Personal Finance Management

Objectives:
1. To create awareness and educate consumers on access to financial
services.
2. To make the students understand the basic concepts, definitions and
terms related to direct taxation.
3. To help the students compute the Goods and Service Tax (GST)
payable by a supplier after considering the eligible input tax credit.
4. To familiarize the students with microfinance for accelerating the
expansion of local microbusinesses.
Outcomes: On completion of the course, learner will be able to:
1. Understand the Indian financial system.
2. Use a framework for financial planning to understand the overall
role finances play in his/her personal life.
3. Compute income from salaries, house property,
business/profession, capital gains and income from other sources.
4. Compute the amount of CGST, SGST and IGST payable after
considering the eligible input tax credit.
5. Understand how Microfinance can help in financial inclusion.
Module 1
• Overview of Indian Financial System: Characteristics, Components
and Functions of Financial System. Financial Instruments and
Financial Markets, Financial inclusion.
• Introduction to Personal Finance
Person Financial Planning in Action, Money Management Skills,
Taxes in Your Financial Plan, Savings and Payment Services.
Consumer Credit: Advantages, Disadvantages, Sources and Costs
Module 2
Personal Financial Management
Loans: Home, Car, Education, Personal, Loan against property and Jewel
loan.
Insurance: Types of Insurance – ULIP and Term; Health and Disability
Income Insurance, Life Insurance.
Investment: Investing Basics and Evaluating Bonds, Investing in Stocks
and Investing in Mutual Funds, Planning for the Future.
Module 3
Income Tax
Income Tax Act Basics- Introduction to Income Tax Act, 1961
Heads of Income and Computation of Total Income and Tax Liability-
Heads of Income and Computation of Total Income under various
heads, Clubbing Provisions, Set off and Carry forward of Losses,
Deductions, Assessment of Income and tax liability of different persons.
Tax Management, Administrative Procedures and ICDS - TDS, TCS and
Advance Tax Administrative Procedures, ICDS.
Module 4
Goods and Services Tax
GST Constitutional framework of Indirect Taxes before GST (Taxation Powers
of Union & State Government); Concept of VAT: Meaning, Variants and
Methods; Major Defects in the structure of Indirect Taxes prior to GST;
Rationale for GST; Structure of GST (SGST, CGST, UTGST & IGST); GST Council,
GST Network, State Compensation Mechanism, Registration.
Levy and Collection of GST
Taxable event- "Supply" of Goods and Services; Place of Supply: Within state,
Interstate, Import and Export; Time of supply: Valuation for GST- Valuation
rules, taxability of reimbursement of expenses; Exemption from GST: Small
supplies and Composition Scheme: Classification of Goods and Services
Module 5
Introduction to Micro – finance
Micro-Finance: Definitions, Scope & Assumptions, Types of Microfinance,
Customers of Micro-finance, Credit Delivery Methodologies, SHG concept,
origin, Formation & Operation of Self Help Groups (SHGs).
Models in Microfinance - Joint Liability Groups (JLG), SHG Bank Linkage
Model and GRAMEEN Model: Achievements & Challenges,
Institutional Mechanism
Current Challenges for Microfinance, Microfinance Institutions (MFIs):
Constraints & Governance Issues, Institutional Structure of Microfinance in
India :NGO-MFIs, NBFC-MFIs, Co-operatives, Banks, Microfinance Networks
and Associations; Demand & Supply of Microfinance Services in India, Impact
assessment and social assessments of MFIs,
Evaluation Scheme:
Semester End Examination (A):
Theory:
1. Question paper based on the entire syllabus will comprise of 4 questions (All
compulsory, but with internal choice as appropriate), each carrying 15 marks,
total summing up to 60 marks.
2. Total duration allotted for writing the paper is 2 hrs.

Continuous Assessment (B):

Theory:
1. Consisting Class Tests for 15 marks based on approximately 40% of contents
and Term Test 1 (based on 40 % syllabus) – 15 marks for 15 Marks and open book test for 10
Marks.
2. Total duration allotted for writing test paper is 45 min.
3. Average of the marks scored in the tests and case study will be considered for
final grading.
“Why do I need to learn about finance..
I am very good in my own area of
specialization”

How would you react to the above statement?

