Mutual Fund And Its Type

Mutual Funds and its Types

A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. They are professionally managed in a way that when people invest in the mutual funds, they get the services of a team of professionals. By investing in mutual fund, one can gain the services of professional fund managers, who would otherwise be costly for an individual investor. Professional fund managers can assess the risk profile of the investments. Without investing a large amount of money, one can enjoy the services. Since many investors are investing small amounts in a single mutual fund, risk (if any) gets divided among all of them, so mutual funds are better options for investments. Investments in a stock market go up or down with the change in prices of the stocks, so the biggest risk in investing in Mutual Funds is the market risk because of the economic alterations.

 An investment in mutual fund follows the following cycle:

 Open Ended: Under this scheme, the investors are free to buy or sell units at any point in time. This means that they do not have a maturity date. So your money is available to you any time you want. As new investors can purchase fresh units any day, the unit capital is case of an open-ended funds can fluctuate on daily basis.

 Closed Ended: Under this scheme, there is a stipulated maturity period. The investors can invest only during the launch period known as the NFO (New Fund Offer) period. Unlike open-ended funds, unit capital in case of closed-ended funds does not fluctuate on daily basis. Interval Fund: This is a scheme which operates as a combination of open and closed ended schemes. It allows investors to trade units at pre-defined intervals.

Term for mutual fund

Important Terms related to Mutual Funds in India

1. Arbitrage Fund

Definition: Arbitrage fund is a type of mutual fund that leverages the price differential in the cash and derivatives market to generate returns. The returns are dependent on the volatility of the asset. These funds are hybrid in nature as they have the provision of investing a sizeable portion of the portfolio in debt markets.

Description: Arbitrage funds are the panacea for low risk taking investors. In a situation of high and persistent volatility, arbitrage funds provide investors a safe avenue to park their hard earned money. These funds capitalize on the market inefficiencies and generate profits for the investors. As these funds
invest predominantly in equities, their tax treatment is at par with equity funds.

2. Benchmark

Definition: A benchmark is an unmanaged group of securities which are considered as a benchmark to measure a funds/stocks performance. Benchmarks are generally broad market indices like BSE Sensex, CNX
Nifty of the Indian stock market with which mutual fund returns are compared.

Description: If a fund returned 59% in a particular year, but the benchmark Sensex returned 70%, this infers the fund underperformed compared to the Sensex benchmark.
A benchmark indicates directly the fund managers performance. For instance, a mutual fund which outperforms the benchmark is a sign of an efficient fund manager.

3. Benchmark Government Bond

Definition: Benchmark government bond is a debt security issued by the Central government with a residual maturity of 10 years.

Description: This bond is backed by sovereign guarantee. Hence investors dont face any default risk. At the maturity of one benchmark sovereign bond, another one with the same residual maturity is issued by the
Central government.

The coupon rate is decided by way of auction. This bond has the highest liquidity amongst similar maturity bonds. Once fixed, the coupon rate remains constant throughout the term of the bond. Only the yieldchanges commensurate with the interest rates and accordingly the price of the bond changes. There exists an inverse relationship between the bond yield and its price.

4. Closed-ended Funds

Definition: The unit capital of closed-ended funds is fixed and they sell a specific number of units. Unlike in open-ended funds, investors cannot buy the units of a closed-ended fund after its NFO period is over.

Description: This means that new investors cannot enter, nor can the existing investors exit till the term of the scheme ends. However, to provide a platform for investors to exit before the term, the fund houses list 

their closed-ended schemes on a stock exchange.

Trading on a stock exchange enables investors to buy and sell units through a broker in the same manner as transacting the shares of a company. The units may trade at a premium or discount to the NAV depending on the investors expectations of the funds future performance and prospects.

The demand and supply of fund units and other market factors also affect their price.The number of outstanding units of a closed-ended fund does not change as a result of trading on the stock exchange. Apart from listing on an exchange, these funds sometimes offer to buy back the units, thus offering another avenue for liquidity. Sebi regulations ensure that closed-ended funds provide at least one
of the two avenues to investors for entering or exiting.
The closed-ended funds are free from the worry of regular and sudden redemption and their fund
managers are not worried about the fund size.

5. Credit Rating

Definition: 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.

Description: Usually, is in the form of a detailed report based on the financial history of borrowing or
lending and credit worthiness of the entity or the person obtained from the statements of its assets and liabilities with an aim to determine their ability to meet the debt obligations. It helps in assessment of the solvency of the particular entity. These ratings based on detailed analysis are published by various credit rating agencies like Standard & Poors, Moodys Investors Service, and ICRA, to name a few.

6. Debt Funds

Definition: Debt funds are mutual funds that invest in fixed income securities like bonds and treasury bills.
Gilt fund, monthly income plans (MIPs), short term plans (STPs), liquid funds, and fixed maturity plans
(FMPs) are some of the investment options in debt funds. Apart from these categories, debt funds include various funds investing in short term, medium term and long term bonds.

Description: Debt funds are preferred by individuals who are not willing to invest in a highly volatile equity market. A debt fund provides a steady but low income relative to equity. It is comparatively less volatile.

7. Duration

Definition: As the term suggests, it is expressed in the form of number of years and measures a bonds
sensitivity to change in interest rates. To be specific, it measures the change in market value of security
due to 1% change in interest rates.

Description: Usually, the higher the duration, the more is the volatility in the prices. In other words, it is the number of years required to get the present value of future payments from a security/bond.

8. Entry Load

Definition: Mutual fund companies collect an amount from investors when they join or leave a scheme.
This fee is generally referred to as a load. Entry load can be said to be the amount or fee charged from an investor while entering a scheme or joining the company as an investor.

Description: Generally, an entry load is collected to cover costs of distribution by the company. Different mutual funds houses charge different fees as an entry load. In India, this charge was usually of about 2.25% of the value of investment. From August 2009, however, SEBI has done away with this practice of charging entry load for mutual funds.

