
insurance coverage. Health insurance coverage, on the other hand, assures that you can
provide necessary treatment to your loved one in the event of an accident or medical
emergency.
8. Sound Financial Decision Making: Finding assets that aren't profitable is an important
part of financial planning. The stock may have little prospect of increasing in value. You
should get rid of any assets that are under stress. In other circumstances, consumers end up
purchasing multiple insurance plans, none of which are beneficial to the policyholder. It is
merely filling up the pockets of the insurance agents. As a result, you must exercise caution
when choosing a life insurance policy or other investment Plans.

9. Improved Standard of Living: Another benefit of financial planning is that it might assist
you in raising your living standards. The more you plan for your finances, the more money
you'll save. This means that more money will be conserved instead of going to unanticipated
expenses. Higher savings can help you cope with difficult situations when you're facing
financial difficulties.

10. Saving tax: Some people end up paying a significant amount of tax each year. However,
you can now legally reduce your tax liability. The Indian Income Tax Act contains a number of
measures that allow persons to lower their tax liability. You can determine the best ways to
invest your money and lower your taxable income by preparing your taxes ahead of time.
Mutual funds are a tax-efficient way to invest for your long-term goals. Thus, financial
planning helps reduce tax liability.

Life Goals and Financial Goals

A goal is an objective or target that someone is trying to reach or achieve. Life goals are the
targets you set for the significant achievements you hope to accomplish in your life.

Financial Goals

Financial goal is the term used to describe the future needs of an individual that require
funding. It specifies the sum of money required to meet the needs and when it is required.
Identifying financial goals helps put in place a spending and saving plan so that current and
future demands on income are met efficiently. Goals described in terms of the money
required to meet it at a point of time in future are called financial goals.

Financial Goals are generally classified as:

a. Short-Term Financial Goals

Short-term goals are the more immediate expenses. Although timelines vary, these are the
things you will generally spend money on within a few months or years. Short-term goal
examples: Emergency fund, Payments toward rent, insurance, or student loans, Credit card
debt payments, Personal goods, Travel, Wedding, Minor repairs and home improvements.

b. Long-Term Financial Goals

Long-term goals are usually your big-picture costs. These goals may take several years or
even decades to reach. These distant goals typically involve more money and regular
attention than short-term goals. Long-term goal examples: Retirement fund, paying off a
mortgage, starting a business, saving for a child's college tuition.

1. Planning Resources for Reaching Financial Goals

Savings are the prime source of reaching financial goals. However, more savings in the bank
won't be enough. Savings should be channelled to various avenues of investment in order to
achieve the majority of the financial goals. To meet your various financial goals, we can
invest in mutual funds, stocks, gold, land and other assets. In reality, risk and returns are
closely connected; the higher the returns, the greater the risk, and vice versa.

2. Review And Prioritize

It's critical to examine the budget frequently to ensure that you're on track. Remember that
the budget should work for you, not against you. Prioritizing your financial goals can mean
the difference between not paying off debt and getting rid of it forever. It can mean the
difference between paying off your mortgage or keeping it around forever.

Essential Features of Financial Goals

The first step toward achieving your financial goal is to create a savings plan. The objectives
are SMART.

Sl.no Attribute Description Example

1 Specific This involves describing exactly I want to save Rs. 3 Lakhs to buy
what you wish to accomplish. a new car.
State exactly what is to be done
with the money involved.

2 Measurable Essentially, you want to decide I need to save Rs.5,000 a

on a unit of measurement for month for the next 60 months in
tracking your progress. order to have 3 Lakhs in 5 years.

3 Achievable To accomplish your goals, you'll This can be accomplished by

need to plan out working overtime at my
specific actions to make them existing job or starting à side
a reality. business. Any incentives I receive
will be used to buy a new car.

4 Realistic You'll also need to set realistic To save money, I'm going to
goals depending on aspects cancel my cable TV subscription,
such as your income, time, and gym
abilities.
 membership and dine out less. I
plan to improve my income by
Rs.10,000 in a year.

-5 Time Finally, you should set a In 3 years, I want to get a new

deadline for when you intend to car. I will be able to accumulate 3
attain your objectives. Lakhs to buy a new car.

Personal Financial Planning

Financial planning is the process of meeting your life goals through the proper management
of your finances. Life goals can include buying a home, saving for your child's education, or
planning for retirement.Personal financial planning is the process of managing your money
to achieve personal economic satisfaction. This planning process allows you to control your
financial situation. Every person, family, or household has a unique financial position, and
any financial activity, therefore, must also be carefully planned to meet specific needs and
goals. Personal Financial Planning also refers to short- and long-term financial planning by
somebody, either independently or with the assistance of a professional adviser.

Meaning of Personal Financial Planning

Financial planning is the process of developing a personal roadmap for your financial
well-being. The inputs to the financial planning process are:
(a) your finances, i.e., your income, assets, and liabilities.
(b) your goals, i.e., your current and future financial needs and
(c) your risk appetite.
The output of the financial planning process is a personal financial plan that tells you how to
use your money to achieve your goals, keeping in mind inflation, real returns, and taxes. In
short, financial planning is the process of systematically planning your finances towards
achieving your short-term and long-term life goals.

