MODULE -3 MUTUAL FUNDS

Mutual Funds: Cleaning and Features of mutual Fundx, History of Mutual Funds in India,
Benefits and drawbacks of investment in mutual l'tmd ; Major Fund Houses in India and
Types of Mutual Fund ilchenies and plans; SIP, STP, SWP of mutual fund; Net Axset Value-
simple problems.

Concept and background on Mutual Funds

A mutual fund is a pool of money managed by a professional Fund Manager. It is a trust

that collects money from a number of investors who share a common investment objective
and invests the same in equities, bonds, money market instruments anal/or other securities.

WHAT ARE MUTUAL FUNDS?

A mutual fund is a pool of money managed by a professional Fund Manager.

It is a trust that collects money from a number of investors who share a common
investment objective and invests the same in equities, bonds, money market instruments
and/or other securities.

Income / gains generated from this collective investment is distributed proportionately

amongst the investors after deducting applicable expenses and levies, by calculating a
scheme’s“NetAsset Value”NAV. orSimply put, the money pooled in by a large number of
investors is what makes up a Mutual Fund.

Meaning of Mutual Fund :

Mutual fund is a financial instrument that pools money from different investors. The
pooled money is then invested in securities like stocks of listed companies, government
bonds. corporate bonds, and money market instruments.

Advantages of Investing in Mutual Funds

There are over 5000 mutual funds in different categories to meet the objectives of all types
of investors. The right mix of growth, income, and safety makes mutual funds suitable for
everyone.

Below are the advantages of investing in mutual funds:

1. Expert Money Management

Your pooled money is managed by a team of experts. So, you have the advantage of expert
guidance in creating wealth. The fund manager does meticulous research in deciding
equities, sectors. allocation, and of course the buy and sell.
2. Low Cost
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If you calculate the benefits of expertise. diversity. and other options of return, then mutual
funds are definitely a very cost-effective instrument of investment.
There is a regulatory cap of 2.ñ% on the expense ratio.

3. SIP Option
Systematic Investment Plan gives you the flexibility to invest at an agreed interval which
could be weekly. monthly. quarterly. You can start investing in mutual funds with an
amount as low as Rs. 500.

4. Switch Funds
If you are not happy with the performance of a particular mutual fund scheme. then some
mutual funds do offer you an option to switch funds. However. you need to be very
cautious while opting to switch.

5. Diversification
Mutual funds offer you the benefit of diversification in such asset classes which otherwise
isn't possible for an individual investor. You reap the dividend of maximum exposure with
minimum risk.

6. Ease of Investing and Redemption

Now, it is pretty easy to buy. sell, and redeem fund units at NAV. Just place the redemption
request and you will q•et moneyyourinthe desired bank account within a few days.

7. Tax Benefit
Under the ELSS, tax-saving mutual fund you have the double benefit of tax saving and
wealth creation. Under Section 80C of the Income Tax Act, you can have a deduction of a
maximum of Rs. 1. 50,000 a year.

8. Lock-in Period
Close-ended mutual funds have a lock-in period. meaning as an investor you are not
allowed to redeem the fund before a cei‘iainperiod.
You get benefits in terms of long-term capital gain tax.

Disadvantages of investing in Mutual Funds:/Limitations or Disadvantages of Mutual

Funds

l. Mutual funds are Subject to Market Risk.

2. No Guarantee of Returns.
3.Diversification of portfolio doesn’tmaximize returns.
4.Selecting Right Financial Securities is not easy.
5.Cost Management not proportional to Performance.
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6.Unethical Practices may creep in.
7.Hidden or 12b-l fees of mutual funds.
Major Fund Houses in India :
SB I Mutual Fund.
ICICI Pmdential Mutual Fund.
HDFC Mutual Fund.
Aditya Birla Sun Life Mutual Fund.
Kotak Mahindra Mutual Fund.
Nippon India Mutual Fund.
Axis Mutual Fund.
UTI Mutual Fund.

