Money and financial system

Unit 1: -

 Definition of money –

Traditional definition Modern definition

Money is regarded as any object which is Money includes not only metallic coins and
generally acceptable as a means of paper notes. But also other things which
payment in transacting an exchange of act as medium of exchange.
goods and services.

 Functions-

Money is often defined in terms of the three functions or services that it provides.
Money serves as a medium of exchange, as a store of value, and as a unit of
account (https://www.cliffsnotes.com/study-guides/economics/money-and-
banking/functions-of-money)

 Characteristics of money: -

1. Money is the most liquid form of asset

2. General acceptability
3. Money is an active element of economy
4. Money is a means not an end
5. Regulation and control by state

 Development of money: -

GOLD, SILER AND COINS AND

BILLS OF
COPPER AS NOTES AS A
BARTER SYSTEM EXCHANGE AND
MEANS OF MEANS OF
PLASTIC MONEY
EXCHANGE EXCHANGE
  Significance- Money is significant for both types of economies capitalistic and
socialistic; though more significant for the former.

a. Significance of Money for a Capitalistic Economy:

Money occupies a pivotal role in a capitalistic economy. In its absence, the economic
life of the capitalistic economy may collapse like a pack of cards.

Some of the points highlighting the significance of money for a capitalistic

society are as under:

(i) Forces of demand and supply interacting on each other develop a system of prices,
known as the price-mechanisms; which mechanisms are built on the basis of the
existence of money. Price mechanism guides producers as to what people want and
how much they what of it. Accordingly, producers decide what shall be produced and in
what quantities; and plan to make best use of their limited productive power.

(ii) Money facilitates exercise of free choice of consumers. Given amount of money
income and the price structure would allow them to buy their most preferred goods for
money.

(iii) Money being a medium of exchange, according to A.C.L. Day, helps in the
distribution of National Income. Workers, government employees, traders, shareholders
etc. all receive their income in form of money.

(iv) Money being a convenient way to lay claims on goods and services is preferred by
people to hold their wealth in the form of money.

(v) Money is an essential condition for the development of an organized money market;
and the economic development of a capitalist society, beyond doubt, depends on
money market.

b. Significance of Money for a Socialist Economy:

Socialist thinkers wanted that only a limited role be assigned to money in a socialist
economy. Lenin himself has pointed out that a socialist economy could not be a
moneyless society.

Some of the points highlighting the significance of money for a socialist economy
are as under:
(i)Economic planning is an essential feature of socialism. Money and price mechanism,
help the State (i.e. Central Planning Authority) in the allocation of resources.

(ii)The value categories viz. price, production cost, wages, profits etc. are all expressed,
in terms of money; because money functions as a means of economic accounting.

(iii)Money serves as a medium of exchange. Farmers, workers, teachers, artists and all
others receive their wages, in form of money. Money is also used for paying interest on
State loans and taxes to the government.

Today, whether it is the U.S.S.R. or the People’s Republic of China or some other
socialist country; one can see money performing a number of functions.

(http://www.yourarticlelibrary.com/economics/money/essay-o-money-definition-function-
significance-and-defects-economics/69631)

 Near money- assets which can easily be converted into cash, such as bills of
exchange. It include following items: -
1. Time deposits and saving deposits with commercial bank and other
financial institutions
2. Bills of exchange
3. Bankers acceptances
4. Treasury bills
5. Saving bonds and certificates
6. Travelers cheque
7. Postal saving deposits
8. Saving in units of units trust
 9. Shares of joint stock companies
10. Negotiable credit instruments

 Functions of money: -

functions of
money

primary secondary contingent

functions functions functions

standard of equalisation of distribution of increases

medium of measure of basis of credit
deferred store of value marginal national productivity of
exchange value system
payment utility income capital

 Supply of money- The money supply (or money stock) is the total value of
money available in an economyat a specific time. There are several ways to
define "money", but standard measures usually include currency in
circulation and demand deposits (depositors' easily accessed assets on the
books of financial institutions). Each country’s central bank may use its own
definitions of what constitutes money for its purposes.

Money supply data is recorded and published, usually by the government or the central
bank of the country. Public and private sector analysts monitor changes in the money
supply because of the belief that it affects the price level, inflation, the exchange
rate and the business cycle.

Measures of money stock in india- The supply of money means the total stock of money
(paper notes, coins and demand deposits of bank) in circulation which is held by the
public at any particular point of time.

Briefly money supply is the stock of money in circulation on a specific day. Thus two
components of money supply are
(i) currency (Paper notes and coins)

(ii) Demand deposits of commercial banks.

Again it needs to be noted that (like difference between stock and supply of a
commodity) total stock of money is different from total supply of money.

Supply of money is only that part of total stock of money which is held by the public at a
particular point of time. In other words, money held by its users (and not producers) in
spendable form at a point of time is termed as money supply.

ADVERTISEMENTS:

The stock of money held by government and the banking system are not included
because they are suppliers or producers of money and cash balances held by them are
not in actual circulation. In short, money supply includes currency held by public and net
demand deposits in banks.

Sources of Money Supply:

(i) Government (which Issues one-rupee notes and all other coins)

(ii) RBI (which issues paper currency)

ADVERTISEMENTS:

(iii) commercial banks (which create credit on the basis of demand deposits).

(b) Alternative measures of Money Supply (money stock):

In India Reserve Bank of India uses four alternative measures of money supply called
M1, M2, M3 and M4. Among these measures M1 is the most commonly used measure of
money supply because its components are regarded most liquid assets. Each measure
is briefly explained below.
(i) M1 = C + DD + OD. Here C denotes currency (paper notes and coins) held by public,
DD stands for demand deposits in banks and OD stands for other deposits in RBI.
Demand deposits are deposits which can be withdrawn at any time by the account
holders. Current account deposits are included in demand deposits.
But savings account deposits are not included in DD because certain conditions are
imposed on the amount of withdrawals and number of withdrawals. OD stands for other
deposits with the RBI which includes demand deposits of public financial institutions,
demand deposits of foreign central banks and international financial institutions like IMF,
World Bank, etc.