9. Exit Load

Definition: Mutual funds companies collect an amount from investors when they join or leave a scheme.
This fee charged is generally referred to as a load. Exit load is a fee or an amount charged from an investor for exiting or leaving a scheme or the company as an investor.

Description: The aim behind the collection of this commission at the time investors exit the scheme is to discourage them from doing so, i.e. to reduce the number of withdrawals by the investors from the
schemes of mutual funds. Different mutual funds houses charge different fees as an exit load.

10. Treasury Bills

Definition: These are government bonds or debt securities with maturity of less than a year.

Description: T- bills are issued to meet short-term mismatches in receipts and expenditure. Bonds of longer maturity are called dated securities.

11. Trustee

Definition: Trustee is an individual who is responsible for a property or an organization on behalf of some other individual or a third party.

Description: Trustee is supposed to make profitable decision for the entity under it authorization. It is a
legal relationship between the trustee and the party, where the trustee is totally responsible for the
maintenance, performance, and profitability of the trust under his guidance. Usually the trustee is not to make any profits, for himself, using the resources of the trust.

12. Ultra Short Term Funds

Definition: Ultra short-term funds invest in fixed-income instruments which are mostly liquid and have short-term maturities.

Description: Ultra short-term funds help investors avoid interest rate risks, yet they are riskier and offer
better returns than most money market instruments. Liquid and ultra short-term funds are similar on
various lines, yet there are differences between a liquid fund and an ultra short-term fund.

13. Yield To Maturity

Definition: It is also known as redemption yield. As the name suggests, if an investment is held till its
maturity date, the rate of return that it will generate will be Yield to Maturity.

Description: Calculation of YTM is a complex process which takes into account the following key factors:
1. Current Market Price
2. Par Value
3. Coupon Interest Rate
4. Time to maturity

14. Systematic Investment Plan

Definition: Systematic Investment Plan is an investment strategy wherein an investor needs to invest the same amount of money in a particular mutual fund at every stipulated time period.

Description: Investing in SIP enables an investor to take part in the stock markets without actively timing them and he/she can benefit by buying more units when the price falls and less units when the price rises.
This scheme helps reduce the average cost per unit of investment through a method called Rupee Cost
Averaging.

For Example: A person invests Rs 1000 for ten months in SIP. We will find out that the actual average purchase cost of asset would be lower than the average NAV of his investment over 10 months, which is the key benefit of Rupee Cost Averaging.

Actual average purchase cost as per SIP = (1000X10)/ (100+200+67+71+67+50+45+40+37+34) = 14.06

15. Systematic Transfer Plan

Definition: STP refers to the Systematic Transfer Plan whereby an investor is able to invest lump sum
amount in a scheme and regularly transfer a fixed or variable amount into another scheme.

Description: In case of a volatile market, STP helps the investors to periodically transfer funds from one
scheme (source scheme) to another (target scheme) and help them save the effort and time by
compressing multiple instructions required for redemption from one scheme to invest in the other into a single instruction.

Transfers are usually made from debt funds to equity funds if the market is doing well and vice versa if the market is not performing well. The STP can be classified based on the amount transferred from the source scheme to the target scheme. If a fixed sum is transferred from the source to the target scheme, then its called Fixed STP, and if the sum transferred is the profit part of the investment of source scheme, then its called Capital Appreciation STP.

16. Systematic Withdrawal Plan

Definition: SWP refers to Systematic Withdrawal Plan which allows an investor to withdraw a fixed or
variable amount from his mutual fund scheme on a preset date every month, quarterly, semi annually or
annually as per his needs.

Description: An investor can customize the cash flows as desired; he can either withdraw a fixed amount or just the capital gains on his investments. SWP provides the investor with a regular income and returns on the money that is still invested in the scheme.

For Example: You have 8,000 units in a MF scheme. You have given instructions to the fund house that you want to withdraw Rs. 5,000 every month through SWP.

On 1 January, the NAV of the scheme is Rs. 10.

Equivalent number of MF units = Rs. 5,000/Rs. 10 = 500

500 units would be redeemed and Rs. 5,000 would be given to you.

Your remaining units = 8,000 - 500 = 7500

Now, on 1 February, the NAV is Rs. 15. Thus,

Equivalent number of units = Rs. 5000/Rs. 15 = 333
333 units would be redeemed from your MF holdings, and Rs. 5,000 would be given to you.

Your remaining units = 7500 - 333 = 7167 And so this process continues till the time you want the
withdrawals.

17. Sortino Ratio

Definition: Sortino ratio is the statistical tool that measures the performance of the investment relative to the downward deviation. Unlike Sharpe, it doesnt take into account the total volatility in the investment.

Description: Sortino ratio is similar to Sharpe ratio, except while Sharpe ratio uses standard deviation in
the denominator, Frank A Sortino uses downside deviation in the denominator.Standard deviation involves both the upward as well as the downward volatility.
Since investors are only concerned about the downward volatility, Sortino ratio presents a more realistic picture of the downside risk ingrained in the fund or the stock.

18. Style Box

Definition: Style box, designed by Morningstar, is a 3x3 square grid which shows the investment style that the fund manager is following to manage the funds portfolio.

Description: For equity funds the horizontal axis of the style box shows the valuation of the fund which is subdivided into categories: value, blend (a value/growth mix) and growth. Growth funds are funds that are expected to grow at a pace that outweighs the average market growth rate.Value stocks are stocks that are available at a price lower than their intrinsic value, but have a potential to unlock the value in the long run. Blend style of investing combines the features of both value and growth funds. The vertical axis shows market capitalization which is further divided according to company-sizes (based on market-capitalization).

19. Swap

Definition: Swap refers to an exchange of one financial instrument for another between the parties
concerned. This exchange takes place at a predetermined time, as specified in the contract.

Description: Swaps are not exchange oriented and are traded over the counter, usually the dealing are
oriented through banks. Swaps can be used to hedge risk of various kinds which includes interest rate risk and currency risk. Currency swaps and interest rates swaps are the two most common kinds of swaps traded in the market.