Sample financial plan for a young adult

Name: Ms. Poorvi
Gender: Female; Age: 22 years; Marital Status: Unmarried
Goal Goal type Target Amount Action Plan
time (approximate)
Master Short 2026 5,00,000 Financing fees partly from parents
degree term and remaining by taking education
loan
Vehicle Medium 2029 10,00,000 By 2028 it is expected to earn
(two term money. Save money to make down
wheeler payment and clear the education
-scooter) loan and take vehicle loan.
 Vacation Medium 2030 1,00,000 Investing in equity and mutual funds
term to earn sufficient returns to fund
vacation for family
Marriage Long term 2031 10,00,000 Investing in equity and mutual funds
to earn sufficient returns to fund to
support marriage expenses
House Long term 2040 60,00,000 Making investment in fixed deposits
which help to lock funds for long
term for this goal and take bank
loan in addition.

Meaning Of Money
Money is any item or medium of exchange that symbolizes perceived value. As a result, it is
accepted by people for the payment of goods and services, as well as for the repayment of
loans. Economies rely on money to facilitate transactions and to power financial growth.
Functions Of Money
●​ Money is a medium of exchange; it allows people and businesses to obtain what they
need to live and thrive.
●​ Bartering was one way that people exchanged goods for other goods before money was
created.
●​ Like gold and other precious metals, money has worth because, for most people, it
represents something valuable.
●​ Fiat money is government-issued currency that is not backed by a physical commodity
but by the stability of the issuing government.
●​ Above all, money is a unit of account - a socially accepted standard unit with which
things are priced.
Money and its need
●​ Money can’t buy happiness, but it can buy security and safety for you and your loved
ones. Human beings need money to pay for all the things that make their life possible,
such as shelter, food, healthcare bills, and a good education.
●​ Money gives you freedom. When you have enough money, you can live where you want,
take care of your needs, and indulge in your hobbies. If you can become financially
independent and have the financial resources necessary to live on without working, you
will enjoy even more freedom since you will be able to do what you want with your time.
●​ Money gives you the power to pursue your dreams. Having money makes it possible for
you to start a business, build a dream home, pay the costs associated with having a
family, or accomplish other goals you believe will help you live a better life.
●​ Money gives you security. When you have enough money in the bank, you need not
worry about having a roof over your head or about having enough to eat or about being
able to see a doctor when you are sick. This doesn’t mean you will be able to afford
everything you want, but you will be able to enjoy a stable middle-class life.
Economics
Economics is the branch of social science that is concerned with the study of how
individuals, households, firms, industries, and governments make decisions relating to the
allocation of limited resources to productive uses to derive maximum gain or satisfaction.
The word "economics" is derived from the ancient Greek word "oikonomikos" or
"oikonomia." Oikonomikos translates to "the task of managing a household." Adam Smith,
considered as the father of modern economics, defined economics as "an inquiry into the
nature and causes of the wealth of nations." British economist Alfred Marshall defined
economics as "the study of man in the ordinary business of life”.

Scope Of Economics
A) Microeconomics: The part of economics whose subject matter of study is individual units,
i.e., a consumer, a household, a firm, an industry, etc. It analyses how the decisions are
taken by the economic agents concerning the allocation of the resources that are limited in
nature. It studies consumer behaviour, product pricing, and firm's behaviour. Factor pricing,
etc.
B) Macro Economics: It is that branch of economics that studies the entire economy instead
of individual units, i.e., level of output, total investment, total savings, total consumption,
etc. It is the study of aggregates and averages. It analyses the economic environment as a
whole, wherein the firms, consumers, households, and governments make decisions.

Factors Influencing Decision-Making In Investments

Business environment factors impact how a business/industry operates and generates
returns. These factors have an impact on the investments and their returns. In broad terms,
this environment can be divided into two categories: macro-environment and
micro-environment. Macro-environment affects the operation of all existing business
entities out there, while the micro-environment influences the functionality of a particular
business itself.
I. Macro-environment factors
The macro environment comprises a range of external factors. Neither businesses nor
governments can entirely control external factors. However, diligent decision-making and
strategies can reduce the impact that these external factors can have on the economy. The
external environment has an indirect impact on financial markets. This is not evident
immediately but can result in huge losses later on in the absence of a strategic move. On the
other hand, a favourable environment presents a variety of profitable opportunities. The
economic development of a country depends on these macro-environment factors. The
factors are as follows:
●​ Demographic factors: Demographics refers to age, language, lifestyle, income
distribution, cultural differences, etc. Financial literacy depends on demographics.
●​ Technology factors: Technological growth and advancement within a nation greatly
influence the production and sale of goods or services. Innovation, automation, and
internet facilities are some examples of technological factors.
●​ Natural and physical factors: Business performance depends on various geographical and
ecological forces- availability of natural resources, climate change, conditions, biological
balance, pollution, etc.
●​ Political and legal factors: The government imposes various regulations on businesses-
employment laws, import/export laws, copyright laws, labour laws, health and safety
laws, and discrimination laws. These are known as political and legal factors.
●​ Social and cultural factors: A business needs to be socially responsible and culturally
aware. Socio-cultural factors comprise education, population growth rate, life
expectancy rate, social status, buying habits, religion, etc.
●​ Economic factors: Consumer buying decisions are significantly impacted by
macroeconomic factors: demand-supply, inflation, interest rates, taxes, exchange rates,
and recession.
II. Micro-environment factors
The microenvironment of the organization consists of those elements that are controllable
by the management. However, the microenvironment does not affect all the companies in
an industry in the same way because the size, capacity, capability, and strategies are
different. Some of the key micro-environment business factors are listed below:
●​ Customers
●​ Suppliers
●​ Competitors
●​ The general public

Banking In India
A bank is a type of financial institution that is licensed to accept deposits and provide loans.
Financial services such as wealth management, currency exchange, and safe deposit boxes
may be offered by banks.
Banking Company: The Banking Regulation Act, 1949 defines "a banking company as a
company which transacts the business of banking in India (Section 5 (C)".