(ii) M2 = M1 (detailed above) + saving deposits with Post Office Saving Banks
(ii) M3= M1 + Net Time-deposits of Banks
(iii) M4 = M3 + Total deposits with Post Office Saving Organisation (excluding NSC)
In fact, a great deal of debate is still going on as to what constitutes money supply.
Savings deposits of post offices are not a part of money supply because they do not
serve as medium of exchange due to lack of cheque facility. Similarly, fixed deposits in
commercial banks are not counted as money. Therefore, M1 and M2 may be treated as
measures of narrow money whereas M3 and M4 as measures of broad money.
In practice, M1 is widely used as measure of money supply which is also called
aggregate monetary resources of the society. All the above four measures represent
different degrees of liquidity, with M4 being the most liquid and M4 is being the least
liquid. It may be noted that liquidity means ability to convert an asset into money quickly
and without loss of value.

 new monetary equation-

RBI working group on money supply has now redefined its parameters for
measuring money supply, saving bank deposits of post office (M2) and also all
deposits with post office saving bank (M4) have now been dropped. Accordingly,
there are now only three monetary aggregates, M1, M2, M3.
M1= currency (coins+notes) + demand deposits + other deposits with RBI
M2= M1+ time liabilities portion of saving deposits with bank + certificates of
deposits (cds) issued by bank + term deposits, maturing within a year {excluding
FCNR(B) deposits.
 FCNR(B)= foreign currency non residence bank deposits accounts.
M3= m2+ term deposits with bank with maturity of over one year + call/term
borrowing of the banking system
Monetary aggregates in india
Original aggregates Revised Aggregates Liquidity Aggregates
M1= currency+ demand M1= currency+ demand L1= new m3 + all
deposites+ other deposits+ other deposits with post office
deposits deposits(unchanged) saving bank (excluding
M2= m1+ post office M2= m1+ time+ liability NSCs)
saving bank deposits portion of saving deposits L2= l1+ term deposits
M3= m1+ time deposits with banks+ CDs issued with term lending
of bank by bank+ term deposits institutions + term
M4= m3+ total post office maturing within one year borrowing of FIS + CDs
deposits [ excluding FCNR (B) issued by FIS
deposits] L3= L2+ public deposits
M3= m2+ term deposits of NBFCs
over one year maturity
[excluding FCNR (B)
deposits] + call/term
borrowing of banks
M4= abolished

 why we demand for money-

1. to help in exchange of other goods or it acts as a medium of exchange
2. to be help as an asset (it serves as a store of value)

(we can say that money helps us to satisfy our daily wants and needs directly)

 value of money by classical approach – it facilitates smooth transactions of

goods and services in the economy. Thus, people demand money fir transactions
purposes. The demand for money, at any time, thus depends upon the supply of
goods and services available.
  value of money modern approach – accourding to this approach preference is
given to liquidity of money. 3 motives are used to mentain liquidity of money.
1. Transactions motive
2. Precautionary motive
3. Speculative motive

Summary: - money supply refers to the total stock of domestic means of payment which
is held by the public. The money supply in a country means the total stock of money in
circulation. It is a stock as well as a flow concept. Money is demand for two reasins first,
to help in the exchange of other goods and second, to be help as an asset. There are
two distinct concepts of the demand for money, the medium of exchange concept and
store of value concept. According to Lord Keynes there are three motives behind
liquidity preference viz., transactions motive, precautionary motive and speculative
motive. Money being a medium of exchange the primary demand for money balances
arises directly out of its use for carrying on ordinary trade and business affairs of the
economy. Apart from transactions purposes, people generally desire to hold some
additional money balances against unforeseen contingencies. The second reason for
the speculative demand for money represents the demand for cash for being invested
rapidly as and when attractive opportunities for monetary investments appear.

 The transactions approach: fisherian version- Fisher's transactions

approach lays stress on the medium of exchange function of money, that is,
according to its people want money to use it as a means of payment for buying
goods and services. On the other hand, cash balance approach emphasizes the
store-of-value function of money.

Total value of all items transacted

MV = PT
or
P = MV/T
Where,
M is the quantity of money
V is the transaction velocity
 P is the price level.
T is the total goods and services transacted.
The equation of exchange is an identity equation, i.e., MV is identically equal to
PT (or MV = PT). It means that in the ex-post or factual sense, the equation must
always be true. The equation states the fact that the actual total value of all
money expenditures (MV) always equals the actual total value of all items sold
(PT).
What is spent for purchases (MV) and what is received for sale (PT) are always
equal; what someone spends must be received by someone. In this sense, the
equation of exchange is not a theory but rather a truism.

 The cash balance approach: Cambridge version- The cash balance

approach relates the process of determination of the value of money to cash the
subjective valuations of individuals who are the real force behind all economic
activities.
 Marshalls equation- M=KPY
M-stands for the quantity of money (currency+ demand deposits)
P- stands for price level
y- denotes aggregate real income, and
k- is the fraction of the real income which people desire to hold, in money
from, as ready purchasing power.
 Pigou’s equation- P=KR/M
P- purchasing power of money or value of money.
R= real income expressed in terms of any particular commodity.
K= real income in terms of cash balance
M= the total money stock or total cash held by a community

 Robertsons equation- P=M/KT

P= price level
M= supply of money
T= total amount of goods and services during a year
 K= cash hold by people

 Keynes equation- P=N/K

N= total supply of money in circulation
P= price level
K= real balance or cash

 Comparison between fishers and Cambridge approach-

Similarities between the Two Approaches:

The similarities between the Fisherian and the Cambridge approaches are
discussed below:

1. Similar Equations:
Robertson’s cash-balance equation, P = M/KT is quite similar to that given by Fisher; P
= MV/T. Both the equations use the same symbols with same meanings. The only
difference lies in V and K which are, in fact, reciprocal to each other; V refers to rate of
spending and K refers to the extent of holding or not spending.

It means when people want to hold more money (higher the K), they want to spend less
or the velocity of circulation of money will be less (lower the V). Thus, by substituting
1/V for K and 1/K for V, the two equations can be reconciled.
2. Same Conclusions:
Both the approaches lead to the same conclusions, i.e., the price level or the value of
money depends upon the money supply. In other words, there is direct proportionate
relationship between the money supply and the price level and inverse proportionate
relationship between money supply and the value of money. If the money supply is
doubled, the price level is also doubled and the value of money is halved.
3. Same Phenomenon of Money:
MV + M’V’ of Fisher’s equation, M of Robertson’s and Pigou’s equation and n of
Keynes’ equation, all refer to the same thing, i.e., the total supply of money.
4. V and K-Two Sides of the Same Phenomenon:
Fisherian and Cambridge approaches are not fundamentally different from each other
because they represent two sides of the same phenomenon. The Fisherian approach
emphasises money as a stock, while the Cambridge approach stresses money as flow.