 Financial System
• For economic transformation of a country, the financial
system is the key for the institutional and functional
vehicle.
• Finance assists in reducing the gap between the present
and the future, and covers every aspect like
channelization and effective usage of savings and
making an efficient investment.
• It formulates the base, the sets and the tone for the
accomplishment of wider national objectives.
According to Robinson, the primary function of the financial
system is:
"To provide a link between savings and investment for the creation
of new wealth and to permit portfolio adjustment in the composition
of the existing wealth".

According to Christy, the objective of the financial system is to :

"Supply funds to various sectors and activities of the economy in
ways that promote the fullest possible utilization of resources
without the destabilizing consequence of price level changes or
unnecessary interference with individual desires".
• A financial system acts as an intermediary where there is surplus
and deficiency of funds. It bridges the gap between the two
segments
• It comprises of various institutions, markets, regulations, laws.
money managers, experts and many others.

In the context of "Financial System" the term system means a

sequence of complex and closely attached variables like institutions,
agents, practices, markets, transactions, claims and liabilities in an
economy.
 Characteristics of Financial system
• Financial system establishes a link between the one having surplus funds with
those who are in need of such funds. Both the investment and the savings
aspects are encouraged.
• Financial system contributes towards the expansion and the development of
financial markets.
• Financial system facilitates the efficient allocation of financial resources for
the benefit of the society and the public at large.
• Financial system boasts the economic quality and accelerates economic
development.
• Financial system lays the foundation for an ideal economy.
• Financial system builds an efficient portfolio for the fund seeker.
• Financial system reduces the transaction costs.
• Financial system ensures availability of all the price-related information.
 Functions of Financial System

1)To Connect the Investors with the Savers

2)Assistance in Selection of a Project
3)Risk Allocation
4)Availability of Information
5)Reducing the Cases of Asymmetric Information
6)Reduction in the Borrowing and the Transaction
Cost
7)Liquidity Promotion
8)Financial Broadening and Deepening
 Components of Financial System

➢ Financial Institutions
➢ Financial Markets
➢ Financial Instruments/ Securities/Assets
➢ Financial Services
Financial Institutions
 Financial Institutions

• Different kinds of organisations which act as an intermediary and

facilitator in financial transactions at the individual and the
corporate level are included in the term financial institutions.
• Covers both the institutions providing finance and the investing
institutions in it. They are the ones who channelize the savings
and allocate the funds in the most optimum manner.

Classified in three different categories :

1. Regulatory Institutions
2. Banking Institutions
3. Non-banking Institutions
 Regulatory Institutions
• Regulatory are the ones who provides rules and
guidelines for a particular market.
• It comprises of RBI, SEBI, IRDA, AMC, etc. Primarily,
an investor would want the funds to be under the control
and to be safe to invest. This assurance is rendered by the
regulatory authority that is regulating the particular
market.
• For example, money market instruments are regulated by
the RBI whereas the capital market instruments are
regulated by SEBI.
 Banking Institutions
The banking institutions are of two types
1) Intermediaries
Intermediaries are the ones who fulfill the short-term requirement of
funds of corporate as well as the individual clients. They comprise of
banking as well as non-banking intermediaries.

For example, banks like SBI, PNB, etc. whereas examples of non-
banking intermediaries comprise of GIC, UTI. LIC, etc.

Other important services like credit rating, leasing. merchant

banking, hire-purchase are also provided by these financial
intermediaries. These services are required while creating a new
firm, during expansion and the economic growth.
The two types of banking intermediaries are as follows :

i) Commercial Banks :
These banks hold deposits on behalf of the customers and thus ensure the safety of the
funds. The primary purpose was thus to hold the same for the customers who do not
wish to hold the same on their own. As a result, the need for the customers to keep
funds in the form of cash has reduced and he can thus use the services of credit cards,
cheques, net banking for entering into any financial transaction. These banks also
provide loans to individuals and businesses for long-term purposes and also for
financing the working capital requirements.

ii) Co-operative Bank :