Banking: Section 5(b) defines banking "as accepting for lending or investment of deposits of
money from the public, repayable on demand or otherwise and withdraw able by cheque,
draft, order or otherwise".
The term bank is derived from the French word "BANCO" which means a Bench or Money
exchange table.

Functions Of Banks
●​ Acceptance of Deposit: A bank accepts money from the people in the form of
deposits, which are usually repayable on demand or after the expiry of a fixed
 period. It gives safety to the deposits of its customers. It also acts as a custodian of
funds of its customers.
●​ Giving Advances/Loans: A bank lends out money in the form of loans to those who
require it for different purposes. These loans can be in the form of retail loans (loans
given to individuals) or corporate loans (loans given to businesses).
●​ Payment and Withdrawal: A bank provides easy payment and withdrawal facilities to
its customers in the form of cheques, drafts, debit cards, Automated Teller Machines
(ATMs), etc. It also brings bank money in circulation. The new age of banking focuses
on providing payment services using mobile technology to enable faster transfers,
using Unified Payment Interface (UPI), etc.
●​ Ever-increasing Functions, including agency and utility services: Banking is an
evolutionary concept. There is continuous expansion and diversification as regards
the functions, services and activities of a bank, which includes wealth portfolio
management services, utility services, agency services, insurance/mutual fund
advisory services, etc.

Need For Banking

A sound banking system is necessary to achieve the following objectives:

●​ Savings and Capital Formation: Banks play a vital role in mobilizing the savings of the
people and promoting capital formation for the economic development of a country.
●​ Channelization of Savings: The mobilized savings are allocated by the banks for the
development of various fields such as agriculture, industry, communication, transport,
etc.
●​ Implementation of Monetary Policy: A structured banking system can easily implement
the monetary policy because the development of the economy depends upon the
control of credit given by the banks. So, banks are necessary for the effective
implementation of monetary policies.
●​ Encouragement of Industries: Banks provide various types of financial services such as
granting cash credit loans, issuing letter of credit, bill discounting, etc., which encourages
the development of various industries in the country.
●​ Regional Development: By transferring surplus money from the developed regions to the
less developed regions, banks reduce regional imbalances.
●​ Development of Agriculture and Other Neglected Sectors: Banks are necessary for the
farmers. It also encourages the development of small-scale and cottage industries in
rural areas.

Types Of Banks In India

1. Commercial Banks: A commercial bank is a financial institution that accepts deposits from
the public and gives loans for the purposes of consumption and investment to make a profit.
Commercial banks are governed by the Banking Regulation Act of 1949, and their business
model is profit-oriented. Their primary function is to receive deposits and lend to
individuals, businesses, and governments. Commercial banks have typically maintained
physical locations, but a growing number now operate exclusively online. Commercial banks
are vital to the economy because they provide the market with capital, credit, and liquidity.
Commercial banks can be divided into:

●​ Public Sector Banks: These are the nationalized banks, which account for more than 75%
of the country's overall banking industry. Public Sector Undertakings (Banks) are a major
type of government-owned banks in India, where a majority stake (i.e., more than 50%)
is held by the Ministry of Finance of the Government of India or State Ministry of
Finance of various State Governments of India. The main goals of public sector banks are
to ensure the accessibility of banking and financial services, to ensure regulatory
compliance to promote the needs of the underprivileged and weaker sections of society
to cater to the needs of agriculture and other priority sectors, and to prevent the
concentration of wealth and economic power. The number of public sector banks has
been reduced to 12 from 27.
●​ Private Sector Banks: Private-sector banks are those in which private shareholders own
the majority of the company rather than the government. Private promoters own,
manage, and govern private sector banks, which are free to operate in accordance with
market forces. Apart from the shareholding structure, both public sector and private
sector banks offer the same set of services. To ensure their safety and smooth operation,
entry hurdles and regulatory criteria such as the minimum net worth are normally in
place. This assures the protection of public deposits entrusted to such organizations, and
they are also governed by rules provided from time to time by the Reserve Bank of India.
At present, there are 21 private banks in India 2021.
●​ Foreign Banks: A Foreign Bank is a financial institution that provides financial services to
international consumers from outside of its native country. Foreign banks are registered
and have their headquarters in another country, yet they have branches in India. These
banks can operate through branches or wholly-owned subsidiaries, according to the RBI.
Most foreign banks' primary business in India has been in the corporate sector.
●​ Regional Rural Banks: On October 2, 1975, the Indian government established Regional
Rural Banks (RRBs). They were established to provide banking and financial services to
remote communities and therefore operate in several states in India. These banks help
small and marginal farmers in rural areas by providing finance. They help small and
marginal farmers, agricultural labourers, artists, and small business owners get finance.
Scheduled banks, often nationalized commercial banks, sponsor RRBs.