Dissimilarities between the Two Approaches:

In spite of similar conclusions and implications of the two approaches, they have some
notable differences. As Hansen has pointed out- “The Marshallian version of the
quantity theory, M = KY, represents a fundamentally new approach to the problem of
money and prices. It is not true; as is often alleged, that the cash-balance equation is
merely the quantity theory in new algebraic dress. To assert this is to miss entirely the
significance of K in the Marshallian equation.”
Important dissimilarities between the two approaches are discussed below:
1. Relative Stress of Supply and Demand for Money:
Fisher’s approach stresses the supply of money, whereas, the Cambridge approach
lays more emphasis on the demand for money to hold cash.
2. Definition of Money:
The two approaches use different definitions of money. The Fisherian approach
emphasises the medium of exchange function of money, whereas the Cambridge
approach stresses the store of value function of money.
3. Flow and Stock Concepts:
The Fisherian approach regards money as a flow concept; money is considered in
terms of flow of money expenditures. The Cambridge version regards money as a stock
concept; money supply refers to a given stock at a particular point of time.
4. Transaction and Income Velocities:
Fisherian approach emphasises the importance of the transaction velocity of circulation
(i.e., V). The Cambridge Version, on the contrary, lays stress on the income velocity of
the part of income which is held in the cash balance (i.e., K).
5. Nature of P:
In both approaches, the price level (P) is not used identically. In Fisher’s version, P is
the average price level of all goods. On the contrary, in Cambridge version. P refers to
the price of consumer goods.
ADVERTISEMENTS:

6. Factors Affecting V and K:

Fisher is concerned about the institutional and technological factors governing how fast
individuals can spend their money (i.e., V). The Cambridge School, on the other hand,
is concerned about the economic factors determining what portion of their wealth the
public desires to hold in the form of money (i.e., K).
7. Relationship between M and P:
The Fisherian approach maintains that any change in the money supply produces
proportional changes in the price level. This is because Fisher believes that both
velocity and real income are in the long run independent of each other and of supply of
money.
In the Cambridge approach, the price level may change by more or less than the money
supply; it depends upon what happens to the stock of non-monetary assets and their
expected yields on which the Cambridge economists believed the desired cash
balances depend.
8. Different Approaches to Monetary Theory:
Both Fisher and Cambridge School led to the development of two different approaches
to the monetary theory. Fisher’s approach has given rise to an inventory theory of
money holding largely for transactions purposes. On the other hand, the Cambridge
approach has been developed into portfolio, or capital theoretic approach to monetary
demand.
Superiority of Cash Balance Approach:
The Cambridge version is superior to the Fisherian version on the following
grounds:
1. Realistic Theory:
The Fisherian approach is mechanical in the sense that it maintains a mechanical, i.e.,
direct and proportional relationship between the supply of money and the price level.
The Cambridge approach, on the contrary, provides a realistic analysis. By emphasising
K, it introduced the role of human motives in the determination of the price level.
2. Complete Theory:
Fisher’s approach is one-sided because it considers quantity of money to be the only
determinant of the value of money or the price level. In the Cambridge approach, both
the demand for and the supply of money are recognised as real determinants of the
value of money.
3. Broader Theory:
The Cambridge approach is broader and comprehensive because it takes into account
income level as well as changes in it as important determinant of the price level. The
Fisherian approach ignored income level and makes the price level dependent upon the
quantity of money and the total number of transactions.
4. More Useful:
According to Kurihara, the Cambridge equation, P = M/KT, is analytically more useful
than the Fisherian equation, P = MV/T, in explaining money value. It is easier to know
the amount of cash balances of an individual than to know his expenditure on various
types of transactions.
5. Causal Process:
According to Fisher, changes in the price level are caused by the changes in the
quantity of money. But according to the Cambridge economists, the price level may
change even without a change in the quantity of money, if K changes. Given the
quantity of money, a desire to keep less money balances will raise the price level and
vice versa.
6. Explanation of Cyclical Fluctuations:
The variable K in the Cambridge equation is more significant in explaining the trade
cycles than the variable V in Fisher’s equation. During inflation, people decrease their
cash balances (K) and as a result, the value of money falls and the price level rises. On
the contrary, during depression, the desire to hold money (K) rises and, as a
consequence, the value of money rises and the price level falls.
7. Basis of Liquidity Preference Theory:
The Cambridge approach, by stressing on the motives for the demand for holding
money, provided a foundation for the development of Keynes ‘liquidity preference theory
of interest, Liquidity preference theory is a significant constituent of the modem theory of
income and employment and its emergence has raised the importance of fiscal policy in
controlling business cycles.
8. Nature of Variables:
Various variables in the Cambridge equation are defined in a better and more realistic
manner than those in the Fisherian equation. T in Fisher’s version refers to the total
transactions, whereas in the Cambridge equation, T refers to only the final goods and
services. Similarly, P in Fisher’s version stands for the average price level of all goods
transacted in a period of time, but in Cambridge version, P is the general price level of
only final goods.
9. General Demand Analysis:
The Cambridge approach is preferred by the economists because it applies the general
demand analysis to the special case of money. It enquires into the utility of money, the
nature of the budget constraint facing the individual and the opportunity cost of holding
money as against the other assets.

Summary-
Fisher’s version and Cambridge version both led to the same destination namely the
price level, or the value of the money depends upon the quantity of money. The motives
as important factors affecting the price level, as opposed to the mechanistic nature of
the cash transactions equations. The cash balances equation emphasizes the
psychological factors as chief determinates of the demand for money. In contrast to the
fisherian approach which stresses the institutional objectives and technological factors
only. Thus, the former is more realistic because, because the fundamental truth about
money is that someone always holds it. It is also clear that cash transaction and cash
balances approaches to the tradition quantity theory of money are in explaining the
forces causing changes in the value of money both indicate some factors like M,V,T,K,R
as direct determinants’ of the value of money. But, actually all this variables are affected
by a complexity of economic factor like consumption, savings, investment, income, etc.
quantity equation are, by and large, equilibrium equations for the money market in the
long term. They are true only in the long run and not in the short run. The fisherian
version of quantity theory of money is mechanical, it treats price level as the exclusive-
function of the quantity of the money in circulation, this version accords no place to
human motives as the determinants of price level the Cambridge version by
emphasizing on human motives as important determining the price level.
unit 2:-

financial system

 meaning:- the financial system consist of a variety of institutions, markets and

instruments related in a systematic manner in provide the principals means by
which savings are transformed into investments.

