There are two main aspects of funds, one with the surplus funds and another one who lack funds. In order to bridge the gap between the two, the concept of these institutions has come into existence. They act as an intermediary between the savers(people with surplus funds) and the borrowers(people who lack funds). They are extremely important for the economy. Financial Institutions fuel or energizes the economy by issuing a credit which comes in the form of credit, and other forms. By issuing credit, they help people or organizations to purchase goods and services and fulfill their needs. A financial institution is also called as the supplier of liquidity to the economy or the market through demand deposits and credit lines.

1. Financial Institution : UTI, LIC, GIC
and Mutual Funds and Their Role

2. Introduction to Financial Institution
• Financial institutions facilitate financing, economic transactions, issue funds, offer
insurance and hold deposits for individuals.
• There are two main aspects of funds, one with the surplus funds and another one
who lack funds. In order to bridge the gap between the two, the concept of these
institutions has come into existence.
• They act as an intermediary between the savers(people with surplus funds) and
the borrowers(people who lack funds). They are extremely important for the
economy.
• Financial Institutions fuel or energizes the economy by issuing a credit which
comes in the form of credit, and other forms.
• By issuing credit, they help people or organizations to purchase goods and
services and fulfill their needs. A financial institution is also called as the supplier
of liquidity to the economy or the market through demand deposits and credit
lines.

3. Key Features of Financial Institutions
1. Firstly, financial Institutions cannot take loans from the general public
from deposits or other payable funds.
2. Secondly, their major activity includes the work of lending (including
personal credits, financing of commercial transactions, etc).
3. Thirdly, they are major contributors to financial leasing.
4. Financial Institutions provide a lot of payment services through both
online as well as offline modes.
5. They act as guarantee providers. Providing a guarantee is one of the
best services used by businesses nowadays).
6. Issuing of shares is an integral part of any business. Financial
Institutions help companies to issue the shares by providing them
underwriting and collection services.
7. Lastly, their licensing framework is of 3 months or 90 days.

4. UTI – Unit Trust of India
• Unit Trust of India was first Set up in 1st February 1964 under the Unit Trust of
India Act, 1963.
• It is a statutory public sector investment institution having the main objective to
encourage and mobilize the savings of the community and canalize them into
productive corporate investment.
• A unit trust is an investment plan in which the funds are pooled together and
then invested.
• The fund which is pooled is then unitized and the investor who is one party to
the unit trust is called a unitholder, holding a certain number of units
• A second party i.e the manager is responsible for the day-to-day running of the
trust and for investing the funds.
• The trustee, governed by the Trust Companies Act 1967, is the third party, and
their role is to monitor the manager’s performance against the trust’s deed.

5. Objectives of Unit Trust of India (UTI)
• Unit Trust of India Provides to the investor a safe return of the
investment whenever they require funds.
• The basic objective of the UTI is to offer both small and large
investors the means of acquiring shares in the properties resulting
from the steady, industrial growth of the country.
• Primary Objectives of UTI
• to promote and pool the small savings from the lower and middle-income
persons who cannot have direct access to the stock exchange, and
• to provide them with an opportunity to share the benefits of prosperity
resulting from rapid industrialization in India.

6. Functions of UTI
• Mobilize the saving of the relatively small investors.
• Channelize these small savings into productive investments.
• Distribute the large scale economies among small income groups.
• Encourage savings of lower and middle-class people.
• Sell nits to investors in different parts of the country.
• Convert the small savings into industrial finance.
• To give investors an opportunity to share the benefits and fruits of
industrialization in the country.

7. Functions of UTI
• Provide liquidity to units.
• Accept discount, purchase or sell bills of exchange, warehouse receipt,
documents of title to goods etc.,
• To grant loans and advances to investors.
• To provide merchant banking and investment advisory service to investors.
• Provide leasing and hire purchase business.
• To extend portfolio management service to persons residing in other
countries.
• To buy or sell or deal in foreign currency.
• Formulate a unit scheme or insurance plan in association with GIC.
• Invest in any security floated by the RBI or foreign bank.

8. LIC (Life Insurance Corporation)
• LIC is one of the financial institutions to be established in India after
independence.
• The full form of LIC is life insurance corporation and it was established
in 1956.
• The main aim behind the establishment was to spread the message of
life insurance in the country.
• Also, it was required to mobilize people’s savings.
• This was done particularly for various nation-building activities

9. Features of LIC
• As a Savings Institution
• Life insurance mobilizes as well as promotes the savings in the country.
Furthermore, income tax concession provides more incentives to people with
higher income.
• Institution for term Financing
• Another function of LIC can also be termed as a large term financing
institution. Also, the net annual business through ingestible funds is very high.
Furthermore, net income obtained through large investments is also very high
for it.

10. Features of LIC
• Investment Institution
• A large part of an investment by LIC is in government securities. Also, it stated in the law that
it has to invest at least 50% of its accrual. This is done in the form of premium income in
government as well as other approved securities.
• Also, it’s funds are made available to the private sector. This is possible through investment in
loans, shares, and debentures. Furthermore, it plays a significant role in developing the
business of underwriting of new issues.
• Stabilizes the Share Market
• LIC plays the role of downward stabilizer for the share market. This is because of the inflows
of the new funds. Thus, these new funds help LIC buy shares from the weak. Particularly
when the market is weak.
• Also, LIC does not sell the shares when the market overshoots. This is done because of the
pressure of investment in new funds. Also, it is partly due to disincentivizing the capital gains
tax.

11. Defects of LIC
• Loan finance defects
• Mostly, development banks provide assistance in the form of debt capital for term loans.
Although the loan financing ensures stable returns there are some drawbacks. Because of
loans, the government loses out on potential corporation tax.
• Furthermore, the development of corporate bonds is limited due to financing. Also, the
industry prefers loans to debentures. This is simply because the default on loans is not made
public. Also, it can be negotiated with the lending agency.
• Dependency on institutional sources
• The capital resources of any development bank are obtained from institutional sources.
Because they cannot raise the funds from the public unlike insurance companies and banks.
Also, institutional sources have enabled the development banks getting funds at a very low
yield.
• But this low yield is now not possible because of the popularity of the banks. Thus, they are
not able to make their loans and debentures raise funds in the public.

12. General Insurance Corporation (GIC)
• General Insurance Corporation is a financial institution of
government.
• One of the special aspects of GIC is that it was the sole
reinsurance company in India before the Indian market was
open for foreign participants in 2016.
• After 2016 a lot of participants came from Germany,
Switzerland, and France.
• Its existence comes under the General Insurance Business
(Nationalization) Act (GIBNA) of 1972.

13. Facts and Characteristics of GIC
1. Before the nationalization of General Insurance Corporation, there were
around 100 companies in the market.
2. At the time of nationalization of GIC, all the companies were merged into
4 subsidies of GIC altogether, viz:
(a) National Insurance Company,
(b) New India Assurance Company,
(c) Oriental Insurance Company, and
(d) United India General Insurance Company.
3. Its major services include providing insurance against some forms of risk
like loss of physical assets, accidents and against personal sickness.
4. Under the service of the GIC, the purchaser simply buys the service, not
a financial asset.

14. Mutual Funds

15. Mutual Funds
• A diversified portfolio of securities that is aimed to attract yields and
appreciation of their value is called mutual funds.
• A mutual fund is an investment vehicle that investors use to increase the
value of their savings.
• There are different managers for different fund.
• Their main task is to increase the return and to minimize the risk.
• The profits that are earned in investment is distributed by the
investors based on the unit held by them. As there is a huge number
of investors, the risk is minimized.
• In India, the mutual funds are governed by the association of mutual
funds. Also, this body, in turn, is managed by the securities and
exchange board of India.

16. Types of Mutual Funds
• Open-ended Funds
• Here, open end means a scheme where mutual funds offer units as a
sale. In this scheme, the duration is not mentioned for redemption.
Also, there is no fixed entry to the fund as well as no fixed maturity.
• Thus, it depends on the investors and they can subscribe anytime for
this scheme. Also, investors have an option to redeem their holdings
anytime.
• Closed-end Fund
• The name is close-ended because the period of maturity for this
scheme is fixed. Also, the corpus in these funds is fixed. Thus, an
investor can only subscribe to this scheme directly during the initial
phase.

17. Types of Mutual Funds
• Income Funds
• The main purpose of these funds is to provide maximum return or
income to the investors. In these funds, the investment is done in the
stocks that yield the highest returns. Also, capital appreciation in these
funds or of little importance. Furthermore, these types of funds
distribute the income that is earned by them in a cyclical manner.
• Interval Funds
• Under the interval scheme, a mutual fund is kept open for a specific
period of time. After this time period, it operates as a closed scheme.
So, it is a combination of both closed and open-ended schemes.

18. Benefits of Mutual Funds
• Risk reduction
• As mutual funds are managed professionally it reduces the risk factor. Also,
they are invested in a huge number of companies. Thus, the risk factor is
reduced more.
• Diversification
• There are a large number of investors that has savings with them. Thus, these
small savings are brought together and a mutual fund is created. So, this can
be used to buy the share of many different companies. Also, because of this
diversification, the investment ensures capital appreciation and regular
return.

19. Benefits of Mutual Funds
• Tax advantage
• There are many schemes in a mutual fund that provide a tax advantage under
the new income tax act. So, the liability of paying the tax of an investor is also
reduced. This can be possible only when he/she invests in mutual funds.
• Investor protection
• Mutual funds are monitored and regulated by the SEBI. Thus, it provides
better protection to its investors. Also, this makes sure that there is no legal
obligation for the investors.