2. Small Finance Bank: Small financing banks were established to reach out to the unbanked
population in distant and underdeveloped locations. Small Finance Banks (SFBs) became
public in India on September 16, 2015, when the Reserve Bank of India authorized the
establishment of small financial institutions known as small finance banks following the
Union Budget of 2014-2015. The goal of India's Small Finance Banks is to give financial
inclusion to the less privileged sectors of the economy who may be unable to access
financial institutions. Small Finance Banks serve small and micro businesses, marginal and
small farmers and the unorganized sector.

3. Payments Bank: The Reserve Bank of India conceptualized Payments Banks as a new type
of bank in India (RBI). These banks can accept a limited deposit, which is now capped at
200,000 per person but could be raised in the future. These banks are unable to provide
loans or credit cards. Banks of this type can handle both current and savings accounts.
Payment banks can provide online and mobile banking as well as ATM and debit cards.
Bharti Airtel established Airtel Payments Bank, India's first payments bank. Examples of
Payments bank in India are as follows: Airtel Payments Bank Ltd, India Post Payments Bank
Ltd, Paytm Payments Bank Ltd, Jio Payments Bank Ltd, NSDL Payments Bank Ltd.

4. Co-operative Banks: Cooperative banks are governed by an elected managing committee

and are governed by the Cooperative Societies Act of 1912. A cooperative bank is a
voluntary organisation that caters to its members' financial requirements on a mutual basis.
They take deposits and lend money to their members in the form of mortgages and other
sorts of loans. The Reserve Bank of India regulates and inspects these banks as well, but they
are normally governed by a distinct statute that is more flexible and easier to comply with
than central bank legislation. Cooperative banks are further divided into the following
categories:

●​ Urban Co-operative Banks: The primary cooperative banks in urban and semi-urban
areas are referred to as urban cooperative banks. Small borrowers and enterprises
oriented around towns, neighbourhoods, and workplace groupings were primarily lent
to by these banks.
●​ State Co-operative Banks: The short-term cooperative credit framework includes state
co-operative banks. State governments register and regulate these organizations under
the relevant state co-operative societies acts. They are also under the authority of the
RBI because they are subject to the rules of the Banking Regulation Act, 1949.

Types Of Bank Deposits

A commercial bank's most significant activity is to collect deposits from the general public.
People who have extra money and savings find it convenient to deposit it in a bank. Funds
deposited with a bank receive interest depending on the nature of the deposit. Banks
typically accept the following types of deposits:

I. Savings account

Individuals who want to deposit small sums of money from their present income should
open a savings account. It assists them in securing their future while also collecting income
on their investments. A savings account can be opened with or without the ability to use a
chequebook. Savings account customers can also deposit checks, draft, dividend warrants,
and other instruments made in their favour with the bank for collection.
Types of Savings Accounts

a) Basic Savings Account: A basic savings account is a simple account that can be opened
with a bank or financial institution. Its sole goal is to save your money safely. In exchange,
you will receive interest on the amount you have deposited. The interest rate varies from
one bank to another. Basic Savings Accounts often have a minimum balance requirement,
and you must ensure that your account balance does not go below a certain level.

b) Instant Savings Account: An Instant Savings Account is quite similar to a Basic Savings
Account in many ways. The main distinction is that, regular savings account may need you to
physically visit the bank to open it, an Instant Savings Account may be started fast online
with only a few clicks. Only your Aadhaar details can be used to start an Instant Savings
Account. It also has a variety of other benefits, including as app-based access to banking
services 24 hours a day, seven days a week.

c) Zero Balance Savings Account: A zero-balance savings account is one in which account
holders are not required to maintain any monthly average amount (AMB).

d) Family Savings Account: Family Savings Accounts are accounts that allow all members of
your family to manage their varied financial needs on a single platform. It has a numerous
benefit over a conventional Individual Savings Account, including lower minimum balance
requirements, expanded banking privileges, and superior features such as Wealth
Management and Private Banking.

II. Current Account

Current bank account is opened by businessmen who have a higher number of regular
transactions with the bank. It includes deposits, withdrawals, and contra transactions. It is
also known as a Demand Deposit Account. The depositor can withdraw the balance of his or
her current account at any time using cheques. Business organisations or businessmen are
allowed to open current accounts. Current accounts do not pay interest because the money
put in them is repayable without restriction on demand.

Features Of A Current Account

●​ A current account requires a higher minimum balance than a savings account.
●​ Designed to make frequent transactions easier, such as transferring funds, receiving
cheques & cash.
●​ Individuals, proprietary businesses, public and private companies, associations,
trusts,
and so on can generally operate current accounts.
●​ The primary goal of the current account is to foster business transactions.
●​ Current accounts charge interest on short-term cash borrowed from the bank by the
account holder.
III. Fixed deposit
The word "fixed deposit” refers to a deposit that is repayable after a set duration of time. It
is also known as a time deposit since it is repayable only after a set duration of time, which is
chosen at the time the account is opened. Fixed deposits are the most beneficial to a
banking institution. Because they are only repayable after a set period, the bank can invest
these funds more profitably by lending at higher interest rates and for longer periods.

