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As per section 65(10) of the Finance Act, 1994, “banking and financial services”
means the following services provided by a banking company or a financial institution
including a non banking financial company, namely :

(i) financial leasing services including equipment leasing and hire-purchase by a body corporate;
(ii) credit card services;
(iii merchant banking services;
(iv) securities and foreign exchange (forex) broking;
(v) asset management including portfolio management, all forms of fund management, pension fund
management, custodial depository and trust services, but does not include cash management;
(vi) advisory and other auxiliary financial services including investment and portfolio research and advice,
advice on mergers and acquisition and advice on corporate restructuring and strategy; and
vii) provision and transfer of information and data processing.


Financial services can be defined as the products and services offered by institutions
like banks of various kinds for the facilitation of various financial transactions and
other related activities in the world of finance like loans, insurance, credit cards,
investment opportunities and money management as well as providing information on
the stock market and other issues like market trends

Financial services refer to services provided by the finance industry. The finance
industry encompasses a broad range of organizations that deal with the management
of money. Among these organizations are banks, credit card companies, insurance
companies, consumer finance companies, stock brokerages, investment funds and
some government sponsored enterprises.
Functions of financial services

1. Facilitating transactions (exchange of goods and services) in the economy.

2. Mobilizing savings (for which the outlets would otherwise be much more
3. Allocating capital funds (notably to finance productive investment).
4. Monitoring managers (so that the funds allocated will be spent as envisaged).
5. Transforming risk (reducing it through aggregation and enabling it to be
carried by those more willing to bear it).

Characterstics and Features of Financial Services

i) Customer-Specific: Financial services are usually customer focussed. The firms

providing these services, study the needs of their customers in detail before deciding
their financial strategy, giving due regard to costs, liquidity and maturity
considerations. Financial services firms continuously remain in touch with their
customers, so that they can design products which can cater to the specific needs of
their customers. The providers of financial services constantly carry out market
surveys, so they can offer new products much ahead of need and impending
legislation. Newer technologies are being used to introduce innovative, customer
friendly products and services which clearly indicate that the concentration of the
providers of financial services is on generating firm/customer specific services.

ii) Intangibility: In a highly competitive global environment brand image is very

crucial. Unless the financial institutions providing financial products and services
have good image, enjoying the confidence of their clients, they may not be successful.
Thus institutions have to focus on the quality and innovativeness of their services to
build up their credibility.

iii) Concomitant: Production of financial services and supply of these services have
to be concomitant. Both these functions i.e. production of new and innovative
financial services and supplying of these services are to be performed simultaneously.

iv) Tendency to Perish: Unlike any other service, financial services do tend to perish
and hence cannot be stored. They have to be supplied as required by the customers.
Hence financial institutions have to ensure a proper synchronization of demand and

v) People based services: Marketing of financial services has to be people intensive

And hence it’s subjected to variability of performance or quality of service. The
personnel in financial services organisation need to be selected on the basis of their
suitability and trained properly, so that they can perform their activities efficiently and
vi) Market Dynamics: The market dynamics depends to a great extent, on
socioeconomic changes such as disposable income, standard of living and educational
changes related to the various classes of customers. Therefore financial services have
to be constantly redefined and refined taking into consideration the market dynamics.
The institutions providing financial services, while evolving new services could be
proactive in visualising in advance what the market wants, or being reactive to the
needs and wants of their customers.

Scope of Financial Services

Financial services cover a wide range of activities. They can be broadly classified into
two, namely:
• i. Traditional. Activities
• ii. Modern activities.

Scope of Financial

Traditional Activities Modern Activities

Non Fund Based

Fund Based Activities
Activities (Fees

Traditional Activites

Traditionally, the financial intermediaries have been rendering a wide range of

services encompassing both capital and money market activities. They can be
grouped under two heads, viz.

• Fund based activities and

• Non-fund based activities.