The co-operative banks give financial help to the agriculture sector and also helps in
establishing the credit system. It basically helps the rural areas of the country as
commercial banks are not able to reach the rural areas. The long-term loans are
required for purchasing of land or permanent improvement on land which is provided
by the land development bank and the short-term loan is provided for purchasing
implements, fertilizers and seeds, etc. which is given by the co-operative banks.
2) Non-Intermediaries :
They are engaged in providing funds on long-term basis to
individuals as well as corporate clients. They comprise of
institutions who are lending on term basis.
For example, financial corporations and investment
institutions like IDBI, NABARD, IFCI, etc.
 Non-Banking Institutions
The non-banking includes following institutions :
1) Non-Banking Financing Institutions (NBFI) :
A Non-Banking Financing Institution (NBFI)/Non-Banking Financing
Intermediary has alternate roles in different parts of the world :
It is an institution which is not just a bank but is engaged in the function of
finance.
Financial institutions who do not accept demand deposits.
Financial institutions who do not accept any deposit.

2) Investment Companies :
They may be called a trust or a corporation which facilitates an individual to
invest in different diversified and professionally managed securities by
arranging pool of funds from other investors. The individual need not invest in
single company stocks but can rather purchase units directly from the investing
company which are well diversified. For example, UTI and Mutual Fund.
3) Insurance Companies :
They create a risk pool by way of collection of premium from the
people at large who wishes to buy a protection either for a person or
for a property. It helps to mitigate the loss and preserve the wealth
and meet out the uncertainties. By insuring large groups, risk is
spread over the entire insured and even in the event of paying claims,
they end-up with sufficient amount of profits unless there is a natural
calamity or disaster.
 IFCI, Industrial Finance Corporation of India The Industrial Investment Bank of India (IIBI)
Industrial Development Bank of India (IDBI) National Bank for Agriculture and Rural Development (NABARD)
National Housing Bank (NHB) as the Common Nodal Agency for both Schedule
Commercial Banks (SCBs) and Housing Finance Companies (HFCs)
Small industrial Development Bank of India (SIDBI) Tourism Finance Corporation of India Ltd. (TFCI)
Housing and Urban Development Corporation Ltd. (HUDCO)
 State Land
State Finance Corp
Development
orations (SFCs)
Bank (India)
SIDC states industrial Primary Land
development corporation Development
State Industrial Bank
National Small Investment
Industries Corporation
Corporation (SIIC)
(NSIC) Bank
Non-Banking Financial Company (NBFC)
 Ministry Of Corporate Affairs

As depicted above, RBI classifies NBFCs into ten categories namely Asset Finance Companies(AFCs), Loan Companies(LCs), Investment
Companies (ICs), Infrastructure Finance Companies(IFCs), Core Investment Companies(CICs), Infrastructure Debt Funds (IDF-NBFCs), NBFC-
Microfinance Institutions (NBFC-MFIs), Factoring companies(FCs), Mortgage Guarantee Companies (MGCs) and Residuary Non- Banking
Companies(RNBCs).
 Commercial bank

The primary functions of a commercial bank are accepting deposits and also lending
funds. Deposits are savings, current, or time deposits. Also, a commercial bank lends
funds to its customers in the form of loans and advances, cash credit, overdraft and
discounting of bills, etc.
 Functions of Commercial bank
➢ Commercial banks provide retail banking services to household and business
customers
➢ They are licensed deposit-takers – providing a range of savings accounts
➢ They are licensed to lend money (and thereby “create” money e.g. in the form of bank
loans, overdrafts and mortgages
➢ Commercial banks are profit-seeking
➢ A commercial bank’s business model relies on receiving a higher interest rate on the
loans (or other assets) than the rate it pays out on its deposits (or other liabilities)
➢ This “spread” on their assets and liabilities is used to pay the operating expenses of a
bank and also to make a profit.
 Merchant Banks

A merchant banker usually refers to a firm or organization involved in all

aspects of issue management. Their services include providing consultancy
or advisory services to corporates for issue management, making
arrangements for buying, selling or subscribing to shares in an issue or any
other consultancy or services such as underwriting, analysis and advice
related to mergers and acquisitions, arranging offshore funding or venture
capital, credit syndication and portfolio management.
Functions of Merchant Banks
 Leading merchant bankers in India

➢ Public sector: SBI Capital Markets, Punjab National bank, IFCI Financial Services
➢ Private sector: ICICI Securities, Axis Bank, Bajaj Capital, Tata Capital Markets, Yes
Bank, Kotak Mahindra Capital Company, Reliance Securities
➢ Foreign merchant bankers: Goldman Sachs (India) Securities, Morgan Stanley India,
Barclays Securities (India), Bank of America, Citigroup Global Markets India
Financial Markets
 Financial Markets
• There does not exist a physical or geographical location that can be
termed as a financial market but all the financial transactions are
deemed to occur in the financial market. So, it can be said that as
financial transactions are pervasive in nature, financial markets are
also pervasive.

