This presentation explores financial products and services in detail. It discusses the Indian Financial System and its constituents. Financial products are classified as per the place of issue/trade; Banks, Money market, Capital market, Asset / Fund based, Fee based. It also reflects on ‘How financial products are managed’ in the course of an individual’s Financial Planning Process.
Agenda• What are Financial Products?• What are Financial Services?• Financial System, its functions• Indian Financial System• Financial Products o Banks o Money market o Capital market o Asset / Fund based o Fee based• How are financial products managed? o Financial Planning Process o Individual Financial Plan o Customer needs and product solutions
Financial Product• A financial product is a facility (arrangement or intangible property) through which, or through the acquisition of which, a person o makes a financial investment the investor gives money to another person and the person uses the contribution to generate a financial return, or other benefit, for the investor the investor has no day-to-day control over the use of the contribution to generate the return or benefit Eg: a person paying money to a company for the issue of shares (the company uses the money to generate dividends for the person and the person, as a shareholder, does not have control over the day-to-day affairs of the company) o manages financial risk manage, avoid or limit the financial consequences to them of particular circumstances happening Eg. taking out insurance and hedging a liability by acquiring a futures contract or entering into a currency swap o makes non-cash payments by ways other than making physical delivery of a domestic or foreign currency in the form of notes / coins Eg: facility for direct debit of a deposit account, a facility for the use of cheques
Financial Service• A person provides a financial service if they o provide financial product advice to influence a person in making a decision in relation to a particular financial product o deal in a financial product acquiring/issuing/varying/disposing a financial product underwriting the securities or interests o make a market for a financial product through a facility, at a place or otherwise, the person regularly states the prices at which they propose to acquire or dispose of financial products on their own behalf o provide a custodial or depository service a financial product, or a beneficial interest in a financial product, is held by the provider in trust for the client
Financial System• Financial system supplies the necessary financial inputs for the production of goods and services which in turn promotes the well being and standard of living of the people of a country• Efficient functioning of the financial system facilitates free flow of funds to more productive activities and thus promotes investment• It the intermediation between savers and investors and promotes faster economic development
Functions of Financial System• It serves as a link between savers and investors.• It channelizes flow of saving into productive investment.• It provides payment mechanism for exchange of goods and services.• It provides a mechanism for the transfer of resources across geographic boundaries• It provides a mechanism for managing and controlling the risk involved in mobilizing savings and allocating credit.• It promotes the process of capital formation by bringing together the supply of saving and the demand for investible funds.
Constituents of Indian Financial System• Financial Institutions o facilitate smooth functioning of the financial system and act as middlemen or intermediaries between savers and borrowers• Financial Markets o Centers and arrangements which facilitate buying and selling of financial assets, claims and services o Unorganized market and Organized market; Capital Market: Market for financial assets with long or indefinite maturity period • Industrial Securities Market (Primary and Secondary) • Government Securities Market • Long term loans market (Term loans, mortgages) Money Market: Market for short term liquid assets
Constituents of Indian Financial System• Financial Instruments / Assets / Securities o represent a claim against the future income and wealth of others o Can be classified as per marketability Marketable (shares, bonds, g-sec) Non-marketable (FDR, PF, Pension funds, NSCs) o As per type: Cash, debt, stock assets o As per maturity: Short term, long term assets• Financial Services o Fund / Asset based o Non-fund / Fee based
Financial products: BanksCorporate Retail◦Business Loan ◦Current account◦Capital raising (Equity, debts) ◦Savings account◦Mezzanine financing (subordinated ◦Money market account debt or preferred equity ◦Certificate of deposit instrument, superior only to equity ◦Individual retirement account shares) ◦Credit card / debit card◦Project finance ◦Mortgage◦Revolving credit (No fixed number of ◦Personal loan (Home, auto, payments. eg. Credit cards) education)◦Risk management (commodities, ◦Time deposit interest rate derivatives) ◦Depository services◦Term loan ◦Credit Cards◦Cash management services◦Agency services
Financial Products: Money Market• Treasury bill: short term borrowings of the government (14 days, 91 days, 182 days, 364 days)• Commercial bills: banks make advances to customers against these• Inter bank call money: source for banks for getting overnight and short term funds• Commercial paper: short term unsecured instrument issued by a company via promissory notes with fixed maturities• Certificate of Deposit: issued by commercial banks at a discount on face value
Financial Products: Capital Market• Derivatives: forwards, futures, options, swaps• Shares, right, bonus, preference• Debentures• Bonds o Euro convertible bonds o Deep discount bonds
Financial Products: Fund basedo Underwriting (shares, debentures, bonds, etc.) of new issueo Equipment Leasingo Hire Purchaseo Bill discountingo Venture capitalo Housing financeo Insurance serviceso Factoring, etc
Financial Planning Processo Financial planning is the process of managing your funds to achieve your desired goals in the required time frame.o It involves analyzing your existing financial position, expected future cash flows, inflation and identified financial objectives to develop a comprehensive financial planning roadmap.o This is aimed at making available the right amounts of funds at the right time in the futureo Insurance planning is an integral part of financial planning. An insurance plan takes care of the unforeseeable demands on your finances.o For instance, an unfortunate illness requiring a surgery can be covered under a medical insurance plan and you need not dig into your savings and other investments to pay for it.o In effect, insurance helps to keep your financial plan on track.
How an Individual Manages FinancialProducts?• An individual investor will undertake comprehensive financial planning: o Determine his current financial situation income, savings, living expenses, and debts o Develop financial goals Retirement, Child’s Education, Child’s Marriage, Asset purchase, Insurance, Investment, Tax planning o Identify alternative courses of action Consider investment options wrt his risk return profile (conservative, moderate, aggressive) Mutual funds, equities, bonds, bank deposits o Create and implement financial plan o Sources of information: Family, spouse Printed materials, Internet, provider website Co-workers Seminars, meetings Financial Advisor
Customer needs and product solutions Customer Need Financial Product Solution Secure depository for readily accessible cash managing receipts and payments Current Account Secure depository for cash that pays interest Deposit Account / Saving Secure depository for cash that pays interest Account Corporate bonds Means of investing lump sum for long term growth Government bonds Growth funds Income funds Means of investing lump sum to generate income Annuities Pension schemes Means of protecting tangible assets from fire, theft, General Insurance accidentl damage, etc. Life Assurance Means of protecting human assets from risks associated Disability insurance with death, illness and medical conditions Critical illness insurance Permanent Health insurance
Possible Questions• Discuss various Financial Products and how these products are being managed?• Explain different Financial Products? How are they managed?• How Financial Planning of Individual is done through Financial Products? How it is managed?