20. Sector Specific Funds

Definition: Mutual funds which invest in a particular sector or industry are said to be sector-specific funds. Since the portfolio of such mutual funds consists mainly of investment in one particular type of sector, they offer less amount of diversification and are considered to be risky.

Description: Sector-specific funds are considered to be relatively more risky compared to a diversified
fund. As these funds take exposure in a single sector, the concentration risk is high. Their performance is aligned with the performance of the sector in which they are investing. As the exposure is not broad based, it carries a high degree of risk. This type of funds is normally suitable for a highly aggressive investor.

Some of the sector-specific funds are mentioned below:

 Banking funds: These are sector-specific mutual funds having a portfolio comprising mainly of
equities of different banks. So if in general the banking sector is performing well, one can expect
good returns.

 Pharma funds: These are sector-specific mutual funds which have a portfolio comprising mainly of
different pharmaceutical companies.

 Technology funds: Sector-specific mutual funds which have a portfolio comprising mainly of IT
companies.

 FMCG funds: Sector-specific mutual funds catering to the investments in the fast moving commodity goods stocks.

21. Expense Ratio

Definition: Expense ratio is the fee charged by the investment company to manage the funds of investors.

Description: All the investment companies incur cost for operating mutual funds and they charge a
percentage of asset funds to cover the expenses. Suppose the expense ratio is 1 per cent and your
investment is Rs 10,000, then Rs 100 is what you pay to the company as operating fee.

Major components of the cost are like legal cost, administration cost, advertising cost and the
management cost. This fee is different from the sales fee and commission or the expenses incurred on the buying and selling of portfolio.

22. Geometric Average Return

Definition: Popularly called Geometric Mean Return, it is primarily used for investments that are
compounded. It is used to calculate average rate per period on investments that are compounded over
multiple periods.

23. Gold Fund

Definition: Gold fund, as the name suggests, invests in various forms of gold. It can be in the form of
physical gold or stocks of gold mining companies. Gold funds which invest in physical gold offer investors the convenience of buying pure gold at low cost. There is no possibility of theft and you can sell these units at market linked prices anytime.

Description: There are various types of gold funds across the globe:
Gold Mining Funds: These funds invest in gold mining companies and returns from such funds are
dependent on the performance of these companies. Investment demand for gold is borne out of the
economic uncertainties as gold is considered to be a safe heaven when equity markets are tumbling.
Dichotomy between demand and supply also govern the gold prices.

Gold ETFs: Gold ETFs are exchange traded funds where the underlying asset is gold. Therefore, value of gold ETF depends upon the price of gold. One needs a demat account to invest in an ETF. The concept of gold ETFs in India was first introduced by Benchmark Asset Management Company, in India.

Gold Fund of Fund (FoF) : Gold FoF invests in the units of gold ETF and does not require a demat account.

Inflation and its types

Inflation

The general rise in the price level of goods and services.

It is estimated as the percentage rate of change in price index over the reference time-period.

Currently in India inflation rate is measured with the help of Consumer Price Index- combined (Base year- 2012).

Till April 2014, Inflation rate was measured with the help of WPI (Wholesale Price Index).

Rate of Inflation= (Current period price index-Reference period price index)/(Reference Period Price Index)×100

Type of Inflation

Based on rate of rising in Inflation

1. Creeping Inflation

Price rise at very small rate (< 3 %)

It is considered safe and essential for the economy.

2. Walking or Trotting Inflation

Price rise at moderate rate (3 % < Inflation < 10 %)

Inflation at this rate is a warning signal for the Economy.

3. Running Inflation

Price rise at high rate (10 % < Inflation < 20 %)

It affects economy adversely.

4. Hyperinflation or Galloping Inflation or Runway Inflation

Price rise at very high rate (20 % < Inflation < 100 %)

This situation brings total collapse of Economy.

Based on causes

Demand Pull Inflation: When Inflation arises due to higher demand for goods and services over the limited supply.

Cost Push Inflation:  When Inflation arises due to higher input cost (Example- raw material, wages etc.) for goods and services over the limited supply.

Other definitions-

1. Deflation

It is opposite to Inflation.

Reduction of general level of price in an economy.

In this price index measured is negative.

2. Stagflation: When stagnation and inflation coexist in the economy.
3. Stagnation: low national income growth and high unemployment.

4. Disinflation

When the rate of Inflation is at a slower rate.

Example:
If the Inflation of last month was 4 % and rate of inflation in the current month is 3 %.

5. Reflation: 

Deliberate action of government to increase the rate of inflation to redeem economy from a deflationary situation.

6. Core Inflation: 

It is a measure of price rise in the economy excluding the price rise of some products (whose price is volatile and temporary in nature.

Effects of Inflation

1. Redistribution of income and wealth

Due to the effect of inflation, some group of people loses and another group of people gains.

Example-
In case of debtors and creditors
Debtor- gainer
Creditor- loser
In case of Producers and Consumers
Producer- gainer
Consumer- loser

2. Effects on Production and Consumption

Due to inflation, the demand decreases which curtails the production.

People try to use fewer services which lead to decrease in consumption.

3. Unfavorable Balance of Payments

Export decreases and import increases from other countries which lead to decrease in forex reserve.

Measures to control Inflation

1. Credit control-

It is used by RBI.

2. Increase in Direct Taxes

Due to increase in direct taxes, people have less money available to them and low demand from them leads to a lower price.

3. Price Control

By fixing maximum price limit by authorities.

4. Trade measures

Maintain proper supply in the economy by export and import of goods and services.

Various Price Indices in India

Price Indices in India

Various weighted price indices are calculated in India.

