SEBI Investor Certification Examination - Key points and summary

Financial Education

Chapter 1 - Introduction

• Financial education helps people in being financially literate and develop a positive attitude towards managing their income, expenditure, assets and liabilities properly, which would lead them to a situation of better financial well-being.
• Financial planning goes beyond savings. It is an investment with a purpose. It is a plan to save and spend future income and should be carefully budgeted.
• This literature provides a fair understanding of the personal finance world, explaining the concept of financial planning, key concepts in financial literacy, various investment options, savings and investment products, insurance and pension products, retirement planning, caution against Ponzi schemes, tax saving options, investor protection measures, do’s and don’ts of investing, etc.

Chapter 2 - Key Concepts in personal finance

• Savings are the surplus of income over expenditure.
• People usually meet their short term goals with savings. Money in savings account of a bank earns a small amount of interest and it is easy to withdraw it whenever needed. People can save in savings bank accounts, Post Office savings accounts, etc. Low risk instruments.
• Investment is the act of deployment of money out of savings into financial or non-financial products with the expectation of earning higher returns over a period of time.
• The various products in which investments may be done are financial products viz. fixed deposit in bank, buying shares in stock market, investing in Mutual funds, etc. and non-financial products viz. purchase of land, gold, silver, etc.
• The investments may be done for short term, medium term or long-term. While investing one should always remember that return on investments may rise or fall over time and it is quite normal for that to happen.
• Items that you own and have economic value are your assets and items which you owe to others or have borrowed from others are your liabilities.
• Money borrowed to meet shortfall of money when expenses are more than the funds available in hand is called debt.
• The time value of money shows that time literally is money, i.e. the value of the money you have now is not the same as it will be in the future and vice versa.
• Inflation refers to rise in prices of goods and services. Over a period of time, as the cost of goods and services increases, the ability of a unit of money, say one rupee, to buy goods and services keeps declining. In other words, the Purchasing Power of money, i.e. ability of money to buy anything, decreases. It is important to take into account the effects of inflation on your investments during financial planning. Investors greatly fear inflation since it reduces the value of their investment.
• This increase in the price is not as a result of higher quantity or a better quality of the end-product, but due to inflation impacting the prices of the ingredients and finally the end product.
• To reduce the risk of decrease in the value of money, you can invest the money available to you today at a rate equal or higher than the rate of inflation.
• Power of Compounding - With simple interest, you can earn interest only on the principal (that is, the amount you initially invested); while with compounding interest, you earn interest on the principal as well as, previously earned interest.
• Rupee cost averaging (for example, Mutual Funds) is the process in which you invest a fixed amount of money at regular intervals irrespective of market fluctuations. For example, you buy more units when unit prices are low and less units when unit prices are high. By investing according to a schedule, you avoid the complex or even impossible duty of trying to figure out the exact best time to invest. The rupee cost averaging effect averages out the costs of your units and hence lessens the impact of short-term market fluctuations on your investments.

Chapter 3 - Financial Planning

• A. Financial planning is the process of estimating financial needs of a person and implementing a comprehensive plan to meet those financial needs during his or her lifetime through investment. For instance, birth of a child, education, purchasing house, marriage, meeting emergency situations like an illness, to meet the impact of an accident, death, or natural calamities like flood, etc.
• B. Financial Planning process
  1. Determine current financial position
  2. Identify & Set your finaicial goals
  3. Identify suitable investment avenues
  4. Evaluate alternatives & strategize
  5. Create & Implement your financial action plan
  6. Review and revise the financial plan
  1-2-3-4-5-6-1-2-- so on...
• Determine your current financial situation - You need to understand what your incomes, expenses, assets and liabilities/debts are? Your net worth is simply assets you own minus liabilities you owe.
• Your net worth indicates your capacity to achieve your financial goals, such as buying a home, paying for university education, future medical expenses, repayment of loan, etc.
• Develop Financial Goals - Your financial goals can range from acquiring assets, saving for emergency as well as making investments for your future financial security. The financial goals of an individual can be categorized as below:
  1. Basic financial goals (food, clothing, shelter, etc.)
  2. Secondary or advanced financial goals (education, house, marriage, etc.)
  3. Retirement planning
  4. Estate planning
• Individuals can use a variety of investment, risk management and tax planning strategies to meet their financial goals. These goals change over an individual's lifetime and accordingly the financial plan should be reviewed on a regular basis for any modification as per change in the circumstances.
• While making financial plans, one should first ensure a planned savings amount and then plan for meeting expenses.
  Mr. Warren Buffett, one of world’s successful investor, has said: - “Don’t save what is left after spending; spend what is left after saving.”
  Therefore, the basic concept that everyone should focus upon while utilising his income is as follows:
  Income – Savings = Expenditure
• Wealth is not built overnight. One needs to set specific financial goals. A good financial goal should be SMART i.e. Specific, Measurable, Achievable, Realistic and Time-bound.

  	Description	Incorrect Approach	Right Approach
  Specific	You need to know exactly what you want to achieve and when you want it.	I need to set aside money for my grand daughter's birthday next year	I need to set aside Rs. 10000.00 for my grand daughter's birthday next year.
  Measurable	A goal should be measurable so that you know when you will achieve it.	I will pay off most of my credit card dues soon.	In the next six months, I will pay off all my credit card bills in full.
  Achievable	Your goal should be within a reasonable reach.	I will save money.	I will save Rs. 48000.00 every year by setting aside Rs. 4000.00 every month.
  Realistic	Your goals need to be based on resources and tasks that you can achieve.	By saving regularly, I will become a millionaire.	By saving regularly, I will be debt free by January next year. If I continue saving regularly after clearing all my debt, by next December I will be saving the sufficient amount to fund six months of my living expenses.
  Time-bound	Goals with timelines allow you to track your progress and encourage you to keep going until you reach your goal.	I will save money for my daughter's marriage.	I will save Rs. 50000.00 every year for next 10 years for my daughter's marriage

• Goal-based investing focuses on meeting goals that are personal and specific. The focus of this approach is to arrive at future value of different goals and then pursuing these goals through asset allocation made for investments according to each individual’s financial goal. To adopt this strategy while investing, one must plan as per one's age, risk appetite (ability to take risk), financial situation and investment horizon.
• Five-Step Approach to Achieve Financial Goals

  Step-1: Identify specific financial goals

  • It is important to prepare a proper plan to fix each investment with a specific goal.
  • It is very important to identify one’s financial goals and aspirations and estimate the amount of money it would be needed to fulfil them.

  Step-2: Classify goals into Short-term, Medium term or Long term

  • Short-term goals are typically financial requirements that are expected to arise in time period ranging from a few months to one year.
  • Medium-term goals may have a time horizon of one year to eight years. Goals like buying a property, starting your own venture, getting enrolled in a professional course, etc. can be medium-term financial goals.
  • Long-term goals may have a time horizon of eight years or more for example child's marriage, retirement planning, etc.

  Step-3: Decide upon asset-allocation

  • Asset-Allocation is a strategy for investing your money into various asset classes such as equity and debt that would suit an investor's income and risk appetite.
  • Asset Classes may be referred to groups of financial instruments which have similar financial characteristics.
  • Asset Allocation refers to an investment strategy that aims to balance risk and reward - in the form of returns - by dividing the assets of an individual’s portfolio according to his/her financial goals, risk tolerance and investment horizon.
  • Allocate assets depending on your age, lifestyle, family commitments and your financial goals.
  • While allocating your funds, distribute your investments across various asset classes such as equity, bonds, real estate, etc., to benefit from diversification, which helps reduce risk and increases the possibility of earning moderate to high returns on your investments.

  Step-4: Choose the right investment with diversification (within asset classes)

  • Arriving at the right risk-return combination and choosing the right asset allocation can seem difficult. For a longer term goal, it is advisable to focus on maximizing returns with diversified asset allocation.
  • Diversification- refers to the process which reduces risk by making investments into various financial instruments, industries and other categories. It aims to minimize loss on return by investing in different asset classes (debt, equity, gold, real assets, etc.) that would react differently to the same event, such as those relating to the economy or markets.
  • Although diversification does not provide guarantee against loss, it is the most important component for reaching long-term financial goals while minimizing risk.

  Step-5: Review and revise financial plans

  • To stay on track, regularly review the progress towards your goals and investments.
  • Review your investments like stocks and mutual funds in your portfolio. Certain products may seem tailor-made for specific needs, but they may not be actually useful for one's portfolio.
  • Be aware of such investment options.
• C. Choosing Investment Options & Understanding Risk
  
  • The investment products available for an investor are fixed income securities, equity investments, mutual funds, etc. Every asset class has its own risk and return.
  • Investments in equities are considered as high risk investments as their returns are subject to performance of individual companies and general economic scenario.
  • On the other hand, investments in the debt instruments are considered having relatively low risk.
  • For instance, Government bonds are considered to be effectively "risk free" due to the trust that government will not default on the repayment to investors.
  • Three pillars of investment - The investment decision by an individual is influenced by safety, liquidity and return. They are called the three pillars of investment.
    • Safety: This is about how well protected the principal and return on the investment is. For instance, if you lend ₹100/- to someone, will it be repaid on time? Or, is your capital of ₹100/- safe? Safety means your money invested is protected and there is every possibility that on the agreed date, or maybe even before, it would be returned whenever needed.
    • Liquidity: This pillar of investment is the degree of ease with which you can en-cash or liquidate your investment at fair value. In the above example, it will be about how soon will you get your money back if you need it immediately?
    • Return: What is the return you will get on your investments? It could be in the form of income, appreciation of capital invested or both. Income means an investment's earnings in the form of interest or dividend payment. Capital appreciation means the increase in market value of investment over a period of time.
• D. Returns from Investment
  Returns from Investment can be described as money made by an investor on his/ her investment. The returns can be in two ways as explained below:
  • Regular Income
    • Equity Investment: You get dividend when you buy and hold equity shares of a company and units of equity mutual fund.
    • Fixed Income Investment: In debt securities, you receive fixed interest on interest bearing Investments
  • Capital Appreciation
    • When the value of initial investment increases over a period of time and the investor benefits by selling part or whole of the investment at the increased value, it is called Capital Appreciation.
• E. What are Risks and Returns?
  Risk can be defined as the probability or likelihood of a loss occurring in relation to your expected returns from any particular investment. It is a measure of the level of uncertainty of achieving the returns as per investor expectations.
  • Risk V/S Return
    Risk and investing go hand in hand. The good news is that "risk" comes with the potential for "rewards" from investing — which is what makes the whole process worthwhile.