Types of Mutual Fund Schemes and plans :

Different Types of Mutual Funds:

1. Open-ended funds

In an open-ended mutual fund, an investor can invest or enter and redeem or exit at any
point of time. It does not have a fixed maturity period.

2. Close-ended funds

Close-ended mutual funds have a fixed maturity date. An investor can only invest or enter
in these types of schemes during the initial period known as the New Fund Offer or NFO
period. His/her investment will automatically be redeemed on the maturity date. They are
listed on stock exchange(s).

3. Equity Mutual Funds

Equity mutual funds invest the pooled money majorly in stocks of different companies.
Hence, equity mutual funds have an inherent higher market risk. Factors like earnings.
revenue forecasts, management changes, and company & economic policy impact price
movements and the returns. Returns from equity funds have high fluctuations. Hence, you
should invest. if you have a fair understanding of the asset class risks associated with equity.

Types of Equity Funds

Equity funds can be further categorized depending on market capitalization and sectors.
• Large-cap Equity Funds — Invest in shares of large-cap companies that are
well-established with a track record of performing consistently over a longer
time pei‘iodThesecompanies. have sound fundamentals and are least affected
by business cycles.

Mid-cap Equity funds — Invest in shares of mid-cap companies. Mid-sized

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 companies have relatively lower stability in terms of performance. But have
the potential to grow more than the large-cap companies.

Small-cap Funds — Invest in shares of small-cap companies. Small-cap

companies have the highest potential to grow or fail. Thus, small-cap funds
have a high-risk exposure but also offer an opportunity to generate the highest
returns.

Multi-cap funds — Invest in a defined proportion across all market caps.

Based on cues and trend analysis, the fund manager allocates aggressivel y to
capitalize on the volatility.

4. Debt Mutual Funds

A debt mutual fund invests a major portion of the pooled corpus in debt instruments like
government securities, corporate bonds. debentures, and money-market instruments. The
bond issuers “borrow”frominvestors bx gii’inganassurance of steady and regular interest
income. Thus, debt funds are less risky compared to equity funds. The debt fund manager
ensures that the fund is invested in the highest-rated securities. The best credit rating
signifies the creditworthiness of the issuer in terms of regular interest payments and
principal repayment.

Type of Debt Funds

Following are the debt funds available in India:

• Dynamic Bond Funds: Dynamic bond fund investment basket comprises both
shorter and longer maturities. The debt fund manager aggressively tweaks the
portfolio composition based on changing the interest rate regime. This
ag•qressivenessmakesthedebtfund dynamic, hence the name.

• Liquid Funds: The short maturity of the underlying securities (not more than
91 days) makes the liquid funds almost risk-free. It is better than parking funds in
saving bank accounts as it gives better returns with much-needed liquidity. You can
redeem liquid funds almost instantly. If you are short-term investors then debt funds
like liquid funds could be better as you get returns in the range of 6.5 to S%. Liquid
funds are an effective tool to meet emergency fund needs.

Income Funds: Fund manager‘sinvestmajoi‘lyinsecurities with lonp•ermaturities to

have more stability and regular interest income flow. Most of the income funds
have an average maturity of 5 to 6 years.

Short-Term and Ultra Short-Term Debt Funds: There is another category in the
maturity range of I to 3 years. The fund manager takes a call on the interest rate

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 regime and invests in securities with maturity of the said range. This is suitable for
those investors who are risk-averse and looking for interest rate movement safety.

5. Hybrid / Monthly Income Plans (MIP):

These funds are similar to balanced funds but the proportion of equity assets is lesser
compared to balanced funds. Hence. they are also called marginal equity funds. They are
especially suitable for investors who are retired and want a regular income with
comparatively low risk.

6. Index Funds

An “indexisatypefund”ofmutualfund or exchange-traded fund thai seeks to track the

returns of a market index. The S&P 500 Index, the Russell 2t)00 Index, and the Wilshire 5000
Total Market Index are just a few examples of market indexes that index funds may seek to
track.

What is in an index fund?

Index funds may take different approaches to track a market index: some invest in all of the
securities included in a market index. while others invest in only a sample of the securities
included in a market index.