These are-
1. Wholesale Price Index (WPI)
2. Old Consumer Price Index
(a) Consumer Price Index for Industrial Workers (CPI- IW)
(b) Consumer Price Index for Urban Non- Manual Employees (CPI- UNME)
(c) Consumer Price Index for Agriculture Labourers (CPI-AL)
(d) Consumer Price Index for Rural Labourers (CPI- RL)
3. New Consumer Price Index (Introduced in February 2011)
(a) CPI (Rural)
(b) CPI (Urban)
(c) CPI (Combined)
4. Consumer Food Price Index

Till April 2014, the Inflation rate was measured with the help of WPI (Wholesale Price Index).

Currently, in India inflation rate is measured with the help of Consumer Price Index- combined.

1. Wholesale Price Index-

It measures the change in the price of commodities traded in the wholesale market.

It is also known as headline inflation.

Current base year- 2011-12.

The index basket of the current series has a total of 697 items (117 items for Primary Articles, 16 items for Fuel & Power and 564 items for Manufactured Products.)

Published by- Economic Advisor, Ministry of Commerce & Industry.

2. Old Consumer Price Index-

(a) Consumer Price Index for Industrial Workers (CPI- IW)

It measures the change in the price of commodities consumed by industrial workers.

Current base year- 2001

Published by- Labour Bureau

Consumer Price Index for Urban Non- Manual Employees (CPI- UNME)

It measures the change in the price of commodities consumed by Non- Manual Employees.

Published by- CSO (Central Statistics Office, Ministry of Statistics)

It has been discontinued.

(b) Consumer Price Index for Agriculture Labourers (CPI-AL)

It measures the change in the price of commodities consumed by agriculture labourers.

It is a subset of CPI-RL.

Current base year- 1986-87

Published by- Labour Bureau

Used for revising minimum wages

(c) Consumer Price Index for Rural Labourers (CPI- RL)

It measures the change in the price of commodities consumed by rural labourers (include agriculture labourers, labourers of village and cottage industries).

Current base year- 1986-87

Published by- Labour Bureau

Used for revising minimum wages.

3. New Consumer Price Index (Introduced in February 2011)

(a) CPI (Rural)

Current base year- 2012

Published by- CSO (Central Statistics Office, Ministry of Statistics)

(b) CPI (Urban)

Current base year- 2012

Published by- CSO

(c) CPI (Combined)

Current base year- 2012

Published by- CSO

Currently, in India inflation rate is measured with the help of Consumer Price Index- combined.

4. Consumer Food Price Index-

It is a measure of change in retail prices of food items consumed by the people.

Current base year- 2012

Published by- CSO

Others

Urjit Patel committee

The committee was appointed to examine the current monetary policy framework of the Reserve Bank of India.

Major Recommendations of the committee are-
(a) CPI range should be between 4 % +/-2 %.
(b) Repo rate always should be more than CPI.
(c) Proposed formation of Monetary Policy committee to fix accountability.
(d) Government to help RBI to achieve set targets.

GDP Deflator

Used to calculate overall price rise.

Known as implicit price deflator.

GDP Deflator= (Nominal GDP/Real GDP) × 100
Here Real GDP- GDP calculated at constant Price
Nominal GDP- GDP calculated at current Price

The GDP deflator is the most accurate because it covers all goods and services produced in the economy. The other indices (WPI and CPI) derive from price quotations for select commodity baskets.

The government does not use it because GDP deflator data comes quarterly (not weekly/monthly basis).

Regulatory (Apex) Bodies in Financial sector in India

RBI (Reserve Bank of India)

RBI was established in April 1935 under Reserve Bank of India, 1934.

On the recommendation of Hilton-Young Commission.

Central Bank of India which was nationalized in 1949.

Central office initial was established in Calcutta and later moved to Mumbai in 1937.

Official Directors- Governors and not more than fourdeputy governors.
Currently following persons are on following posts-
Governor- Dr Urjit R. Patel

RBI performs his function under the guidance of the Board of financial supervision.
Board for Financial Supervision (BFS)-
Constituted in November 1994.The Board is constituted by co-opting four Directors from the Central Board and is chaired by the Governor.

Important Acts Administered by RBI-
(i) Reserve Bank of India Act, 1934
(ii) Public Debt Act, 1944/Government Securities Act, 2006
(iii) Government Securities Regulations, 2007
(iv) Banking Regulation Act, 1949
(v) Foreign Exchange Management Act, 1999
(vi) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002
Other Relevant Acts-
(i) Negotiable Instruments Act, 1881
(ii) Companies Act, 1956/ Companies Act, 2013
(iii) Deposit Insurance and Credit Guarantee Corporation Act, 1961
(iv) Regional Rural Banks Act, 1976
(v) National Bank for Agriculture and Rural Development Act, 1981
(vi) National Housing Bank Act, 1987
(vii) Competition Act, 2002
(viii) Indian Coinage Act, 2011

RBI has 20 Regional offices and 11 Sub Offices

Following are the fully owned subsidiary of RBI-
(i) Deposit Insurance and Credit Guarantee Corporation of India (DICGC)
(ii) Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)
(iii) National Housing Bank (NHB)

First governor of RBI- Sir Osborne Smith
First governor of RBI after nationalization- C. D. Deshmukh
First women Deputy Governor of RBI -K.J.Udeshi.

RBI Emblem: Tiger and Palm tree

SEBI (Securities and Exchange Board of India)

Established in April 1992 under SEBI Act, 1992.

Regulator for the securities market in India.

Headquarters- Mumbai

Current Chairman- Ajay Tyagi

The Forwards Market Commission, the commodities market regulator, was merged with the Securities and Exchange Board of India in December 2015.

IRDAI (Insurance Regulatory and Development Authority of India)

Apex Body in the insurance sector in India.

Based on Insurance Regulatory and Development Authority Act, 1999.

Established on the recommendation of Malhotra Committee report of 1994.

Headquarter- Hyderabad, Telangana

The Body consists of 10 members-
(a) Chairman (b) Five full-time members (c) Four part-time members.

Current Chairman- T. S. Vijayan

NABARD (National Bank for Agriculture and Rural Development)

Apex development financial institution in India.