IV. RECURRING DEPOSIT

A recurring deposit (RD) is a type of account in which the depositor is required to deposit
money at regular intervals, such as monthly, quarterly, or weekly for a set duration of time.
Most banks and NBFCs in India offer recurring deposit accounts with terms ranging from 6
months to 10 years. The interest rate typically fluctuates between 5.00 percent and 7.85
percent. After the prescribed period has expired, the customer receives all of his deposits, as
well as the cumulative interest accrued on the deposit.

Difference between Fixed Deposit and Recurring Deposit

Deposit Insurance (PMJDY)

Pradhan Mantri Jan-Dhan Yojana (PMJDY) is a National Mission for Financial Inclusion
to ensure access to financial services, namely, basic savings & deposit accounts, remittance,
credit, insurance, and pension in an affordable manner. Under the scheme, a basic savings
bank deposit (BSBD) account can be opened in any bank branch or Business Correspondent
(Bank Mitra) outlet by persons not having any other account.

Benefits under PMJDY

 One basic savings bank account is opened for an unbanked person.

 There is no requirement to maintain any minimum balance in PMJDY accounts.

 Interest is earned on the deposit in PMJDY accounts.

 A Rupay Debit card is provided to PMJDY account holders.

 Accident Insurance Cover of 1 lakh (enhanced to 2 lakh to new PMJDY accounts opened
after 28.8.2018) is available with a RuPay card issued to the PMJDY account holders.

 An overdraft (OD) facility up to 10,000 to eligible account holders is available.

 PMJDY accounts are eligible for Direct Benefit Transfer (DBT), Pradhan Mantri Jeevan Jyoti
Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY), Atal Pension Yojana
(APY), and Micro Units Development & Refinance Agency Bank (MUDRA) scheme.

Traditional And New Banking Models

India has traditionally been a cash-based economy. The government's decision to implement
demonetisation, as well as the recent COVID-19 epidemic, has mandated contactless
payments and increased cashless banking. Demonetization may have failed to attain its
stated goals, like seizing all black money and undeclared assets, but it did disrupt life and
economic activity. The positive side of demonetization is that it compelled people to conduct
cashless transactions because there was very little liquid currency available to the public as
the government had banned old currency notes. Many digital payment services have
emerged, assisting people to transition to cashless purchases. The imposition of
demonetisation in 2016 paved the way for a cashless banking.

Methods Of New Banking Models Banking Cards

A) Banking Cards: Banking cards, such as debit and credit cards, are among the most
widely used cashless payment systems worldwide. Banking cards provide numerous benefits
such as secure payments, convenience, and many others. One of the most significant
benefits of banking cards is that they may also be used to make digital payments. To perform
cashless payments, a user can store his card information in mobile wallets or digital payment
apps. The types of bank cards and their characteristics:

●​ Debit card: Debit cards are provided when an account is opened at a bank. Debit
cards are linked to a bank account and enable you to pay at both physical and online
stores, as well as withdraw cash from branches or ATMs. Upon using a debit card, the
amount will be debited from your savings or current account. As a result, if there
were insufficient funds in the the transaction could not be completed. The debit card
normally has a daily limit connected with it for security concerns, especially when
withdrawing cash from an ATM.
●​ Credit card: The primary distinction between a debit card and a credit card is that
when we use a debit card, the amount is deducted from the bank account. When we
use a credit card, the amount is deducted from the pre-approved credit limit rather
than the bank account. The card's limit is determined by the issuing institution based
on the credit score and history. In general, a higher credit score results in a greater
credit limit.
B) Mobile Application-Based Payment System

Because of the rapid, safe, and easy payment options, mobile wallet applications are
increasingly gaining popularity. Mobile apps enable users to transfer, receive, and store
money. By simply integrating the bank account, a user can add or save money in his wallet.
The following are the types of Mobile Payment Apps [ e-Wallets ]

1. Open e-wallets: Banks are the only institutions authorised to issue & operate open
wallets. Users with open wallets can use them for any transactions, including the purchase
of products and services, as well as financial services such as money transfer at merchant
locations or point-of-sale terminals that accept cards, and cash withdrawal at ATMs. RBI
authorization or Pre-paid Payment Instruments (PPIs) license is not required for Banks for
operating open-eWallets.
Examples: Yono – State Bank
Lime – Axis Bank
Pockets – ICICI Bank.

2. Semi-closed e-wallets: A semi-closed wallet is issued by a fintech or by any payments

company (non-bank entity). Using this type of app, a user can also transact with merchants
that have a contract with the app company. Merchants need to sign contracts with the app
company for accepting payment from the mobile wallets. Semi-closed wallets also do not
permit cash withdrawals. Since semi-closed wallets are administered by non-bank entities,
they are mandated to keep money in the escrow account with a partner bank. RBI
authorization or Pre-paid Payment Instruments (PPIs) license is required for closed wallet
companies.

Examples: Paytm, Phonepe, Google Pay.

3. Closed e-wallets: A closed e-wallet is issued by a merchant to a consumer for buying

goods and services exclusively on its platform. Cash withdrawal or redemption is not
possible with these wallets. Typically, merchants create these wallets account for customers
to find money in the event of cancellation or return of a product or service. RBI
authorization or Pre-paid Payment Instruments (PPIs) license is not compulsory for closed
wallet companies.

Examples: Flipkart, MakeMyTrip.

C) BHIM/UPI
Based on the Unified Payments Interface, BHIM is an Indian mobile payment app developed
by the National Payments Corporation of India. BHIM (Bharat Interface for Money) is a
UPI-based platform that allows users to make secure, simple, and instant digital payments
using their phones.
The Unified Payments Interface (UPI) is a real-time payment system designed by the
National Payments Corporation of India (NPCI) that allows for inter-bank, peer-to-peer (P2P)
and person-to-merchant (P2M) transactions. The Reserve Bank of India (RBI) regulates the
interface, which works by immediately transferring payments between two bank accounts
on a mobile platform.

D) QR CODES
QR is an abbreviation for Quick Response. It is a two-dimensional code that consists of a
pattern of black squares grouped on a square grid. Imaging devices, such as smartphone
cameras, can scan QR codes. QR codes are extensively used for conducting cashless
payments, in which a user just scans the merchant service QR code to complete the
transaction.

E) CONTACTLESS PAYMENTS
Contactless payment is a simple and safe technology that allows users to buy products by
just tapping a card near a point-of-sale terminal. The card can simply be a debit, credit, or
smart card based on NFC (near field communication) or RFID technology. Because
contactless payments do not require a signature or a PIN, they are highly convenient.
Furthermore, contactless payments can be made using NFC-enabled phones that are directly
linked to a mobile wallet. To make the payment, the user merely needs to keep his
NFC-enabled phone close to the reader.

F) ECS
Electronic clearance service is extensively used for making bulk payments, equating monthly
instalments, paying off utility bills, and disbursing payments such as dividends, pensions, and
salaries. ECS can be used for credit as well as debit services. To begin the ECS, the bank must
obtain authorization to make periodic credits and debits. ECS is a secure technique since you
may specify the maximum amount of debit, the validity time, and the purpose of the
transaction.

G) ONLINE FUND TRANSFER

There are several methods for transferring funds from one bank account to another. With
the advancement of technology, online money transfers has become the most convenient
method of sending funds from one bank to another. Here are the three most common
methods of money transfer:

1. NEFT: The National Electronic Fund Transfer, or NEFT, is the most basic and widely used
method of transferring money from one bank to another. To complete a NEFT transaction,
you just need two pieces of information: the account number and the IFSC code of the
destination account. There is no limit to the amount of money that can be transmitted via
NEFT. Individual banks, on the other hand, may impose a limit.
2. RTGS: RTGS is an abbreviation for Real-Time Gross Settlement. RTGS is a real-time funds
transfer system based on the gross settlement principle, in which money is sent from one
bank to another in real time. RTGS is primarily intended for high-value As a result, while
there is no maximum transfer amount, you must send a minimum of INR 2 lakhs at a time.
When the transaction amount is high and payment must be processed instantly, RTGS is
extremely important. A typical RTGS transfer, like NEFT, requires the beneficiary's name,
account number and type, the name of the bank, and the Indian Financial System Code
(IFSC) of the bank.

3. IMPS: Immediate Payment Service (IMP) is a service that allows for instant financial
transfers and can be used at any time. IMPS is simply the combination of NEFT and RTGS.
The transaction limit is set quite low in order to avoid fraud complaints. You only need the
destination account holder's IMPS id (MMID) and mobile number to make an IMPS transfer.

H) GIFT CARDS OR VOUCHERS

Gift cards are also a convenient option to go cashless. It allows the recipient to use a
voucher to purchase anything. There are also a number of stores that provide discounts on
gift cards.

I) ATM
ATMs, or Automated Teller Machines, are one of the most useful innovations in the banking
industry. ATMs enable banking customers to do self-service activities such as cash
withdrawal, deposit, and fund transfers in a timely manner. In 1967, ATMs were first used in
London. HSBC opened the first ATM in India in Mumbai in 1987. ATMs can be on-site or
off-site. On-site ATMs are found at banks. By using ATMs, customers benefit from increased
choice, convenience, and availability, while banks increase transaction income, reduce
operating and maximise staff resources.

J) AEPS (Aadhar Enabled Payment System)

Aadhaar Enabled Payment System (AEPS) is a type of payment system that is based on the
Unique Identification Number and allows Aadhaar card holders to seamlessly make financial
transactions through Aadhaar-based authentication. The AEPS system aims to empower all
sections of the society by making financial and banking services available to all through
Aadhaar. AEPS is nothing but an Aadhaar-enabled payment system through which you can
transfer funds, make payments, deposit cash, make withdrawals, make enquiries about your
bank balance, etc. This is a simple, secure and user-friendly platform for financial
transactions. This is another initiative taken by the National Payments Corporation of India
(NPCI) to encourage cashless transactions in India. Services Offered by AEPS: Cash Deposit,
Payment Transactions (C2B, C2G Transactions), Balance Enquiry, Cash Withdrawal, Aadhaar
to Aadhaar funds transfer.
Financial Statements: Financial Terms and Overview
1) There are two basic types of income
a) Revenue self-generated fees for service/sales.
b) Support charitable contributions and grants.
2) Financial information is based on periods.
a) Past-Financial Statements (prepared monthly, quarterly, annually to reflect historical
activity)
b) Present Reality = Cash Flow Projections (include current and near-term cash projections)
c) Future = Budget (prepared in anticipation of future activity)

Types And Uses of Financial Statements

Financial statements are a compilation of financial data, collected and classified

systematically according to the accounting principles, to assess the financial position of an
enterprise as regards to its profitability, operational efficiency, long- and short-term
solvency, and growth potential. They are structured financial representations of the financial
position, performance, and cash flows of an enterprise.