Fund based activities: The traditional services which come under fund based
activities are the following:

• Underwriting or investment in shares, debentures, bonds, etc. of new issues

(primary market activities).
• Dealing in secondary market activities.
• Participating in money market instruments like commercial
• Papers, certificate of deposits, treasury bills, discounting of bills etc.
• Involving in equipment leasing, hire purchase, venture capital, seed capital,
• Dealing in foreign exchange market activities. Non fund based activities

Non fund based activities

Financial intermediaries provide services on the basis of non-fund activities also.

This can be called 'fee based' activity. Today customers, whether individual or
corporate, are not satisfied with mere provisions of finance. They expect more
from financial services companies. Hence a wide variety of services, are being
provided under this head. They include:

• Managing the capital issue — i.e. management of pre-issue and post-issue

activities relating to the capital issue in accordance with the SEBI guidelines
and thus enabling the promoters to market their issue.
• Making arrangements for the placement of capital and debt instruments with
investment institutions.
• Arrangement of funds from financial institutions for the clients' project cost or
his working capital requirements.
• Assisting in the process of getting all Government and other clearances.

Modern Activities

Beside the above traditional services, the financial intermediaries render

innumerable services in recent times. Most of them are in the nature of non-fund
based activity. In view of the importance, these activities have been in brief under
the head 'New financial products and services'. However, some of the modern
services provided by them are given in brief hereunder.

• Rendering project advisory services right from the preparation of the project
report till the raising of funds for starting the project with necessary
Government approvals.
• Planning for M&A and assisting for their smooth carry out.
• Guiding corporate customers in capital restructuring.
• Acting as trustees to the debenture holders.
• Recommending suitable changes in the management structure and
management style with a view to achieving better results.
• Structuring the financial collaborations / joint ventures by identifying suitable
joint venture partners and preparing joint venture agreements.
• Rehabilitating and restructuring sick companies through appropriate scheme of
reconstruction and facilitating the implementation of the scheme.
• Hedging of risks due to exchange rate risk, interest rate risk, economic risk,
and political risk by using swaps and other derivative products.
• Managing In- portfolio of large Public Sector Corporations.
• Undertaking risk management services like insurance services, buy-hack
options etc.
• Advising the clients on the questions of selecting the best source of funds
taking into consideration the quantum of funds required, their cost, lending
period etc.
• Guiding the clients in the minimization of the cost of debt and in the
determination of the optimum debt-equity mix.
• Undertaking services relating to the capital market, such as
a. Clearing services
• b. Registration and transfers,
• c. Safe custody of securities
• d. Collection of income on securities
• Promoting credit rating agencies for the purpose of rating companies which
want to go public by the issue of debt instrument.

Developments in the sector

The financial services sector has gone through a period of significant changes over the
last few decades.

These changes have been due to the interplay of a number of factors, such as:

• financial sector reform

• technological developments
• consolidation
• internationalization of financial services
• changing role of financial services providers
• competition and outsourcing.
Financial sector reform

After decades of ‘financial repression’, most countries in the world underwent

significant financial sector reform over the last two decades in an attempt to reduce or
eliminate distortions in financial markets, deepen the financial sector and strengthen
financial institutions. Trade liberalization — i.e. market opening and the elimination
of discrimination against foreign services and institutions — was a crucial part of
those endeavours.

Technological developments

Technological developments are changing the nature of the financial system,

modifying the organization of financial activity, and challenging the dominance of


Consolidation in the financial services sector, both domestically and cross-border, is

one of the key trends affecting the sector, as a consequence of a perceived need for
firms to secure economies of scale and scope in an environment characterized by
more open and less fragmented markets. This is reflected in the decline in the number
of financial institutions, and the rise of mergers and acquisitions, both in developed
and emerging economies. This process has also had the effect of increasing
concentration levels in some national markets, and is also changing the ownership

Internationalization of financial services

Financial services have become increasingly internationalized over the years. The
presence of foreign financial services providers in national markets has grown
significantly in the last two decades. As shown by recent studies, market shares of
majority foreign-owned banks increased dramatically in East Asia, Eastern Europe
and Latin America, sometimes exceeding 50 per cent of the market. Cross-border
trade in financial services is also an important component of services exports
worldwide. In 2005, financial services and insurance accounted for 18 per cent of
world exports of ‘other commercial services’. Financial services trade has
experienced rapid growth in recent years. For example, between 2000 and 2005,
insurance was among the top three fastest growing sectors, with a rate of 14 per cent
(WTO International Trade Statistics 2007).