• A financial market is a common place where the buyers and the

sellers of financial instruments meet and exchange products. Stock
exchange may be termed as a place where these transactions take
place and a location for the financial market.

• In India, financial markets are classified as unorganized and

organised markets.
 STRUCTURE OF MONEY MARKETS

❖ ORGANISED MONEY STRUCTURE

❖ UNORGANISED MONEY
STRUCTURE
 ORGANISED MONEY STRUCTURE

PARTICIPANTS:
✓ Reserve bank of India.
✓ DFHI (discount and finance house of India)
✓ Commercial banks:-
Public sector banks
✓ SBI with 7 subsidiaries
Cooperative banks
✓ 20 nationalized banks
Private banks
✓ Indian Banks
Foreign banks
✓ Development bank
IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
 UNORGANISED SECTOR

✓ Indigenous

✓ Money lenders

✓ Unregulated Intermediaries
aries
 INDEGENEOUS BANKS

✓ Private firms that receive deposits and give loans and thereby
operate as banks
✓ As activities are not regulated properly ,they are
unorganized segment
✓ Broadly classified into 4 groups- GUJRATI SHROFFS, MULTANI
SHROFFS, CHETTIARS AND MARWARI KAYAS
 MONEY LENDERS

Broadly classified into 3 categories:

✓ PROFESSIONAL MONEYLENDERS

✓ ITINERANT MONEYLENDERS

✓ NON PROFESSIONAL MONEYLENDERS

 UNREGULATED INTERMEDIARIES

✓ FINANCE COMPANIES- gives loans to the retailers,

artisians and other self-employed persons

✓ CHIT FUNDS- are saving institutions

✓ NIDHIS- operate in unregulated credit market and

provide kind of mutual benefit funds
 KINDS OF FINANCIAL MARKET
Financial market is classified in two types of market
 MONEY MARKET

• It means a ready market or a short-term market

where securities are bought or sold only for a very
short duration.
• The tenure usually does not exceed one year thus
is considered to be an equivalent to cash only.
• The securities are highly liquid in nature and can
be readily converted to the cash.
• The transaction cost is also the minimum.
 DISADVANTAGES OF MONEY MARKET

✓ Absence of integration

✓ Shortage of funds

✓ Lower rate of return

✓ Larger amount of transaction fee

 CAPITAL MARKET
It is a market where securities are usually held for long-term basis, i.e., more
than one year. They do not have a fixed maturity or expiry date. The buyer
can hold the same, till the time he wishes to do so.
1) Equity Market :
It comprises of the equity shares of the company. Equity shares are
further classified in two categories :
i) Primary Market :
Where the shares are. being sold for the very first time, i.e., Initial Public Offer
(IPO) and Right Issues.

ii) Secondary Market :

Where the existing shares are bought or sold, after they were originally issued to
the public. These shares are listed on stock exchange through which they can be
traded.
2) Debt Market :
➢ It is the financial market in which debt securities are bought and
sold by the investors.
➢ These securities are in the nature of bonds or debentures and
carry a fixed rate of return.
➢ They are fixed income bearing securities that are issued by the
Central and State Governments municipal corporations, other
government bodies, and commercial entities like financial
institutions, banks, PSU, public limited companies, etc.
Financial Instruments/ Securities/Assets
3 Types of Financial Instruments

• Money market instruments.

• Capital market instruments.

• Hybrid instruments.
On the basis of term the financial instruments can be classified into following
three types:
1. Short-Term
2. Long-Term
3. Medium-Term

1) Short-Term Financial Instruments:

The short-term financial instruments include the instruments which are of less
than one year. The various types of securities are T-bills and commercial paper.
The different kinds of cash can be deposits, certificate of deposits, etc. which
are as follows :
Money market instruments

1. Call/Notice Money

2. Treasury Bills

3. Term Money

4. Certificate of Deposit
5. Commercial Papers
 COMPOSITION OF MONEY MARKET

Call /Notice-Money Market

• Call/Notice money is the money borrowed or lent on demand for a
very short period. When money is borrowed or lent for a day, it is
known as Call (Overnight) Money.