financial system

financial
financial iinstruments
financial market financial services
institution (claims,assets,sec
urities)

non- inter- secondary (for

reguletry inter-mediaries others organised unorganised primary
mediaries both f.i.)

banking non-banking money market capital market short term middem term long term

primary market secondary market

 function:-
1. inducement to save
2. mobilization of savings
3. allocation of funds
 importance and components of financial system:-
1. liability-asset transformation
2. size transformation
3. risk asset transformation
4. maturity transformation
summary: -

A financial system is a set of financial institution, markets, instruments that facilitate the
transfer of savings from savers to those who can put the savings to use with the
objectives of achieving economic development. Financial intermediaries mobilize the
saving from the saving-surplus units by issuing clams against themselves and land this
funds to those who are in need of them. A variety of financial securities are created and
marketed in order to satisfy the variegated requirements of both the suppliers and users
of the funds. The role of regulatory authority to ensure that participants in the financial
system conduct their activities according to the guidelines of the government. It also
facilities flow of savings through out the economy and thereby the flow of funds in
directions where returns are presumably highest.

Indian financial system

 An overview- the financial system of India refers to the system of borrowing and
lending of funds or the demand for and the supply of funds of all individuals,
institutions, companies and of the government. commonly, the financial system
specified into:
1. Industrial finance: funds required for the conduct of industry and trade
2. Agricultural finance: funds needed and supplies for the conduct of
agriculture an allied activities
3. Development finance: funds needed for development
4. Government finance: relates to the demand for and supply for funds to
meet government expenditure
 indian financial
system

users of providers of
financial financial facilitators
services servises

individual insurance investments new issue

business goverment banks other FIS stock exchange
investers companies funds market

BASIS FOR
INFLATION DEFLATION
COMPARISON

Meaning When the value of money Deflation is a situation, when the

decreases in the value of money increases in the
international market, then international market.
this situation is termed as
inflation.

Effects Increase in the general Decrease in the general price level

price level

National income Does not declines Declines

Gold prices Falls Rises

Classification Demand pull inflation, cost Debt deflation, money supply side
push inflation, stagflation deflation, credit deflation.
and deflation.
BASIS FOR
INFLATION DEFLATION
COMPARISON

Good for Producers Consumers

Consequences Unequal distribution of Rise in the level of unemployment

income.

Which is evil? A little bit of inflation is a Deflation is not good for an

symbol of economic growth economy.
of the country.

Summary: -

The Indian financial system plays an important role in economic development of India
through saving investment process, also known as capital formation. Indian financial
system comprises the banking sector, insurance sector, FIS and NBFCs. Inn terms if
institutional infrastructure, the Indian financial system is on par with other international
financial systems. Regulatory authorities like RBI, SEBI, IRDA and BIFR have provided
the necessary checks and balance for the effective functioning of the financial system.
The DFIs serve as the pillars of industrial and trade development. The commercial
banks, by adopting international prudential norms have become professional banking
firms with sound capitalization and effective monitoring systems.
Unit 3: -

 Financial market- it refer to the institutional arrangements for dealing in financial

assets and credit instruments of various kinds such as currency, cheques, bills,
bonds, bank deposits, etc. financial market activate simplified organization if
saving –investment process. A financial market can be defined as the market in
which financial assets are created or transferred.

ultimate supply of ultimate

lenders funds borrowers

 Money and capital markets

BASIS FOR
MONEY MARKET CAPITAL MARKET
COMPARISON

Meaning A segment of the financial market A section of financial market

where lending and borrowing of where long term securities are
short term securities are done. issued and traded.

Nature of Informal Formal

Market

Financial Treasury Bills, Commercial Shares, Debentures, Bonds,

instruments Papers, Certificate of Deposit, Retained Earnings, Asset
Trade Credit etc. Securitization, Euro Issues etc.

Institutions Central bank, Commercial bank, Commercial banks, Stock

non-financial institutions, bill exchange, non-banking
BASIS FOR
MONEY MARKET CAPITAL MARKET
COMPARISON

brokers, acceptance houses, and institutions like insurance

so on. companies etc.

Risk Factor Low Comparatively High

Liquidity High Low

Purpose To fulfill short term credit needs To fulfill long term credit needs
of the business. of the business.

Time Horizon Within a year More than a year

Merit Increases liquidity of funds in the Mobilization of Savings in the

economy. economy.

Return on Less Comparatively High

Investment

 Money market: -

Meaning constituents- An unorganised arena of banks, financial institutions, bill brokers,

money dealers, etc. wherein trading on short-term financial instruments is
being concluded is known as Money Market. These markets are also known by the
name wholesale market.

Trade Credit, Commercial Paper, Certificate of Deposit, Treasury Bills are some
examples of the short-term debt instruments. They are highly liquid (cash equivalents)
in nature, and that is why their redemption period is limited to one year. They provide a
low return on investment, but they are quite safe trading instruments.

Money Market is an unsystematic market, and so the trading is done off the exchange,
i.e. Over The Counter (OTC) between two parties by using phones, email, fax, online,
etc. It plays a major role in the circulation of short-term funds in the economy. It helps
the industries to fulfil their working capital requirement.

 Money market instruments:-

1. Call money market
2. Collateral loan market
3. Acceptance money market
4. Bill market or discount market
5. Commercial paper market
6. Certificate of deposits market

 Indian money market

indian money
market

unorganised sector organised sector

MF'S and
reserve bank of investment
indigenous bankers money lenders nidhi and chit funds commercial banks co-oprative banks
india companies (lic,gic,
uti)

public sector privet sector

non scheduled
SBI GROUP nationalized banks RRB's scheduled banks
banks

indian foreign
Reserve bank of India- RBI as the central bank of country is the center of the Indian
financial and monetary system. As the apex financial institution, it has been guiding,
monitoring, regulating, controlling and promoting the destiny of the Indian financial
system since its inception. The RBI has the responsibility to guide and control the
institutions of the money market and towards this end; it is armed with both qualitative
and qualitative weapons of credit control. The head office of the bank is in the Mumbai
and its executive head is called governor.

evolution of the RBI

Amagamation of three presidency banks

impirial bank of india

hilton young commisions proposel to setup a reserve bank as a private and

shareholders bank

reserve bank bill 1927

central banking enquiry committee, 1931

Reseve bank of indai act 1934

constitution of the reserve bank of india 1 april 1935

nationalization of the rbi on 1 january 1949

Summary:-

The RBI of India is the apex financial institution of the country. It started its operations
on 1april, 1935 the RBI was nationalized in 1949. The composition of the bank consists
of the governor, 4 deputy governors and 15 directors. The functions of the RBI are to
print issue and manage currency, to be a banker to the government, to be a bankers
bank, to supervise and control commercial banks and co-operative banks and non bank
financial intermediaries, to promote and develop financial markets and institutions, to
administrator foreign exchange reserves and manage rupee exchange rate and to
control money and credit in India. The RBI has used both traditional and innovative
techniques to manage and control money in the country.

 commercial bank: -

Meaning- A commercial bank is a type of bank that provides services such as

accepting deposits, making business loans, and offering basic investment products that
is operated as a business for profit.