Changing role of financial services providers

With falling barriers to entry in the financial services industry, the differences
between financial institutions have been eroded, and an increasing number of
competitive services and products are being offered by different types of institutions.
For example, commercial banks have been allowed to enter into investment banking,
finance companies provide banking products, and insurance companies also provide
different forms of financing.

Competition and outsourcing

Cost reduction has become a priority for institutions in the new competitive
environment, and one of the responses to cost pressures within the sector has been the
outsourcing of specific functions to other countries, a process usually referred to as
‘offshoring’. Outsourcing/offshoring has become a significant feature of the
international financial services sector.

Problems Of Financial Services

Though financial services sector is growing very fast, it has its own set of problems
and challenges. The financial sector has to face many challenges in its attempt to
fulfill the ever growing financial demands of the economy. Some of the important
challenges are briefly explained hereunder

1. Lack of qualified personnel: The financial services sector is fully geared to the
task of 'financial creativity'. However, this sector has to face many challenges.
The dearth of qualified and trained personnel is an important impediment in its
2. Lack of investor awareness : The introduction of new financial products and
instruments will be of no use unless the investor is aware of the advantages
and uses of the new and innovative products and instruments,
3. Lack of transparency: The whole financial system is undergoing a phenomenal
change in accordance with the requirements of the national global
environments. It is high time that this sector gave up their orthodox attitude of
keeping accounts in a highly secret manner.
4. Lack of specialization: in the Indian sense, each financial intermediary seems
to deal in different financial service lines without specializing in one or two
areas. In other countries , FI specialize in one or two areas only and provide
expert service
5. Lack of recent data: most of the fi do not spend more on research. It is very
vital that one should build up a proper data base on the basis of which one
could embark upon financial creativity.
6. Lack of efficient risk management system: with the opening of the economy to
multinationals and exposure of Indian companies to international competition,
much importance is given to foreign portfolio flows. It involves the utilization
of multi currency transactions which exposes the client to exchange rate risk,
interest rate risk and economic and political risk.


Mutual Funds a fund, managed by an investment company with the financial

objective of generating high Rate of Returns. These asset management or investment
management companies collects money from the investors and invests those money in
different Stocks, Bonds and other financial securities in a diversified manner. Before
they carry out thorough research and detailed analysis on the market conditions and
market trends of stock and bond prices. These things help the fund mangers to
speculate properly in the right direction.

The investors who invest their money in the Mutual fund of any Investment
Management Company receive an Equity Position in that particular mutual fund.
When after certain period of time, whether long term or short term, the investors sell
the Shares of the Mutual Fund, they receive the return according to the market

The investment companies receive profit by allocating people's money in different

stocks and bonds according to their Speculation about the Market Trend.

Other than some specific mutual funds which carry certain Maturity Term, Investors
can generally sell the shares of their mutual funds at any time they want. But, the
return will vary according to market value of the stocks and bonds in which that
particular mutual fund made investment. But, generally the share holders of mutual
fund sell their share when the prices are up and Capital Gain is sure to happen.

Meaning of Mutual Fund

A mutual fund is a professionally managed type of collective investment scheme that

pools money from many investors and invests it in stocks, bonds, short-term money
market instruments and other securities. Mutual funds have a fund manager who
invests the money on behalf of the investors by buying / selling stocks, bonds etc.

A mutual fund is a company that brings together money from many people and
invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or
other assets the fund owns are known as its portfolio. Each investor in the fund owns
shares, which represent a part of these holdings and its commonly known as units.

Defination of Mutual Fund

“Mutual fund is a fund established in the form of trust by a sponsor, to raise money’s
by the trustees through the sale of units to the public, under one or more schemes for
investing in securities in accordance with these regulations.”
- The Securities and Exchange Board of India (Mutual Funds) Regulations, 1993.