Chapter 4. Savings Related Products

• Deposit schemes offered by banks, government deposit schemes, public deposits issued by companies, etc.
• A. Why to keep money in banks?
  Drawbacks of keeping cash at home are mentioned as below:
  • Unsafe – Money can be stolen or lost due to natural calamities
  • Loss of growth opportunities - Loss of interest income
  • No/Low credit eligibility - Deposit in banks creates eligibility for taking loans
  Therefore, it is beneficial to keep money in banks rather than at home in cash.
• B. Banking
  
  • Commercial banks are regulated financial institutions as they deal with public money and trust.
  • Commercial banks in India are regulated by Reserve Bank of India. Banks are required to go through mandatory inspection and audits at various intervals and are also audited by the Reserve Bank of India every year.
  • Bank deposits are comparatively lower risk investments. Banks offer various types of deposits, depending on the needs of the customers.
  • Bank deposits are preferred more for their liquidity and safety than for the returns. It is also possible to get loans from banks against fixed deposits up to 75 to 90 % of the deposit amount.
  • Central Government deposit insurance scheme ensures that all deposits are insured by the Government up to a limit of ₹5 lakhs per customer in that particular bank. So, even in case of a failure of a bank, depositors are assured that the Government will step in and return up to ₹5 lakhs of their savings in that bank.
• C. Account Opening Process — Know Your Client (KYC) Norms
  
  • For opening any type of bank account, customers need to undergo the process of complying with KYC norms. KYC Stands for "Know Your Customer".
  • The objective of KYC is to enable banks to know and understand their customers better and help them manage their risks prudently.
  • The KYC documents generally accepted by banks are: Photograph, Document for proof of identity (copy of PAN Card, Aadhaar Card, etc.) and Document for proof of address (copy of electricity bill, driving license, passport, Aadhaar card, etc).
• D. Types of Bank Accounts
  
  1. Savings Bank (SB) Account
     • Low interest, however, highly liquid.
     • Facilitates payment mechanism through Automated Teller Machines (ATMs).
     • No Tax deducted at Source (TDS) on interest on SB account balance, but taxable in the hands of depositor.
     • Account can be opened in single name or joint names. In the case of joint account, the operation of the account can be done by any one account holder or jointly.
     • Minors of any age can also open a savings bank account through their natural or legally appointed guardian. Minors above age of 10 years can also avail additional banking facilities like internet banking, ATM/ debit card, cheque book facility, etc.
  2. Basic Savings Bank Deposit Account (BSBDA)
     
     • Introduced to promote financial inclusion.
     • Zero balance savings account without any requirement of an initial deposit can be opened for individuals and also minors (through their guardian).
     • Relaxed conditions for number of deposits/ withdrawals in a month.
     • ATM Card, passbooks are issued free of charge.
     • BSDBA account holders are not eligible for opening any other savings bank deposit account in that bank.
  3. Fixed Deposit (FD) Account
     
     • Involves placing funds with the bank for a fixed term at a certain interest rate.
     • Interest accrued or earned on FD is subject to Tax Deducted at Source (TDS) beyond a stipulated amount.
     • Senior citizens may get extra benefits on the interest rate.
     • Tenure and rate of interest on FDs varies from bank to bank.
  4. Recurring Deposit (RD) Account
     
     • A fixed amount is deposited at monthly intervals for a predetermined term.
     • Earns higher interest than savings bank account.
     • TDS applicable on interest accrued or earned beyond a stipulated amount.
     • Senior citizens may get extra benefits on the interest rate.
     • Tenure and rate of interest on RDs varies from bank to bank.
  5. Special Bank Term Deposit Scheme
     
     • Tax savings scheme available with banks.
     • Relief under Section 80C of the Income Tax Act, 1961.
     • Term deposit with 5 years lock in period.
     • No premature withdrawal/loan allowed.
• E. Digital Banking
  In the modern era, transactions including payments, fund transfers and buying goods, all take place on digital platforms, such as mobile phones. Customers can perform transactions from any place.
  
  The various digital modes of transferring funds are as follows:
  
  1. NEFT (National Electronic Fund Transfer)
     • Transfer of funds from one Bank account to another.
     • No restrictions on the minimum/ maximum amount for transfer.
     • Transfer is done using beneficiary's account number and IFSC Code (Indian Financial System Code, a unique code assigned to each bank branch)
     • Charges for transfer may differ from bank to bank.
     • Transfer of funds can be initiated any time during the day and it takes few hours to get credited in the beneficiary account.
  2. RTGS (Real Time Gross Settlement)
     • Transfer of funds from one Bank account to a different account of another bank on a real time basis.
     • Used to make high value transactions.
     • Transfer is done using beneficiary's account number and IFSC Code (Indian Financial System Code, a unique code assigned to each bank branch).
     • Charges for transfer may differ from bank to bank.
     • Transfer of funds can be initiated during the specified period on working day and is completed instantly on a real time basis.
  3. IMPS (Immediate Payment Service)
     
     • Transfer of funds from one Bank account to another facilitating instant fund transfer.
     • For fund transfer through internet banking, beneficiary's account number and IFSC Code (Indian Financial Services Code, a unique code assigned to each bank branch) are needed.
     • For fund transfer through mobile banking, beneficiary's MMID (Mobile Money Identifier is a 7 digit number issued by bank to the customer) is needed.
  4. Unified Payment Interface (UPI)
     • Instant transfer of funds through any smart phone using VPA (Virtual Payment Address).
     • 24 x 7 fund transfer facility on a real time basis.
     • One needs to download UPI-enabled bank app and login using bank details.
• New Categories of Banks and Business Correspondents:
  Reserve Bank of India (RBI) has introduced certain new categories of banks and Business Correspondents whose key features are detailed as below: Payment Bank
  • Provides savings account/ current account facilities.
  • Can accept demand deposit but not recurring/ fixed deposit.
  • Can issue ATM/ Debit Cards but not credit cards.
  • Cannot give loans/ advances.
  • Offer payment and remittance service through various channels.
  Small Finance Bank
  • Provides features like taking small deposits and disbursing small amount loans.
  • Instrument to save funds primarily to unserved and underserved sections of population.
  • Extend loans of small amount to small business units, micro and small enterprises, small and marginal farmers and entities in the unorganized sectors.
  Business Correspondent
  • Representative of a bank who goes to customers (usually in remote locations/ villages) to help them with their banking needs/ transactions.
  • Can provide services like opening of bank accounts, deposits, transfer of funds, collection of loan deposits, disbursal of small value credit, collection of payment/ fees, etc.
• G. What is a Credit card and a Debit card?
  • Credit card gives the card holder the benefit of availing credit facility for a certain period of time for example making payments without having immediate money in hand in the form of credit card transactions.
  • Debit card, on the other hand, is a card issued to a bank account holder for withdrawing money at ATMs from his account as well as to make payment at point of sale. All the merchant establishments accept debit cards in settlement of transactions.
  • Both credit and debit cards can be used for withdrawal of cash from ATMs as well as for digital transactions.
• H. Customer Liability for unauthorized banking transactions
  
  • RBI has specified that a customer has no liability when an unauthorized transaction happens on account of fraud, contributory negligence or deficiency on part of the bank.
  • Similarly, even when neither the customer nor the bank is at fault, but the problem lies elsewhere in the system, the customer does not have any liability, provided he/she notifies the bank about the unauthorized or illegal operation within three days of receiving an alert from the bank.
  • And the bank shall credit the amount involved in such transaction to the customer's account within a specified time period. However, in cases where such fraud takes place on account of the negligence of the customer, the entire loss, until the date of reporting the unlawful transaction, will be borne by the customer.
  • RBI has emphasized banks that they need to send SMS and e-mail alerts to the customers immediately after a transaction is carried out in their account. They have been instructed to ensure that such messages are enabled to carry the customer's reply too, so that a customer can report any such fraud immediately.
• I. Reserve Bank of India (RBI)
  • Reserve Bank of India (RBI), the central bank of India, was established on April 1, 1935, under the Reserve Bank of India Act. The Reserve Bank of India uses monetary policy to create financial stability in India, and it is charged with regulating the country's currency and credit systems.
  • The main purpose of RBI is to conduct consolidated supervision of the financial sector in India, which is made up of commercial banks, financial institutions and nonbanking finance companies. It formulates, implements and monitors India's monetary policy.
  • The central bank's management objective is to maintain price stability and ensure that credit is flowing to productive economic sectors. RBI acts as a regulator and supervisor of the overall banking system and it is also the banker to the Government of India.
  • RBI is also the lender of last resort for all commercial banks.

Chapter 5 - Investment in Securities Market

Types of Risks:
1. Market risk or Systematic Risks- An investor may experience losses due to factors affecting the overall performance of financial markets and macroeconomic factors. Stock market bubbles and crashes are good examples of heightened market risk.
2. Unsystematic Risk- Unsystematic risk can be described as the uncertainty inherent in a particular company or industry. Examples of unsystematic risk include a new competitor in the marketplace with the potential to take significant market share from the company an investor is invested in, a regulatory change, such as one that could drive down company sales, a shift in management, a product recall, etc.
3. Inflation risk- Inflation risk, also called as purchasing power risk, is the chance that the cash flows from an investment won't be worth as much in the future as they are today because of a decline in its purchasing power due to inflation.
4. Liquidity risk -Liquidity risk arises when an investment cannot be bought or sold or converted into cash quickly enough to prevent or minimize a loss or to meet any immediate expense. You can minimize this risk to a great extent by diversifying your investments.
5. Business Risk- It refers to the risk that a business might stop its operations due to any unfavourable market or financial situation.
6. Volatility Risk- It refers to the risk when the stock prices of a company may fluctuate, even when those companies aren't in danger of failing.
7. Currency Risk- Currency risk arises when there is a possibility of losing money due to unfavourable movements in exchange rates. It may happen from change in price of one currency in relation to other and investors who have assets across national borders are exposed to this risk.
• How to mitigate the risk?
  
  • Asset allocation is one strategy through which an investor can benefit from diversification of their investments into various sectors and companies to mitigate risk.
  • Volatility risk can be managed by investing through Systematic Investment Plan of Mutual Funds or buying equities directly from the market in smaller lots over a period of time.
  • A good understanding of the fundamentals of a company can help one make an appropriate judgment about the health of a company.
  • Of course, investors should ignore the rumours and unsolicited messages for investing in securities market.
  • Investments in securities market are done through primary market as well as secondary market. The difference between primary market and secondary market is that in the primary market, investors are allotted securities directly by the company, while in the secondary market investors buy securities from the existing investors through their stock brokers. Investments in securities market are subject to taxation, which includes short term and long term tax on capital gains as well as dividend pay-outs.
• What are the pre-requisites to invest in securities?
  In order to invest in equity shares, an investor should have three accounts:
  • Savings Account –Saving bank account with a commercial bank
  • Trading Account - Trading account with a SEBI registered stock broker of a recognized stock exchange to buy or sell securities on the Stock Exchange
  • Demat Account - Demat account with a SEBI recognized Depository Participant (DP) of Depository for holding securities in dematerialized/electronic form. The Demat account can be opened with depository participant (DP) of any of the Depository. National Securities Depository Ltd. (NSDL) and Central Depository Services (India) Ltd. (CDSL) are two SEBI registered depositories in India.
• Primary Market
  • When a company publicly issues new stocks and bonds for the first time, it does so in the primary market. In many cases, this takes the form of an initial public offer (IPO).
  • SEBI examines the prospectus issued to the public for subscription of shares to see that it meets with the requirements of the SEBI Regulations.
  • Companies issuing securities via the primary market hire merchant bankers who, on behalf of the company, prepare the prospectus and ensure related compliance for the issue of shares viz. finalization of allotment process, listing of shares in the stock exchanges, etc.
• Application Supported by Blocked Amount (ASBA) for Shares
  • An investor can now apply for shares in the primary market through ASBA. In public issues w.e.f. May 01, 2010 all the investors can apply through ASBA.
  • ASBA is an application by an investor containing an authorization to the bank to block the application money in his/ her bank account, for subscribing to an issue.
  • Blocked amount continues to earn interest. If an investor is applying through ASBA, his application money shall be debited from the bank account only if his/her application is selected for allotment, after the basis of allotment is finalized.
  • The investor need not have to bother about refunds as money to the extent required for allotment of securities, is deducted from the bank account and in case the securities are not allotted to the investor, then the blocked amount in his/ her bank account is released and made available to use.
• Unified Payment Interface (UPI) in ASBA
  • A new feature of utilizing Unified Payment Interface (UPI) while making payment in ASBA, has also been introduced recently.
  • This feature may be used for the purpose of blocking of funds and making payments in the public issue process.
  • This requires the investors to create a UPI ID and PIN using any of the UPI enabled mobile application. Usage of UPI in public issue process brings in comfort, ease of use and reduces the listing time for public issues.
• Secondary Market
  • Secondary market is the market where securities are traded after the company has issued the stocks and bonds in the primary market.
  • The shares are listed and traded on the stock exchanges which facilitates the buying and selling of stocks in the secondary market.
  • Major SEBI recognized stock exchanges in India are BSE Ltd. (formerly Bombay Stock Exchange Ltd.) and the National Stock Exchange of India Ltd. (NSE).
  • Anyone can purchase securities on the secondary market as long as they are willing to pay the price at which the securities are being traded.
  • Investment in securities market should be done after carrying out research on the background of the company, future prospects and financial strength of the company.
• Know Your Client (KYC)
  • For the purpose of opening of Demat and trading account with a Depository Participant (DP)/Stock broker, the investor has to complete Know Your Client (KYC) process with the respective DP/Stock Broker.
  • KYC is mandatory under the Prevention of Money Laundering Act, 2002 and Rules framed there under. Investor has to submit Officially Valid Documents (OVDs) as proof of identity and proof of address such as PAN card / Unique Identification (UID) (Aadhaar)/ Passport/ Voter ID card/ Driving license, etc. KYC process may be done online through Aadhaar based E-KYC mechanism or offline by visiting or sending the documents to the registered address of the intermediary.
• Online portal based Investor (Resident) E-KYC Process
  1. Investor visits portal of SEBI registered intermediary to open account
  2. Investor enters the Aadhar number
  3. Investor will receive the OTP in mobile number registered with Aadhar. He enters the OTP in portal.
  4. E-KYC details from UIDAI will be displayed in the portal
  5. Investor needs to fill additional details as required under KYC format and submit
  