It can also refer to a bank, or a division of a large bank, which deals with corporations or
large/middle-sized business to differentiate it from a retail bank and an investment bank.

The general role of commercial banks is to provide financial services to general public
and business, ensuring economic and social stability and sustainable growth of the
economy.

In this respect, credit creation is the most significant function of commercial banks.
While sanctioning a loan to a customer, they do not provide cash to the borrower.
Instead, they open a deposit account from which the borrower can withdraw. In other
words, while sanctioning a loan, they automatically create deposits.

Functions

functions of
commercial
banks

primary secondary
functions functions

acceptance of advancinng of remittance of agency general utility

use of cheques
deposites loans funds services services

demand current saving bank

time deposit fix deposit
deposit acccounts account
Secondary functions: -

1. agency services
a) collection and payment of chaques, bills and promissory notes
b) Execution of standing orders such as payments of insurance premium,
subscription to clubs and societies etc.
c) Collection of dividend or interest on behalf of customers.
d) Purchase and sell of securities on behalf of its customers.
e) Acting as a trustee or executer of will.

2. General utility services: -

a) Issuing of letters of credit
b) Transiting foreign exchange business
c) Providing safety vaults or lockers for the safe custody of valuable and
securities
d) Serving as refry to the financial standing and credit worthiness or its
customers
e) Underwriting loans to be raised by public bodies and corporations
f) Banks compile statistics and information relating to trade, comers and
industry
g) Preparing feasibility studies, come up project report, etc, for its customers
h) Misc. services such as the issue of travelers cheques, gift cheques,
provision for tax assistance and investment advice etc.

 Indian banking system-

The exact date of existence of indigenous bank is not known. But, it is certain
that the old banking system has been functioning for centuries. Some people
trace the presence of indigenous banks to the Vedic times of 2000-1400 BC. It
has admirably fulfilled the needs of the country in the past.
however, with the coming of the British, its decline started. Despite the fast
growth of modern commercial banks, however, the indigenous banks continue to
hold a prominent position in the Indian money market even in the present times.
 It includes shroffs, seths, mahajans, chettis, etc. The indigenous bankers lend
money; act as money changers and finance internal trade of India by means of
hundis or internal bills of exchange.

Defects:
The main defects of indigenous banking are:
(i) They are unorganised and do not have any contact with other sections of the banking
world.

(ii) They combine banking with trading and commission business and thus have
introduced trade risks into their banking business.

(iii) They do not distinguish between short term and long term finance and also between
the purpose of finance.

(iv) They follow vernacular methods of keeping accounts. They do not give receipts in
most cases and interest which they charge is out of proportion to the rate of interest
charged by other banking institutions in the country.

Suggestions for Improvements:

(i) The banking practices need to be upgraded.

(ii) Encouraging them to avail of certain facilities from the banking system, including the
RBI.

(iii) These banks should be linked with commercial banks on the basis of certain
understanding in the respect of interest charged from the borrowers, the verification of
the same by the commercial banks and the passing of the concessions to the priority
sectors etc.

(iv) These banks should be encouraged to become corporate bodies rather than
continuing as family based enterprises.

Structure of Organised Indian Banking System:

The organised banking system in India can be classified as given below:

Reserve Bank of India (RBI):

The country had no central bank prior to the establishment of the RBI. The RBI is the
supreme monetary and banking authority in the country and controls the banking
system in India. It is called the Reserve Bank’ as it keeps the reserves of all commercial
banks.

Commercial Banks:

Commercial banks mobilise savings of general public and make them available to large
and small industrial and trading units mainly for working capital requirements.

Commercial banks in India are largely Indian-public sector and private sector with a few
foreign banks. The public sector banks account for more than 92 percent of the entire
banking business in India—occupying a dominant position in the commercial banking.
The State Bank of India and its 7 associate banks along with another 19 banks are the
public sector banks.

Scheduled and Non-Scheduled Banks:

The scheduled banks are those which are enshrined in the second schedule of the RBI
Act, 1934. These banks have a paid-up capital and reserves of an aggregate value of
not less than Rs. 5 lakhs, hey have to satisfy the RBI that their affairs are carried out in
the interest of their depositors.

All commercial banks (Indian and foreign), regional rural banks, and state cooperative
banks are scheduled banks. Non- scheduled banks are those which are not included in
the second schedule of the RBI Act, 1934. At present these are only three such banks
in the country.

Regional Rural Banks:

The Regional Rural Banks (RRBs) the newest form of banks, came into existence in the
middle of 1970s (sponsored by individual nationalised commercial banks) with the
objective of developing rural economy by providing credit and deposit facilities for
agriculture and other productive activities of al kinds in rural areas.

The emphasis is on providing such facilities to small and marginal farmers, agricultural
labourers, rural artisans and other small entrepreneurs in rural areas.

Other special features of these banks are:

(i) their area of operation is limited to a specified region, comprising one or more
districts in any state; (ii) their lending rates cannot be higher than the prevailing lending
rates of cooperative credit societies in any particular state; (iii) the paid-up capital of
each rural bank is Rs. 25 lakh, 50 percent of which has been contributed by the Central
Government, 15 percent by State Government and 35 percent by sponsoring public
sector commercial banks which are also responsible for actual setting up of the RRBs.

These banks are helped by higher-level agencies: the sponsoring banks lend them
funds and advise and train their senior staff, the NABARD (National Bank for Agriculture
and Rural Development) gives them short-term and medium, term loans: the RBI has
kept CRR (Cash Reserve Requirements) of them at 3% and SLR (Statutory Liquidity
Requirement) at 25% of their total net liabilities, whereas for other commercial banks
the required minimum ratios have been varied over time.

Cooperative Banks:
Cooperative banks are so-called because they are organised under the provisions of
the Cooperative Credit Societies Act of the states. The major beneficiary of the
Cooperative Banking is the agricultural sector in particular and the rural sector in
general.