The importance objectives of MF’s are as follows

• To mobilize saving from Public.

• To invest them to earn a good return.
• To achieve long term capital appreciation.
• To assist in the process of capital formation and industrial development of the
• To provide investment expertise for the benefits of the investors.

Mechanisms of Mutual Funds

Investor’s Pool their

Returns passed back
money with Fund
to Investors

Securities Fund manager

Generates Returns invest in Securities
Structure of Mutual Fund

Sponsor 1st Tier

Mutual Funds in India follow a 3-tier structure. There is a Sponsor (the First tier),
who thinks of starting a mutual fund. The Sponsor approaches the Securities &
Exchange Board of India (SEBI), which is the market regulator and also the regulator
for mutual funds. Not everyone can start a mutual fund. SEBI checks whether the
person is of integrity, whether he has enough experience in the financial sector, his
networth etc.

Trust 2nd Tier

Once SEBI is convinced, the sponsor creates a Public Trust (the Second tier) as per
the Indian Trusts Act, 1882. It is important to understand the difference between the
Sponsor and the Trust. They are two separate entities. Sponsor is not the Trust; i.e.
Sponsor is not the Mutual Fund. It is the Trust which is the Mutual Fund.


Trusts have no legal identity in India and cannot enter into contracts, hence the
Trustees are the people authorized to act on behalf of the Trust. Contracts are entered
into in the name of the Trustees. Once the Trust is created, it is registered with SEBI
after which this trust is known as the mutual fund.

The Trustees role is not to manage the money. Their job is only to see, whether the
money is being managed as per stated objectives. Trustees may be seen as the internal
regulators of a mutual fund.

Asset Management Company(AMC) 3rd Tier

Trustees appoint the Asset Management Company (AMC), to manage investor’s

money. The AMC in return charges a fee for the services provided and this fee is
borne by the investors as it is deducted from the money collected from them. The
AMC’s Board of Directors must have at least 50% of Directors who are independent
directors. The AMC has to be approved by SEBI. The AMC functions under the
supervision of its Board of Directors, and also under the direction of the Trustees and
SEBI. It is the AMC, which in the name of the Trust, floats new schemes and manage
these schemes by buying and selling securities. In order to do this the AMC needs to
follow all rules and regulations prescribed by SEBI and as per the Investment
Management Agreement it signs with the Trustees.

Compliance Officer

If any fund manager, analyst intends to buy/ sell some securities, the permission of the
Compliance Officer is a must. A compliance Officer is one of the most important
persons in the AMC. Whenever the fund intends to launch a new scheme, the AMC
has to submit a Draft Offer Document to SEBI. This draft offer document, after
getting SEBI approval becomes the offer document of the scheme. The Offer
Document (OD) is a legal document and investors rely upon the information provided
in the OD for investing in the mutual fund scheme. The Compliance Offic er has to
sign the Due Diligence Certificate in the OD. This certificate says that all the
information provided inside the OD is true and correct. This ensures that there is
accountability and somebody is responsible for the OD. In case there is no compliance
officer, then senior executives like CEO, Chairman of the AMC has to sign the due
diligence certificate. The certificate ensures that the AMC takes responsibility of the
OD and its contents.


A custodian’s role is safe keeping of physical securities and also keeping a tab on the
corporate actions like rights, bonus and dividends declared by the companies in which
the fund has invested. The Custodian is appointed by the Board of Trustees. The
custodian also participates in a clearing and settlement system through approved
depository companies on behalf of mutual funds, in case of dematerialized securities.
In India today, securities (and units of mutual funds) are no longer held in physical
form but mostly in dematerialized form with the Depositories. The holdings are held
in the Depository through Depository Participants (DPs). Only the physical securities
are held by the Custodian. The deliveries and receipt of units of a mutual fund are
done by the custodian or a depository participant at the instruction of the AMC and
under the overall direction and responsibility of the Trustees. Regulations provide that
the Sponsor and the Custodian must be separate entities.