7 .Money Market Fund?

A money market fund is a kind of mutual fund that invests in highly liquid, near-term
instruments. These instruments include cash, cash equivalent securities. and high-credit-
rating, debt-based securities with a short-term maturity (such as U.S. Treasuries). Money
market funds are intended to offer investors high liquidity with a very low level of risk.
Money market funds are also called money market mutual funds.

SIP, UTP, SWP of mutual fund :

A Systematic Investment Plan (SIP) is an investment tool which allows the investor to
invest a fixed amount at regular intervals in a Mutual Fund scheme. SIP works by investing
a fixed amount at a defined frequency. With this an investor does not need to time the
market and can invest in a hassle-free manner.

What is an STP-Systematic Transfer Plan? Systematic Transfer Plan (STP) is a facility by

which a predetermined amount can be transferred from one scheme of mutual fund to
another scheme at predefined intervals.

While both STP and SIP involve regular investments in equity mutual funds, in SIP the

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money comes from your bank account while in the case of STP, it gets transferred from your
debt fund. Also, STPs offer higher returns than SIPs, since you are also getting returns from
your debt fund.

The STP route is best for all those investors who wish to invest a lump sum in mutual fund
schemes because this way they get the dual benefits of comparative risk investment.
Investing a large amount of money in one go in equity oriented mutual funds can be risky.

A Systematic Investment Plan(SIP) allows an investor to invest a fixed amount at

predetermined intervals and a Systematic Withdrawal Plan(SWP) is a facility which allows
an investor to withdraw a fixed amount at predetermined intervals.

If investors want regular cash How from their investments the automatic choice for many
are bank fixed deposits or postal deposits. However, declining interest rates on these
schemes have made investors worry about their future income needs. Mutual funds have a
solution for this, called SWP.

What is SWP in mutual funds? SWP or systematic withdrawal plan is a mutual fund
investment plan, through which investors can withdraw fixed amounts at regular intervals,
for example — monthly/ quarterly/ yearly from the investment they have made in any
mutual fund scheme.

What Is Mutual Fund NAV?

Calculation and use of Net Asset Value:

What Is Mutual Fund NAV?

Mutual fund net asset value (NAV) represents a fund's per share market value. It is the
price at which investors buy (bid price) fund shares from a fund company and sell them
(redemption price) to a fund company.

A fund's NAV is calculated by dividing the total value of all the cash and securities in a
fund's portfolio, less any liabilities, by the number of shares outstanding.

Let us understand the concept witb tbe help of an illustration

Mr. Arun invests in 2 different schemes, Scheme-A and Scheme-B. He invests Rs I

lakh in both the schemes.

NAV of Scheme-A is Rs 10
NAV of Scheme-B is Rs 50
Units to be allocated
Scheme-A: 10000 units (Rs 100,000 / IO)
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Scheme-A: 2000 units (Rs 100,000 / TO)
Returns earned in both the schemes is I 0% after a month

Here the revised NAV per unit is Rs 11 for Scheme-A and Rs 55 for Scheme-B. The initial
amount invested for both the schemes is Rs 1 lakh. The only difference is the number of
units allocated, the units allocated in Scheme-A is higher than Scheme-B. But the NAV and
the return for both the schemes are the same. So. the role of NAV is not the only factor to
measure the performance of the fund.

Mutual fund NAVs are the book value of the scheme. When investing in any scheme, an
investor must check the past performance of the scheme. Also, an investor must look at the
returns earned by the fund over the years.

DEFINITION OF BANKING
Banking Company: The Banking Regulation Act, 1949 defines “a banking company as a
company which transacts the
business of banking in India (Section 5 (C)”.
Banking: Section 5(b) defines banking “as accepting for the purpose of lending or
investment of deposits of money from the public, repayable on demand or otherwise and
withdraw able by cheque, draft, order or otherwise”.

Need for Banking

A sound banking system is necessary to achieve the following objectives:
1. Savings and Capital Formation: Banks play a vital role in mobilizing the savings of the
people and promoting the
capital formation for the economic development of a country.
2. Channelization of Savings: The mobilized savings are allocated by the banks for the
development of various fields
such as agriculture, industry, communication, transport, etc.
3. Implementation of Monetary Policy: A structured banking system can easily implement
the monetary policy because
development of the economy depends upon the control of credit given by the banks. So,
banks are necessary for the
effective implementation of monetary policies.
4. Encouragement of Industries: Banks provide various types of financial services such as
granting cash credit loans,
issuing letter of credit, bill discounting, etc., which encourages the development of various
industries in the country.
5. Regional Development: By transferring surplus money from the developed regions to
the less developed regions,
banks reduce regional imbalances.

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6. Development of Agriculture and Other Neglected Sectors: Banks are necessary for the
farmers. It also encourages
the development of small-scale and cottage industries in rural areas.

Functions of Banks
1. Acceptance of Deposit: A bank accepts money from the people in the form of deposits
which are usually repayable on
demand or after the expiry of a fixed period. It gives safety to the deposits of its customers.
It also acts as a custodian
of funds of its customers.
2. Giving Advances/Loans: A bank lends out money in the form of loans to those who
require it for different purposes.
These loans can be in the form of retail loans (loans given to individuals) or corporate loans
(loans given to businesses).
3. Payment and Withdrawal: A bank provides easy payment and withdrawal facility to its
customers in the form of
cheques, drafts, debit cards, Automated Teller Machines (ATMs), etc. It also brings bank
money in circulation. The
new age banking focusses on providing payment services using mobile technology to
enable faster transfers, using
Unified Payment Interface (UPI), etc.
4. Ever increasing Functions including agency and utility services: Banking is an
evolutionary concept. There is
continuous expansion and diversification as regards the functions, services and activities of
a bank, which includes
wealth/portfolio management services, utility services, agency services, insurance/mutual
fund advisory services, etc.

Types of Bank Accounts or Deposit Accounts

1. Current Account
2. Savings Bank Account
3. Fixed Deposit Account
4. Recurring Deposit Account

1. Current Account: Current accounts are intended for commercial and industrial
undertakings, public bodies which have numerous and frequent banking
transactions for convenience of making payment by cheques.

Features:
a. It’s opened with a minimum deposit of Rs 2000 to Rs 3000.
b. It is an active or a running account because a customer can deposit into a account
any amount of money and any number of times. Similarly. A customer can

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 withdraw from account any amount and any number times as there are sufficient
funds to his credit.
c. These deposits are repayable on demand, hence it is demand deposit and banker
has to keep a major portion in the liquid form.
d. No interest is allowed on current deposits but incidental charges are levied.
e. Overdraft facilities are allowed and commitment charges are also made.

2. Saving Bank Account: Saving bank accounts are meant for middle and low income
groups who can deposit only small sums for the purpose of saving a part of their
income for future needs and for earning a fair interest on their deposits.

Features:
a. It can be opened with a very small deposits of Rs 100, Rs 500 and Rs 1000/-
b. No incidental charges are made levied but incidental charges are if minimum
balance is not maintained by the customer.
c. A customer can deposit any amount of money and any number of times
d. But restrictions are made on withdrawals of deposits to promote of saving habit
among the depositors. E.g. 5 times a day and Rs 25.000/- per day only.
e. A fair interest is allowed by the banker on saving bank deposits on daily credit
balances with the banker e.g 4% pa according RBI directions.

3. Fixed Deposit Account: FD means deposits repayable after the expiry of a certain
period of time, which varies from 1 month to 10 years which is also known as Time
or Term deposits.

Features:
a. It is opened with an intention of investing their money on safe bank deposits
and to earn a high and steady interest on their deposits i.e 6 to 9%
b. No introduction is necessary for opening FD Account.
c. In a FD account, a fixed amount of money is deposited by a customer for a fixed
period of time at a fixed rate of interest.
d. It can be opened with a minimum deposit of Rs 50 and maximum no limit.
e. A FD can be withdrawn by returning the FD receipt which is given by bank at
the time of depositing money.
f. It cannot be withdrawal before maturity, if so, prepayment charges are made.

4. Recurring Deposit Account: RD means a fixed amount is deposited at regular time

interval and which is repayable after the expiry of a specified period of time along
with interest is also known as Time or Term deposits.

Features:
a. No introduction is necessary for opening RD Account.
b. It can be opened with a minimum deposit of Rs 50 and maximum no limit.
c. A RD can be withdrawn by returning the RD book which is given by bank at the
time of depositing money.
d. It cannot be withdrawal before maturity, if so, prepayment charges are made.
e. It is meant for people who gets regular income and to save their income.

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Insurance of Bank Deposits
To assure the depositor about the security of their deposit in any type of account with
banks, the Deposit Insurance and Credit Guarantee Corporation was created by the
Government of India in 1961, through an act of parliament.
Under this scheme, which came Into effect from 1st January 1962, a depositor having a
deposit in any bank, which is not able to meet its liability of paying back the deposit
amount to its depositors due to bankruptcy, can approach the corporation for remedy.

As per the provision of the act, the corporation will pay the aggrieved depositor a sum of
Rs. 5 lac per account in the same capacity.
Pradhan Mantri Jan-Dhan Yojana (PMJDY)
Pradhan Mantri Jan-Dhan Yojana (PMJDY) is National Mission for Financial Inclusion to
ensure access to financial services, namely, a basic savings & deposit accounts, remittance,
credit, insurance, pension in an affordable manner. Under the scheme, a basic savings bank
deposit (BSBD) account can be opened in any bank branch or Business Correspondent
(Bank Mitra) outlet, by persons not having any other account.
Benefits under PMJDY

a) One basic savings bank account is opened for unbanked person.

b) There is no requirement to maintain any minimum balance in PMJDY accounts.

c) Interest is earned on the deposit in PMJDY accounts.

d) RuPay debit card is provided to the PMJDY account holder.

e) Accident insurance cover of Rs.1 lakh (upgraded to Rs. 2 lakh to new PMJDY accounts
opened after 28.8.2018) is

available with RuPay card issued to the PMJDY account holders.

f) An overdraft (OD) facility up to Rs. 10,000 to eligible account holders is available.

g) PMJDY accounts are eligible for Direct Benefit Transfer (DBT), Pradhan Mantri Jeevan
Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY), Atal Pension
Yojana (APY), Micro Units Development & Refinance Agency Bank (MUDRA) scheme.
E-Banking
It refers to delivery of services of bank to a customer at his office or home by using
electronic technology. It may be viewed as the use of technology for servicing the
customers.
1. E-Banking have following e-Services.
a) Customer to bank E-Banking:

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E- banking is basically internet based. Banking products and services such as deposits,
remittances, credit cards etc as well as the important banking information can be made
available with easy access to customers on internet.
b) Bank to Bank E-Banking:
Transacting inter-bank transactions such as money at call etc.
c) Electronic central Banking:
They are interconnected to extranet to facilitate clearing cheques, management of cash
reserves, open market operations, discounting bills etc.,
d) Intranet procurement:
Intranet procurement is essential to transact between bank and its branches, subsidiaries.
2. Internet banking:
Online banking (or Internet banking or E-banking) is a facility that allows customers of a
financial institution to conduct financial transactions on a secured website operated by the
institution. To access a financial institution's online banking facility, a customer must
register with the institution for the service, and set up some password for customer
verification. Online banking can be used to check balances, transfer money, shop online,
pay bills etc.

Advantages of E-banking or Internet banking

1. Convenience: Banks that offer internet banking are open for business transactions
anywhere a client might be as long as there is internet connection. Apart from periods of
website maintenance, services are available 24 hours a day and 365 days round the year. In
a scenario where internet connection is unavailable, customer services are provided round
the clock via telephone.

2. Low cost banking service: E-banking helps in reducing the operational costs of banking
services. Better quality services can be ensured at low cost.

3. Higher interest rate: Lower operating cost results in higher interest rates on savings and
lower rates on mortgages and loans offers from the banks. Some banks offer high yield
certificate of deposits and don’t penalize withdrawals on certificate of deposits, opening of
accounts without minimum deposits and no minimum balance.

4. Transfer services: Online banking allows automatic funding of accounts from long
established bank accounts via electronic funds transfers.

5. Ease of monitoring: A client can monitor his/her spending via a virtual wallet through
certain banks and applications and enable payments.
6. Ease of transaction: The speed of transaction is faster relative to use of ATM’s or
customary banking.

7. Discounts: The credit cards and debit cards enables the Customers to obtain discounts
from retail outlets.

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8. Quality service: E-Banking helps the bank to provide efficient, economic and quality
service to the customers. It helps the bank to create new customer and retaining the old
ones successfully.

9. Any time cash facility: The customer can obtain funds at any time from ATM machines.

Disadvantages of E-banking Internet banking

1. High start-up cost: E-banking requires high initial start-up cost. It includes internet
installation cost, cost of advanced hardware and software, modem, computers and cost of
maintenance of all computers.

2. Security Concerns: One of the biggest disadvantages of doing e-banking is the question
of security. People worry that their bank accounts can be hacked and accessed without their
knowledge or that the funds they transfer may not reach the intended recipients.

3. Training and Maintenance: E-banking requires 24 hours supportive environment,

support of qualified staff. Bank has to spend a lot on training to its employees. Shortage of
trained and qualified staff is a major obstacle in e-banking activities.

4. Transaction problems: Face to face meeting is better in handling complex transactions

and problems. Banks may call for meetings and seek expert advice to solve issues.

5. Lack of personal contact between customer and banker: Customary banking allows
creation of a personal touch between a bank and its clients. A personal touch with a bank
manager can enable the manager to change terms in our account since he/she has some
discretion in case of any personal circumstantial change. It can include reversal of an
undeserved service charge.

3. Debit cards:

Debit card is a plastic card that may be used for purchasing goods and services or for
obtaining cash advances for which payment is made from existing funds in a bank account

Benefits of debit cards.

a. Free with opening bank account
b. Easy cash withdrawals
c. Convenience
d. Fair exchange
e. Statement of accounts
f. Balance enquiry

Drawbacks of debit cards.

a. No grace period
b. Less protection
c. Fees
Some Guidelines
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 • Guard your debit card against loss or theft. Keep it in a safe place just like cash,
credit cards or checks.
• If you lose your debit card, notify your financial institution immediately.
• Choose a PIN number that only you know. It is recommended, you don't use your
phone number or birthday.
• Guard your PIN number. Memorize it and never write it on anything you keep with
you.
• Keep receipts from all your debit card transactions for your records.
• Review your statements immediately and investigate any unknown transactions.
• Use chip-enabled technology if available. For the most secure transaction, if a
retailer offers a chip-enabled terminal, use it instead of swiping the magnetic strip.

4. Credit cards

A credit card is an electronic, plastic card issued by a financial institution that lets an
individual borrow money at the point of sale (i.e. checkout) to complete a purchase.

Benefits of Credit cards:

• Purchasing Power: Credit Cards enable users to make big ticket purchases they
might not otherwise be able to afford.
• Rewards: Many cards offer rewards programs that will accrue points, discounts, or
other benefits like frequent flyer miles.
• Convenience: Credit cards reduce the need to carry cash. Most retailers accept credit
cards and they are pretty much required for online purchases.
• Trackability: The electronic record keeping that comes with credit cards make it easy
to track your spending and identify fraud.
• Use during an emergency: There are times when money is the simple solution to an
emergency. If you get hit with an unexpected expense, credit cards can be the quick
and easy solution you need.
• Builds credit history: Responsible use of a credit card over time builds your credit
history, qualifying you for better interest rates and other financial benefits.