The cooperative credit institutions operating in the country are mainly of two kinds:
agricultural (dominant) and non-agricultural. There are two separate cooperative
agencies for the provision of agricultural credit: one for short and medium-term credit,
and the other for long-term credit. The former has three tier and federal structure.

At the apex is the State Co-operative Bank (SCB) (cooperation being a state subject in
India), at the intermediate (district) level are the Central Cooperative Banks (CCBs) and
at the village level are Primary Agricultural Credit Societies (PACs).

Long-term agriculture credit is provided by the Land Development Banks. The funds of
the RBI meant for the agriculture sector actually pass through SCBs and CCBs.
Originally based in rural sector, the cooperative credit movement has now spread to
urban areas also and there are many urban cooperative banks coming under SCBs.

 Innovative trends in Indian banking retail banking: - Indian banking is presentaly

in the process of completing one full circle. Initially, it was in private sector, it
move to public sector with nationalization of banks in two stagies in 1969 and
1980. Now with preposed move to the govermentto reduce its stake in banks
from 51% to 33%. Public sector banking is again moving in the direction of
privatization. At present private sector banking system is on trend.
 Factors responsible for the change
 Globalization of Indian economy
 Competition from private sector players
 Changing customer needs
 Technology improvements
 Economies of scale and scope
 Reforms by the governmet

 E-banking- E-banking refers to the system that enables the banks to offer their
customers access to their accounts, transact business and obtain information
via electronic communication channels
Products of e-banking:-
a) Automated teller machines (ATM)
b) Electro-magnetic cards:-
 Credit card
 Debit card
 Smart card
c) Electronic funds transfer system (EFT)
d) Electronic clearing service (ECS)
e) Micr clearing
f) National electronic fund transfer (NEFT) system
g) Real time gross settlement (RTGS) system
h) Society for worldwide inter-bank financial telecommunication (SWIFT) this
system was used in nirav modi scam.

 Internet banking:- Online banking, also known as internet banking, is

an electronic payment system that enables customers of a bank or other financial
institution to conduct a range of financial transactions through the financial
institution's website. The online banking system will typically connect to or be part
 of the core banking system operated by a bank and is in contrast to branch
banking which was the traditional way customers accessed banking services.
 Banking on mobile
 Tele banking
 Electronic payment system
1. NEFT- National Electronic Funds Transfer (NEFT) is an electronic
funds transfer system maintained by the Reserve Bank of India (RBI).
Started in November 2005, the setup was established and maintained
by Institute for Development and Research in Banking
Technology(IDRBT).[1] NEFT enables bank customers in India to transfer
funds between any two NEFT-enabled bank accounts on a one-to-one
basis. It is done via electronic messages. Electronic fund transfer less
then Rs 1,00,000/- are done under this system.
2. ECS- electronic clearing sevice is a mode of electronic funds transfer from
one bank account to another bankaccount using the services of a
Clearing House. ... ECS (Credit) is used for affording credit to a large
number of beneficiaries by raising a single debit to an account, such as
dividend, interest or salary payment.
3. RTGS- Real Time Gross Settlement (RTGS) is an electronic form of funds
transfer where the transmission takes place on a real time basis. In India,
transfer of funds with RTGS is done for high value transactions, the
minimum amount being Rs 2 lakh. The beneficiary account receives the
funds transferred, on a real time basis.
UNIT 4: -

Capital market: -

 Meaning A capital market is a financial market in which long-term debt (over a

year) or equity-backed securities are bought and sold.[6] Capital markets channel
the wealth of savers to those who can put it to long-term productive use, such as
companies or governments making long-term investments.

capiital
market

savers investors

development commercial stock merchant investment

unit trust life insurance mutual fund
banks banks exchange bank companies

Supply of funds in capital market

capital market in
india

financial
securities
institutions (long
market
term loans)

development glit-edged or industrial

financial govt. securities securrities
institutions market market

primary market secondary

IFCI IDBI ICICI SFCs (new issue market (old
market issues market)

organised stock over the counter

exchanges market

preference
bonds equities
shares

Composition of the capital market in india

  Functions:-

1. Mobilization of savings to finance long term investments.

2. Facilitates trading of securities.
3. Minimization of transaction and information cost.
4. Encourage wide range of ownership of productive assets.
5. Quick valuation of financial instruments like shares and debentures.
6. Facilitates transaction settlement, as per the definite time schedules.
7. Offering insurance against market or price risk, through derivative trading.
8. Improvement in the effectiveness of capital allocation, with the help of
competitive price mechanism.

 Composition of the Indian capital market primary and secondary market: -

The capital market is bifurcated in two segments, primary market and secondary
market:

1. Primary Market: Otherwise called as New Issues Market, it is the market for the trading
of new securities, for the first time. It embraces both initial public offering and further
public offering. In the primary market, the mobilisation of funds takes place through
prospectus, right issue and private placement of securities.
2. Secondary Market: Secondary Market can be described as the market for old
securities, in the sense that securities which are previously issued in the primary market
are traded here. The trading takes place between investors, that follows the original
issue in the primary market. It covers both stock exchange and over-the counter market.

Capital market improves the quality of information available to the investor regarding the
investment. Add to that, it plays a crucial role in encouraging the adoption of rules of
corporate governance, which backs the trading environment. It includes all the
processes that help in the transfer of already existing securities.

 Functions and role of stock exchange

Functions: -
1. Liquidity and marketability of securities
2. Safety of funds
3. Supply of long term funds
4. Flow of capital to profitable ventures
5. Motivation for improved performance
6. Promotion of investment
7. Marketing of new issues
8. Miscellaneous functions/services

Role of stock exchange: -

1. Mobilization of savings and acceleration of capital formation
2. Proper channelization of funds
3. Promotion of industrial growth
4. Raising long term capital
5. Ready and continuous market

Stock exchange in India:- The first organised stock exchange in India was started in
1875 at Bombay and it is stated to be the oldest in Asia. In 1894 the Ahmedabad Stock
Exchange was started to facilitate dealings in the shares of textile mills there. The
Calcutta stock exchange was started in 1908 to provide a market for shares of
plantations and jute mills.

Then the madras stock exchange was started in 1920. At present there are 24 stock
exchanges in the country, 21 of them being regional ones with allotted areas. Two
others set up in the reform era, viz., the National Stock Exchange (NSE) and Over the
Counter Exchange of India (OICEI), have mandate to have nation-wise trading.