Registrar and Transfer agents (RTA)

Registrars and Transfer Agents (RTAs) perform the important role of maintaining
investor records. All the New Fund Offer (NFO) forms, redemption forms (i.e. when
an investor wants to exit from a scheme, it requests for redemption) go to the RTA’s
office where the information is converted from physical to electronic form. How
many units will the investor get, at what price, what is the applicable NAV, what is
the entry load, how much money will he get in case of redemption, exit loads, folio
number, etc. is all taken care of by the RTA.


Once the 3 – tier structure is in place, the AMC launches new schemes, under the
name of the Trust, after getting approval from the Trustees and SEBI. The launch of a
new scheme is known as a New Fund Offer (NFO). We see NFOs hitting markets
regularly. It is like an invitation to the investors to put their money into the mutual
fund scheme by subscribing to its units. When a scheme is launched, the distributors
talk to potential investors and collect money from them by way of cheques or demand
drafts. Mutual funds cannot accept cash. (Mutual funds units can also be purchased
on-line through a number of intermediaries who offer on-line purchase / redemption
facilities). Before investing, it is expected that the investor reads the Offer Document
(OD) carefully to understand the risks associated with the scheme.
The investor has to fill a form, which is available with the distributor. The investor
must read the Offer Document (OD) before investing in a mutual fund scheme. In
case the investor does not read the OD, he must read the Key Information
Memorandum (KIM), which is available with the application form. Investors have the
right to ask for the KIM/ OD from the distributor. Once the form is filled and the
cheque is given to the distributor, he forwards both these documents to the RTA. The
RTA after capturing all the information from the application form into the system,
sends the form to a location where all the forms are stored and the cheque is sent to
the bank where the mutual fund has an account. After the cheque is cleared, the RTA
then creates units for the investor. The same process is followed in case an investor
intends to invest in a scheme, whose units are available for subscription on an on-
going basis, even after the NFO period is over.

Types of Mutual Fund


On the On the
basis of basis of
Execution yield
and investment
operation Pattern

Close Open Income Growth Specialised Taxation Sectoral

Index Fund
Ended Ended Fund Fund Fund Fund Fund
On the basis of Execution and operation

Close ended Fund

Under this scheme, the corpus of the fund and its duration are prefixed. In other
words, the corpus of the fund and the number of units are determined in advance.
Once the subscription reaches the predetermined level, the entry of investors is closed.
After the expiry of the fixed period, the entire corpus is distributed to the various unit
holders in proportion to their holding. Thus the fund ceases to be a fund after the final


1. The Period and / or the target amount of the fund is definite and fixed
2. Once the period is over and/ or the target is reached, the door is closed for the
investors. They cannot purchase any more units.
3. These units are public traded through stock exchange and generally there is no
repurchase facility by the fund.
4. The main objective of this fund is capital appreciation.
5. From the investors point of view it may attract more tax since, the entire
capital appreciation is realized at one stage itself.
6. If market condition is not favourable, it may also affect the investor since, he
may not get the full benefit of capital appreciation in the value of the
7. Generally, the prices of closed end scheme units are quoted at a discount of
upto 40% below the net asset value(NAV).

Open Ended Funds

It is just opposite to close ended fund. Under this scheme the size of the fund and/or
period of the fund is not predetermined. The investors are free to buy any number of
units at point of time. For instance, the unit scheme(1964) of the UTI is an open ended
fund, both in term of period and target amount. Anybody can buy this unit at any time
and sell it also at any time at his discretion.


1. There is complete flexibility with regard to one’s investment or dis-

investment. In other words, there is free entry and exit of investors in an open
ended fund. There is no time limit. The investors can join in and come out
form the fund as end when he desires.
2. These unit are not publicly traded out the fund is ready to repurchase then and
resell them at any time.
3. The investor is offered instant liquidity in the sense that the units can be sold
on any working day to the fund. In fact, the fund operates just like a bank
account wherein one can get cash across the counter for any number of units
4. Since the units are not listed on the stock market, their prices are linked to net
asset value (NAV) of the units. The NAV is determined by the fund and it
varies from time to time.

On the Basis of yield Investment Pattern: