 So, welcome back and we will be continuing with the remainder of our discussion and some of the other products that we have to cover. So, the other next type of products is mutual funds and we all have heard and known about this. So, it is time to understand how that operates as a product and what are some of the terms and terminologies that are associated with mutual fund offering. So, I would like to just show you a quick video here before we get into the details. What is a mutual fund? The word mutual implies a group of people coming together and funds means pooling of money. Therefore, the term mutual funds suggests a group of people putting their money together. What is a mutual fund? The word mutual implies a group of people coming together and funds means pooling of money. Therefore, the term mutual funds suggests a group of people putting their money together to buy stocks and bonds or in some cases a combination of both. Or think of it like this, a baker bakes a million pound cake. The cake is made up of a variety of ingredients. Each ingredient is an individual stock or bond. The list of these ingredients makes up your portfolio. This fund is managed by a professional fund manager who manages this pool of money and builds a portfolio which is in line with the investment objective of the scheme. Investments are spread across a wide cross-section of industries and sectors. This ensures that risk is controlled because all stocks may not move in the same direction in the same proportion at the same time. Thus, it helps balance things out. What are mutual fund units? And how is their NAV calculated? Mutual funds issue units to the investors in accordance with the quantum of money invested by them. Investors in mutual funds are commonly known as unit holders. When an investor invests money in any scheme, he or she is allocated units. The value of each unit is called NAV. It's reflective of the current market value of a single unit of the fund's holdings. When investors invest in the fund, they buy units of the fund at its NAV price. Let's go back to the baker and the cake. To make the cake affordable, the baker cuts the cake into many pieces and sells it by the piece. Each piece comes at a price. In accordance with the amount you pay, a proportionate amount of the cake is then owned by you. The number of units that an investor can buy depends upon two factors. The NAV of each unit and the total amount of investment. Hence, the NAV per unit of a scheme is the market value of securities, less total recurring expenses of the scheme divided by the total number of units of the scheme on any particular date. So, if the NAV is 15 rupees and the investor invests 15,000 rupees in the scheme, then he or she will be allotted 1000 units. So basically, net asset value is the current market value of one unit of the scheme. Take a piece of cake for example. Each piece of cake includes all the ingredients in various amounts. Each ingredient has a market value. The combined market value of all the ingredients in the cake contributes to calculating the NAV of the cake. However, it must be noted that this value keeps changing every day. Since market value of securities changes every day, NAV of a scheme also varies on a day-to-day basis. Mutual fund investments are subject to market risks. Okay, that's a standard disclaimer which you will find for any investment not just a mutual fund because market risk is something which individuals can't control. So that's a disclaimer though. So to summarize what you saw in the video, a mutual fund is basically a collective investment scheme where a group of investors invest money for a common investment objective. The investment objective could be to let's say seek capital appreciation or to have regular growth or to have regular interest or to receive regular interest payments. So we will actually take a look at a mutual fund fact sheet in some time which is a single pager document which summarizes the characteristics of any listed mutual fund and I will walk you through some of the terms. But before that, as you saw in the video, investors in a mutual fund could be both retail as well as institutional. Obviously, they come together for a common investment objective or a need that they have. You could enter into a mutual fund by way of buying units of the mutual fund. Units of the mutual fund are traded at what is called as net asset value of the fund which in simple mathematical terms is nothing but the current market value of all the assets of products that the mutual fund in turn invests your money into divided by the total number of units that are there in circulation at any given point in day. And the fund is managed by a professional fund manager who has got the necessary qualifications and expertise in that space who will regularly monitor the investments that the mutual fund is making so as to achieve the investment objective of the firm. And it goes without saying that since a mutual fund is a professionally managed fund, it is run by a class of companies called asset management companies which not just have one mutual fund scheme but they have a variety of mutual fund schemes that they offer to investors with different investment objectives. And therefore, mutual fund will also have recurring expenses which you saw coming up in the slide and these recurring expenses could be to do with the salary of the professional fund manager. Then the administrative setup has to be there in order to manage and run the fund. And the fund is created under an asset management company so obviously services of fund accounting agency are used to calculate the day to day asset value of the fund on an ongoing basis, maintenance of the records of people investing into and liquidating out of the fund so on and so forth. And these expenses are something which are passed on to the investors by what is called as an expense ratio of the firm which is a impact to the NAV. So the expenses are reduced in arriving at the NAV so actually investors like all of us who are investing in a mutual fund pay for expenses in running the mutual fund scheme. As you noticed mutual funds offer you an avenue for diversification because they invest in different types of stocks, different sectors depending upon the objectives of the fund. So your investment is not subject or heavily skewed in favor of one organization or one sector which in case of an adverse event if impacted could erode into the value of a investment. So it is spread across a variety of products, a variety of sectors based on what the fund wants to achieve so that is where the diversification of your risk comes in picture. Now there are various mutual fund structures, they are primarily of three types. The first one is called open ended schemes which means you can enter into or exit out of the scheme at any point in time. These are traded on exchanges so you can buy units and sell units anytime you wish. You can also start something called as a SIP, a systematic investment plan wherein every month specific amount will be debited from your account and units of the equivalent amount corresponding to the price at which the units are allocated to you every month will be deposited in your mutual fund account. So these are called open ended schemes because they allow you to entry and exit at any point in time. The second structure is closed ended schemes wherein you can enter only when the scheme is offered for the first time of the scheme opens for the first time it is called new fund offered that process is referred to as a new fund offer. So you can invest whatever money you want to invest at that point in time and then it is running for a specific period of time let us say one year or two years or three years depending upon the objective of the fund. Your investment stay is locked in and at the end of the specific period depending upon whatever is the prevailing net asset value on that day you will be redeemed back your investment upon maturity. The third category is what is called as unit investment trust in which case the portfolio of stocks or bonds or other products which the mutual fund invests decided in advance on the date on which the scheme is launched. As with open ended and closed ended mutual fund schemes the portfolio fund manager will actively analyze the portfolio and do adjustments to the investment on a day to day basis in a unit investment trust that decision is taken only once at the outside of the fund. And then upon the expiry of the duration of the fund whatever is the portfolio of assets in the mutual fund whatever market prices are prevailing as on the date of expiry that will be the returns that you get. So unit investment trust do not have a professional fund manager who actively manages the funds portfolio. There are various types of mutual funds these were the structures within these structures there are various types depending upon what exposure the mutual fund takes to which type of products. So you have equity mutual funds which predominantly invest in equity markets, you have debt funds which predominantly invest in debt markets, there are balanced funds which invest in a combination of both equity and debt markets, there are sector specific funds say infrastructure fund or pharma fund or healthcare opportunities fund and all of that. Then there are hedge funds which basically invest in variety of hedge fund avenues and the objective there is to generate super normal returns. There are funds which invest into liquid instruments like treasuries and government bonds which have short term maturity they are called money market funds. There could be country specific funds or sector specific funds an example here could be let us say India emerging markets fund. So based on the different investment objectives the fund will have their portfolio structured on that basis. The next point around mutual funds is liquidity. So which means that since mutual funds are traded on the exchange a unit holder can basically exit out of his investment at any point in time by just selling off the units on the exchange. We already spoke about expenses, these are expenses that are incurred in the course of professionally managing the fund from the fund manager salaries admin expenses and fund accounting services expenses, these are factored into the NAV. So finally the end consumer who subscribes for the units of the mutual fund ends up paying a proportional share of these expenses. So at this point in time I will show you a quick glimpse of what is called as a mutual fund fact sheet. So every mutual fund is required to publish a fact sheet which is essentially a synopsis of that fund from some static information to dynamic information like performance ratios and all. Every mutual fund will publish this sort of a fact sheet on a monthly basis and these are publicly available free documents which can be downloaded from the respective mutual funds website and these are for investor awareness and for you to make informed decisions on your fund investments. So if I were to talk about couple of things here on the top you see the sector there it is the infrastructure sector. So this fund SBI infrastructure fund direct growth this invest in the infrastructure sectors. This fund tracks its returns in comparison with a benchmark. So the benchmark here is the S&P BSC 500 India index. The funds benchmark is the NIFTY infrastructure index and Morningstar is a agency which actually gives ratings to mutual funds. So Morningstar has rated this fund 4 stars out of 5. The investment objective you can see here to provide investors with opportunities for long term growth in capital because it is this invests in infrastructure sector the objective is to generate long term growth by way of capital appreciation of the investments. When you see the performance here which is given for the last 10 odd years 10 12 odd years and then there are some risk measures here. So these are performance measures of the fund which are useful in taking decisions. So quick mention on all of these so alpha basically stands for returns which the firm is generating in excess of the benchmark returns. So the NIFTY will generate some returns from A point to B points let us say NIFTY was 5000 2 years back and today NIFTY is 10,000 which means it is grown by 50 100 percent almost. So this fund benchmark itself to the NIFTY so the alpha that is generated on this fund will analyze how this fund has performed with respect to the performance of the index. Alpha is a measure of the fund manager's performance because if the fund is able to generate returns in excess of the benchmark it is largely due to the active involvement and the investment strategy which is adopted by the fund manager. There is no market movements that are driving this return because if the market movements were there it would reflect in the return on the benchmark as well. Then the next component here is called beta which is basically the degree of volatility that this fund has as compared to the benchmark. So if the benchmark moves up does this fund move up or does this fund move down? So if it is a positive beta or beta number greater than 1 which means it has a positive relation. So benchmark returns go up the returns of the fund automatically should go up. This has nothing to do with the fund manager's performance. This is a market driven measure of return. R squared stands for a risk adjusted return measure and then you have something called a sharp ratio which is the degree of volatility of the returns to the degree of volatility of the benchmark. Again a statistical measure which is used to analyze mutual fund returns and then if you go below you will see the 3 month, 6 month returns that are listed out here. Going a little further down below you can see the portfolio. So the asset allocation is into stocks and these stocks would be largely the infrastructure sector because this is a infra fund. So you can see the top holdings here they will mostly give the top 10 holdings here. So Bharti, LNT, NCC and all of that and then you will also see the world regions where this fund is concentrated its investment. So this is a Asia emerging Asia. So India falls in Asia emerging market. So this fund predominantly invests in infrastructure companies, stocks of infrastructure companies in India which is why the Asia emerging markets region has got a 100% weightage. And then you will have some details around the funds management down below. So who is the fund, the asset management company, the SBI funds management, phone number all of that. The manager's name you can see here Richard Disuja, so he is the fund manager. Some of the fact sheets also published the funds manager qualification experience and all of that. So what I thought was, this was a handy document that you know you could see with respect to any mutual fund that you want to evaluate for your investment objective. Flipping back to the presentation. So we will now move further and we will talk about the next product which is insurance popular product very few all are familiar with this various forms of insurance exist. You have car insurance, you have home property insurance, you would have credit card insurance. So if somebody makes a fraudulent transaction on your card, you can actually buy a credit card insurance cover as well. Then you have insurance which is what is called as casualty insurance. So insurance to the nature of accident insurance, workman's compensation, disability, permanent disability, partial disability, all those things form part of your casualty insurance. What insurance essentially means is it's a means of protection from a financial loss. So if I buy an insurance policy, I am basically signing a contract with an insurance company to compensate me from the financial loss that could happen because of an unexpected event in future. So basically there are three components to an insurance policy. The first one is called premium. So if I am approaching an insurance company to underwrite an insurance contract for me, I have to pay a premium in return. The insurance contract will come with a policy limit which is the second component. So that's the maximum amount which the insurance company will reimburse to me in event that the loss happens to me because of the condition stipulated in the insurance contract. And the third component of an insurance policy is what is called as deductible, which means that is the amount I have to pay upfront before the insurance company and settle the claim to me. So classic example here could be of vehicle insurance where even if you take a zero depreciation cover, plastic parts are not covered. So if the car were to go and meet with an accident and it were to be repaired for any plastic parts, that amount would not be reimbursed by the insurance company. So that's a deductible. Now it's important to understand how the insurance business model works. So how basically the insurance company makes money. They make money from two sources. One is through the premiums that they are collecting from us. So that's called underwriting business and the profits that they earn as part of this business are called underwriting profits. So by formula, underwriting profits would include the premiums that they are collecting from policy holders minus any expenses that are incurred in connection with servicing the insurance policy or administrative expenses and minus any claims that they may have to pay because a claim has arisen on a contract they have written in the past. So that is the underwriting profit. The premiums that they collect from the policy holders are invested by the insurance company into a variety of other financial products and these products earn them incomes. So the second component of an insurance business model is the investment income from the premiums that are invested out. This is popularly known to be a form of a risk management technique to hedge against contingent losses. We will now move on to, before we move on to derivatives, I will just open up for a quick round of questions because now we are getting into some slightly complex products. Please remove your camera from demo mode and ask your question. You are not audible yet. Yes, go ahead. I want to ask what is the need that bank keeps a minimum, need of maintaining a minimum balance in the bank accounts. Why is it required? Is there any financial reason behind it? Brilliant question, very fundamental but there is a reason behind why banks mandate. Now we would appreciate that any banking infrastructure to operate also has operating costs on one side and on the other side there is this whole aspect of liquidity that I talked about before. So for a bank, maintaining liquidity in the system is of paramount importance. If all the customers in the bank where to keep absolutely zero balance in their account, where will the bank go for generating money when its liabilities fall due? The only source that they can bank upon is their assets. So they would assume that the loans that they have given out will pay EMI's on a regular basis. They will be able to connect the money's on a regular basis which they will maybe invest, generate income on that and then also use it to pay their liabilities. That's a very 50,000 feet assumption that we are having that all investors are good and all investors pay your EMI's on time. At any point in time you need to have liquidity in the system which is achieved by all these minimum balances that are maintained in the account. That is reason number one. The other reason though here is that all these balances act as a cheap source of funds for the bank. Referring back to the example which we spoke of at the beginning of the session where we understood the banking model, what did we say that current account, savings accounts are the sources to have a low cost of borrowing for the bank. So if I ask mandate my customers to maintain at least some sort of minimum balance in the account, then at least to that extent I am receiving a cheap source of funding. Though practicality there are category of accounts where it's okay for you to maintain a zero balance but those are only given to certain high priority customers and these high priority customers would rarely maintain a zero balance though the flexibility is given. So I will give you an example. Now all our corporate salary accounts come with the advantage of maintaining zero balance but how many of us in India actually end up maintaining zero balance there? No right because we use the account for many practical purposes. The third thing why banks ask to maintain certain number of balance in accounts is also preferentially serving different category of customers. So if you need an account with let's say X plus Y features the minimum balance is 5000. If you need an account with X plus Y plus Z features you need to have a higher minimum balance. If you need an account with X plus Y plus Z plus A plus B then you need to have a slightly higher balance. That's the bank's fee pricing structure. So to your question there are a variety of these reasons why banks will mandate that you should maintain account and obviously you know practically banks are not in business for free. And there's a very popular saying in banking parlance which goes like this that banking is a business of making money using other people's money. You will never find a bank who employs their whole capital in the business because it's just not feasible it's too costly. Other people's money are a cheap source of funds which I will deploy in the business and cash is not free with me. Any idle cash I can reinvest anywhere to earn an extra profit. So because of all these things you will find that banks will mandate maintaining minimum balances in the accounts. Does it answer your question? Yes ma'am. Okay. Thank you. Any other question from Asia Pacific Institute of Information Technology? Go ahead with your question. You are on mute. No not audible. Yeah now it is audible. Yes ma'am. Okay. Ma'am please hold the mic a little bit closer, very close, close it to your mouth yeah. Loud. First of all thank you. Louder louder. Thank you so much for sharing this information with us and I wanted to ask about what are derivatives but I am asking a little bit. We lost, we lost you my friend. So I could get the first part of your question what are derivative products. So you know you just killed my suspense I am about to speak on derivative products now. So if your answer is what are derivative products just hold your breath it will come in another two minutes. Okay. One more question. There is one more question I am asking a little bit, yes ma'am I am asking a little bit about how Central Bank and Reserve Bank of India are different so I think it will be how Central Bank and Reserve Bank are different from how Central Bank and Reserve Bank are different. They are not different they are same, they are not different they are the same so Central Bank means the Central Bank of the country RBI is the name of the Central Bank of the country for India right and in the US the name of the Central Bank is Federal Reserve Board they are same okay, we will probably take one more question from another institute before we move further BLDEA. Good afternoon ma'am I am Harsha from BLDEA CET my question is what is the basic difference between equity market and commodity market? So equity market is a market where shares are sold what and sold they may either be sold through the stock exchange or they may be sold you know over the counter using the telecommunication and infrastructure networks between two parties. Commodity markets are where commodities are sold it could also be through a exchange or it could be through the over the counter which is called OTC market right now the same exchange could also offer possibilities for equity trading as well as commodities trading. So simplest example of that is the India National Stock Exchange or Bombay Stock Exchange where you can also trade in shares through your broker you can also trade in commodities which are listed there through your broker but they are essentially two different products which are traded in two different market operations does that answer your question? Yes ma'am one more question why do we how is the TDS is cut on the returns of IT? How will? How is TDS calculated ma'am returns of IT? How is how is how is tax deducted at source okay out of syllabus question if we have time at the end I will I will cover that let us finish the topic first that's a that's a disconnected question to this topic but I will try I will answer that towards the end right so hang on if I forget you remind me okay right or you post it on the blog and I will answer it hello ma'am my question is what is BTST STBT and intraday and what are the basic difference between them okay can I answer your question towards the end sure ma'am yeah we will continue with the rest of the topics there is still left to cover and during the last Q&A session I will get back to you in the meantime if you could post no I will have it handy with me just post it on the chat sure ma'am yeah thank you okay so now we will move further and we get into the topic of derivatives which my friend killed the suspense sometime back by asking the question so before we get into derivatives now this is a slightly complex financial product that we are getting into the explanation might sound very simple but the structure and the operation of these products is quite complex so I will show you a quick video before I summarize what a derivative product is all about so this is a video from Nasdaq Dubai this is an educational awareness video so full credits to them for this brilliant video so take a look and then we will summarize you would think that everybody knows how financial markets work share prices go up shareholders make money share prices go down shareholders lose money and that's it right wrong it doesn't have to be like that let me explain it to you in fact there are financial products that allow you to make money even when share prices are falling yes you heard it right we call these equity derivatives and there are two kinds of these derivatives we call them futures and options and they enable you to take a view on what the price of a share will be at a future date like in one month three months or even a year for now let's focus on futures only these financial products are widely traded in the global financial markets from New York and London to Mumbai and Istanbul now let's have a look at how it works suppose the current market price of a share is five dollars you think the market price will stay below six dollars in the next six months well another person thinks it will go above six dollars you can agree to sell a future on that share to that person for six dollars in six months time that's a locked in price that won't change then if the actual share price has indeed stayed below six dollars in six months you've made a profit what just happened here is a buyer and a seller entered into a futures contract so basically a future is a contract that obligates the buyer to buy an asset and a seller to sell that asset at a predetermined future date and price there are so many other advantages of these flexible products let's say you already own some shares and you're worried that the price might go down what you can do is use futures to hedge the risk that might happen I insure yourself against the possibility of the price going down oh and another huge benefit is that because futures make use of margin also called leverage that gives you the possibility of gaining much more money than the amount you lay out in the first place remember that because of leveraging you can also lose much more money than your initial investment you should always trade responsibly and fully understand the risks and seek independent advice if necessary equity futures will soon be easily tradable on a Middle East stock exchange Nasdaq Dubai the good news is that all these transactions will happen in a transparent and regulated stock exchange environment this is an exciting opportunity for all investors so whether you are a high net worth individual an investor with more modest capital or a professional fund manager you can easily join the market Nasdaq Dubai all right so that was a quick example of how two of the derivative products operate so they talked about futures and options broadly speaking there are four types of derivative products forwards futures options and swaps right but before we get into understanding each of these it is important to understand what a derivative means so derivative comes from the word to derive which means to get its value from something else and that something else in financial terms is called an underline the underline could be a stock could be a bond could be commodities could be currencies so just as you saw in the example somebody would expect the price of a share to rise in future I can enter into a contract today based on that speculation to exchange monies in the future right the underline could also be your index or interest rates that are there in there so we saw saw the index when we saw the mutual fund fact sheet nifty index I could enter into a contract to exchange cash with another person based on how the nifty index performs over the next six months so so the contract itself is getting its value from the performance of the nifty index over a period of six months right now I will give you a very simple layman example let us say a enters into a contract with b that he will pay him a million dollars if Ronaldo scores 10 goals in his next tournament right so this is an example of a derivative contract this is entered into with a speculation motive right what is the underlying here the underlying here is Ronaldo's legs or the act of he scoring 10 goals but what is traded is cash flows which means the exchange of a million dollars based on whether he scores 10 goals or not so drawing an analogy here to the practical use of such a contract let's say there is a software company in India whose job is to manufacture software and export it to a entity who's requested the software and that entity is in the US right so today the exchange rate between INR and US dollar is one dollar is for let's say 63 rupees right but when am I going to deliver the software to them let's say six months down the line now as a software company if I have the view that the exchange rates are going to fluctuate and the rupee will further appreciate against the dollar which means it will become let's say 58 six months from now I will receive the payment for the software that I have created for them in dollars I am a company in India I am going to convert them into Indian rupees and at that time the exchange rate is 58 so I will lose out when I entered into the contract to deliver software exchange rate was 63 had I converted today I would have got 63 rupees in exchange however I will get only 58 if the rupee further appreciates so this is a potential risk which the software company will want to cover and we talked about hedging which is a technique to cover the risk so they will approach a party a third party and most in most cases it is a bank or a financial institution who will ensure this risk for them by entering into entering into what is called as a forward contract so let's say the software company approaches state bank of India and tells them that six months down the line I will exchange a million dollars with you at 60 rupees when today's price is 63 and you give me 63 60 rupees in exchange for one million dollars now after six months when I receive the million dollars and I go to SBI to exercise the contract if the exchange rate has stayed at 63 I am still I will not I am at a loss because SBI is going to pay me 60 rupees for a dollar if the exchange rate has fallen to 58 I will be in a benefiting position because I will receive 60 rupees from SBI which is a rate I have locked in and vice versa so this is a classic example of what is called as a forward contract rate is decided today settlement of the contract happens in future and then both parties are obligated to perform their parts of the transaction depending upon the performance of the underlying currency now this is a highly customized contract between let's say me as a software company and SBI so I could have any terms and conditions that I associate with this what is the biggest problem in such type of a contract these type of contracts are basically called forward contracts now what is the risk in these type of a contract apart from the market risk the other risk is obviously a default risk so which means when I was after six months to SBI to honor their part of the commitment SBI may be bankrupt and not pay me down right or if a forward contract was entered into for let's say a commodity then there are questions as to you know the quality of the commodity that is delivered the quantity of the commodity that is delivered so because in a customized thing it is all on paper so to solve this problem futures contract were invented where now such contracts will be standardized and put on the exchange for trading between two parties and then the exchange will act as a central clearing body for the seller as well as the buyer to execute on this particular contract so exchange will then specify minimum norms so how much is the quantity that needs to be traded in this particular contract what is the quality so they go by something called as lot sizes so I cannot trade one share or two shares share lot size has to be 500 shares in a lot so exchange will specify standard requirements or components that form part of this contract which is then listed on the exchange for buying and selling by the investor parties this type of derivatives are called futures so forwards basically when they are traded on the exchange are called futures so if I want some customization some standard some non-standardization in the way the payoffs have to be exchanged I need to go through the over the trade counter mechanism which is customized arrangement between two parties like a forward contract but if I want standardization then I can just buy contracts on the exchange and upon expiry either benefit or lose out of the payoffs the other beauty about having the contracts traded on the exchange is that I may not want to lock in myself till maturity because these contracts are traded so anytime before the maturity of the contract I could exit out of the contract by squaring of my position with the exchange the exchange will pay me at the current market rate and get me out of the contract so that's the flexibility with futures contracts now option contracts are contracts which actually give the option to the buyer to exercise at a later date right so let me give you a quick example here remember Ramesh and Suresh in the famous Pithajiki, Patlu, Indobilan, Chodigardho, the five-star ad so let's assume Ramesh and Suresh are not brothers but two friends and Ramesh has a view on a particular security let's say Ramesh has a view on Tata Motors security which is today trading at 210 rupees Ramesh feels that you know by this month end Tata Motors security price is going to appreciate but he doesn't know whether it will really appreciate or not he just has a sense and a view that it might appreciate in future so today if he were to purchase Tata shares in bulk and sell it off at the month end he would make a super normal profit right now the biggest problem in this is that he doesn't have the money to buy a lot of thousand shares as the exchange specifies that for any futures contract on Tata shares the minimum lot sizes thousand shares so he what he does is he shares this view with his friend Suresh and he tells Suresh that I will give you 10 rupees upfront under a condition that you sell me Tata Motors shares at the month end for let's say 225 when today's price is 210 now for Suresh he also sees an opportunity that he is receiving 10 rupees upfront as a commission and then if Ramesh decides to buy at the month end then only he will have to sell the shares to Suresh at 225 when current market price is 210 so still makes a profit of 15 if the market price at that time is 225 so what basically Ramesh has done here is he has bought an option contract from Suresh where he has got the right to exercise the contract at a later date Suresh will have the obligation to perform his part of the contract if Ramesh decides to exercise the contract when will Ramesh decide to exercise the contract by looking at the cost of the contract let's say today's share price is 210 and he has paid 10 rupees premium to Suresh as a upfront one-time fee so the moment the market price is more than 220 which is 210 plus 10 he will exercise the contract because he is in a beneficial position so an option contract basically gives the buyer of the contract the right to exercise the contract the right to say yes or no whether I want to but obviously this right comes at a cost so nobody is a fool to sell such a contract to him without anything involved and taking a huge exposure if the person decides to exercise the contract so what the seller will demand is an upfront fee which is called as a option premium so their option premium is paid upfront and if the buyer decides to exercise the option the seller will have to deliver whatever has been agreed to in the contract option contracts are also traded on the stock exchange what is quoted on the stock exchange is the premium values and not the whole value of the contract because the contract is contingent upon the buyer's decision to exercise right so some terminologies there are strike price which means the price at which I am entering into the contract today then you have the forward price which is the price determined today that will be exchanged in the future and then you have option premium which is that upfront fee or commission that you are paying to the seller of the option to grant you this right of saying yes or no so that's options and then the fourth type of products is called swaps so swaps is basically exchanging two different streams of payments so quick example here would be let's say there is a company X who is given out loans that carry variable interest so they will have to pay variable interest on the loans that people have given them so for the next few years till the loan is outstanding they need to make sure that they steadily receive cash flows which are of a floating nature that they will use to service these loan payments so they could enter into a contract with another part counterparty who has got the same opposite requirement so let's say there's a fund party who has given out fixed loans and need to service fixed loan payments so they could enter into a contract mutually saying I will exchange with you varying amounts over the next two three years or whatever duration we agree in exchange of you giving me a fixed amount every month and these are linked to the interest rates so let's say X will tell why I will pay you libar plus 50 basis points and you pay me fixed 4% so that's two interest payment streams being exchanged between two parties on an amount which is decided by them at the outset before entering into a contract so this amount is not exchanged it's only the interest calculated on this amount that is exchanged between the two parties and they actually net this off an exchange so if at every exchange period they will evaluate how much has X to pay to Y how much has Y to pay to X and then they'll net off the amount so net will be then exchanged between the parties this is called the interest rate swap where only interest rate payments are exchanged but you could also have a currency swap where two parties are exchanging currencies at a future date and this is an increasingly useful when there are import export or MNCs operating in global environments where they have to fund expenditures that are happening in a different currency so they may want to lock in the currency today currency rate today to fund that expenditure which is going to happen let's say two years down the line so these are called currency swaps or sometimes cross currency swaps also if interest is also exchanged along with the principal amount right so again derivatives are used for a variety of purposes primary of them being for hedging or covering a risk as we spoke about the software company example the other purpose is for speculation so people with a higher risk appetite may want to actively invest in derivative products and take exposure to the market movements and benefit by fluctuations in prices that keep on happening and then the third opportunity is for arbitrage which is basically leveraging or taking benefit of different prices of the same commodity or the same asset in different markets an example here could be currency so the INR USD pairs not a pair not only trades on Mumbai stock national stock exchange it also trades on New York stock exchange it also trades on Japanese stock exchange so there will be intrinsic price differences between the exchange rates that are trading on in different exchanges so arbitrage is making use of these exchanges so buying in one exchange selling off in the other exchange and so on and so forth and then making profits out of those type of transactions the four types of derivatives that I talked about could be broadly classified as a lock versus option so forwards futures and swaps would fall in the lock category where buyers and sellers are locked in terms of their obligations on the contract an option is flexible to the extent that the buyer has option whether to say yes or no to perform the contract at a future date these are simple structures but these could get more and more complex by hybrid form so you could have something called swapsions which is basically option on a swap contract you could have a variety of combination of all these products bucketed and sold out as branches so there are sophisticated structures like collateralized debt obligations credit default swaps and all of that which are again traded between parties so the more and more complex it gets the more and more risk an investor has to assume so if it is traded through the exchange to some extent the exchange by acting as a common clearing counterparty tries to mitigate and manage the risk but most of these contracts which are structured or customized are all over the counter so credit risk and market risk are a big problem in those places unless you manage them really well so incidentally at this point in time I would like to inform you that the third modulus part of the college to corporate program which talks about technical skills is also going to talk about the back end activity in terms of how exchanges operate and how exchanges work so those are who are interested to know and learn more about the technical aspects can sign up for those sessions and take benefit right so I will stop here once again to take any questions before I move further may be caps Institute of Technology please go ahead I'm good afternoon am I audible to you yes I am Mancavaljit from the Medigap University in Dore yes I have posted a question on your question blog ma'am have you seen that so we will take it at the end of the session because we just interacting live right now we will take all the block questions in some time I actually put a question which is related to the initial part of your lecture so maybe you want to you want to say your question right now and yes I will say the question if you feel it is the right time to answer yes my question is you explained to us very beautifully the entire financial system up to the working of the financial instruments which are available in the market now in the initial part you said that banks form a very important part of the financial system of the country yeah post demonetization the government had imposed the compulsory rule that everybody should place their funds in savings bank accounts and transact for their major transactions only through banks and not in cash with this provision what is happening is that a majority of the citizens of the country have put their funds into savings bank accounts under the regulated interest regime the savings bank accounts pay a very minimal rate of interest yeah and on the contrary you brought out that banks also invest their funds the other person's money other people's money into the market to earn their interest yeah with this situation and also there are large number of banks which are providing merchant bank services to large corporate houses my indication is towards the kingfisher company which went bankrupt yeah and in such situations what is happening is the depositor who is one of the important sources of funds for the bank ends up getting a very minimal rate of interest on whatever funds they park in the bank the bank invests this money into financial instruments and earns supposedly a very large portion of interest from the market or by extending these this amount or this money which is parked in the banks to corporate houses as corporate loans they they they end up earning loans and when certain banks like the public sector banks they go bankrupt because of non-performing assets the government uses the taxpayers money to bail them out this part of the financial system if this is a very complex thing which is not understood very well what you are telling us in the second part of a lecture about an individual or an individual investor going to the market and trying to grow their wealth by investing in financial instruments is well understood but on the other hand what is happening to those funds which are going down the drain because of these actions which I highlighted you you have raised a very valid question and I think fundamentally all of us as individual investors will be opposed the idea opposed with the idea of taxpayers money going down the drain to you know bail out financial institutions but I think that is one of the key functions which the central bank of the country does so when I spoke about the entire financial system landscape if there was one shock somewhere because of you know collapse of one particular entity could be the Kingfisher example which you know you took right now or the NPA examples where banks are going bankrupt because of increasing NPAs now if one of those type of institutions where to fail it is going to send a systematic shock to the entire financial system and the entire financial system would cripple so it's like a domino effect so if let's say SBI fails they have got their hands and legs with everybody else due to the interbank borrowings and the connections with RBI and the merchant acquirers and all of that so if SBI goes down the drain you will have a domino effect of all others which is eventually going to end up with consumers like all of us also facing the brunt of all of this so that is when you know as a policy measure the central bank of the country would intervene and say that I am going to bail this bank out and the central bank is not a profit entity that you know it earns by way of market instrument it's the taxpayers money or the other forms of deficit financing that they resort to so in those eventualities only the central bank would intervene and it's probably unfair and contrary to you know what people would feel their money is being used for but that's like the extreme drastic measure which the bank would take to prevent all these aftershocks in the in the economy and then all global all the markets are connected globally as well so India maybe is not in isolation it's connected geographically across the globe so one market going down is going to cause a panic situation and that's precisely happened when we had the financial crisis of 2008 so major banks collapsed and sending ripples across the economy eroding wealth of many which is where Federal Reserve to intervene to bail out some of the major banks on Wall Street so I hope that that answers your question that is that is that was just to understand this part of the financial system where the government plays an important role that's an extreme step yes I'll close my quest the question with the second part asking you there are certain banks that most of our Indian banks are paying the fixed rate of interest on the savings bank account I understand that is called the regulated interest regime yeah and there are certain banks like the Kotak Mahendra which are able to pay interest rates in excess of seven percent on savings bank account now are they functioning under a different regime brilliant why do the hang on I like the question I mean it's a brilliant question very practical question and so that is part of their banking ramp of strategy so see all banks are regulated there is no bank which which is operating outside the regulations that RBI has laid out for them because otherwise RBI would not give them a license right now the rate of interest that they are paying depends on primarily two things one is obviously the interest rates that are going on in the economy and the other is their customer base so as I was speaking the basic business of a bank is borrowing and lending right so that's their basic bread and butter so the more I have depositors with me the more funds I generate which are so-called low cost that I can give loans out and earn a higher rate of interest and thereby my spreads will be more right now how will I attract depositors in an economy which is so heavily concentrated with so many dominant players and in a economy like India where 52% of the population is rural and agro rural communities where private banks don't venture how will I you know attract that customer base the only way I can attract that customer base is by paying them a premium so initially it is going to impact my profitability so if I'm paying 7% on saving the account the loans that I give out I cannot give out beyond a rate which competitors are charging in the market because nobody would take it from me the only thing I can do is draw more depositors by incentivizing them that you know you open your account you open your wife's account son's account father's account open everyone's account with me and I'll pay everyone 7% and then that's an investment strategy to ramp up my depositor base that is going to improve my Casa current account saving the account so my profitability is going to start improving at the initial outset I will suffer a dip in my margins because my spread is thinly spread out but as I ramp up and I gather a large customer base I'm going to normalize eventually with how the market functions I might have a competitive advantage but I will eventually rationalize so take the likes of newly coming up banks Ratnakar Bank, Yes Bank, Kotak Mahindra, why would a HDFC and ICIC not do it because they've already ramped up with a considerable consumer base that is a good answer ma'am but it adds on to another question actually okay sorry for taking your time sorry for taking your time no problem but you brought out that certain banks are regulated certain banks to attract consumers are giving higher rates of interest and in the entire lecture till now what I wondered is that there are certain safe players who do not like to put their money into the market and so they park their funds either at home that was an erstwhile situation and now they park their funds in the savings bank account and there are certain people who are high-risk players so they go into the market to try and grow their wealth yeah all the different financial instruments and those safe players who feel that their money is lying in safe accounts their money also ends up in the market because banks invest that money into the market absolutely so if the government is coming out with rules that everybody should put their money into the banks and instead of facilitating which I feel is we are trying to facilitate flow of income from the economy into few hands that is few people are growing wealthy and majority of the people by putting their money into accounts are not going ultimately they are becoming poorer because at three and a half percent rate of interest the money is not growing it is actually deflating in its value absolutely so that's that's how the market functions that's that's reality but and it's true so and it depends on your risk appetite also the the fundamental theory is that you know higher the risk you take higher the return you get now government by way of bringing out the regime that you need to bank all your money in the savings bank account they have a quite a different motive in my opinion to that and that motive is curbing of black money because people are stashing away money in cash not depositing in the account so the demonetization and all the related related measures that came out were all targeted towards curbing of black money and canalizing money into the system now you will always have players who will have a low risk appetite and a high risk appetite the people like all of us conservatively we would say that you know why should I invest in derivatives when I can burn my fingers let me put it in a FD post tax return is still you know 3% it doesn't beat inflation all of that and that is where you know I feel we go wrong conservative approach doesn't help so you need to do a thorough evaluation of what are your goals which will eat up money in future and based on that you need to have a careful evaluation of what sort of product is suitable to your needs so salary taxpayers will only on a specific amount every month unlike business which fluctuates so within that where all should I channelize my money considering the investment goals I have that's a personal investment decision which I believe every person even if not financial literate has to take so and if you do not have financial literacy then there are people you know who are called wealth planners who can help you get there so it's the it's a you know what I can say it's not a capitalistic economy right where you have concentrating money in the hands of few players I think it is investment decisions also made by people like us which is leading to that shift so I think all of us should try and focus really well on planning for our financial goals in future and diversify our investments considering what we want to achieve in future so we are also going to back this session up with a financial planning one so I hope you know for those of us who are risk hours maybe we will get some insights into how to get out of that shift and start investing in products which could meet up with some of our financial needs in future thank you so much ma'am okay thank you that was a interesting discussion thanks for bringing that up right we will take one more question before we go to the remainder of the session Sagar Institute go ahead please good evening ma'am good evening my question is that why interest rates on loans in is some banks is less why interest rates in some banks is less I think I just answered the question what was posed before that's the same question as to why some interest is higher in some and my another question is that ma'am what is the difference between SIP and FD SIP and FD okay fixed deposit is a fixed deposit deposit product what we talked about so you are placing money into a bank for safekeeping for a specific period of time and the bank will give you back the money when the fixed deposit matches SIP is a terminology when it comes to mutual funds wherein you are investing a fixed amount monthly which the mutual fund in turn will invest into a variety of products so what you get is the benefit of a price averaging so today if you were to just put a lump sum 10,000 rupees into a mutual fund and let's say today's price that is trading is 15 rupees so you will get only those many number of units but if you were to do a SIP of let's say 1000 rupees per month this month you will get maybe 10 units next month if the price goes down you will get higher unit more number of units the other month if the price goes up you will get less a number of units so eventually if you look at a long-term you will your price will average out so you will have a lower cost of your investment so that's the benefit of the SIP model okay thank you man all right so we will now get back to the remaining part of the discussion so that was about all the different kinds of financial products that exist and as we've been speaking and harping I think the one message that is consistently coming through is diversify your investment so a variety of financial products exist for different kinds of financial needs that you have or different kinds of returns that you want to generate on your investment so but do not put all your investments into one or two products diversify them over a broad range of products that suit and meet the investment objectives that you have so stay tuned for the next Saturday session which will talk to you in details about how to diversify your investments and how to go about making a financial plan now we will quickly cover now that we've understood the various financial products understanding financial markets and participants become very easy so we will now understand what are the different financial markets and how they are classified so again to recap financial markets are basically a marketplace like any other marketplace where financial products are traded so these refer to the arrangements or the centers so arrangements would mean your OTC network centers would mean your stock exchange networks that would provide you facilities for buying and selling of products the most important function that financial markets do in an economy is to provide a meeting place for buyers and sellers to come together thereby giving the liquidity to the asset so a seller can sell off an asset because he will always find a matching buyer to buy the assets due to the market which he enters. Financial institutions, government, corporations, particularly banking system forms a very critical part of the entire financial market infrastructure now let us understand the different types in which markets could be classified and I have broken them into three stripes so the first category is based on the new issue of the products in the market so when the products are issued for the first time all subsequent trading happen based on that you could classify them as primary and secondary markets based on the maturity period of the instruments or the financial products that are traded markets could be classified as money markets and capital markets and based on the actual financial product being traded markets could be classified as equities bonds or debt markets foreign exchange markets derivatives markets commodities markets etc let us take a quick look at each of these features so primary market is a place where new shares are offered to the public for the first time we already spoke about concepts like IPO new issues and floatations if it is the bond market the bond products are traded that is when they come into the market place for the first time in the primary market so there are specific mechanisms for selling bonds like shares you have floatations IPOs and new issues for bonds what is more popular is syndicated deals bought deals and auctions so syndicated deals are basically when two or more investor parties come together and buy out an entire bond offering and then later on they sell off the bond offering to individual investors that happens in the secondary market secondary market is a subsequent place where the products once they have come in the primary market subsequently get traded right so stock exchanges are a classic example of secondary market so secondary market because there is continuous buying and selling of the financial products they are very efficient price discovery mechanisms that facilitate discovery of price through the demand and supply of those products based on the maturity period we have the classification as capital markets and money market so capital market deals in medium and short-term security medium and long-term securities and money market deals in short-term security so examples of financial products that are traded in capital markets include equity shares preferences bonds etc. examples of money market are commercial paper treasury bills certificate of deposit so on these are all instruments that have maturity is typically less than one year capital market is risky because of price fluctuations money market because the maturity of the securities is short and these are mostly issued by the government or very highly rated credit worthy companies the instruments are kind of relatively secure since the capital market investments are risky the expected return on these investments are higher because risk can return for follow an inverse relationship and because money markets are relatively safe they the instruments that are traded have lower returns that they give to investors typically participants in a capital market will be individuals investors financial institutions corporate firms etc and in the money market typically it's a market for short-term so you'll have participants like the central bank of the country the commercial banking system within the country and financial institution very rarely you find individuals who invest in money market they may invest in a mutual fund who invests in money market then the third classification based on the type of financial products traded we classify markets as stock markets bond markets foreign exchange derivative markets and some other markets which are clubbed together like reinsurance as a market which is providing insurance to an insurance company then you have real estate market which is a form of alternative investment again though those are some kind of other markets right so in terms of this slide essentially gives you a quick snapshot of the financial markets what sort of financial products are traded in which market and who are the typical players in each of these markets so capital market predominantly trades equity debt and players could be retail corporate banks fixed-income products and foreign institutional investors money market typically will have a treasury bills overnight money it's also called as call money or repo transactions in the corporate deposits commercial paper certificate of deposit so very very short term dated instruments that are traded and players again in this space are banks corporate firms FIs and FIs Forex market typical contracts that are traded as spots and forwards on currency players again here would be banks corporates and FIs and FIs and then the derivatives market derivatives could trade on agricultural produced metals so they will commodity derivatives there could be financial derivatives like financial futures options swaps that are linked to currencies indices that all trade on the derivatives market again either through OTC over the counter trade or through the derivative exchanges again banks FIs and corporate firms are the major players in this space now let us quickly move on to the last part of today's session which would be to talk about the financial market participants right so I have tried to club them into three or four categories so the first category is obviously issuers and investors so they are the two parties who make up the trade so they could be retail investors which is people like all of us you could have institutional investors which is non-retail people firms corporates MNCs and the likes you could have governments who either wish to raise money for financing their activity or are issuers to some of the financial products like bonds and derivative products that trade the second category here is called financial intermediaries these are the catalysts who make the buyers and sellers meet and act as financial intermediaries to channelize funds from one side to other and products from the other side to this side so banks play a very dominant role in acting as financial intermediaries brokers and dealers another entity who help issuers and investor transact in securities on their behalf so brokerage houses are also brokers and dealers they not only execute deals on behalf of the investors but at times also act as dealers that means the counterparty on the other side to sell that specific product to the investor then we have mutual funds we already spoken details about them and then the fourth player here is the investment banks so investment banks are a specialized class of banking institutions who offer services right from underwriting of shares and securities to advising companies in terms of mergers and acquisitions providing brokerage dealership services by helping institutional and retail investors transact on the stock exchange and a variety of other services in terms of raising finances and issuing structured products then the third category is a category of infrastructure providers so while we will have investors issuers and financial intermediaries unless the infrastructure is there in place the whole system will not work so the infrastructure to help the markets operate is provided by players like stock exchanges India example could be the national stock exchange Bombay stock exchange US the New York stock exchange then you have depository participant who help the who help manage the delivery and receipt of securities and funds from one side to other side so by providing us with DMAT account so typical players in this space from an India perspective would be NSDL and CDSS so there are only two depository participants in India which are linked to the stock exchanges to hold shares and securities in dematerialized form for the issuers and investors and then the third type of entities here are information providers which provide a whole range of services like technical analysis charts performance analysis pricing quotes and all of that two investors and issuers examples here here again could include people like Bloomberg Reuters money control CNN these are all popular examples which we know of and last but not the least regulatory agencies these play a very pivotal role in maintaining the integrity of the overall financial system by laying down policies procedures rules guidelines they are set up for investor protection and make sure that they have the necessary regulations in place that would help the markets operate efficiently and protect the interest of the transacting parties as well so couple of examples here in this space could be RBI and SEBI in India and if I were to take the US examples the equivalents there would be the Federal Reserve Board and the Securities Exchange Commission the SEC and then lastly central banks they are the bankers to the bankers they control the money supply in the economy they manage the interest rates and they help the entire financial system to operate by injecting the necessary liquidity into the system time and again they also manage inflationary forces by making policy decisions the example here again is RBI that's the central bank of the country and US it's the Federal Reserve Board right so to sum it up all I just tried to put slide here that talks about how the puzzle comes together so just as in a human body if the heart shuts down the entire system where to have a cardiac arrest everything will collapse similarly if any component in this puzzle where to collapse the entire financial system of the economy will cripple so just to give you like a quick wrap up of how it all comes together on the left hand side of this diagram we have the suppliers of funds which is where the surplus units surplus funds are it could be individuals business and government they are basically the investors in the markets and on the right hand side we have the users of funds who need funds for a variety of their personal or business requirements now they are they are both linked by a network of financial markets and financial institutions that help them meet and do transactions and trade products and exchange funds in return most of the times transactions happen through the mechanism of financial markets and financial institutions through the exchange as well but there could be times when financial intermediaries come in between and act as a mediator to privately place financial products with the investors from the issuers so that is why you have that private placement block in between and what exchanges hands is the variety of financial products in return for cash flows that goes on circulating through the whole system. So if I were to just draw an analogy and piece it all together the entire financial system is like the oil which keeps the engine running so with that we come to the end of the financial system overview and I am happy to open it up for some last round of questions. Thurna Engineering College. Good afternoon ma'am I am Vinit from Thurna Engineering College my question is if someone take loan from bank but they don't pay back so there is an imbalance in bank transition so how bank overcome them. Okay so let's say you have taken a loan from the bank and you don't intend to pay it back right so one is obviously the bank is going to suffer a loss but the moment the bank has given a loan to you what the bank proactively does is it assesses your credit worthiness when you are granted a loan. So in India there is something called as a civil score if you have heard of something like that so that's a score which the bank evaluates in terms of how worthy you are a customer to grant a loan in the first place right based on that a loan will be granted to you and then you will be assigned a credit score. Let's say you are assigned a credit score of four on a scale of seven based on your civil report. Every periodic interval the bank will assess you know how you have behaved as a customer have you defaulted on loan payments are there delays in loan payments if history shows that then what the bank will do is the bank will make a small provision on the loan that they have given to you by removing a portion of that from their profits. So it's a book entry where they will remove some money from their profits and keep it in an account called provision for bad debts or provision for credit losses account and then every quarter they will evaluate your position if you improved then they no longer need the money they will transfer it back to their profit. So over the period of your loan the bank has already built a provision of some sort which they will utilize in case you default on a loan right that is one. The second thing is when the loan is given to you the bank will receive interest and principal amounts over a large period of period of time have to wait till the next 15 years to recover the money from you. I don't want to wait that longer so what a bank additionally does is a certain percentage of their loans they will create some sort of a special purpose vehicle and I don't want to get into technical details right now because it can be complicated for you to understand. So what they will do is based on the performance of some loans they will issue what is called as mortgage back securities in the market which will be invested by basically institutional investors like banks insurance companies and all of that. So you are paying reaping the loan on one side that's one story but the bank has generated a different product based on the assumption that you would pay interest and principal period over time and sold out of product to some other investors for which they have collected upfront cash. That cash they will channelize into the banking system in the form of various investments which will also be used to cushion some of the risks that are there with your loan liability. This process is called securitization right. So by creating a provision and by creating a process called securitization where they issue mortgage back, asset back securities banks will try to minimize the risk that they have with the loan outstanding with it. And obviously the third level bank will apply a series of measures to recover the amount back from you. So first level is gentle reminders. Second level of this thing is force or threat sorry so they will send you stinkers that it's outstanding and then even if you don't respond to that then banks have something called as recovery specialist. They are basically goons who they will send to recover the money from you. If nothing works then they will file a case. Hello. Yeah. Yeah I'm having one practical question ma'am. Yes. So you talked about SEBI and all know. So now if it is a nationalized bank it is well and good. If it is a cooperative and all if some persons takes money and he is not at all paying for a longer duration of time so it would be a huge amount then it comes to the you know laws and the cooperative bank will be locked and it will be under the liquidation and the whole employees along with the customers are also dying and the case goes and it will be you know a huge problem. Yeah. So how we should be tackled out. So cooperative banks in first place are not fully regulated by RBI. They are bound by the cooperative societies rules act and all of that so they have their own bylaws and regulations and all of that. So in the first place if you as an investor are investing into a cooperative bank or a credit cooperative society or whatever you need to be very sure of you know where you are investing in terms of what's the standing is the is the society credit worthy and all of that. Now if there is a fraud that happens at that bank and then your money is lost unfortunately it is lost consumers will go in consumer court file a case and the litigation will go on and on something may work out in your favor but you never know how many years it will take for the litigation to settle. So they are because they are not heavily regulated by the Reserve Bank of India there is a very limited extent to which RBI can intervene because these are you know collective investment schemes so it's like you are buying shares of that cooperative society to buy shares of that cooperative society you have to pay them money which is held in the form of deposit. So it's not a complete what you say banking structure they have a license that they get from RBI because they have to use the RBI's channels for payments and all of that. My question my concern is all the investment whatever the Indian people are going to do whether the it is any provision that the government has to have the eye on that because any how the RBI is going to put everything so whatever might be the case it might be a nationalized or it might be a cooperative or it might be any private sectors yeah but you know it any how yeah. So the banks that you talked about still have to follow RBI norms in terms of CRR SLR and all those things so what that 4% cash that they have to keep the government securities that they have to buy as the statutory liquidity provision those all rules apply to all these banks so beyond that then it's it's dependent upon the bank that the cooperative banking system if it shuts down then the depositors have invested therein will lose to the extent it is not protected by any of these measures thank you so we will take the next one SVERI college we can't hear you hello ma'am I name is Shubham Shah. My question is network marketing financially useful or not and how? I didn't get your question sorry. Network marketing is financially useful or not and how to use? No what do you mean by network marketing in the first place can you just elaborate a little bit? No ma'am well suppose one company is network marketing then I will be investing financially sorry I am not able to get your question. Financially safe. Investing in network marketing so what do you exactly mean by that I am not getting what you're trying to say what do you mean by net investing in network marketing so what exactly are you doing or trying to do? Net marketing ma'am net marketing net marketing so are you talking about shopping on the net? Yes ma'am. So it's are you talking about doing online transactions? Yes ma'am. Okay okay so those all those malls and all ATM mall and all those things? Yes ma'am. Okay okay no problem that is safe don't worry you can invest so you're not going to invest in any financial product there you are going to buy whatever is offered at that marketplace right they are all called e-commerce sites and they're all secured through the networks that I talked about before when I was explaining the payment system so they are very safe no problems at all. Thank you ma'am. Okay we will go to Maulana Azad Institute of National Institute of Technology you are not audible. Hello. Yeah go ahead. Hello. Yeah go ahead please. Hello. Yes go ahead with your question. Hello ma'am ma'am my question is as you have told there are two kinds of derivatives lock and option. Yeah. So I would like to ask what is the minimum locking period for both of them? Okay so there is no minimum lock in period as such because forward contracts they are forward contracts they are mutually decided they are customized contracts wherein the future date at which the contract is settled is also mutually decided between two parties right when it is a futures contract which is listed on the exchange I was talking about standardization right so standardization means that everything should be same with respect to the contract the settlement date also should be fixed. So depending upon the type of the derivative futures trading on the stock market the stock market will specify that you know this derivative is expiring on the last day of every month as an example right. Now if it is a swap again that is a customized contract between two parties so that is governed by an underlying document called the swap agreement and the swap agreement is made under guidelines of an association called ISDA, ISDA, International Swaps and Derivatives Association. So based on that guideline I will mutually agree what's the date options they are again traded on the stock exchange so stock exchange will say that options will have a fixed expiry date so if you were to take the case of India options expire last Thursday of every month. So whatever you have not exercised into the expiry it will cease to exit the next Thursday of the next month the last Thursday of the next month will be the next expiry date right. Does that answer your question? Does that answer your question? Yes ma'am. Thank you so much. Thank you. We will take the last question from BLDA PG college. We have stock brokers like Geojet, BNP Paribas, Trade Genie etc. How will they earn profit ma'am? So they are basically brokers they are registered with the stock exchanges so they act in two capacities one is as a broker so if you have a brokerage account with them you ask them to buy they will buy for you ask them to sell they will sell for you and they will charge you a certain commission on the transaction price so whatever if you have bought hundred shares of reliance and the total transaction amount is a lack of rupees they will charge you say 2% whatever is the agreed rate between you and them that's their brokerage right. The other way they earn is by being what is called as a market maker right. So what is a market maker basically they are members of the stock exchange so they can actively quote for the shares so somebody puts a buy order on the stock exchange the exchange terminal will flash being a member I have access to quote a selling price right. So if the broker has to buy he will quote what is called as a bid price and if BNP or whatever are matching the selling position they will quote something called as a sale price or a ask price. Now ask price is always more than the bid price and that's how they will make money on the basis of the difference bid ask price so they will simultaneously buy shares of that particular company they will also simultaneously trade on that shares of the same company and that's how they will earn the margin so there are two ways how these people make money and then the third way is they might offer you services of mutual fund advisor or financial advisor and all of that for which they may charge you some fees depending upon the type of client you are. So these are the various forms. Thank you ma'am I have just another question as I has earlier my question was what is BTST, SDBT and intraday. So I can tell you intraday I am not really very familiar with the full form of BTST and STBT are you meaning some terminologies there. Yes ma'am buy today sell tomorrow and sell today buy tomorrow. Okay so that's the normal settlement cycle versus intraday right so normally when you interact on the stock exchange the exchange process is a T plus 2 settlement so the BTST and STBT you do a trade today but the exchange will settle the trade for you within two working days. So let's say you placed order for reliance shares today you will receive the reliance shares into your demand account on the second working day from today and money will move out of your account immediately but it will be transferred to the recipient party on the second business day whoever has sold the reliance shares to you through the exchange right and intraday means I am buying today morning and I am selling in the afternoon and I want to profit actively by speculating on the price price movements. So that's a slightly more riskier form in which then the settlement has to happen instantaneously right so it's like DVP delivery versus payment and delivery versus receipt systems. Intraday is banned in India but it is allowed in other economies primarily because India is a very highly regulated market by the RBI and FedE but it's allowed in other jurisdiction. Yes ma'am thank you ma'am. Okay and then there's the last question should I take that question? There's the last question that is there on the chat which is from SVERI College of Engineering. Hello ma'am. Yes go ahead. My question is why petroleum products are not taken under GST and if taken what will be its further consequences madam that question may not be related with the current discussion but can you please answer it. Yeah so I'll be very honest with you I'm not an expert on GST so I don't know the rationale why petroleum products are not covered under GST but I will find the answer for you and maybe post it for you so if you don't mind you could post the question on the student block and we will get the necessary expert to answer your question. Alright fair deal. Alright. Okay alright so I will be closing the session with this last question though it is out of syllabus but I'll still take it so the question was what is the rate at which TDS is cut and how is it calculated so TDS stands for tax deducted at source so all of us as taxpayers have an obligation to pay taxes to the government and taxes are a way of financing the government's expenditure so as for the current tax regime there are various slabs at which tax rates are applicable to different types of customers and different types of entities so for individuals there are slabs like up to 5 lakhs nil 5 lakhs to 10 lakhs 10 percent 10 lakhs and about 30 percent plus you have such a Bharat says and education says and all those things so whoever had this question can just read up from income tax India dot GOV dot IM there is a detailed ready rechner guide that is available on taxation rates corporates are taxed at a different rate of 30 percent and there are there is tax on securities called securities transaction tax the budget has now introduced a 10 percent long term capital gains tax on investments that you do in shares and security so income tax side which is the official side has got access to all this information but tax is collected at source to answer your very fundamental question because that it's the the regime is a first point collection regime so it's not the I will you will get the revenue and then you are expected to pay the taxes the party who is paying you the money has to collect it at source on your behalf and deposit with the government and if it is falling short of the tax rates that are applicable to you when you file your it return you are supposed to calculate once again considering the provisions of the income tax act minus from it so work out your tax liability basically reduce from that whatever tax has been collected in advance on your behalf and if there is any residual tax that needs to be paid you got to pay it as part of what is called as self-assessment tax right so more details in terms of limits and amounts and all of that if you are interested you can just browse through the income tax side you will have that all in there so with that I am going to close today's session it was nice interacting with an engaging audience like you and all the best for your future thank you