They are located at Ahmedabad, Vadodara, Bangalore, Bhubaneswar, Mumbai,

Kolkata, Kochi, Coimbatore, Delhi, Guwahati, Hyderabad, Indore, Jaipur’ Kanpur,
Ludhiana, Chennai Mangalore, Meerut, Patna, Pune, Rajkot.

The Stock Exchanges are being administered by their governing boards and executive
chiefs. Policies relating to their regulation and control are laid down by the Ministry of
Finance. Government also Constituted Securities and Exchange Board of India (SEBI)
in April 1988 for orderly development and regulation of securities industry and stock
exchanges.

 Merchant banking: - “a bank that specializes in bankers acceptance and

underwriting or syndicating equity or bond issues.”
“Merchant bank are the financial institutions providing specialist services which
generally include the acceptance of bills of exchange corporate finance, portfolio
management and other banking services.”

functions of
merchant
bank

forrign
spondser of issue credit investment ararnging other
promotional currency
issue management syndication management deposits activities
finance

SEBI: - REGULATIONS BY SEBI ON MERCHANT BANKING

Reforms for the merchant bankers
SEBI has made the following reforms for the merchant banker
1. Multiple categories of merchant banker will be abolished and there will be only one
equity merchant banker.

2. The merchant banker is allowed to perform underwriting activity. For performing

portfolio manager, the merchant banker has to seek separate registration from SEBI.
3. A merchant banker cannot undertake the function of a non banking financial
company, such as accepting deposits, financing others’ business, etc.

4. A merchant banker has to confine himself only to capital market activities.

Recognition by SEBI on merchant bankers

SEBI will grant recognition a merchant banker after taking into account the following
aspects

1. Considering how much the merchant are professionally competent.

2. Whether they have adequate capital

3. Track record, experience and general reputation of merchant bankers.

4. Quality of staff employed by merchant bankers, their adequacy and available

infrastructure are taken into account. After considering the above aspects, SEBI will
grant permission for the merchant banker to start functioning.

Conditions by SEBI for merchant bankers

SEBI has laid the following conditions on the merchant bankers, for conducting their
operations. They are

1. SEBI will give authorization for a merchant banker to operate for 3 years only.
Without SEBI’s authorization, merchant bankers cannot operate.

2. The minimum net worth of merchant banker should be Rs. 1 crore.

3. Merchant banker has to pay authorization fee, annual fee and renewal fee.

4. All issue of shares must be managed by one authorized merchant banker. It should
be the lead manager.
5. The responsibility of the lead manager will be clearly indicated by SEBI.

6. Lead managers are responsible for allotment of securities, refunds, etc.

7. Merchant banker will submit to SEBI all returns and send reports regarding the issue
of shares.

8. A code of conduct for merchant bankers will be given by SEBI, which has to be
followed by them.

9. Any violation by the merchant banker will lead to the revocation of authorization by
SEBI.

 Credit rating: -
1. Concept:- Credit rating is an analysis of the credit risks associated with a
financial instrument or a financial entity. It is a rating given to a particular
entity based on the credentials and the extent to which the financial
statements of the entity are sound, in terms of borrowing and lending that
has been done in the past

Significance: - For The Money Lenders

1. Better Investment Decision: No bank or money lender companies would like to

give money to a risky customer. With credit rating, they get an idea about the
credit worthiness of an individual or company (who is borrowing the money) and
the risk factor attached with them. By evaluating this, they can make a better
investment decision.
2. Safety Assured: High credit rating means an assurance about the safety of the
money and that it will be paid back with interest on time.

For Borrowers
1. Easy Loan Approval: With high credit rating, you will be seen as low/no risk
customer. Therefore, banks will approve your loan application easily.
2. Considerate Rate of Interest: You must be aware of the fact every bank offers
loan at a particular range of interest rates. One of the major factors that
determine the rate of interest on the loan you take is your credit history. Higher
the credit rating, lower will the rate of interest.

 Credit rating agencies in India: - Credit rating agencies in India do not have a
distant past. They came into existence in the second half of the 1980s. As of
now, there are six credit rating agencies registered under SEBI namely, CRISIL,
ICRA, CARE, SMERA, Fitch India and Brickwork Ratings. Ratings provided by
these agencies determine the nature and integrals of the loan. Higher the credit
rating, lower is the rate of interest offered to the organization.
UNIT 5: -

 Development financial institution: - development finance company (DFC) is

a financial institution that provides risk capital for economic development
projects on non commercial basis. They are often established and owned by
governments or charitable institutions to provide funds for projects that would
otherwise not be able to get funds from commercial lenders. Some development
banks include socially responsible investing and impact investing criteria into
their mandates. Governments often use development banks to form part of
their development aid or economic developmentinitiatives
 Development banks: - Development banks are specialized financial institutions.
They provide medium and long-term finance to the industrial and agricultural
sector. They provide finance to both private and public sector.Development
banks are multipurpose financial institutions

Objectives: - The main objectives of the development banks are:

 They promote industrial growth.

 To develop backward areas.
 To create more employment opportunities.
 The generate more exports and encourage import substitution.
 To encourage modernization and improvement in technology.
 To promote more self-employment projects.
 The revive sick units.
 To improve the management of large industries by providing training.
 To remove regional disparities or regional imbalance.
 They promote science and technology in new areas by providing risk capital,
and.
 To improve the capital market in the country.
DEVELOPMENT BANKS: FUNCTIONS

The Few important functions of development banks in India are as follows:

 They promote and develop small-scale industries (SSI) in India.

 To finance the development of the housing sector in India.
 To facilitate the development of large-scale industries (LSI) in India.
 They help in the development of the agricultural sector and rural India.
 To enhance the foreign trade of India.
 They help to review (cure) sick industrial units.
 To encourage the development of Indian entrepreneurs.
 To promote economic activities in backward regions of the country.
 They contribute to the growth of capital markets.