A) Income Statement (Profit and Loss Statement)

The profit and loss account (income statement) shows the financial performance of the
company/firm over a period. It indicates the revenues and expenses during that particular
period. The period is an accounting period/year, April- March. The accounting report
summarizes the revenue items, the expense items, and the difference between them (net
income) for an accounting period.

B) Balance Sheet

A balance sheet is a financial statement that reports a company's assets, liabilities, and
shareholder equity. The balance sheet is one of the three core financial statements that are
used to evaluate a business. The balance sheet adheres to the following formula:
Assets = Liabilities+ Shareholders' Equity

A balance sheet contains the following:

●​ Assets: Assets in a balance sheet show the number of assets an entity holds on the
date of the balance sheet.
●​ Liabilities: Liabilities in the balance sheet show the amount of liability an entity is
liable to pay in future (determined on the date of balance sheet).
●​ Equity & Reserves: Equity and reserves is the amount of capital the entity has,
including reserves balances, if any. A higher amount of equity and reserves indicates
a higher net worth of the entity.

C) Cash Flow Statement

The cash flow statement (also known as statements of cash flow) shows the flow of cash and
cash equivalents during the period and breaks the analysis down to operating, investing. And
financing activities. It helps in assessing the liquidity and solvency of a company and to
check efficient cash management.

There are three key components of Cash flow statements:

●​ Cash from operating activities: This includes all the cash inflows and outflows
generated by the revenue-generating activities of an enterprise like sale & purchase
of raw materials, goods, labour cost, building inventory, advertising, shipping the
product, etc.
●​ Cash from investing activities: These activities include all cash inflows and outflows
involving the investments that the company made in a specific time period, such as
the purchase of new plant, property, equipment, improvements capital expenditures,
and cash involved in purchasing other businesses or investments.
●​ Cash from financial activities: This activity includes the inflow of cash from investors
such as banks and shareholders by getting loans, offering new shares, etc, as well as
the outflow of cash to shareholders as dividends as the company generates income.
They reflect the change in capital & borrowings of the business.

Financial Terms and Concepts

1. Assets: Anything a company owns with quantifiable value.

2. Liabilities: Money a company owes to a debtor, such as outstanding payroll expenses, debt
payments, rent and utility, bonds payable, and taxes.

3. Owners' equity refers to the net worth of a company.

4. Revenue: The amount of money a business takes in.

5. Expenses: The amount of money a business spends.

6. Costs of goods sold (COGS): The cost of component parts of what it takes to make
whatever a business sells.

7. Gross profit: Total revenue less COGS.

8. Operating income: Gross profit less operating expenses.

9. Income before taxes: Operating income less non-operating expenses.

10. Net income: Income before taxes less taxes.

11. Earnings per share (EPS): Division of net income by the total number of outstanding
shares.

12. Depreciation: The extent to which assets (for example, aging equipment) have lost value
over time.

13. EBITDA: Earnings before interest, taxes, depreciation, and amortization. Money a
company owes to a debtor, such as outstanding payroll expenses, debt payments, rent and
utility, bonds payable, and taxes.

Reviewing and understanding these financial documents will provide to the prospective
investors with valuable insights about a company, including:

●​ Its debts and ability to repay them.

●​ Profits and/or losses for a given quarter or year.
●​ Whether profit has increased or decreased compared to similar past accounting
periods.
●​ The level of investment required to maintain or grow the business Operational
expenses, especially compared to the revenue generated from those expenses.

Important Ratios / Basic ratios for evaluating companies while investing

A ratio is a meaningful relationship between two financial parameters. Ratios are best
interpreted in comparison with Historical data, Competition and Industry norms.

Measures for Understanding Financial Health

1) Current Ratio This ratio is used to assess a firm's ability to meet its current liabilities. The
relationship of current assets to current liabilities is known as the current ratio. The ratio is
calculated as:

Current Ratio = Current Assets / Current Liabilities

2) Liquid Ratio This ratio is used to assess the firm's short-term liquidity. The relationship of
liquid assets to current liabilities is known as the Liquid ratio. It is also called the acid test
ratio or quick ratio.

The ratio is calculated as:

Liquid Ratio = Liquid Assets / Current Liabilities

3) Debt Equity Ratio This ratio helps to ascertain the soundness of the long-term financial
position of the concern. It indicates the proportion between total long-term debt and
shareholders' funds. This also indicates the extent to which a firm depends upon outsiders
for its existence. The ratio is calculated as:

Debt-Equity Ratio = Total long term Debt /Shareholders Funds

4) Return on Equity Ratio It measures the returns of the company is generating on

shareholders' equity.

Return on Equity = Profit After Tax/Equity share capital.