Disadvantages of Credit cards:

• Overspending: Credit cards can make life easier, but they can also make overspending
easier as well. With a credit card, you’re spending money you don’t necessarily have
yet. If you’re not careful, this can quickly lead to unexpected debt.
• Interest and fees: Using credit is essentially borrowing. And you’re not borrowing for
free. Mismanaging a credit card can lead not only to a high balance, or maxed-out card,
but also to debt in the form of interest and fees.
• Fraud: Credit cards (and other electronic forms of payment) carry unique dangers.
Credit cards can be stolen, their numbers can be copied, and they can be used to steal
your money and identity.
• Mounting Debt: If you carry a balance on your credit card from month to month, it can
be very easy for charges and interest to rack up.
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5. Electronic Clearing Service (ECS)

ECS is an electronic mode of payment / receipt for transactions that are repetitive
and periodic in nature. ECS is used by institutions for making bulk payment of amounts
towards distribution of dividend, interest, salary, pension, etc., or for bulk collection of
amounts towards telephone / electricity / water dues, cess / tax collections, loan
instalment repayments, periodic investments in mutual funds, insurance premium etc.

6. National Electronic Fund Transfer (NEFT)

National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating

one-to-one funds transfer. Under this Scheme, individuals, firms and corporate scan
electronically transfer funds from any bank branch to any individual, firm or corporate
having an account with any other bank branch in the country participating in the Scheme.
For being part of the NEFT funds transfer network, a bank branch has to be NEFT- enabled.
The list of bank-wise branches which are participating in NEFT is provided in the website
of Reserve Bank of India.

Benefits of NEFT:

1. Safe and Effective – For a seamless movement of funds on the Internet, you could
opt for NEFT as it helps you transfer any amount of money quickly.

2. Low Processing Charges – Internet banking and NEFT are flexible payment options
which are very economical. For getting this facility, you don’t have to reimburse a
huge sum of money to your bank. The processing charges are quite low and you can
transfer any amount of money without any difficulty.

3. Highly Dependable – NEFT, an integral aspect of Internet banking, is a highly

dependable method of making payments and receiving funds online. Most of the
banks in India are regulated under the norms set by RBI and, hence, the Internet
banking facility too is quite safe in nature.

4. Rapid Settlement – Unlike the regular banking methods of fund transfer, NEFT
transfer is really quick and you can enjoy rapid settlement of accounts, thereby
improving the overall functionality of your business.
Disadvantages of NEFT:

1. Highly Technical – One of the major drawbacks of Internet banking and NEFT
transfer in India is that this is a highly technical method of funds transfer which is
not easy to operate for everyone. An individual with little knowledge of computer or
the Internet might not be able to operate an Internet banking account easily.

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 2. The Risk involved with Online Payments – Even though most of the banks in India
take proper steps to secure an NEFT transaction, it is quite possible that your
information might get passed on to a hacker if you’re using an unsecured browser.
This is one of the reasons why a lot of people across the country don’t believe in this
facility.
7. Electronic Fund Transfer (EFT)

An electronic funds transfer (EFT) is a transaction that takes place over a

computerized network, either among accounts at the same bank or to different accounts at
separate financial institutions EFTs include direct-debit transactions, wire transfers, direct
deposits, ATM withdrawals and online bill pay services. Transactions are processed
through the Automated Clearing House (ACH) network, the secure transfer system of the
Federal Reserve that connects all U.S. banks, credit unions and other financial institutions.

8. Real Time Gross Settlement (RTGS)

The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as
the continuous (real-time) settlement of funds transfers individually on an order by order
basis (without netting). 'Real Time' means the processing of instructions at the time they are
received rather than at some later time; 'Gross Settlement' means the settlement of funds
transfer instructions occurs individually (on an instruction by instruction basis).
Considering that the funds settlement takes place in the books of the Reserve Bank of India,
the payments are final and irrevocable.

9. DEFINITION of Magnetic Ink Character Recognition Line (MICR)

Magnetic ink character recognition (MICR) is the information that appears at the bottom
of a check. This includes the bank's routing number, the customer's account number, and
the check number. The magnetic ink character recognition line is printed using technology
that allows certain computers to read and process the printed information.