  Once you have opened an account with a stock broker, you can buy or sell shares of a company through a stock broker of the recognized stock exchange where the shares are listed and traded. You can place order to buy or sell securities with your broker using the online trading account by visiting broker's website, mobile trading app of broker, through the phone using Call & Trade facility or physically visiting their office.
• Modes of Placement of Order
  • Mobile trading app
  • Online trading account
  • Physical order with broker
  • Place orders on phone
• Trading days and Trading & Settlement Cycle
  • Trading on the stock exchange takes place on all days of the week (except Saturdays and Sundays and holidays declared by the Stock Exchange in advance).
  • In case of purchase of shares, investors are required to make payment to the bank account of your stock broker prior to the pay-in day for the relevant settlement. Once payment is made by the investor, the broker would credit the shares in the Demat account of investor after pay-out day.
  • Similarly, in case of sale of shares, investors are required to deliver the shares to Demat account of broker prior to the pay-in day for the relevant settlement. Once the shares are delivered by the investor, the broker would credit the funds in the bank account of investor after pay-out day.
• What is the pay-in day and pay-out day?
  • Pay-in day is the day when the brokers shall make payment of funds (in case of purchase of shares) or delivery of securities (in case of sale of shares) to the stock exchange.
  • Pay-out day is the day when the stock exchange makes payment of funds (in case of sale of shares) or delivery of securities (in case of purchase of shares) to the broker. Settlement cycle is on T+2 rolling settlement basis w.e.f. April 01, 2003 (where T stands for the trade day). For example, trades executed on a Monday are typically settled on the following Wednesday (considering 2 working days from the trade day). The funds and securities pay-in and pay-out are carried out on T+2 day.
  • The exchanges have to ensure that the pay-out of funds and securities to the clients is done by the broker within 24 hours of the pay-out.
• Margin and Pledging / Re-pledging of securities
  When an investor buys a stock, he has two options, i.e.
  • to pay the entire price of the stock upfront, called early pay in or
  • to pay only a certain percentage of the price of the stock and borrow money from the broker to finance the rest. The percentage of the price of the stock paid upfront is called margin. The payment of the remaining amount can be made by the designated pay-out time.
  
  Similarly, when an investor desires to sell his stocks he has the option
  • to either pay in the shares to be sold or
  • can give a margin upfront.


• Margin can be provided in the form of cash or instruments like fixed deposits, bank guarantee, securities, units of mutual funds, government securities and treasury bills in demat form.
• Margin is provided in the form of securities, in favour of the broker only in the form of pledge. A pledge is a deposit of some personal property as collateral for a debt. Stock Brokers can accept securities (viz shares) as collateral only in the form of margin pledge created on the securities held in client’s demat account. Investor (client) needs to give instructions to create margin pledge on securities. This instruction can be in physical form or electronically through “SPEED-e” (for NSDL) and “Easiest” (for CDSL).
• Contract Note
  • A Contract Note is evidence of trade done by the stock broker given to the investor and is a legal document which contains details of the transaction such as securities bought/sold, traded price, time of trade, brokerage, etc.
  • Contract Notes can be issued in physical form or in electronic form. In case investor opts for electronic contract note, a specific authorization needs to be given to the stock broker along with the details of email of the investor.
  • Such electronic contract notes shall be digitally signed and encrypted which would make them difficult to be tampered.
• Basic Services Demat Account (BSDA)
  • SEBI with a view to achieve wider financial inclusion, encourage holding of demat accounts. In order to reduce the cost of maintaining securities in demat accounts for retail individual investors, SEBI has made available a Basic Services Demat Account" (BSDA) to investors.
  • Benefits of BSDA
    • Nil/Low Annual Maintenance Charges (AMC)
    • Free of charge periodic Transaction and Holding statements of the Demat account.
    • 2 physical statements free of charge during the billing cycle.
    • At least 2 Delivery Instruction Slips (DIS) shall be issued at time of account opening.
  • Annual Maintenance Charges (AMC)
    It refers to the charges collected by Depository Participants (DPs) towards maintenance of Demat accounts of the beneficiary owners (Account Holders), depending upon the value of holdings in the Demat account.
• Mutual Fund
  
  • A mutual fund pools in money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments.
  • All mutual funds are required to be registered with SEBI before they launch any scheme.
  • Salient features of mutual funds are:
    • Professional management - Money is invested through fund managers with proven expertise in the field of investment.
    • Diversification - Diversification is an investing strategy that can be summed up as investing small amounts of your money in different investment options like different schemes of mutual funds and holding shares of multiple companies.
    • Economy of scale - A mutual fund buys and sells large amount of securities at one go. This makes its transaction cost lower than what an individual would pay for securities transactions.
    • Liquidity - Just like individual shares, mutual fund units can be converted into money through sale in the market or through redemption.
    • Simplicity - Buying a mutual fund unit is simple and the minimum investment amount required is small.
    • Tax Benefits - Different mutual fund categories are subjected to different tax treatments. It is important to understand the tax benefits of a fund before you invest in it.
  • Mutual funds are segregated in different categories based on the objectives of the mutual fund scheme. The schemes are designed to keep in mind the needs of various types of investors, risk averse investors (basically a conservative Investor who does not want to take high risk), moderate investors (investors who can take some amount of risk) and aggressive investors (investors who are willing to take risk in search of higher returns).
  • Categorization of Mutual Funds
    Mutual funds are broadly categorized into five schemes mentioned as below:
    1. Equity Schemes Mutual funds which principally invest in stocks
    2. Debt Schemes Mutual funds which principally invest in fixed income securities like bonds & treasury bills
    3. Hybrid Schemes Mutual funds which invest in two or more asset classes
    4. Solution Oriented Schemes Mutual fund schemes which make their investments as per the goals of individuals like retirement & child education planning, etc.
    5. Other Schemes
  • Product Labelling of Mutual Funds
    As per SEBI guidelines, mutual funds are to be labelled according to the level of risk involved and the same is to be depicted on the risk-o-meter. The different labels and risk-o-meter are mentioned as below:
    1. Low: Principal at low risk
    2. Low to Moderate: Principal at moderately low risk
    3. Moderate: Principal at moderate risk
    4. Moderately High: Principal at moderately high risk
    5. High: Principal at high risk
    6. Very High: Principal at very high risk
  • What is Systematic Investment Plan (SIP)?
    
    • An SIP or a Systematic Investment Plan allows an investor to invest a fixed amount of money regularly in a mutual fund scheme.
    • It lets you set aside a fixed sum of money at regular intervals (weekly, monthly or quarterly) with an objective to gain capital appreciation in the longer run.
    • SIP investment inculcates the habit of savings. Instead of trying to time the market, by investing on a regular basis, the investor benefits from the rupee-cost averaging factor.
    • As the investments are done over different market cycles, the investor benefits from the market volatility by getting to buy more units of the same fund when the markets are low and buying less units when the prices are high.
    • An investor can invest a pre-determined fixed amount as low as ₹500/- in a scheme every month or quarter, depending on his/her convenience through post-dated cheques, through Standing instruction (SI) facility or through ECS (Electronic Clearing Service) facility.
    • Investors need to fill up an application form and SIP mandate form on which they need to indicate their choice for the SIP date (basically when the pre-determined amount will be invested). Subsequent SIPs may be auto-debited through a standing instruction, electronic clearing service or post-dated cheques.
  • Advantages of SIP
    
    • Disciplined approach to investments
    • No need to time the market
    • Rupee Cost Averaging Benefit from
    • Power of Compounding Small investments create Big Kitty over time
    • Lighter on the wallet
  • In order to further ease out the investment procedure for the investors, Mutual Funds also offer the following options:
    
    • Systematic Withdrawal Plans Facility to withdraw fixed amounts from a particular scheme at regular intervals
    • Systematic Transfer Plans Facility to transfer funds from one scheme to another at regular intervals
• Commodity Derivatives Market
  
  What are commodities?
  Commodities are goods with economic value. They are earth's natural products which are produced and traded. They are usually raw materials for further processing. The broad types of commodities are as under:
  • Agricultural commodities: Food & non-food crops.
  • Non-Agricultural commodities: Metals, Energy, Polymers, etc.
  • Others: cattle head, processed foods like juices, etc.
  
  Major commodities are:
  
  • Edible oilseed Groundnut, Mustard seed, Cottonseed, Soy oil, Crude Palm Oil etc.
  • Food grains Wheat, Gram, Bajra (Pearl Millet), Maize, etc.
  • Bullion Gold, Silver
  • Metals & Energy Natural Gas, Crude Oil, Copper, Zinc, Aluminium, Lead, Nickel, Steel etc.
  • Spices Turmeric, Pepper, Cumin seed, Cardamom etc.
  • Fibres Cotton, Jute, etc.
  • Others Castor Seed, Guar seed (Cluster Bean), Guar gum, Rubber etc.
  
  What is Commodity Price Risk?
  Commodity price risk is the price uncertainty that adversely impacts the financial position of those who both use and produce commodities. For example, as the price of steel rises, this increases the cost of automobile production and can negatively impact that producer's profit margins. Similarly, commodity price risk can equally impact producers of a commodity, not just users. If crop prices are low one year, a farmer may plant less of that crop. If prices subsequently rise next year, the farmer will miss out on a potentially profitable crop. This is called commodity price risk. The factors that can affect commodity prices include political and regulatory changes, seasonal variations, weather, technology and market conditions.
  
  Risk Faced by Various Stakeholders
  Various stakeholders face many risks in commodity trading, especially farmers, such as:
  
  • Price volatility and price risk
  • Lack of quality storage facilities
  • Need for finance at the time of sowing of crops
  • Dependence on local middlemen and agents for selling their crops
  • Small farm holdings — no bargaining power
  • Opaque/manipulated prices at Mandis
  
  How to protect against price risk in commodities?
  A producer of a commodity is at risk of prices moving lower. Conversely, a consumer of a commodity is at risk of prices moving higher. The producers and consumers of commodities can participate in the commodity derivatives exchange to protect against adverse price movements. The process of protecting against financial loss or price risk is called "Hedging''. A hedge will guarantee a consumer the supply of a required commodity at a set price and a producer the known price for commodity output.
  
  Benefits of Commodity Derivative Exchange
  Commodity derivative exchange offers following benefits to producers and consumers of commodities:
  • Price discovery: Helps producers / sellers and consumers / buyers and also exporters & importers of a commodity to discover price for a future date and helps them take informed decision.
  • Price risk management: Helps hedge price risk or insure against adverse price movement and locks-in profit margin.
  
