LA CONSOLACION COLLEGE

(Formerly: Sacred Heart Academy)

PACUCOA ACCREDITED LEVEL II
Bais City, Negros Oriental
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Telefax No. (035) 541-5097 email: [email protected]/www.lccb.edu.ph \*
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DEPARTMENT OF BUSINESS & MANAGEMENT

Module no. 2

Capital Market/ Financial Market

Module No. 2
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Module no. 2
Capital Market /Financial Market
Topic : Financial Education

1. Basics
a. Importance of financial education: As much as skills are required to earn money, it is required in equal measurePage |in PAGE
spending it wisely. Accordingly, financial education provides you the basic life skill to build a secure financial \*
future.
Proper financial knowledge can improve your ability to save for your long term goals and prevent you and yourMERGEFORM
family
from financial exigencies. It is important to know the following concepts:
b. Savings and Investing Saving is the excess of your income over your expenditure. Generally, savings is in the form of
savings bank account and cash. Your money is very safe in a savings account, earning a small rate of interest and you can
get back your money as and when you need it (high liquidity).

Whereas when you are investing, you are setting your money aside for long term goals. It is normal for investments to
rise and fall in value over time. However, in the end, prudent investments can earn a lot more than in your savings
account.

c. Budgeting The first step in your financial planning is budgeting - a process for tracking, planning and controlling the
inflow and outflow of your income. It entails identifying all the sources of income and taking into account all current and
future expenses, with an aim to meet your financial goals. The primary aim of a budgeting is to ensure reasonable
savings after providing for all expenses

Benefits of budgeting
• it puts checks and balances in place in order to prevent overspending at various levels;
• it takes into account the unexpected need for funds;
• it disciplines you in matters of earning and spending; and
• it helps you to maintain same standard of living even after post retirement

d. Inflation effects on Investments While planning your investment, it is important to take into account the effects of
inflation on your investments. Inflation is the rise in prices of goods and services. As the prices of goods and services
increase, the value of rupee goes down and you will not be able to purchase as much with those rupees as you could
have in the last month or last year.

The effect of inflation on investment can be better understood with the following illustration:

Say that your monthly consumption of petrol is 10 litres, costing you ` 500 @ ` 50 / litre. Further, you meet this expense
out of the monthly interest income of ` 500, earned from your fixed deposit. If the inflation rate during the year is 10%,
then price of petrol per litre would increase from ` 50 to ` 55 / litre. Accordingly, the next year you will not be able to
purchase 10 litres of petrol, now costing ` 55 / litre, out your interest income of ` 500 from your fixed deposit. Hence
your financial plan should aim to earn returns above the rate of inflation.

e. Risk and Return Risk and return go hand in hand. Risk is loosely defined as the chance of loosing all or part of your
money invested. The good news is that investment risk comes with the potential for return – which makes the activity
worthwhile.

The basic thing to remember about risk is that it increases as the potential return increases. Essentially, higher the risk,
the higher is the potential return. (Do not forget the two words - “potential return”. There is no guarantee).

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Module no. 2
Capital Market /Financial Market
f. Power of Compounding As you pursue your financial planning, the most powerful tool for creating wealth safely and
surely is the magical ‘power of compounding’. If you park your money in an investment with a given return, and then
reinvest those earnings as you receive them, your investment grows exponentially over time.

Illustratively, if you set aside a sum of say ` 5,000 every month from the age of 25, earning interest at the rate Page
of 10%
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p.a., in 60 years you will have with you funds worth more than ` 1 crore. However, if you start at 40 with the \*same
amount and rate of interest, the fund accumulated will amount to only around ` 33 lakh. Hence, it is always advisable to
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start savings early to enjoy the benefits of power of compounding.

g. Time Value of Money has time value. As the time passes, the value of money decreases. This means that the value of
a thousand rupee note you have today is higher than its value five years hence, even if there is no inflation. This is
because we prefer consumption today to consumption in future which is uncertain. That is why, if you invest ` 1,000
today at 5% per annum, you would receive ` 1,050 after a year. Thus, ` 1,000 today is equivalent to ` 1,050 received after
a year or its value one year hence.