5) Return on Capital Employed (ROCE) The comparison is between operating profit and total
capital employed, including debt.

ROCE = Profit before interest and tax/Total capital employed.

6) Inventory Turnover Ratio The inventory turnover ratio is an efficiency ratio that shows
how effectively inventory is managed by comparing the cost of goods sold with the average
inventory for a period. This measures how many times the average inventory is “turned” or
sold during a period.

Inventory Turnover Ratio = Cost of Goods Sold/Average lnventory.

7) Gross Margin Ratio The gross margin ratio is a profitability ratio that compares the gross
margin of a business with the net sales. This ratio measures how profitably a company sells
its inventory or merchandise. This is the pure profit from the sale of inventory that can go to
paying operating expenses.

Gross Margin Ratio = Gross Margin / Net Sales

a) Gross Margin = Net Sales - Cost of Goods Sold

b) Net Sales = Gross Sales - Returns/Refunds

8) Net Margin Ratio

It is the percentage of revenue left after all expenses have been deducted from sales. The
measurement reveals the amount of profit that a business can extract from its total sales.

Net Margin Ratio = Net Profit/Total Sales

9) Earnings per Share (EPS) Earnings per share, or EPS, is one of the most common ratios
used in the financial world. This ratio tells how much a company earns in profit for each
outstanding share of stock..EPS is basically the net profit that a company has made in a given
time period divided by the total outstanding shares of the company. Generally, EPS can be
calculated on an Annual or Quarterly basis. Preferred shares are not included in calculating
EPS.

Earnings Per Share (EPS) = (Net income - Dividends from preferred stock) / (Average
outstanding shares)

10) Price to Earnings (PE) Ratio The price-to-earnings ratio is one of the most widely used
financial ratio analyses among investors for a very long time. A high PE ratio generally shows
that the investor is paying more for the share. The PE ratio is calculated using this formula:

Price to Earnings Ratio = (Price Per Share)/( Earnings Per Share)

11) Price to Book Value (PBV) Ratio Price-to-price-to-book ratio (PBV) is calculated by
dividing the current price of the stock by the book value per share. Here, Book value can be
considered as the net asset value of a company and is calculated as total assets minus
intangible assets (patents, goodwill) and liabilities. Here's the formula for the PBV ratio:

Price to Book Ratio = (Price per Share)/( Book Value per Share)

PBV ratio is an indication of how much shareholders are paying for the net assets of a
company. Generally, a lower PBV ratio could mean that the stock is undervalued.

12) Price to Sales Ratio (P/S) The stock's price/sales ratio (P/S) ratio measures the price of a
company's stock against its annual sales. P/S ratio is another stock valuation indicator similar
to the P/E ratio.

Price to Sales Ratio = (Price per Share)/(Annual Sales Per Share)

The P/S ratio is a great tool because sales figures are considered to be relatively reliable
while other income statement items, like earnings, can be easily manipulated by using
different accounting rules.

13) Dividend Yield A stock's dividend yield is calculated as the company's annual cash
dividend per share divided by the current price of the stock and is expressed an annual
percentage. Mathematically, it can be calculated as:

Dividend Yield = (Dividend per Share)/(Price per Share)*100

For Example, If the share price of a company is 100 and it is giving a dividend of 10, then the

dividend yield will be 10%.

A lot of growing companies do not give dividends but rather reinvest their income in their
growth. Therefore, it totally depends on the investor whether he wants to invest in a high or
low-dividend-yielding company. Anyways, as a rule, a consistent or growing dividend yield is
a good sign for dividend investors.
Time Value of Money
The concept of the time value of money is based on the principle that 'a rupee today is more
valuable than a rupee receivable in future. This means money available at present is worth
more than the same amount in the future due to its potential earning capacity. This happens
because money received in future involves risk and uncertainty, and money available at
present provides investment opportunities as it can earn interest; therefore, any amount of
money is worth more the sooner it is received.

Importance Of Time Value Of Money

Money today is worth more than money in the future. This is called the time value of money.
There are three reasons for the time value of money: inflation, risk and liquidity
Calculation Of Time Value Of Money
To calculate the time value of money following are the required terms:
●​ Present Value: This is the sum of money you have today.
●​ Future Value: This refers to the total amount of money you will have at a specified future
date.
●​ Discount rate is the percentage rate that is used to determine the present value of the
future amount. It can often be approximated at the interest rate.
Formula: Present Value = Future Value / (1+ Discount Rate)

Present Value Calculation:

1) To have 2000 today, you would have needed to invest some money a year ago. Your

future value is now 2000, and you would use the discount rate of 7% . Calculate present

Value

Sol: Present Value = 2000 / 1.07 = Rs. 1869.16/-

Future value calculation:

1) Mr Gupta deposits 2,000 at the end of every year for 45 years in his saving account,
paying 5% interest compounded annually. Determine the sum of money he will have at the
end of the 5 years.

Sol:
2) What is the compound interest (CI) on Rs.10,000 for 2 Years at 10% p.a compounded

annually?

Sol:

Formula: A = P [ 1 + (R/100)] N

=10,000 [1 + (10/100)]2 = 10,000 *1.21 = Rs. 12,100/-

Compound Interest = 12,100 – 10,000 = Rs. 2,100/-