Headquarter- Mumbai

Established in July 1982 under NABARD Act 1981.

On the recommendation of B. Sivaraman Committee.

Replaced the RBI’s Agriculture Credit Department and Rural Planning and Credit cell.

It is a specialised bank for Agriculture and rural development in India.

Rural Innovation Fund and Rural Infrastructure Development Fund have been set under NABARD.

Important Functions-
(i) Recommends about licensing for RRBs and Cooperative banks to RBI.
(ii) Refinances the financial institutions which finance the rural sector.

Current Chairman- Dr Harsh Kumar Bhanwala

SIDBI (Small Industries Development Bank of India)

Established in April 1990 under SIDBI Act, 1989.

Provide refinance facilities and short-term lending to industries and MSME’s.

Headquarter- Lucknow

Associates of SIDBI-
(i) Credit Guarantee Fund Trust for Micro and Small Enterprises- provides guarantees to banks for collateral-free loans extended to SME.
(ii) SIDBI Venture Capital Ltd
(iii) SME Rating Agency of India Ltd. (SMERA)- Provides composite ratings to SME. 
(iv) ISARC - India SME Asset Reconstruction Company in 2009, as specialized entities for NPA resolution for SME.

MUDRA Bank is a subsidiary of SIDBI.

EXIM (Export-Import Bank of India)

Premier export finance institution in India

Established in 1982 under EXIM Act 1981.

Unemployment and its type

Unemployment

It is a situation in which people are ready and willing to work at the existing rate of wages but still, they cannot get work.

Measurement unemployment and employment are done by NSSO (National Sample Survey Organization) in India.

NSSO divide people into the following three categories -
(a) Working people (engaged in an economic activity)
(b) Not working (looking for work)
(c) Neither working nor looking for workPeople in category (a) are called 
People in category (a) are called workforce.
People in category (b) are called unemployed.People in categories (a) and (b) are called Labour force.
People in category (c) are called not in the Labour force.
Number of unemployed = Labour force – Workforce

Unemployment data in India are kept under the Ministry of Labour and Employment.

Types of Unemployment-

Structural Unemployment-

Caused by structural change.

Example- technological change, growing population etc.

Frictional Unemployment-

When people shift from one job to another and remain unemployed during this interval period.

Cyclical Unemployment (Demand Deficiency Unemployment)-

When people are thrown out from the job due to a decrease in demand.

Example- recession

Disguised Unemployment-

In this type of employment, people are employed but their marginal productivity is zero.

Example- One man is engaged in some agriculture work, his friend joins him but the productivity of both remains same. His friends come under disguised unemployment.

Educated Unemployment-

If one educated person not able to get a suitable job suited to his qualification.

Example- Engineering graduate is getting clerk post instead of engineer post.

Open Unemployment-

A condition in which people do not find any work to do.

It includes both skilled and non-skilled people.

Under Unemployment-

When people obtain work but their efficiency and capability are not utilized at their optimum and they contribute in the production up-to a limited level.

Voluntary Unemployment-

In this type of unemployment, jobs are available but individual wants to remain idle.

Example- lazy people, people who have ancestor property do not want to earn.

Natural Unemployment-

2 to 3 % unemployment considered natural and cannot be eliminated.

Chronic Unemployment-

Caused due to the long-term unemployment present in the economy.

Seasonal Unemployment-

In this type of unemployment, people are unemployed for few months of the year.

Example- Farmers

Taxation In India

In India, Taxes are divided into the following Six Groups/भारत में, करों को निम्नलिखित छह समूहों में विभाजित किया गया है:-

India is a Federal state. Power is divided between the Union and the states. The functions have been classified as exclusively for the centre, exclusively for the state and both for the centre and the states.

भारत एक संघीय राज्य है। सत्ता, संघ और राज्यों के बीच विभाजित है। कार्यों को विशेष रूप से केंद्र के लिए, विशेष रूप से राज्य के लिए और केंद्र और राज्यों दोनों के लिए भी वर्गीकृत किया गया है।

The constitution provided a way to distribute the revenues from captain taxes collected by the centre among the states. To ensure a fair and judicious balance between the respective shares of the centre and states. Article 280 of our constitution empowers the President of India to set up a Finance Commission every five years.

संविधान ने केंद्र द्वारा राज्यों से एकत्र किए गए मुख्य करों से राजस्व को वितरित करने का एक तरीका प्रदान किया। केंद्र और राज्यों के संबंधित शेयरों के बीच एक निष्पक्ष और विवेकपूर्ण संतुलन सुनिश्चित करने के लिए हमारे संविधान का अनुच्छेद 280 भारत के राष्ट्रपति को हर पांच साल में एक वित्त आयोग स्थापित करने का अधिकार देता है।

In India, taxes are divided into six groups/भारत में, करों को छह समूहों में विभाजित किया गया है:

(I) Taxes Levied, Collected and Retained by the Centre/केंद्र द्वारा लगाया व एकत्रित किया गया कर:-

These taxes are belonging to the centre exclusively. In other words, no part of the proceeds of these taxes can be assigned to the states. The following taxes fall under this category:

ये कर विशेष रूप से केंद्र से संबंधित हैं। दूसरे शब्दों में, इन करों की आय का कोई भी हिस्सा राज्यों को नहीं सौंपा जा सकता है। निम्नलिखित कर इस श्रेणी में आते हैं:

Corporation Tax (Corporate tax)/निगम कर

(Customs Duties/सीमा शुल्क

Surcharge on Income Tax/आयकर पर अधिभार

Taxes on the capital value of assets of individual and companies/व्यक्तिगत और कंपनियों की संपत्ति के पूंजी मूल्य पर कर

Fees on matters of the Union list/संघ सूची के मामलों पर शुल्क

(II) Taxes Levied by the Centre but Collected and Appropriated by the States/केंद्र द्वारा लगाए गए लेकिन राज्यों द्वारा एकत्रित और विनियोजित कर:-