  Commodity Derivative Exchanges
  
  • A commodity derivative exchange is an organized, regulated market that facilitates the purchase and sale of contracts whose values are linked to the price of commodities (e.g., wheat, barley, crude oil, gold, etc.).
  • Typically, the buyers of these contracts agree to accept delivery of a commodity at a price on a future date, and similarly, the sellers agree to deliver the commodity at a price on a future date.
  • For example, in case of Agricultural commodities, Commodity Derivatives Exchange helps in reducing the price risk, both for the farmers (seller of crop) and the consumer (buyers of crop /food processors) by helping them decide a price today (i.e. at the time of sowing or at the time of harvesting of the crop) for the crop to be delivered in the future. The transaction in the exchange is done through commodity brokers. The settlement of contract to buy and sell is guaranteed by the commodity derivatives exchange.
  • The trading rules and procedures of recognized Commodity Derivatives Exchanges and Commodity Brokers are regulated by Securities and Exchange Board of India (SEBI) — a statutory body established under SEBI Act, 1992. In India, major commodity derivative exchanges are as follows:
    • Multi Commodity Exchange of India Ltd (MCX) — predominantly non-agricultural products like gold, silver, aluminium, copper, nickel, lead, zinc and energy products like crude oil and natural gas are traded on this exchange.
    • National Commodity and Derivative Exchange (NCDEX) — predominantly agricultural products like pulses, cereals, sugar, etc. are traded on this exchange.
  
  There are three types of contracts in commodity derivatives market. These are Forward Contracts, Futures Contract and Options. Forward contract is an agreement between two parties to sell or buy a certain commodity at a fixed price in the future. This contract hedges the risk for the buyer against price fluctuations and the seller can get a guaranteed price for his product at a specified date.
  
  Forward contracts are traded over the counter, while futures contracts are traded on the commodity derivatives exchanges. Forward contracts can be privately negotiated. Futures contract have a standardized way of execution and the transaction is guaranteed by the clearing house of a recognized commodity derivative exchange which minimizes the risk of defaults on the settlement of transaction.
  
  For example, if A has the machinery that produces 10 bales of cotton, he can secure an agreement with B to sell the bales at a certain price after a year irrespective of the price that is trending. This is called hedging the risk. "A" hedges the risk by securing the price and "B" transacts by pre-booking the price expecting that prices would go up in the near future which would benefit him. The payment and delivery of the asset is made on the future date termed as the delivery date. The buyer in the futures contract is known to hold a long position. The seller in the futures contracts is said to be having short position.
  
  An options contract refers to the financial instrument which gives the buyer of the option the right but not the obligation to exercise the option at a predetermined date at a predetermined price. Options contracts are of two types as explained below:
  • Call Option: Call option gives one the right to buy the underlying security
  • Put Option: Put option gives one the right to sell the underlying security
  
  
  Investors are charged a premium when they buy an options contract. On expiry of the contract, generally the transaction is cash settled instead of actually buying/selling the underlying security unlike in the cash market. Hence, many investors find Futures & Options (F&O) cheaper to trade, however, it is riskier than the cash segment because F&O is time dependent and you cannot hold on to the contract till the desired time i.e. when the market is favourable to earn positive returns. On the expiry of the contract, even if you cash settle the contract instead of taking delivery, the change in value of the underlying will be either credited or debited to your account.
  
  How does a farmer do trading in Commodity Derivatives Market?
  
  • To deal with the legal/ logistics/ quality requirements of Derivatives Markets farmers would have to form a society/ trust/ Farmers Producing Organization (FPO), etc.
  • Collectively they would have to deposit their produce in the warehouse of the Exchange.
  • Quality of the produce for the purpose of standardization to be assayed (checked / tested) by Exchange recognized assayers.
  • Exchange would issue a warehouse receipt (Loans can be obtained from banks against these receipts). Exchanges assume responsibility for maintaining the quality of the product for a certain period of time.
  • The depositors now have time to check the prices (on the exchange) at which they can profitably sell the produce.
  • When the desired price is likely to be realized, the bid is placed at the exchange. Once the order matches with the purchaser's bid, the trade is concluded.
  • Farmers have to give delivery on the Exchange platform.
  • Funds are given to the farmers upon satisfactory delivery of the commodity.

Chapter 6 - Insurance Related Products

• Insurance
  • Insurance allows individuals, businesses and other entities to protect themselves against significant potential losses and financial hardship at a reasonably affordable cost. Insurance is a form of risk management, primarily used to manage the risk of an uncertain future loss.
  • Thus, insurance is a promise of compensation for specific potential future losses in exchange for a periodic payment called premium. An entity which provides insurance is known as the insurer. A person who buys insurance is known as an insured or the policy holder. The insured receives a contract called the insurance policy which contains details like the conditions and circumstances under which the insured will be financially compensated along with other details related to the insurance policy.
  • The insurance policies are generally classified into the following:
    Life Insurance - Term Insurance
    • In event of your unfortunate demise during the policy term, your nominees will receive the “Sum Assured” which you had selected while purchasing the plan.
    • Active for a fixed period of time (popularly referred to as the "term of the policy").
    Life Insurance - Endowment Insurance
    • A life insurance contract designed to pay a lump sum amount after a specific term (on the maturity of the policy) or on death of the policy holder (insured).
    • Typical maturities of insurance policies are ten, fifteen or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness.
    Life Insurance - Whole Life
    • Type of life insurance policy which stays active as long as you pay the premiums.
    Life Insurance – Unit Linked insurance
    • Combination of insurance and an investment vehicle.
    • A portion of the premium paid by the policyholder is utilized to provide insurance coverage to the policyholder and the remaining portion invested in equity and debt instruments.
    Personal Accidental cover policy
    • Insurance plan which provides monetary compensation in the event of bodily injuries or disability or death caused solely by accident.
    Motor Insurance
    • Insurance for cars, trucks, motorcycles and other road vehicles.
    • Also called as vehicle insurance, car insurance or auto insurance.
    Health Insurance
    • Insurance coverage that covers the cost of an insured individual's medical and surgical expenses.
    • The "insured" is the owner of the health insurance policy or the person with the health insurance coverage.
    Travel Insurance
    • Insurance for covering against travel risks such as lost or stolen luggage, cancellation cover (if you are not able to travel due to unexpected medical reasons) and most importantly, unexpected medical costs abroad.
    • Comprehensive travel insurance policy will provide:
      1. Emergency medical cover
      2. Losses incurred due to unforeseen cancellations or having to cut your trip short
      3. Death and disability cover
      4. Personal liability cover
      5. Luggage cover
    Property Insurance
    • Policy that provides financial reimbursement to the owner or renter of a structure and its contents in the event of damage or theft.
    • Property insurance can include homeowner’s insurance, renters insurance, flood insurance and earthquake insurance.
    Group Insurance
    • Insurance policy that covers a defined group of people, for example the members of a society or professional association or the employees of a particular employer.
• Role of IRDAI (Insurance Regulatory and Development Authority of India)
  Insurance Regulatory and Development Authority of India regulates the insurance sector in India. It aims to protect the interests of the insurance policy holders and ensures systematic growth of the insurance industry.

Chapter 7 - Pension, Retirement and Estate Planning

• Pension may be described as a regular payment which one aspires to receive regularly, once the person retires from his regular occupation/ job or attain a certain age from which he/ she does not want to work.
• Pension schemes give an opportunity to invest and accumulate savings and get lump sum amount as regular income through annuity plan on retirement.
• National Pension System (NPS)
  NPS aims to institute pension reforms and to inculcate the habit of saving for retirement amongst the citizens.
• Investment Options under the NPS
  The subscribers to the NPS choose the investment options in which their contributions have to be invested. Following options are offered by the NPS:
  • E (Equity): High Return, High Risk option- Fund invests predominantly in equity-oriented investments.
  • C (Corporate Bonds): Medium Return, Medium Risk option- Fund invests predominantly in fixed income bearing securities other than government securities.
  • G (Government Securities): Low Return, Low Risk option- Fund invests predominantly in pure low risk government fixed income securities.
  • A (Alternative Investments): High risk and High return option- Fund invests in Alternative Investment Schemes including instruments like CMBS (Commercial Mortgage-Backed Securities), MBS (Mortgage Backed Security), REITs (Real Estate Investment Trusts), AlFs (Alternative Investment Funds), InvITs (Infrastructure Investment Trusts), etc. This asset class is not available for investment of contribution made under Tier Il account.
• Active Choice Option - Subscriber can choose the proportion of their funds that may be invested in each of the investment option. This is called the Active Choice. The only restriction is that the proportion invested in asset class E cannot exceed 75 percent and that in asset class A is restricted to 5 percent.
• Auto Choice Option - Under this choice the subscriber's contribution will be invested in the lifecycle fund. The lifecycle fund is a dynamic allocation of the subscriber's wealth to the different asset classes in a defined proportion determined by the age of the subscriber, with the exposure to equity decreasing and that to the safer corporate bonds and government securities increasing with the age of the subscriber.
• Exit from NPS
  
  • Before 60 years - Only 20% of the fund can be withdrawn; the rest 80% has to be used ffor purchasing annuity from a life insurer.
  • Between 60 and 70 years - Can withdraw up to 60% of the fund; at least 40% has to be used for buying annuity from approved life insurers.
  • After death - in case of death of the subscriber, the nominee can withdraw all the money at one go
• Role of PFRDA in Pension Segment
  Pension Fund Regulatory and Development Authority (PFRDA) is a statutory regulatory body established by an Act of Parliament of India with the charter to promote, develop and regulate pension sector in India.
• Estate Planning
  Estate planning refers to planning during one's lifetime, earmarking one's assets to beneficiaries, typically family members, loved ones and institutions, so that they can be used/ claimed after one's demise with ease, and without any significant cost. Making a "Will" is an essential part of estate planning. Following are the constituents of estate planning:
  • Will It is a written legal declaration of desires to distribute assets of the deceased after his or her demise. This way one can transfer assets to loved ones, according to his or her preferences. By making a Will, one can avoid any feud among beneficiaries over distribution of assets. Making a Will is a simple process.
• Nomination
  A nominee is a person who receives the right to have custody of the money on the death of the account holder. A nominee is only a custodian of the asset owner's money and doesn't have any ownership rights. In the absence of nomination, it could be expensive and time consuming for the legal heirs of the deceased to get their money. Is nomination mandatory in case of a Demat account as well? It is not mandatory but advisable; nomination alleviates the problems faced by legal heirs in case of death of account holder. One should always remember to fill in the nomination details while opening any account.
• Power of Attorney
  • Power of attorney is a legal document that allows another person to act on your behalf. It ensures that important matters are dealt with by someone you trust if you are unable to deal with them yourself.
  • If you aren't able to personally accomplish a task, you may grant someone else — the power to do it for you. This permission can include things like accessing your bank accounts, selling a vehicle, purchasing property or getting a home loan. In fact, your power of attorney can grant your agent the authority to conduct nearly any type of Transaction you could conduct on your behalf.
  • The person who grants power of attorney to an agent is called the principal, and the principal may use either a general power of attorney or special power of attorney to give power to his or her agent. (Agent means many people to whom the power is given by the principal to act on the behalf of the principal). A general power of attorney gives the agent power to accomplish anything the principal could do, whereas a special power of attorney gives the agent limited powers, such as the power to accomplish a specific transaction.
• Procedure to transfer person's wealth and assets after his or her death
  • After the demise of an individual, his or her legal heirs have to approach various authorities (like banks, depositories, mutual fund companies and Insurance companies) with their claim on the deceased assets. They have to present the death certificate along with legal heir's certificate to these authorities to transfer the assets of the deceased in their name.
  • If the deceased has made a Will, the assets and the wealth of the deceased will be distributed as per his or her Will. In the absence of a Will, the transfer will be made only to legal heirs.

Chapter 8 – Borrowing-Related Products

• Borrowing is an act of taking money and paying it back over a period. In meeting financial goals, in case the savings are inadequate, one resorts to borrowing. Borrowing provides the flexibility of repaying in small instalments over a period of time. Equated Monthly Instalments (EMI) is a very popuar mode of repayment of loan.
• Collateral is a property or other asset that a borrower offers as a security to the lender in exchange of availing the loan. If the borrower stops making the promised loan repayments, the lender can seize the assets financed and the collateral to cover its losses. A lender's claim to a borrower's collateral is called a lien.
• Different Type of Loans Available
  The banking institutions provide various types of loans to individuals and business community such as:
  • Personal Loan
    This loan can be utilized for any purpose, for example, paying debt, marriage expenses or vacation expenditure. No collateral security is required for this type of loan.
  • Vehicle Loan
    This loan is issued for the purpose of purchasing new or second-hand vehicles for personal and commercial uses.
  • Education Loan
    Education loan is required for students and family to meet the financial goal of higher education.
    Students should have an admission offer from an institution before they apply for education loan.
  • Gold Loan
    Gold loan is given only on providing gold as a security to a bank or any other lending institution.
  • Housing Loan
    Housing Loans are taken by people for a variety of house-related purposes such as construction of a house, house renovation, extension of house, buying of property or land, etc.
  • Agriculture Loan
    Agriculture Loans are provided to farmers to fund agricultural operations or related activities like horticulture, sericulture, etc.
  • Consumer Durable Loans
    Consumer Durable Loans are the loans which may be availed for purchasing of consumer durables like television, refrigerator, etc.
• 5 Cs in Credit — One Stop Guide to get your Loan Sanctioned
  The banks generally follow a conservative approach for processing the loan request of the borrowers. In this analysis, banks consider five elements and these are known as 5 Cs in credit. These are as follows:
  • Capacity: The prospective lender will want to know exactly how you intend to and what is your capacity to repay the loan.
  • Character: Lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company.
  • Capital: Capital is the money you personally have invested in the business and is an indication of how much you have at risk, should the business fail.
  • Collateral: Banks insist on taking a security in addition to that is created out of loan proceeds.
  • Conditions: Banks analyse the intended purpose of availing the loan like will the money be used for working capital, additional equipment or inventory, among others.
• Credit Score
  Credit information agencies play a vital role in decision making in loan application process. After an applicant fills out the application form and hands it over to the lender, the lender first checks the credit score and credit report of the applicant. If the credit score is low, the lender may not even consider the application further and reject it at that point. If the credit score is high, the lender will look into the application and consider other details to determine if the applicant is credit-worthy. The credit score works as a first impression for the lender, the higher the score, the better are your chances of the loan being reviewed and approved. The decision to lend is solely dependent on the lender and credit score or credit report does not in any manner decide if the loan or credit card should be sanctioned or not.
  Credit Information Bureau (India) Ltd (CIBIL) is India's first credit information company, also commonly referred as a credit bureau. CIBIL collects and maintains records of individuals' and non-individuals' (commercial entities) payments pertaining to loans and credit cards. These records are submitted to CIBIL by banks and other lenders on a monthly basis; using this information a Credit Information Report (CIR) and credit score is developed, enabling lenders to evaluate and approve loan applications. A credit bureau is licensed by the RBI and governed by the Credit Information Companies (Regulation) Act of 2005. The Reserve Bank of India requires all credit bureaus to give one free full credit report, every year, to all consumers.

Chapter 9 - Government Schemes for Various Savings & Investment Options

1. Government Schemes

   Government of India accepts deposits from the public and some of them are also tax saving instruments. National Savings Certificates, Kisan Vikas Patra, Post Office Savings Certificates, Sukanya Samrudhi Deposit, PPF, etc. are some of the examples of various schemes run by Government of India. These schemes have different durations for investments and carry specific interest rates.
   The details of latest schemes are as follows:
   
   • Sukanya Samrudhi Yojana
     Objective: To promote the welfare of the girl child.
     Who can open the account: A natural or legal guardian on behalf of a girl child where child's age is 10 or less.
     Maximum number of accounts: Up to two girl children, or three in case of twin girls as second birth, or the first birth itself results in three girl children.
     Tax deduction: As applicable under Section 80C of the Income Tax Act, 1961.
     Premature Closure: Allowed in the event of death of the depositor or on compassionate grounds such as medical support in life threatening diseases and is authorized by an order of the Central Government of India.
     Irregular payment/ Revival of account: By payment of penalty amount
     Mode of Deposit: Cash/Cheque/Demand Draft/digital payment
     Withdrawal: A certain portion of the balance lying in the account as at the end of previous financial year for the purpose of higher education and marriage after attaining the age of 18 years.
   • Pradhan Mantri Jan Dhan Yojana (PMJDY)
     Objective: Launched in August 2014 by Government of India to ensure financial inclusion of every individual who does not have a bank account in India.
     To provide access to financial services, namely, banking, savings and deposit accounts, remittance, credit, insurance and pension in an affordable manner to all.
     Accounts can be opened with any bank branch or Business Correspondent (Bank Mitra).
     Facilities provided with the account opened:
     • Zero balance account
     • RuPay debit card
     • Accidental insurance cover and a life cover of certain amount with payment on the death of the beneficiary (subject to conditions).
     • Overdraft facility up to a certain amount. This facility is available against one account per household.
     • Mobile banking facility for checking balance and transferring funds with ease across India.
     • Interest earned on the deposits.
     • Not mandated to have a minimum balance in the account.
     • Direct Benefit Transfer for beneficiaries of government schemes.
     • Easy access to pension and insurance products.
     To get a cheque book, the individual will have to fulfil minimum balance criteria.
   
   Overdraft is a facility available to bank customers wherein they can take a short term loan from bank to meet their urgent requirements with promise to pay back the same amount in the timelines agreed between the bank and the customer.

2. Basic Insurance Schemes Run by Government of India

   1. Pradhan Mantri Suraksha Bima Yojana
      • Provides accidental insurance cover to bank account holders in the age group of 18 to 70 years.
      • A fixed annual premium is deducted from the bank account of the insured through auto—debit facility.
      • Person would be eligible to join the scheme through one savings bank account only.
      • Insurance covers permanent and partial disability due to accident.
   2. Pradhan Mantri Jeevan Jyoti Bima Yojana
      • Provides life insurance cover to bank account holders in the age group of 18 to 50 years.
      • A fixed annual premium is deducted from the bank account of the insured through auto—debit facility.
      • Person would be eligible to join the scheme through one savings bank account only.
   3. Pradhan Mantri Jan Aarogya Yojana -Ayushman Bharat
      • Provides healthcare facilities targeting poor, deprived rural families and identified occupational category of urban workers' families.
      • There is no restriction on family size, age or gender.
      • All members of eligible families, as present in SECC (Socio-Economic Caste Census 2011) database, are automatically covered.
      • No money needs to be paid by the family for treatment in case of hospitalization.
      • All pre-existing conditions are covered from day one of the policy. The benefit cover will include pre & post hospitalization expenses. You can go to public or empanelled private hospitals across the country and get free treatment.
   4. Pradhan Mantri Fasal Bima Yojana
      • Crop insurance scheme aimed at shielding farmers from the crop failure through insurance.
      • In the event of a crop loss, the farmer will be paid based on the difference between the threshold yield and the actual yield. The threshold yield is calculated based on average yield for the last seven years and the extent of compensation is set according to the degree of risk for the notified crop.
      • The scheme is compulsory for farmers who have availed of institutional loans.
      • The scheme insures farmers against a wide range of external risks like droughts, dry spells, floods, inundation, pests and diseases, landslides, natural fire and lightning, hailstorms, cyclones, typhoons, tempests, hurricanes and tornadoes.
      • Scheme covers post-harvest losses up to a period of 14 days.

3. Other savings/ insurance schemes run by Government of India

   1. Kisan Vikas Patra
      • Small saving certificate scheme from India Post designed to double the investment after a predetermined time.
      • Objective is to inculcate long term financial discipline in people.
      • Minimum amount for opening is ₹1000/- and in multiples of ₹100/-, no maximum limit.
      • Certificate can be purchased by adult and also minors above 10 years of age.
      • Can be purchased from post office.
   2. Public Provident Fund (PPF)
      • Tax free savings scheme offered by the Government of India.
      • PPF account can be opened with either a post office or with any nationalized or private bank.
      • Joint account cannot be opened and only one account can be opened by a citizen in India along with nomination facility.
      • Investments made in the PPF account during a particular financial year are available to claim deduction under Section 80C of Income Tax Act up to a certain limit.
      • Investors can also avail loans against a particular amount of their investments made in PPF account subject to other conditions of the scheme.
   3. National Savings Certificate (NSC)
      • A Government of India initiative, primarily to invest while saving on income tax.
      • Can be opened from any post office and NSCs will be issued in shape of Passbook.
      • Joint account allowed, can be opened by an adult on behalf of a minor.
      • Deposits qualify for tax rebate under Sec. 80C of IT Act.

4. Pension Schemes run by Government of India

   1. Atal Pension Yojana (APY)
      • Pension oriented savings scheme focused on the citizens in the unorganized sector. It may be opened for all bank account holders.
      • Objective is to provide a fixed amount of pension to unorganized sector workers, who find no coverage under other social security schemes.
      • Minimum age of joining the APY is 18 years and the maximum age is 40 years.
      • Exit before 60 years is not generally permitted except for in the event of death of the beneficiary or a terminal disease. However, the spouse can continue with the scheme after the death of the beneficiary.

5. Borrowing related schemes of Government of India

   1. Educational Loans through Vidyalakshmi Portal
      • Objective is to provide easy and effective system of getting educational loans so that no student leaves his or her education mid-way due to lack of funds.
      • The web address of the portal is www.vidyalakshmi.co.in.
      • The students get information about educational loan schemes of banks.
      • Common educational loan application form is available for students.
      • There is a provision to apply to various banks for educational loans through a single form.
      • The site is linked to the national scholarship portal for information and to apply for government scholarship.
      • The students can view the status of their loan application at any time and at any place with an easy access to the dashboard facility of the website.
   2. Prime Minister Awas Yojana
      • Credit Linked Subsidy Scheme (CLSS) for Lower Income Groups/Economically Weaker Sections (EWS/LIG) and Middle Income Groups.
      • Individuals are eligible to avail subsidy through this scheme only when they are purchasing their first house or it is a new construction.
      • In case a family has already availed of central assistance under any housing scheme in the past or they already own a house in India, either in their name or in the name of a family member or their spouse is also claiming interest subsidy for a house; then they will not be eligible to avail subsidy under this scheme.
      • Property purchased needs to be in compliance with the guidelines as prescribed by the scheme from time to time.
   3. Pradhan Mantri Mudra Yojana (PMMY)
      • Government of India scheme that offers business loans to proprietors or entrepreneurs of small & medium enterprises.
      • Loan schemes offered under PMMY: SHISHU, KISHOR and TARUN depending upon the amount of loan availed.
      • Eligibility: The borrowers must be from the following Non-corporate Small Business Segment: Proprietorship; Partnership firms; Small manufacturing units; Service sector units; Shopkeepers; Fruit or vegetable vendors; Truck operators; Food service units; Repair shops; Machine operators; Small industries; Food processors; Other industries in rural and urban areas.
      • Key Documents required to avail such loans are: Proof of Identity, quotation of items purchased and category certificates.
   4. Stand up India
      • Scheme for financing SC/ST and/or Women Entrepreneurs above 18 years of age.
      • Objective is to facilitate bank loans to the above mentioned target groups.
      • Purpose of loan is for setting up a new enterprise in manufacturing, trading or services sector.

Chapter 10 - Tax Saving Options

• Income tax is that percentage of your income that you pay to the government so that it can fund its many expenses such as infrastructural development, pay the salaries of those employed by the state or central governments, etc.

• Deductions allowed under Income Tax Act Section Key features

  Section 80C
  • Deduction for money invested in life insurance, provident fund, ELSS schemes of mutual fund, Special Bank Deposits of 5 year term, contribution to NPS account (Tier 1 account only), National Savings Certificate, principal repayment of housing loan, etc.
  Section 80CCD (1 B)
  • In addition to deduction claimed under Section 80C.
  • Investment in NPS by any individual is available for claiming deduction under Section 80CCD (1B) of the IT Act.
  • Amount available for deduction under this section is over and above the amount available for claiming deduction under Section 80C of IT Act.
  Section 80D
  • Individuals are eligible to claim deductions for medical insurance availed for self, spouse, dependent parents and dependent children.
  Section 80G
  • Donations to National Children Foundation, University or educational institutions of national importance, Prime Minister's Relief Fund, charitable institutions, etc. are deductible from the taxable income.
  Section 80TTA
  • Interest on savings account is taxable. However, tax charged on interest earned on savings bank account is eligible to be claimed as a deduction under section 80TTA, subject to limits on the amount claimed as deduction and other conditions specified from time to time.
  • Available only to individual or HUF.
  • Applicable for savings bank account, post office or cooperative banks.
  Section 24
  • Interest paid on housing loan availed for purposes of acquisition of property, construction of property or repair of property.
  • Applicable on housing loans availed after April 1, 1999.

Chapter 11 - Caution against Ponzi Schemes and Unregistered Investment Advisers

• A Ponzi scheme is a fraudulent investment scheme promising high rates of return to investors.
• Caution against Unregistered Investment Advisers
  Investment Advisers are supposed to obtain registration from SEBI and follow the Code of Conduct.
  It is illegal to act as Investment Adviser without SEBI registration. SEBI is making concerted efforts to stop such illegal activity. Some unscrupulous and ignorant entities may not get themselves registered and, or, may not follow the Code of Conduct. Investment Advisers have to limit themselves to giving advice and they should not handle cash or securities.
  Investors therefore need to be aware and guard themselves against above mentioned practices present in the market and deal with caution with entities claiming expertise in capital markets. Investors are advised to take advice for investment only from entities registered under SEBI (Investment Adviser) Regulations, 2013 [Last amended on July 03, 2020].

Chapter 12 - Grievance Redressal Mechanism

SCORES (SEBI COmplaints REdress System)

• SEBI launched a centralized web based complaints redressal system “SCORES”. The purposes of SCORES is to provide a platform for aggrieved investors whose grievances, pertaining to securities market, remain unresolved by the concerned listed company or registered intermediary after being approached directly. Whenever an individual entity faces an issue, he or she has to first contact his or her company, exchange or broker for filing his complaint. If he is not satisfied with the resolution provided to him or has not received any response from his concerned company, exchange or broker where he has filed his complaint, then he can directly file his complaint on SCORES.
• For filing a complaint on SCORES, you may either access http://scores.gov.in or download SCORES Mobile Application. An investor may lodge a complaint on SCORES within three years from the date of cause of complaint. In case an investor fails to lodge a complaint within the stipulated time, he may take it up with the entity concerned or in the appropriate court of law.
• Supporting documents up to 2 MB can be attached in the PDF format. In case the data to be uploaded for each category is more than 2 MB, it can be sent by post to any SEBI office.
• Matters that are not considered as complaints in SCORES
  • Complaints those are incomplete or not specific.
  • Allegations without supporting documents
  • Offering suggestions or seeking guidance/explanation
  • Seeking explanation for non trading of shares or illiquidity of shares
  • Not satisfied with trading price of the shares of the companies
  • Non-listing of shares of private offer
  • Disputes arising out of private agreement with companies
• The Mobile App “SEBI SCORES” is available on both iOS and Android platforms.
• SEBI Help Line - Toll-free Helpline Service for Investors. 1800 266 7575 or 1800 22 7575. 8 languages and all days 9:30 AM to 5:30 PM.

Chapter 13 - Grievance Redressal Agencies

Chapter 14 - About SEBI

• Securities and Exchange Board of India (SEBI) is a statutory body set up by the Parliament of India in 1992 to protect the interests of investors and to regulate and develop the Indian securities market.
• It started operations in 1988 through an order of Government of India.
• The key functions of SEBI are focused upon development of Indian securities market, regulation of various intermediaries in the securities market and protection of the interests of investors.
• It is head quartered in Mumbai with regional offices in Delhi, Kolkata, Chennai and Ahmedabad and various local offices across different States.
• Buying and selling of shares takes place in the stock exchanges through stock brokers. These intermediaries in securities market can function only if they are registered with SEBI. They are also required to follow the rules, regulations and guidelines laid down by SEBI to protect the investors.
• Similarly, SEBI also regulates other participants in the capital market like stock exchanges, brokers, depositories, depository participants, portfolio managers, merchant bankers, share transfer agents, etc.
• Mutual funds collect money from different investors and then invest that money in various schemes as per the choice of the investors. They are governed by rules formulated by SEBI.
• Mutual Funds have to disclose details of the scheme, where they will invest money, the fees charged from the investor, etc. They also have to make periodic disclosures for the benefits of investors as mandated by SEBI.
• SEBI also educates investors and facilitates redressal of their grievances.
• For details on functions of SEBI and other information please visit their official website www.sebi.gov.in.

SECURITIES MARKET - UNDERSTANDING FROM INVESTOR’S PERSPECTIVE

Chapter 1: Regulatory Framework for Securities Markets

• The regulation of buying, selling and dealing in securities such as shares of a company, units of mutual funds, Derivatives, etc. and stock exchanges, commodity derivative exchanges and depositories comes within the purview of Securities and Exchange Board of India (SEBI) in terms of SEBI Act, 1992 (SEBI Act) and various SEBI regulations/ circulars/ guidelines/ directives.
• SEBI was established on April 12, 1992 in accordance with the provisions of the SEBI Act. The mandate of SEBI is to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto.
• At present, the four main legislations governing “the securities market” are:
  1. The SEBI Act, 1992, which empowers SEBI with statutory powers for (i) protecting the interests of investors in securities, (ii) promoting development of the securities market, and (iii) regulating the securities market.
  2. The Companies Act, 2013, which provides regulations for issuance, allotment and transfer of securities, and related matters in public issues of securities;
  3. The Securities Contracts (Regulation) Act, 1956, which provides for recognition and regulation of transactions in securities in a Stock Exchange.
  4. The Depositories Act, 1996, which provides for electronic maintenance and transfer of ownership of dematerialized (demat) shares.

Chapter 2: What are Securities and Securities Market?

1. Equity Shares or commonly called as shares, represent a share of ownership in a company. An investor who invests in shares of a company is called a shareholder, and is entitled to receive all corporate benefits, like dividends, out of the profits of the company. The investor is also entitled to receive the right to cast a vote with regard to the decision making process of the company at General meeting of the company.
2. Debt Securities represent money that is borrowed by the company / institution from an investor and must be repaid to the investor. Debt securities are also called as debentures or bonds. An investor who invests in debt securities is entitled to receive payment of interest/coupons and repayment of principal (i.e. the money invested). Debt Securities are issued for a fixed term, at the end of which the securities can be redeemed by the issuer of securities. Debt securities can be secured (backed by collateral) or unsecured.
3. Derivatives are financial instruments whose value depends upon the value of another asset such as shares, debt securities, commodities, etc. The main types of exchange traded derivatives are futures and options.
4. Mutual Funds are type of financial instruments made up of a pool of money collected from many investors. These funds/ mutual funds, then, invest in securities such as shares, bonds, money market instruments and other assets.

Securities market has two interdependent and inseparable segments, which are mentioned as below:

• Securities Market
  1. Primary Market
     1. Objective: To raise funds
     2. Includes issuance of new Securities through IPO, i.e. Initial Public Offer.
  2. Secondary Market
     1. Objective: Capital Appreciation
     2. Includes the further trading Of securities already offered To the public.

Chapter 3: Primary Market and Secondary Market

• Primary Market: This market is also called as the new issues market where company / institutions raise funds (capital) from public by issuing new securities (shares, debentures, bonds, etc.).
  There are two major types of issuers of securities:
  • Corporate Entities (companies) which mainly issue equity instruments (shares) and debt instruments (bonds, debentures, etc.)
  • Government (Central as well as State) which issues debt securities (dated securities and treasury bills).
• The types of issues made in Primary Market are:
  1. Public Issue
     Securities are issued to general public and anyone can subscribe to them. Public issue of equity shares can be categorized as follows:
     1. Initial Public Offer (IPO):
        An IPO is where first public offer of shares is made by a company. An IPO can be in the following forms:
        • Fresh Issue of shares where new shares are issued by the company to the public investors. In this kind of an issue, the funds of investors will go to the company to be used for the purpose for which the issue is made.
        • Offer for Sale where existing shareholders such as promoters or financial institutions or any other person offer their holding to the public. In this kind of an issue, the funds of the investors will go to such sellers of the shares and not to the company.
     2. Follow on Public Offer (FPO):
        It is made by an issuer/ company that has already done an IPO in the past and is making a fresh issue of securities to the public.
  2. Preferential Issue
     In this mode of issue, securities are issued to an identified set of investors like promoters, strategic investors, employees, etc.
  3. Rights Issue
     When the Company gives its existing shareholders the right to subscribe to newly issued shares, in proportion to their existing shareholding, it is called a rights issue.
  4. Bonus Issue
     When the existing shareholders of a company are issued additional shares, in proportion to their existing shareholding and without any additional cost, then it is called a bonus issue.
• In order to raise funds from public, companies need to file an offer document with SEBI which is called as the draft red herring prospectus or the draft prospectus. The prospectus contains details like the history of the company, details of the promoters, business model, financial history of the company, risks in that business, purpose for which the money is being raised, terms of issue and such other information that will help an investor to make an informed decision on investment in the shares of that company.
• The securities which are issued in primary market are listed on a recognized Stock Exchange in less than six (06) working days from the date of the closure of the issue. The shares are then listed on the recognized stock exchanges, where further trading of the shares takes place.
• The shares allotted by the company are credited in the Demat account of the investor which is maintained with a Depository through a SEBI registered Depository Participant (DP).
• An investor can sell the shares on the stock exchanges through a SEBI registered Stock broker and receive the money.
• Secondary market: Once the securities are issued in the primary market, they get listed on the Stock Exchanges and the investors can buy or sell these listed securities through those Stock Exchanges. Stock Exchanges have two main segments - Cash Market segment and the Derivatives Market segment.

Chapter 4: Who are the Market Infrastructure Institutions and Market Intermediaries in the securities market?

• Market Infrastructure Institutions: The infrastructure to facilitate the transactions in securities market (viz. issue, purchase and sale of securities) is provided by Stock Exchanges, Depositories and Clearing Corporations. These institutions are known as Market Infrastructure Institutions (MIIs). A list of SEBI registered market infrastructure institutions (MIIs) is available on the link: https://www.sebi.gov.in/intermediaries.html.
• The Stock Exchanges provide a nation-wide computerized screen based trading platform to facilitate buying and selling of securities, through their registered stock brokers and at market determined prices, in a fair manner. The list of SEBI recognized stock exchanges in India is available on the link: https://www.sebi.gov.in/stock-exchanges.html.
• The major nation-wide stock exchanges are BSE Limited (BSE), National Stock Exchange of India Limited (NSE) and Metropolitan Stock Exchange of India Limited (MSE).
• Clearing Corporations: The main function of Clearing Corporations is to guarantee the settlement of trades executed on the Stock Exchanges. In other words, Clearing corporations guarantee that every buyer will get the securities which are bought by him and every seller of securities will get money for the securities sold by him.
• Depositories: Depositories are institutions that hold securities of investors in dematerialized / electronic form and provide demat services to the investors through their Depository Participants (DP). There are two depositories in our country namely, National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Under each Depository, there are registered Depository Participants (DPs) (like branches of banks), which provide various services to the investors like opening and maintaining of a Demat account, dematerialization of shares, etc.
• Market Intermediaries are important participants in the smooth functioning of the primary and the secondary markets. These market intermediaries support the process of executing orders for buying or selling of securities, dealing in securities and providing information relevant to the trading of securities. Some important intermediaries are stock brokers, depository participants, merchant bankers, share and transfer agents, registrars, etc. All such intermediaries are registered with SEBI and are required to abide by the prescribed norms to protect the investors. A list of SEBI recognized market intermediaries may be accessed on the following link: https://www.sebi.gov.in.