 Financial institutions

All india development bank:- All India Financial Institutions (AIFI) is a group
composed of development finance institutions and investment institutions that play a
pivotal role in the financial markets. Also known as "financial instruments", the financial
institutions assist in the proper allocation of resources, sourcing from businesses that
have a surplus and distributing to others who have deficits - this also assists with
ensuring the continued circulation of money in the economy. Possibly of greatest
significance, the financial institutions act as an intermediary between borrowers and
final lenders, providing safety and liquidity. This process subsequently ensures earnings
on the investments and savings involved.[citation needed]

In Post-Independence India, people were encouraged to increase savings, a tactic

intended to provide funds for investment by the Indian government. However, there was
a huge gap between the supply of savings and demand for the investment opportunities
in the country.
IDBI: - Industrial Development Bank of India (IDBI Bank Limited) was established in
1964 by an Act to provide credit and other financial facilities for the development of the
fledgling Indian industry. Initially it operated as a subsidiary of Reserve Bank of India
RBI transferred it to GOI . Many institutes of national importance finds their roots in IDBI
like Sidbi, Exim bank, NSE and NSDL. The war cry for reforms in financial space saw
GOI reducing its stake in the bank in the year 2019. At present, Life Insurance
Corporation of India holds 51% stake in IDBI Bank. Following Life Insurance
Corporation of India (LIC) acquiring 51 per cent of the total paid-up equity share capital
of the bank, IDBI Bank has been categorised as a private sector bank for regulatory
purposes with effect from January 21, 2019.

IRBI: - The Government of India set up the Industrial Reconstruction Corporation of

India (IRCI) in April 1971, under the Indian Companies Act mainly to look after special
problems of sick units’ and provide assistance for their speedy reconstruction and
rehabilitation, if necessary, by undertaking the management of the units and developing
infrastructure facilities like those of transport, marketing etc.

In 1984, the Government of India passed an Act converting the Industrial

Reconstruction Corporation of India (IRCI) into the Industrial Reconstruction Bank of
India (IRBI). IRBI was established in March 1985 to take over IRCI, Now IRBI has to
function as the principal all-India credit a reconstruction agency for industrial revival,
assisting and promoting industrial development and rehabilitating industrial concerns. It
has also to co-ordinate with similar institutions.

The authorised capital of the bank is Rs. 200 crore, out of which the initial paid-up
capital is Rs. 50 crore. The bank is empowered to supplement its resources by issuing
and selling bonds and debentures, accepting deposits from the public, borrowing from
RBI and other institutions. It may also raise foreign currency loans from any bank (if it
gets previous approval from the Government of India).

IRBI provides term loans and working capital finance to medium, large, sick, small and
tiny sector units. It also provides ancillary services, such as consultancy, preparation of
schemes of amalgamation, merger, sale, reconstruction, equipment leasing, merchant
banking etc. IRBI has full power to take any step to remove industrial sickness.

ICICI: - ICICI Bank Limited is an Indian multinational banking and financial

services company headquartered in Mumbai, Maharashtra with its registered office
in Vadodara, Gujarat. As of 2018, ICICI Bank is the second largest bank in India in
terms of assets and market capitalisation. It offers a wide range of banking products and
financial services for corporate and retail customers through a variety of delivery
channels and specialised subsidiaries in the areas of investment banking, life, non-life
insurance, venture capitaland asset management. As on March 31, 2018, the bank has
a network of 4867 branches and 14367 ATMs across India and has a presence in 17
countries including India.

IFCI: - IFCI, previously Industrial Finance Corporation of India, is a Non-Banking

Finance Company in the public sector. Established in 1948 as a statutory corporation,
IFCI is currently a company listed on BSE and NSE. IFCI manages seven number of
subsidiaries and one associate under its fold.

It provides financial support for the diversified growth of Industries across the spectrum.
The financing activities cover various kinds of projects such as airports, roads, telecom,
power, real estate, manufacturing, services sector and such other allied industries.
During its 70 years of existence, mega projects like Adani Mundra Ports, GMR Goa
International Airport, Salasar Highways, NRSS Transmission, Raichur Power
Corporation, to name a few, have been setup with financial assistance of IFCI.

SIDBI: - Small industrial Development Bank of India (SIDBI) is a development

financial institution in India, headquartered at Lucknow and having its offices all over the
country. Its purpose is to provide refinance facilities and short term lending to industries,
and serves as the principal financial institution in the Micro, Small and Medium
Enterprises (MSME) sector. SIDBI also coordinates the functions of institutions engaged
in similar activities. It was established on April 2, 1990, through an Act of Parliament. It
is headquartered in Lucknow.[1] SIDBI operates under the Department of Financial
Services, Government of India.

NABARD: - National Bank for Agriculture and Rural Development (NABARD) is an

apex development financial institution in India. It is an institution fully owned by
Government of India, headquartered at Mumbai with regional offices all over
India.[4] The Bank has been entrusted with "matters concerning policy, planning and
operations in the field of credit for agriculture and other economic activities in rural
areas in India". NABARD is active in developing financial inclusion policy.

 Mutual funds: -

Concept: - A mutual fund is a professionally managed investment fund that pools

money from many investors to purchase securities. These investors may be retail or
institutional in nature.

Mutual funds have advantages and disadvantages compared to direct investing in

individual securities. The primary advantages of mutual funds are that they provide
economies of scale, a higher level of diversification, they provide liquidity, and they are
managed by professional investors. On the negative side, investors in a mutual fund
must pay various fees and expenses.

Primary structures of mutual funds include open-end funds, unit investment trusts,
and closed-end funds. Exchange-traded funds (ETFs) are open-end funds or unit
investment trusts that trade on an exchange

Objectives and working:-

Objectives of mutual funds: - Professional Management: When you invest in a mutual

fund, your money is managed by finance professionals. Investors who do not have the
time or skill to manage their own portfolio can invest in mutual funds. By investing in
mutual funds, you can gain the services of professional fund managers, which would
otherwise be costly for an individual investor.

Diversification: Mutual funds provide the benefit of diversification across different

sectors and companies. Mutual funds widen investments across various industries and
asset classes. Thus, by investing in a mutual fund, you can gain from the benefits of
diversification and asset allocation, without investing a large amount of money that
would be required to build an individual portfolio.

Liquidity: Mutual funds are usually very liquid investments. Unless they have a pre-
specified lock-in period, your money is available to you anytime you want subject to exit
load, if any. Normally funds take a couple of days for returning your money to you.
Since they are well integrated with the banking system, most funds can transfer the
money directly to your bank account.

Flexibility: Investors can benefit from the convenience and flexibility offered by mutual
funds to invest in a wide range of schemes. The option of systematic (at regular
intervals) investment and withdrawal is also offered to investors in most open-ended
schemes. Depending on one’s inclinations and convenience one can invest or withdraw
funds.

Low transaction cost: Due to economies of scale, mutual funds pay lower transaction
costs. The benefits are passed on to mutual fund investors, which may not be enjoyed
by an individual who enters the market directly.

Transparency: Funds provide investors with updated information pertaining to the

markets and schemes through fact sheet, offer documents, annual reports etc.