• Intervening holidays and/or Sunday are excluded for this purpose.

Thus money, borrowed on a day and repaid on the next working
day, (irrespective of the number of intervening holidays) is "Call
Money".

• When money is borrowed or lent for more than a day and up to 14

days, it is "Notice Money". No collateral security is required to cover
these transactions.
Treasury Bills:
➢ Treasury bills show the responsibilities of Government of
India.
➢ It is basically of 91 days and 364 days. They are given to
the customers on the auction basis every week which has
certain small denominations which are issued by the
Reserve Bank of India.
➢ It does not have any specific interest rate so they are sold
on discount or are redeem at par.
Inter-Bank Term Money

• Inter-bank market for deposits of maturity beyond 14

days is referred to as the term money market.

• The entry restrictions are the same as those for Call/Notice

Money except that, as per existing regulations, the specified
entities are not allowed to lend beyond 14 days.
Certificates of Deposit (CD):
• CD is also a money market instrument issued by banks to the
depositors, in the form of certificate showing the existence of
such deposit with them.
• These certificates are in turn traded by the depositors (when such
a need arises) between their business associates.
• In short, under this arrangement, the Bank deposit may be
transferred from one owner to another, any number of times,
before its maturity.
• Interest on such deposits continues to be paid in the normal
course.
• The price of CD depends on the (a) Rate of interest available on
the Bank Deposit (which is fixed), and (b) Rate of interest
prevailing in the market at that particular time.
Commercial Paper (CP):
➢ A commercial paper is an unsecured promissory note and
money market instrument, issued by large corporate houses for
raising funds with a view to meeting their short-term debt
obligations such as payroll.
➢ CP is not secured by collateral security. It is supported by an
issuing bank or company who promise to pay the face value at
the maturity date indicated on the note,
➢ As it is an unsecured instrument, only the organizations with
exceptional credit ratings are capable of issuing their commercial
paper at an economical price.
➢ The maturity period of Commercial Paper ranges between 15
days and one year. On maturity date, the issuer has to repay the
due amount without any delay. There is no provision of grace
period in this case.
 Merits of Commercial Paper
• Technically, it provides more
funds compared to other
sources. The cost of
commercial paper to the
issuing firm is lower than the
cost of commercial
bank loans.
• It is in freely
transferable nature, therefore
it has high liquidity also a
wide range of maturity
provide more flexibility.
 Merits of Commercial Paper
• A commercial paper is highly secure and does not contain
any restrictive condition.
• Companies can save their extra funds on commercial paper
and also earn some good return on the same.
• Commercial papers produce a continuing source of funds.
This is because their maturity can be tailored to suit the
needs of issuing firm. Again, commercial paper that matures
can be repaid by selling the new commercial paper.
 Limitations of Commercial Paper
• Only financially secure and highly rated organizations can
raise money through commercial papers. New and
moderately rated organizations are not in a position to raise
funds by this method.

• The amount of money that we can raise through commercial

paper is limited to the deductible liquidity available with the
suppliers of funds at a particular time.

• Commercial paper is an odd method of financing. As such if

a firm is not in a position to redeem its paper due to financial
difficulties, extending the duration of commercial paper is
not possible.
2) Medium-Term Financial Instruments
The medium-term instruments consist of the instruments which has the maturity of 1 to 5 years. The
various types of medium-term instruments are as follows :
i) Bank Deposits :
In bank deposits, an individual opens a bank account and deposit the money in that. The different
kinds of bank accounts are current accounts, fixed deposits, term deposits, savings bank account,
recurring deposits, post office deposits, public provident fund, employee provident fund scheme,
etc.
ii) Mutual Funds :
A mutual fund is referred to as collection of investment scheme which has the money from
various sources and is professionally managed. The investment is done in stocks, bonds, short-
term money market instruments and other securities. Hence, it helps the investors to earn more
profits of diversified portfolio.
iii) Life Insurance :
The life insurance provides the protection to the policyholder from any uncertain situation like
death or long-term sickness and disability which may affect the financial condition of the
policyholders. These policies help the policyholder to arrange for funds required for certain work
like regular income at the time of retirement or repayment of loan
BASIC CAPITAL MARKET INSTRUMENTS
 Capital market instruments
Long-Term Financial Instruments :
This sub-category comprises instruments with maturity longer than those of
short- and medium term instruments. Some of the long-term instruments are as
follows :