10. ATM

Computerized machine that permits bank customers to gain access to their accounts
with a magnetically encoded plastic card and a code number. It enables the customers to
perform several banking operations without the help of a teller, such as to withdraw cash,
make deposits, pay bills, obtain bank statements, effect cash transfers. Also called
automated Banking machine, automatic till machine, or remote service unit.

Advantages of ATM :

• Round the Clock Services : ATM provides banking services to its customers round
the clock, 24 hours a day, 7 days a week and 365 days a year.

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 • Access to bank from any part of the world : Essential banking services like deposits,
withdrawals transfer of funds, etc can be accessed by customers from any part of the
world.
• Expansion of Services to any corner of the world : Of the Banks can expand their
services to any corner of the world by providing electronic access to its customers.
• Reduction in cost of operation : This reduces human intervention and thereby
reduces the cost of operations and increases profitability of banks.
• For shopping Purpose : Now a days almost every shopping mall, restaurant and
other organizations are accepting credit card payments.

Disadvantages :
• Cannot be provided in rural areas : In a country like India, where banks are having
large number of rural and non-computerized branches, ATM services cannot be
provided.
• Presence various constraints : Even if banks make some efforts to introduce ATM
services country side, various constraints like illiteracy, security concern, etc., may
not permit that.

• Limitation of cash withdrawals : Again there is a limitation of cash withdrawals

from ATM. For example, many banks do not permit withdrawal of more than 25,000
at a time.

• Cash deposit facility is not safe : Similarly cash deposit facility is restricted and not
safe as dropping of envelope with can in ATM is not advisable.

• Possibility of misusing ATM card : ATM card, if misplaced, lost or stolen, may be
misused. There are number of such reported incidences now a days.

• Loss of personnel touch with the Banks : Last but not the least, customers lose
personal touch with their bankers.
11. DEMAT Account:

Demat Account or dematerialised account provides facility of holding shares and

securities in electronic format. During online trading, shares are bought and held in a
Demat account, thus facilitating easy trade for the users. A Demat Account holds all the
investments an individual makes in shares, government securities, exchange-traded funds,
bonds and mutual funds in one place.

DIGITAL PAYMENT SYSTEM

Payment and Settlement Systems in Indian Banking Sector
In India, the RBI oversees the payment systems. The Board for Regulation and Supervision
of Payment and Settlement Systems (BPSS), chaired by the Governor, RBI, spearheads this
responsibility.

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The creation of a new department viz., Department of Payment and Settlement Systems
(DPSS) by RBI in the year 2005 to focus exclusively on payment and settlement systems, and
subsequent legislation of the Payment and Settlement Systems Act, 2007 (PSS Act) set the
stage for a new era in the history of payment systems in the country. The Bank for
International Settlements’ (BIS) Committee on Payments and Market Infrastructures
(CPMI) defines payment systems transactions to include the total transactions undertaken
by all payment systems in the country. Considering this definition, payment systems
transactions in India would comprise of transactions processed and settled through:

a) Paper Clearing [Magnetic Ink Character Recognition (MICR), Non-MICR, Cheque

Truncation System (CTS), Express

Cheque Clearing System (ECCS)];

b) Bulk electronic transaction processing systems like Electronic Clearing Service (ECS),
with its variants Regional ECS and National ECS; National Automated Clearing House
(NACH) – Debit and Credit;

c) Card Payments (Debit, Credit and Electronic);

d) Large Value [Real Time Gross Settlement (RTGS)];

e) Retail [National Electronic Funds Transfer (NEFT)];

f) Fast Payments [Immediate Payment Service (IMPS), Unified Payments Interface (UPI)];
and

g) e-Money [Prepaid Payment Instrument (PPI) Cards and Wallets)

Except (a) above and cash transactions, all other payments constitute digital transactions

In addition to the above payment and settlement systems, RBI has also institutionalised a
well-established clearing and settlement system for Government Securities.

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