2. Products Available: There are a large variety of financial products available for investment. You need to choose the
best product or the best combination of products to meet your preference and objectives. Your choice generally takes a
balance view of three factors, namely, Liquidity, Safety and Return depending on the stage of life.

a. Savings Related products Bank deposits are generally safe because they are partly covered by deposit insurance and
banks have high capital requirements. The banks are regulated by the Reserve Bank of India. They offer various types of
deposits, depending on the needs of the customer. Bank deposits are preferred more for their liquidity and safety than
for their returns.

b. Investment Related Products Company fixed deposits are fixed deposit scheme offered by (manufacturing)
companies. They are similar to bank fixed deposits but entail lesser liquidity and usually carry higher risk and return.

Capital market offers products like equity, debt, hybrid instruments and various mutual fund schemes. Each of this
investment class carries different risk-return profile and is covered separately under ‘products available in capital
markets’.

c. Protection Related Products

• Life Insurance is a contract providing for payment of a sum of money to the person assured or, following him to the
person entitled to receive the same, on the happening of a certain event.
• Term Life Insurance Lump sum is paid to the designated beneficiary in case of the death of the insured. • Endowment
Policies Provide for periodic payment of premia and a lump sum amount either in the event of death of the insured or
on the date of expiry of the policy, whichever occurs earlier.
• Units Linked Insurance Policy (ULIP) provides a combination of risk cover and investment. For more details on
insurance products, please refer to the website of the Insurance Regulatory and Development Authority (IRDA),
www.irda.org.in

d. Pension Products
• New Pension System (NPS): You can build your retirement corpus during your working days by regularly contributing
(the minimum amount being ` 6,000 p.a.) to the NPS till the age of 60. Your contribution will be invested by the Pension
Fund Manager (PFM) you choose, in the investment option of your choice:

1. Active Choice

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Module no. 2
Capital Market /Financial Market
 ● Asset Class E (Equity): Invests in index funds (the maximum allowed is 50%, the balance has to be in Asset Class
G & C)
● Asset Class G (Government securities): Invests in central and state government bonds
● Asset Class C (non government debt): Invests in liquid funds of Asset Management Companies, bank fixed
deposits, rated bonds issued by corporates, banks, financial institutions, PSUs, Municipality and Infrastructure
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entities. \*
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2. Auto Choice (Life cycle fund): Under this option, your contributions will be automatically allocated to the three asset
classes in a predefined manner depending on you age, as illustrated in table below.

Upon subscribing, you will be allotted a Permanent pension account number (PPAN) and your account will reflect your
contributions etc. PPAN will remain constant even if you change the PFM, your location or employer. The returns earned
by your contributions would depend on your investment option. Charges are applicable to the NPS account as
prescribed by the regulator.

At the age of 60, a minimum of 40% of the accumulated amount in the account has to be used to buy a pension
(annuity) scheme from an insurance company of your choice from whom you will receive monthly pension. The balance
of 60% in your account can be withdrawn or be used to buy annuity. NPS is regulated by Pension Fund Regulatory and
Development Authority (PFRDA) and for further details on NPS, please visit PFRDA’s website (www.pfrda.org.in)

• Annuity / Pension Policies / Funds are offered by insurance companies and offer guaranteed income either for life or
for a certain period without any insurance cover.

e. Borrowing Related Products

• Personal Loans are usually expensive and are generally taken when you have to meet unexpected needs that are
beyond your immediate financial means.
• Housing Loan is just another loan with your house as the collateral.
• Reverse Mortgage Senior citizens having house property but no regular income, can mortgage their house to a bank /
housing finance company. In return, they receive regular periodical payments up to a maximum of 15 years. The bank
will recover this loan by selling off the property upon the demise or leaves the place. Excess amount, if any is paid to the
legal heir.
• Loan against Securities preserves investment, apart from taking care of personal needs.
• Credit Card Debt is very expensive and is usually resorted to when all other options including personal loans are
exhausted.

Activity no 2.1
Give me the best savings strategy you have as a student. ( 25pts).

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Module no. 2
Capital Market /Financial Market