i) Equity Shares :
• Equity shares are also termed as ordinary shares or common shares.
• Holders of the equity shares are the owners of the company as they have
invested in the company.
• They have the voting rights and part of decision-making process on major
issues relating to the affairs of the company.
• The shareholders' return on the funds invested by them in the company is in
the form of 'Dividend".
 MERITS OF EQUITYSHARES LIMITATIONS OF EQUITY SHARES

➢ A permanent source of finance to ➢ No guarantee on returns to

the company shareholders
➢ No fixed rate of dividend ➢ Loss of managerial control
➢ Easy liquidity and marketability
ii) Preference Shares :
✓ Preference shares have the unique characteristics of being hybrid in
nature, i.e., they have certain features of equity and at the same time
certain features of debentures. It is similar to equity shares in the
following ways :
✓ From disposable profits, the dividend of preference shares is paid.
✓ Preference dividend is not compulsory for the payment of fixed
amount of dividend. It totally depends upon the director's decision.
✓ There is no tax-deduction in Preference Dividend.
iii) Debentures :
➢ A debenture is an instrument through which an Indian Public Limited Company can
raise funds from the market.
➢ A debenture is signed by the company with its seal, to acknowledge the debt of the
person(s). ensuring the advanced amount of debt. So this is a security issued by a
company against debt.
➢ A company may issue debentures after getting Certificate of Commencement of
Business, provided its Memorandum of Association contain a clause which permits
the company to issue debentures.

Redeemable Convertible Secured Bearer

or or non- or or
irredeemable convertible unsecured registered
iv) Term Loan :
• Term loans are loans procured for the acquisition of fixed assets
and working capital margins and are repayable over a long period
of time, generally ranging between one year and ten years.
• Term loans are extended by banks and other financial institutions
set up for the purpose of extending term finance.
• Term loans differ from short-term bank loans, also known as
'Working Capital Finance', which are sanctioned by banks to meet
day-to-day business requirements like purchase of raw material,
work-in-progress and finished goods, etc. They are self liquidating
over a period of time.
v) Bonds :
• A bond is a debt security, in which the authorized issuer owes the
holder a debt and is obliged to repay the principal and interest (the
coupon) at a later date, termed maturity.
• A bond is simply a loan in the form of a security with different
terminology; the issuer is equivalent the borrower, the bond holder
to the lender, and the coupon to the interest.
• Bonds enable the issuer to finance long-term investments with
external funds. Bonds are issued by public authorities, credit
institutions, companies and supranational institutions in the
primary markets.
TYPES OF BONDS

• Bearer bonds
• Registered bonds
• Callable bonds
• Convertible bonds
• Zero coupon bonds
• Fixed rate bonds
 Bond Debenture
A bond is a financial instrument A debt instrument used to raise
showing the indebtedness of the long term finance is known as
issuing body towards its holders. Debentures.

Bonds are generally secured by Can be Secured or Unsecured.

collateral.
Low Interest Rates High Interest Rates.
Issued by Govt Agencies, Financial Issued by Public Companies
institution, Corporation etc.

Accrued Periodical payments

 EQUITY SECURITY DEBT SECURITY

Owner of the company. Creditor of the company.

Get Dividend only when company Provides steady income to the

earns sufficient profits. investors.

Have voting rights. No voting rights.

Not secured. Secured in nature.

Share capital of the company. Borrowed capital of the company.

 Hybrid Instruments
Hybrid instruments have both the features of equity and
debenture. This kind of instruments is called as hybrid
instruments. Examples are convertible debentures, warrants etc.
• A hybrid financial insturment is an investment that blends chearacteristics of both
equity and debt markets (stocks and bonds).

• The most common form of a hybrid instrument is the convertible bond, warrants.

• This type of security is an issuance of debt that can be converted to a company's

common stock at any given time. So, it is kind of like a call option.