The following taxes are included in this category/इस श्रेणी में निम्नलिखित कर शामिल हैं:

Stamp duties on bills of exchange, cheques, promissory notes and others/विनिमय, चेक, वचन पत्र और अन्य के बिलों पर स्टाम्प शुल्क

Excise duties on medicinal and toilet preparation containing alcohol/औषधीय और शौचालय की सामग्री व शराब पर उत्पाद शुल्क

Those taxes which form part of the union list are levied by the centre but (a) collected by the states within which such duties are levied, and (b) collected by the centre when such duties are levied within any Union Territory

वे कर जो संघ सूची का हिस्सा हैं, केंद्र द्वारा लगाए जाते हैं, लेकिन (ए) उन राज्यों द्वारा एकत्र किए जाते हैं जिनके भीतर इस तरह के करों को लगाया जाता है, और (ख) केंद्र द्वारा एकत्र किए जाते हैं जब किसी केंद्र शासित प्रदेश के भीतर इस तरह के शुल्क लगाए जाते हैं।

(III) Taxes Levied and Collected by the Centre but Assigned to the States/वे कर, जिसे केंद्र द्वारा लगाया व एकत्र किया जाता है लेकिन राज्यों को सौंप दिया जाता है:-

This category includes the following duties and taxes/इस श्रेणी में निम्नलिखित शुल्क और कर शामिल हैं:

Duties on succession to property (other than agricultural land)/संपत्ति के उत्तराधिकार पर शुल्क(कृषि भूमि के अलावा)

Estate duty on the property (other than agricultural land)/संपत्ति पर संपदा शुल्क (कृषि भूमि के अलावा)

Terminal taxes on goods and passengers carried by railways, sea and airways/रेलवे, समुद्र और वायुमार्ग द्वारा किए गए परिवहन के लिए माल और यात्रियों पर टर्मिनल कर

Taxes on railway fares a freight/रेल भाड़े पर कर 

Taxes on the transaction in stock exchanges and future markets (other than stamp duties)/स्टॉक एक्सचेंज और भविष्य के बाजारों में लेनदेन पर कर (स्टांप ड्यूटी के अलावा)

Taxes on the sale or purchase of newspapers and taxes on advertisements published in them/समाचार पत्रों की बिक्री या खरीद पर कर और उनमें प्रकाशित विज्ञापनों पर कर

Taxes on the sale or purchase of goods in course of inter-state trade or commerce (other than newspaper)/अंतरराज्यीय व्यापार या वाणिज्य (अखबार के अलावा) के दौरान माल की बिक्री या खरीद पर कर

Taxes on the consignment of goods in the course of inter-state trade or commerce/अंतरराज्यीय व्यापार या वाणिज्य के दौरान माल की परिवहन पर कर

The net proceeds of these duties and taxes are assigned to states in accordance with the principles laid down by the parliament.

इन शुल्कों और करों की शुद्ध आय संसद द्वारा निर्धारित सिद्धांतों के अनुसार राज्यों को सौंपी जाती है।

(IV) Taxes Levied and Collected by the Centre and Compulsorily Distributed between the Centre and the States/केंद्र द्वारा लगाए व एकत्रित किये गए परन्तु अनिवार्य रूप से केंद्र व राज्यों के बीच बांटे गए कर:-

Taxes on income (other than agricultural income and corporation tax) shall be levied and collected by the centre but compulsorily distributed between the centre and the states in such manner as prescribed by the president on the recommendations of the Finance Commission. The obligatory sharing of income tax is provided by Article 270 of the Constitution.

आय पर कर (कृषि आय और निगम कर के अलावा) केंद्र द्वारा लगाया जाएगा और एकत्र किया जाएगा, लेकिन केंद्र और राज्यों के बीच अनिवार्य रूप से वितरित किया जाएगा, जैसा कि वित्त आयोग की सिफारिशों पर राष्ट्रपति द्वारा निर्धारित किया गया है। आयकर के अनिवार्य बंटवारे को संविधान के अनुच्छेद 270 द्वारा सुझाव प्रदान किया गया है।

(V) Taxes Levied and Collected by the Centre and may be distributed between the Centre and the States/केंद्र द्वारा लगाया व एकत्र किया गया परन्तु केंद्र व राज्यों के बीच इक्षित बंटवारे वाला कर:-

Under this category falls the excise duties included in the Union list except those on medicinal and toilet preparations. These are levied and collected by the centre. The net proceeds of such duties can be paid to states out of the Consolidated Fund of India only if the parliament so provides.

इस श्रेणी के तहत औषधीय और शौचालय की सामग्री को छोड़कर संघ सूची में शामिल उत्पाद शुल्क आती है। इन्हें केंद्र द्वारा लगाया जाता है और एकत्र किया जाता है। ऐसे शुल्कों की शुद्ध आय का भुगतान भारत के समेकित कोष में से केवल तभी किया जा सकता है जब संसद ऐसा प्रदान करती है।

Further, the principles of distribution shall also be laid down by the parliament. It is to be noted that sharing of the proceeds, of income tax, is obligatory, while that of excise duties is permissible.