• Basics of Investing

  
  Before you start investing in securities market, you need to understand and identify your investment goals, objectives and risk appetite (the extent up to which you are willing to take risk). Every investment decision should reflect your needs and requirements and should be as per your desired preferences. For example, whether you are willing to invest in safe products which give steady returns or if you want to take slightly higher risk and invest in products which may give you higher returns. Every investment comes with the risk of change in the inherent value of that investment. For example, investment in shares of automobile industry will attract the risk attached with the automobile industry (sales may go up or down or one brand of cars may be sold more than other brand, etc.)
  Once you have decided your goals and identified your risk appetite, please decide the amount you want to invest and the time period over which you want to invest. The ability to take risk differs from investor to investor and could be dependent on the goals as well as the age of the investor.
  The investors should also be well informed about their rights, responsibilities, Do’s and Don’ts of investing and these documents are available on the website/s of SEBI and stock exchanges and depositories. The Do’s and Don’ts of investing in securities market are also attached in the Annexure-I of this booklet. In addition to the same, the rights and obligations of investors are attached in the Annexure-II of this booklet.
  Investors should make informed decision before investing in the shares of a company. They should carefully read all the information related to the company such as disclosures related to the company, its promoters, the project details, financial details, etc. These details can be found on the websites of the stock exchanges.
  For investing in securities market, investors may also approach any SEBI registered Investment Adviser. A list of SEBI registered Investment Adviser(s) may be found on the following link: https://www.sebi.gov.in.

Chapter 5: Key Risks in Investing in Securities Market

• Market risk or Systematic Risk: It refers to the risk faced by investments due to factors affecting the overall performance of securities and general economy of the country.
• Unsystematic Risk: Unsystematic risk can be described as the risk attached with a particular company or industry.
• Inflation risk: Inflation risk is also called as purchasing power risk. It is defined as the chance that the cash flows from an investment would lose their value in future because of a decline in its purchasing power due to inflation.
• Liquidity risk: Liquidity risk arises when an investment can’t be bought or sold quickly enough.
• Business Risk: It refers to the risk that a business of a company might be affected or may stop its operations due to any unfavorable operational, market or financial situation.
• Volatility Risk: Volatility risk arises as the Companies’ stock prices may fluctuate over time.
• Currency Risk: It refers to the potential risk of loss from fluctuating foreign exchange rates that an investor may face when he has invested in foreign currency or made foreign-currency-traded investments.

Chapter 6: How to Mitigate the Risks?

The investors can try to mitigate risk by different means. Asset allocation is one strategy through which an investor can mitigate risk by diversifying their investments into various companies and asset classes.

Chapter 7: Account Opening Process

• Pre-requisites for Investing in Securities Market
  In order to invest in equity shares, an investor needs to open three accounts namely:
  1. Bank account
  2. Trading account or broking account with a SEBI registered stock broker of a recognized Stock Exchange. This account is used to buy and sell securities on the Stock Exchanges. To open a trading account, you have to fill ACCOUNT OPENING FORM and submit the signed Know Your Client (KYC) documents.
  3. Demat Account
• Take the following precautions while filling up the account opening form:
  • You should put your signatures while indicating preferences for trading in different exchanges.
  • You should carefully note all the charges/ fees/ brokerage that are applicable on your accounts and keep a record of the same.
  • Identify the segments in which you would like to trade (cash, F&O, Currency Derivative or any other segments). Trading in derivatives requires understanding of the derivative products.
  • In case you want to avail additional facilities namely Running Account facility, execution of Power of Attorney, etc., you will have to give specific authorization to the stock broker in order to avoid any dispute in the future.
  • You should provide your email address and mobile number in the account opening form. The broker and stock exchanges use these contact details to keep you updated on the trading updates that are important for you to know.
  • You should always demand and take a copy of the account opening form for your records.

Chapter 8: Procedure for opening an account: Know Your Client (KYC) process

• While opening of Demat/ Trading/ Bank Account, you have to submit Know Your Client (KYC) documents.
• KYC is mandatory under the Prevention of Money Laundering Act, 2002 and Rules framed thereunder. While opening of Demat / Trading/ Bank account, client have to submit Officially Valid Documents (OVDs) as proof of identity and proof of address and these documents form a part of the KYC requirements.
• An investor can establish his identity and address through relevant supporting prescribed documents such as PAN card / UIDAI-Aadhar/ Passport/ Voter ID card/ Driving license, etc.
• Once the KYC form is submitted, a unique KYC Identification Number (KIN) is generated and communicated to the client by SMS/ Email. KYC is a one-time process and is valid across all the intermediaries. You need not undergo the same process again while opening an account with another intermediary in securities market.
• e-KYC
  Investors can complete KYC process using e-KYC facility using UIDAI - Aadhaar/ Digi Locker.
  • Fill the account opening details/ form online in the Stock Broker’s website.
  • Submit scanned images of the mandatory documents/POA (Proof of address) /
  • POI(Proof of Identity).
  • Complete IPV (In Person Verification) process over video call.
  • Digitally Sign the document.
  • Account gets activated.

Chapter 9: Basic Services Demat Account (BSDA)

Basic Services Demat Account (BSDA):

• Basic Services Demat Account is the demat account facility which is provided to individuals who have only one demat account (across all depositories) and the value of the holdings doesn’t exceed Rs.2 lakhs each for non-debt securities (like equities) and debt securities, at any point of time.
• The Annual Maintenance charges (AMC) structure for BSDA is as mentioned below:

  Security Type	Slabs Value of Holdings	Charges
  For Non-Debt Securities	Up to Rs. 50,000/-	No AMC
  For Non-Debt Securities	Rs. 50,001 to Rs. 2,00,000/-	Up to Rs. 100/-
  For Debt Securities	Up to Rs. 1,00,000/-	No AMC
  For Debt Securities	Rs. 1,00,001 to Rs. 2,00,000/-	Up to Rs. 100/-

• A combination of the above mentioned three accounts (i.e. a bank account, a demat account and a trading account) is often referred to as the “3-in-1” account.
• The investors may either open the above mentioned three accounts separately with different depository participant/ broker/ institution or they may also approach a single depository participant/ broker / institution who provides the facility of opening of all the three accounts together.

Chapter 10: Power of Attorney

• Power of Attorney is a document of high importance as it is capable of giving your rights and access over your accounts and money to somebody else. In securities market, a client may execute the power of attorney (PoA) in favour of the stock broker and/or depository participant to authorize them to operate his demat and bank account to facilitate the delivery of shares and pay-in/ pay-out of funds.
• A specific Power of Attorney (PoA), as per the guidelines of SEBI, may be executed by the client in favour of the stock broker / depository participant.
• As per SEBI guidelines, it is not mandatory to sign and issue a power of attorney. Signing of Power of Attorney is purely optional and voluntary – if you find that signing power of attorney is useful for you, you may sign it. You can also revoke the Power of Attorney at any point of time.
• In case any transfer of shares is done by your stock broker in your account, for any reason other than those that are authorized by you under POA, you should immediately take up the matter with your stock broker. In case no response is received from them or you are not satisfied with the response, you should immediately take up the matter with the Depository/Exchange.

Chapter 11: Nomination

• Nomination is a facility that enables an individual investor to nominate a person, who can claim the securities held by him/ her in their demat accounts or the redemption proceeds thereof (in respect of mutual fund units) in the event of death of the investor.

Chapter 12: How do I invest in Securities Market?

Investment through Primary Market

• When an issuer company issues shares to the general public through public offer, you can apply for the shares by submitting the necessary application form. For issuance of securities, the issuer company has to follow certain rules, regulations, etc. Shares will be allotted as per the prescribed Rules & regulations. The shares allotted will be credited in the applicant’s Demat Account maintained with DP.
• Allotment of securities will be made in demat form and investors have a choice of subsequently getting them converted to physical shares. On closure of public issue, within six (06) working days of closure of the issue, shares allotted are listed on the recognized Stock Exchanges where further trading of the shares takes place.
• Please Note:
  As per latest SEBI guidelines, you can opt to hold securities such as share certificates in physical form or Demat form. However, with effect from April 01, 2019, securities can be transferred only if the same are held in Demat form. It is therefore advisable to open a demat account and hold all the securities in demat form. This rule is not applicable if the shares are to be transmitted to their legal heirs by way of inheritance or succession.

Chapter 13: Process of investing in Primary Market

• You can buy shares of a Company directly from the company during the public offer/ issue by filling up an application form and making payment during the period when the public issue is open for issue to the public.
• In the application form, you have to fill your details such as name, address, number of shares applied for, bank account details, demat account in which shares are to be credited, etc.
• Investors who are interested in investing in that IPO may then apply for the same through Application Supported by Blocked Amount (ASBA) and also by using Unified Payment Interface (UPI) as a payment mechanism (mentioned later in the booklet in detail).
• Investors will then have to fill up the application form and apply for allocation of shares to them as per their preference. The money for the shares for which the investor has applied, then gets blocked in the bank account of the investor.
• The entire process of listing of an IPO takes six (06) working days after the closure of the issue. The investors to whom the shares are issued, get the shares in their demat account and the funds for the same get debited from their bank account.
• In case the shares aren’t allocated, the funds blocked in the applicant investor’s bank account gets released for further utilization.

Chapter 14: Application Supported by Blocked Amount (ASBA)

• Investors can now apply for securities in IPOs through ASBA. In ASBA, money to the extent of price of the shares for which the investor has applied, is blocked, but it remains in your account till allotment.
• Upon allotment of shares, etc., requisite amount is debited from your account. Blocked amount continues to earn interest and there is no requirement of refund in case of non-allotment.
• Thus, instead of actually sending a cheque for applying in IPOs you can now apply through Application Supported by Blocked Amount (ASBA) which is facilitated by certain branches of collecting banks.
• Investors can now invest in IPOs by using Unified Payment Interface (UPI) as a payment mechanism.

Chapter 15: Investment through Secondary Market

• Once you have opened a trading/ broking account with a stock broker of a recognized Stock Exchange, you can buy or sell shares of a company through the stock broker at the stock exchange.
• You can place the order for purchase or sale of securities through your broker using the online trading account by visiting broker’s website, mobile trading app of broker, through the phone using Call & Trade facility, by physically visiting the broker’s office or through Authorized Persons of stock brokers.

Modes of placement of Order:

1. Mobile Trading App
2. Place orders on Phone
3. Online Trading App
4. Physical Order with Broker

Chapter 16: Trading days and Trading & Settlement Cycle

• Trading on the Stock Exchanges takes place on all days of the week (except Saturdays, Sundays and holidays declared by the Stock Exchanges).
• In case of purchase of shares, you are required to make payment to the bank account of your stock broker prior to the pay-in day for the relevant settlement (preferably immediately after receiving confirmation from the broker that your purchase order is successfully executed).
• Similarly, in case of sale of shares, you are required to deliver the shares to the demat account of broker prior to the pay-in day for the relevant settlement.

What is the pay-in day and pay-out day?

• Pay-in day is the day when the brokers shall make payment or delivery of securities to the clearing corporation of the exchange. Pay-out day is the day when the clearing corporation makes payment or delivery of securities to the broker. Settlement cycle is on a T+2 rolling settlement basis w.e.f. April 01, 2003 (where T stands for the trade day). For example, the trades executed on a Monday are typically settled on the following Wednesday (considering 2 working days from the trade day). Stock Exchanges ensure that the pay-in and pay-out of funds and securities are carried out on T+2 day.
• Pay-in of funds/ securities refers to the transfer of funds/ securities from brokers account to the exchange’s account.
• Pay-out: Pay-out of funds/securities refers to transfer of funds/securities from Exchange account to Broker account.

Chapter 17: Contract Note

• Contract Note is an evidence of the trade done by the stock broker. It is a legal document which contains details of the transaction such as securities bought/ sold, traded price, time of trade, brokerage, etc.
• Contract Notes can be issued in physical form or in electronic form. In case you opt for an electronic contract note, a specific authorization needs to be given to the stock broker along with the details of your email ID. Such electronic contract notes shall be digitally signed, encrypted and can’t be tampered. Such contract notes should be preserved by the investor for future references. These have huge importance, especially if any dispute arises later.

Record of client order:

1. Physical record written and signed by client,
2. Telephone recording,
3. Email from authorized email ID,
4. Log for internet transactions,
5. Record of messages through mobile phones,
6. Any other legally verifiable record.

Chapter 18: SMS and Email Alerts to Investors

• Investors can opt for SMS and email alerts facility through which they shall receive free of cost SMS and email alerts for any trading/ transaction activity that would happen in their trading and demat account.
• In order to avail this facility, investors should ensure that their mobile numbers and email IDs are shared and regularly updated with their stock brokers and depository participants.

Chapter 19: Running Account Authorization

• In normal course, settlement of a transaction (buy/sell) by a broker has to be done within 24 hours of pay-out of funds / securities. However, if you regularly trade in shares on the stock exchange, you may specifically authorize the stock broker to maintain a Running Account whereby your shares or funds, as the case may be, would be kept in a separate account with the stock broker.
• Running Account facilitates ease of carrying out transactions in securities whereby the shares or funds kept in the running account with the stock broker are adjusted towards the settlement obligations of the future transactions.
• Running Account authorization is voluntary and useful for the investors who frequently buy and sell securities. Running Account authorization shall be dated and revocable at any time. The actual settlement of the funds and securities shall be done by the broker, at least once in 30 days / 90 days as opted by the investors (client).

Chapter 20: Trade Verification

• Trade Verification module on the websites of exchanges is a very simple tool to verify the trades executed in your account. The data on the trades would be available on T+1 day.

Chapter 21: What is Margin money?

• The margin money is prescribed by exchanges / Clearing Corporations and collected from investors by brokers before executing a trade on their behalf.
• The margin money is collected to mitigate the risk of non- payment of funds for buy trades or non-delivery of securities for sell trades by an investor.
• Margin can be provided in the form of cash or securities or cash equivalent i.e. fixed deposits, bank guarantee, units of mutual funds, government securities, and treasury bills in demat form etc.
• With effect from September 01, 2020 investors (client) can provide margin in the form of “securities” only by pledging the securities in favour of specially designated demat account of stock broker.
• Early Pay-in: In case investor wants to avail exemption from payment of margin, investor may use “early pay-in” facility where payment of funds / delivery of shares shall be made to the broker before the pay-in date or as per time/date specified by the broker.

Chapter 22: Statement of Account from Stock Broker and Depository Participants

• You are entitled to receive reports such as monthly report, quarterly report, etc., free of cost, on a regular basis from brokers and depositories regarding the transactions done by you.
• Depositories and Stock Exchanges, will inform you on your registered mobile number or email id regarding the transactions in your accounts.
• If you do not understand the message, clarify the matter with the Bank, Depository, Depository Participant, your Stock Exchange, broker, or call SEBI’s toll free helpline for guidance. Always keep your contact details updated with the intermediaries so that you receive alerts and account statements on a timely basis. In case you do not receive such a report, you must raise the matter with relevant entities.

Chapter 23: Consolidated Account Statement (CAS)

• Consolidated Account Statement (CAS) is a single/ combined account statement which shows the details of transactions made by an investor during a month across all Mutual Funds and also other securities held in the demat account(s). In order to get your CAS, you should update your PAN card number with your stock broker/ depository participant.

Chapter 24: Derivatives Market

• Derivatives refers to the financial instruments which derive their value from an underlying security or financial instrument. The underlying products can be equity, commodity, currency, etc.
• Derivatives are primarily used by investors for hedging their position and minimizing the price risk.
• Hedging is basically a risk management strategy in which the investors invest in the instruments strategically to offset the risk of any adverse price movements.
• The players in derivatives may be hedgers, speculators and arbitrageurs and different roles may be played in different situations.
• Futures and Options, or commonly called as F&O segment, are an essential part of the derivatives segment of the securities market. Futures and options are two different types of derivatives.
• Futures contract
  A futures contract is a standardized exchange traded contract to buy or sell an underlying product at a predetermined price on a future date.
• Options Contract
  An options contract refers to the financial instrument which gives the buyer of the option the right but not the obligation to exercise the option at a pre-determined date and price.
  A call option gives one the right to buy the underlying security and
  a put option gives one the right to sell the underlying security.
  Investors are charged a premium when they buy an options contract.

Chapter 25: Mutual Funds

• A mutual fund pools in money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments.
• All mutual funds are required to be registered with SEBI before they launch any scheme.
• Mutual funds can also be segregated in different categories based on the objectives of the mutual fund scheme.
• The schemes are designed to keep in mind the needs of various types of investors - risk averse investors (basically a conservative Investor who does not want to take high risk), moderate investors (investors who can take some amount of risk) and aggressive investors (investors who are willing to take higher risk in search of higher returns).

Categorization of mutual funds: Mutual funds are now broadly categorized into five types of schemes mentioned as below:

1. Equity Schemes: Mutual funds which principally invest in stocks/ equities.
2. Debt Schemes: Mutual funds which principally invest in fixed income securities like bonds and treasury bills.
3. Hybrid Schemes: Mutual funds which invest in two or more asset classes such as equities, fixed income, cash, etc.
4. Solution Oriented Schemes: Mutual fund schemes which make their investments as per the goals of individuals like retirement and child planning, etc.
5. Other Schemes: All other schemes like Index Funds, Sectoral funds, etc.

Chapter 26: How to invest in Mutual Funds?

• Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms.
• While investing in mutual funds, the investors will first have to complete their KYC process. An investor can either do a physical KYC at the branch of the fund or at the registrar office. Alternatively, an individual can also do e-KYC using his Aadhaar card and his PAN card number.
• Once the KYC process is complete, the investor then has to decide upon the scheme that he wants to invest in. This decision is based on the risk appetite and financial goals. When the investor has shortlisted the mutual fund scheme, he will have to fill up the necessary application forms for investing in those respective schemes.
• Forms can be deposited with mutual funds through the agents and distributors who provide such services or directly with the MF. While filling up the application form, an investor must mention clearly his name, address, number of units applied for and such other information as required in the application form.
• He must give his bank account number so as to avoid any fraudulent encashment of any cheque/ draft issued by the mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the address, bank account number, etc. at a later date should be informed to the mutual fund immediately.
• In order to further ease out the investment procedure for the investors, Mutual Funds offer the following options in addition to the lumpsum investment:
  • Systematic Investment Plans: Facility to invest fixed amounts in a particular scheme at regular intervals.
  • Systematic Withdrawal Plans: Facility to withdraw fixed amounts from a particular scheme at regular intervals.
  • Systematic Transfer Plans: Facility to transfer funds from one scheme to another at regular intervals.

Chapter 27: Product Labelling of Mutual Funds

• As per SEBI guidelines, mutual fund schemes are to be labelled according to the level of risk involved and the same is to be depicted on the risk-o-meter. The risk-o-meter with different labels of risk is depicted as below:
  1. Low: Principal at low risk
  2. Low to Moderate: Principal at moderately low risk
  3. Moderate: Principal at moderate risk
  4. Moderately High: Principal at moderately high risk
  5. High: Principal at high risk
  6. Very High: Principal at very high risk
• Risk-o-meter is evaluated on a monthly basis.
• Mutual Funds/ AMCs shall disclose the Risk-o-meter along with portfolio disclosure for all their schemes on their respective websites and on AMFI website within 10 days from close of each month.
• Investors should not be carried away by commission/gifts given by agents/distributors for investing in a particular scheme. On the other hand they must consider the track record of the mutual fund and should take objective and informed decisions.

Chpter 28: Exchange Traded Funds (ETF)

• An Exchange traded fund (ETF) is a security that tracks an index, commodity, bonds, or a basket of assets like an index fund and is traded in the securities market.
• In simple words, ETFs are funds that track indices such as Sensex, Nifty, etc. When you buy units of an ETF, you actually buy units of a portfolio that tracks the performance of the index. ETFs just reflect the performance of the index they track.
• Unlike regular mutual funds, ETFs trade like a common stock on the stock exchange and the price of an ETF changes as per the trading in the market takes place.
• The trading value of an ETF depends on the net asset value of the underlying asstes that it represents. ETFs, generally, have higher daily liquidity and lower fees than mutual fund schemes.

Chapter 29: SEBI Complaints Redress System (SCORES)

• In case of any complaint related to the securities market, you may first approach the concerned intermediary or company.
• The concerned intermediary or company shall facilitate your complaint redressal.
• In case the grievance remains unresolved, you may approach the concerned Stock Exchange or Depository against your stock broker or listed company.
• If you are still not satisfied with the redressal, you may lodge a complaint with SEBI through a web based centralized grievance redressal called SCORES (SEBI Complaints Redress System). The address of the SCORES portal is http://scores.gov.in.
• Investors can also lodge their complaints using the SCORES mobile App while is available on Android and iOS platforms.
• you may call SEBI Toll-Free helpline numbers - 1800 22 7575, 1800 266 7575.
• SCORES enables you to lodge your complaint, follow up and track the status of redressal of the complaint(s) online, at any time and from anywhere.

Chapter 30: Investor Services Cell of Stock Exchange

• Investor Services Cells cater to the needs of investors by resolving the queries of investors, resolution of investor complaints and by providing the Arbitration mechanism for quasi-judicial settlement of disputes.
• The Stock Exchanges facilitate the redressal of the grievances of the investors through Investor Grievance Resolution Panel (IGRP) at NSE and Investor Grievance Redressal Committee (IGRC) at BSE Ltd and MSE.
• In order to facilitate the convenience to the investors in redressing their grievances, these Exchanges have their Investor Service Centers at the various regions spread across the country. The detailed lists of these centers are available on the websites of these Exchanges.

Chapter 31: Arbitration Mechanism

• Arbitration refers to a quasi-judicial process of settlement of disputes between Stock Broker and investor.
• When one of the parties feels that the complaint has not been resolved satisfactorily either by the other party or through the complaint resolution process of the Exchange, the parties may choose the route of arbitration process available with Stock Exchange.
• For further information regarding the list of investor service centres, process of arbitration and fees and charges involved, you may visit the websites of respective stock exchanges.

Information about Unclaimed Shares/ Unpaid Dividend Amount - IEPF

• Investor Education and Protection Fund (IEPF) has been established under Section 125 of Companies Act, 2013 and for promotion of investors’ awareness and protection of the interests of investors. IEPF Authority is a statutory body, constituted under the provisions of Companies Act, 2013.
• All dividends and Shares which remain unpaid or unclaimed for seven consecutive years, are transferred by respective companies to Investor Education and Protection Fund Authority (IEPF). Investor or his representatives need to submit their claim to IEPF Authority to receive unpaid dividend and/or unclaimed shares.

Chapter 35: Unified Payment Interface (UPI) in ASBA

• Investors can now invest in IPOs by using Unified Payment Interface (UPI) as a payment mechanism. UPI is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund transfers & merchant payments into one single mechanism.
• How to invest using UPI:
  The process of investing in IPO through UPI involves 3 major steps as mentioned below:
  1. Bidding through UPI: Investors should fill the bid details in the application form along with their UPI ID. The applications may be submitted with the intermediary who will upload the bid details along with UPI ID in the stock exchange bidding platform. The stock exchange will electronically share the bid details, along with investors UPI ID with the Escrow/ Sponsor bank appointed by the issuer company.
  2. Blocking of funds: The Escrow/ sponsor bank will request the investor to authorize blocking of funds equivalent to applicant amount and subsequent debit of funds in case of allotment. Upon validation of block request by the investor, the funds would then be blocked in the investors account and the investors will be informed of the same.
  3. Payment for shares post allocation process: Once the shares are allocated, the process of debiting of funds from investors account would take place and excess money would be unblocked. This process would take place on the basis of the authorization given by investor using UPI PIN at the time of blocking of funds.

Last updated on: February 15, 2025