इसके अलावा, वितरण के सिद्धांतों को भी संसद द्वारा निर्धारित किया जाएगा। यह ध्यान दिया जाना चाहिए कि आय का कर, आयकर का बंटवारा अनिवार्य है, जबकि उत्पाद शुल्क अनुमत (आज्ञा पाने योग्य) है।

(VI) Taxes Levied and Collected and Retained by States/राज्यों द्वारा लगाया, एकत्र किया गया और अपनाया गया कर:-

The following taxes and duties exclusively belong to states. They are mentioned in the State list. Every state is entitled to levy, collect and appropriate these taxes. The taxes are/निम्नलिखित कर और शुल्क विशेष रूप से राज्यों के हैं। राज्य सूची में उनका उल्लेख है। हर राज्य इन करों को वसूलने, इकट्ठा करने और अपनाने का हकदार है। ये कर हैं:-

Duty on succession to agricultural land/कृषि भूमि के उत्तराधिकार पर शुल्क 

Estate duty on agricultural land/कृषि भूमि पर संपदा शुल्क

Land revenue/भू-राजस्व 

Tax on agricultural income/कृषि आय पर कर

Tax on land and buildings/भूमि और भवनों पर कर

Capitation taxes/प्रतिव्यक्ति कर

Tax on mineral rights/खनिज अधिकारों पर कर

Tax on the consumption or sale of electricity/बिजली की खपत या बिक्री पर कर

Tax on vehicles/वाहनों पर कर

Tax on the sales and purchase of goods (other than newspaper) for e.g. Sales tax/माल (अखबार के अलावा) की बिक्री और खरीद पर कर। जैसे- बिक्री कर

Tolls Taxes/टोल टैक्स

Tax on professions, trades and employment/व्यवसायों, व्यापारों और रोजगार पर कर

Banking Structure In India

Banking System and its Structures

Money Market

In this borrowing and lending of funds take place up to 1 years.

It is used for short-term credit.

It includes Reserve Bank of India, Commercial Banks, Cooperative Banks, Regional Rural Banks, Some NBFC’s etc.

The composition of Money Market

Indian Money market consists of organised sector and unorganised sector.

1. Organised Sector-

It is also divided into two categories-         

a. Banking
b. Sub Markets

a. Banking-

In this, we include Commercial Banks, Regional Rural Banks, and Cooperative Banks.

Commercial Banks-

Regulated under Banking Regulation act 1949.

They can accept deposits, can provide loans and other financial services to earn profit.

Commercial Banks consists of- Public Sector Banksand Private Sector Banks.

(i) Public Sector Banks-

In these Banks majority of shares (more than 50 %) are held by Government.

Currently, in India, there are 21 Public sector banks after the merger of SBI with their associate banks and Bhartiya Mahila Bank (BMB).

The Nationalisation of Banks was done by government in two stages-
The first stage of nationalization took place in July 1969, in which fourteen Banks were nationalized.
The second stage of nationalization of Banks took place in April 1980, in which 6 banks were nationalized.
Objectives of Nationalization of Banks-
1. Reducing Private Monopolies
2. Social Welfare 
3. Expansion of Banking Facilities
4.Focus on Priority Sector Lending

(ii) Private Sector Banks-

In these Banks, majority parts of share are not held by the government.

These banks consist of both Indian Banks as well as foreign banks.

Private banks which were set up before 1990 (liberalisation of the economy) are categorised as Old Banks.

Private banks which were set up after 1990 (liberalisation of the economy) are categorised as New Banks.

Local Area Banks- Private Banks which are allowed to operate in the limited area called local area banks and registered under the companies act, 1956. The minimum capital required for these are Rs. 5 crores.

(iii) Small Finance Banks- 

(iv) Payment Banks-

Regional Rural Banks-

Established under RRB Act, 1976.

Set up by Public Sector Banks.

The objective is to increase credit flow to rural areas.

After Kelkar committee’s recommendations in April 1987, no new RRBs have been opened.

Cooperative Banks-

Established with the aim of funding agriculture, cottage industries etc.

Deposits and lending Both activities can do.

NABARD (National Bank for Agriculture and Rural development) is the apex body of the cooperative sector in India.

Composition of Cooperative Banks-

1. Rural Cooperative Credit Institutions

(a) Short Term Structure-

Lend up to one year.

It is divided into three-tiered setup-

(i) State Cooperative Bank-

Apex body for cooperative banks in the state.

(ii) Central or District Cooperative Banks-

Operate at the district level.

(iii) Primary Agriculture Credit Societies-

Operate at the village level.

(b) Long-Term Structure-

Lend for more than one year to twenty-five years.

It is divided into two-tiered setup-
(i) State Cooperative Agriculture and Rural Development Banks and
(ii) Primary Cooperative Agriculture and Rural Developments Banks

2. Urban Cooperative Credit Institutions

Set up in urban and semi-urban areas.

Lend to small businesses and borrowers.

Classification of Banks based on schedule of RBI Act 1934-

All banks (Commercial Banks, RRB, Cooperative Banks) can be classified into scheduled and non-scheduled banks.

1. Scheduled Banks-

Banks those are listed in the second schedule of RBI Act, 1934.

Eligible for obtaining loans from RB on Bank Rate.

2. Non- Scheduled Banks-

Banks those are not listed in the second schedule of RBI Act, 1934.

Generally, not eligible for obtaining loans from RBI.

Keep CRR with itself, not with RBI.

b. Sub Markets-

Sub Market, market to generate resources for investment and to meet the shortage of money for regular activities.

The government, Financial Institutions and Industries take part in submarket.

Composition of Sub Market-

(i) Call Money Market-

Known as Short Notice Market.

Generally used for inter-bank borrowing and lending.

Loans for a range from One to Fourteen Days.

It is also divided into two categories- A. Call market or Overnight Market (Within one Day) B. Short Notice market (up to fourteen days)

(ii) Bill Market or Discount Market-

(a) Treasury Bills-

Issued by Government treasury.

Used for short-term credit.

Non-interest bearing (Zero Coupon bonds), issued at discount price.

(b) Commercial Bill Market-

Bills other than treasury bills.

Issued by traders and industries.

(iii) Dated Government Securities-

Used for long-term maturity.

(iv) Certificates of Deposits

Issued by commercial banks and financial Institution

(v) Commercial Paper-

Issued by corporate, Primary dealers and financial institutions.

2. Unorganised Sector-

(i) Money Lenders
(ii) Merchant Cum Money Lenders

*******************************============*************************

Big Bank Theory

Payments Banks

(a). What exactly is a Payment Bank?

Payment Bank is basically a new model of banks that has been conceptualized by RBI. Now, many of you may further ask, how it is different from a regular banks?

How is it different from a regular bank ?

Payment Banks operate on a smaller scale as compared to the commercial banks of the country.

Payment Banks do not have any credit risk involved with them as they cannot issue loans and credit cards.

Payment Banks can accept demand deposits up to Rs 1 lakh only.

Why were the Payment Banks required?

The primary aim of payments bank is to expand the availability of financial services to unbanked entities, for instance, small businesses, households with low income, migrant labour force etc. i.e. to achieve financial inclusion as well as to provide financial services to every citizen concentrating more to the rural India.

(b). History of Payment banks

Reserve Bank of India (RBI), on 23rd September 2013constituted a committee on Comprehensive Financial Services for Small Businesses and Low Income Households headed by Nachiket Mor. The committee submitted the report on 7th January 2014 and recommended the formation of a new category of bank (Payment Banks).

Nachiket Mor

The following points recommended by committee:

Draft guidelines were issued for payment banks, seeking the opinion of interested entities as well as general public on 17th July 2014. Final guidelines for Payment banks were released by RBI on 27th November 2014.

41 applicants applied for the licence of Payments Bank and their list was released by RBI in February 2015. The licence applications were evaluated by External advisory Committee (EAC), headed by Nachiket Mor, which submitted the report on 6th July 2015 after examining the financial track record as well as governance issues of the applicant entities.

On 19th august 2015, RBI gave in-principle licence to 11 entities to launch Payments Bank. The In-Principle licence is valid for a period of 18 months and the concerned entities are required to fulfill the requirements within this period. They cannot engage in the banking activities in this period. Upon satisfactory fulfillment of the conditions required to set up a Payments Bank. RBI will grant full licences under Section 22 of the Banking Regulation act, 1949.

Following 11 entities were initially granted the In-Principle licence by RBI

Airtel M-Commerce Services

Department of Posts

Aditya Birla Nuvo

FINO PayTech

Cholamandalam Distribution Services

National Securities Depository

Paytm

Tech Mahindra

Vodafone M-Pesa

Reliance Industries

Sun Pharmaceuticals (Dilip Shanghvi)

However, 3 out of these 11 organisations surrendered their licences, namely

(a) Cholamandalam Distribution Services
(b) Sun Pharmaceuticals (Dilip Shanghvi)
(c) Tech Mahindra

Conditions for Payments Banks

The minimum capital requirement to set up a Payments Bank is Rs. 100 crore.

The stake of the promoter for the initial 5 year period should be minimum 40%.

Foreign share holdings will be permitted subject to the rules of foreign direct investment for private banks in India.

The voting rights in the bank will be regulated by Banking Regulation Act, 1949 and the upper cap of voting right for any shareholder will be 10%. This may be raised to 26% by Reserve bank of India.

Any acquisition of more than 5% needs to be approved by RBI.

Majority of Bank’s board of Directors should consist of independent directors, who should be appointed as per RBI Guidelines.

Payments Bank can accept Utility Bills and they cannot form separate subsidiary to undertake non-banking activities.

25% of the branches of these banks should be in the unbanked rural areas.

Payment Banks cannot approve/ disburse loans or issue credit cards.

Payment banks can offer remittance services, mobile payments/transfers/purchases and other banking services like ATM/debit cards, net banking and third party fund transfers.

Payment Bank will be provided licence under Section 22 of the Banking Regulation act, 1949 and they will be registered as a Public Limited Company under Companies act, 2013.

As of now, 6 entities have already started their operations as Payments Bank. The list is as follows:

Airtel Payments Bank 

Paytm Payments Bank

India Post Payments Bank

Fino Payment Bank

Aditya Birla Idea Payments Bank

Jio Payments Banks

Payments Banks in Details

(a). Airtel Payment bank Ltd

It is the first Payments banks in India.

Airtel Payment Bank Ltd is a joint venture between Bharti Airtel (80.1%) and Kotak Mahindra Bank (19.9%).

Airtel Payment bank Ltd launched its pilot project of its banking services 10,000 Airtel retail outlets in Rajasthan on 23rd November 2016.

Anubrata Biswas is the MD & CEO of Airtel Payments Bank.

Airtel Payments Bank is a fully digital and paperless bank.

It offers quick and paperless account opening using Aadhaar based e-KYC i.e no documents are required, only the customer’s Aadhaar number is sufficient.

It also offers personal accidental insurance of Rs. 1 Lac with every Savings Account.

(b). Paytm Payments Bank

Paytm received approval from RBI to start its Payment Bank in January 2017 and started its operation with first branch coming up in Noida, Uttar Pradesh.

Vijay Shekhar Sharma, founder of One97 Communications (parent company of Paytm) is MD & CEO.

(c). India Post Payment bank

India Post Payment Bank (IPPB) was incorporated as a Public Sector Bank under the Department of Posts with 100% Government of India equity.

First branch of IPPB inaugurated at Raipur and Ranchi on 30th January, 2017 .

IPPB will play a major role in financial inclusion as India Post has about 1,54,000 post offices, of them 90% are in rural areas.

IPPB will set up 650 branches across the country by September 2017.

Payments Banks will thus help expand the potential of financial inclusion in the economy.

MD & CEO - Suresh Sethi

(d). Fino Payments Bank

The first payments bank to go live with 410 branches and more than 25,000 banking points on day one.

The bank was incorporated on 4th April, 2017 with the name Fino Payments Bank Limited.

MD & CEO - Rishi Gupta   

Headquarters - Mumbai

(e). Aditya Birla Idea Payments Bank

    

Aditya Birla Idea Payments Bank Ltd has commenced operations as a payments bank with effect from February 22, 2018.

MD & CEO - Sudhakar Ramasubramanian

Headquarters - Mumbai

(f). Jio Payments Bank

Jio Payments Bank is an Indian payment bank that started operating in 2018.

MD & CEO - H. Srikrishnan

Headquarters - Mumbai

------------------------------------------