Know Financial Services and Its Types

Financial services comprise services such as loans, insurance, portfolio management, stock markets, banking, and mutual funds. Learn more.

Financial services involve the management, investment, and lending of money and assets for both people and organizations. In this blog, we will discuss the following topics for you better to understand the meaning of financial services and their types.

What are Financial Services?

In simple terms, any activity that is of a financial nature can be termed a financial service. It implies services provided by the finance industry. It comprises several organizations that manage finances. These organizations include banks, credit card companies, insurance companies, consumer finance companies, stockbrokers, investment funds, and government-sponsored enterprises. Financial services are products and services financial organisations offer for financial transactions and other related services. 

Types of Financial Services

Banking

The banking industry is the foundation of the financial services sector in India. The nation has many public sector (27), private sector (21), foreign (49), regional rural (56) and urban/rural cooperative (95,000+) banks. Banks provide services such as personal banking- checking accounts, savings accounts, fixed deposits, credit cards and debit cards. They also offer business banking such as corporate internet banking, transfer funds through NEFT, RTGS & IMPS, paying utility bills online and an instant overdraft facility. Banks provide business loans, personal loans, home loans, automobile loans etc. In India, the banking sector is regulated by the Reserve Bank of India, which monitors foreign reserves, controls credit, manages printing and supply of currency, bankers to the government and lends money to commercial banks. 

Professional Advisory

Several professional advisory services offer consulting investment due diligence, mergers and acquisitions, taxation, risk, real estate and valuation. Individual consultants, as well as large multi-national corporations offer these consultation services. 

Wealth management

Financial services in this category include managing customer’s financial portfolios by investing in various financial instruments such as equity, debt, mutual funds, insurance, commodities, real estate and derivatives. Wealth managers invest customers’ money based on factors such as investment purpose, time horizon, and risk appetite. 

Mutual funds

Mutual fund service providers assist regarding investment in various funds and asset classes such as equity and debt. They help in SIP registration, managing funds, account opening and capital gains reports. Mutual funds offer several advantages, such as diversification. It allows the investor to invest in various asset classes that lower risk. When the value of another investment declines, the value of another investment may rise, thus minimizing the risk. In mutual funds, a professional manager operates your account. Experts pool money from various investors and allocate money in securities, helping investors profit. 

You can also invest smaller amounts through a Systematic Investment Plan (SIP). Through SIP, you can invest either monthly or quarterly at your convenience. Mutual funds are easily accessible, too. You can invest in these funds from anywhere across the globe. Moreover, they are safe and transparent in nature. As per SEBI guidelines, all products of mutual funds should be labelled. Colour-coding on these products helps investors to know the risk level of investment. Investors can also easily check the manager’s credentials, qualifications, years of experience, assets under management and solvency details of the fund house. 

You can also enjoy taxing benefits when investing in mutual funds. ELSS Mutual funds have a tax exemption of Rs 1.5 lacs a year under Section 80 C of the Income Tax Act. They also have the lowest lock-in period of only 3 years, unlike FD, ULIPs and PPF, which have a lock-in period of 5 years. 

Insurance

Insurance is a type of financial service that provides financial protection against any unforeseen circumstance in exchange of a premium paid by the policyholder. It is primarily available in two forms:

General insurance:  It is defined as a non-life insurance policy. It includes health, car, home and travel insurance.

Life insurance: Life insurance is a payout given to the policyholder’s family at the time of the policyholder’s death. The policyholder pays a premium during the tenure of the policy. Life insurance is of various types, such as term-life policies, money-back, ULIPs, pension plans, etc. The insurance market in India is regulated by the Insurance Regulatory and Development Authority of India (IRDAI). Premiums towards policies vary depending on the risk assessment, type of policy, sum assured, time horizons, etc. 

Stock markets

In this type of financial service, investors can invest in Indian stock markets- National Stock Exchange and Bombay Stock Exchange. Investors can invest in various stocks of companies to earn a return on investment. You can sell the stock once its price increases and you earn a profit. Returns are dependent on the payout of dividends to investors, too. The penetration of demat accounts in India has risen to 6.9% in Q1FY23 instead of 1.7% in FY 13. There has been a steady growth in demat accounts to 97 million in Q1FY23 as opposed to 21 million in FY13. 

Treasury

Investors can invest in government and private organization bonds in these types of financial services. Bonds are fixed-income instruments wherein the government or corporate borrow money and repay the loan with interest. These are typically done to finance projects and operations. The borrower offers the investor fixed payment and principal repayment at the end of the tenure. Bonds are more stable investments than equities and can provide a steady source of income during retirement. 

Tax/audit consulting

This segment of financial services includes consulting on tax and auditing to customers. Service providers offer services to both individuals and business clients. For individual customers, they help in filing income tax returns, tax-saving, checking tax liability, etc. For business clients, they help in filing GST returns, tax compliance advisory, transfer pricing analysis and determining tax liability. Apart from tax consultation, service providers offer audit consultations, including tax, stock, and risk audits. 

Capital restructuring

These services are given to companies for restructuring their capital (debt and equity), especially during bankruptcy, liquidity crunch, volatile markets or hostile takeover. Capital restructuring helps a company improve its position in the market, attract customers and clients and maintain business continuity. It involves rearranging capital assets to help the company exploit growth opportunities or receive funding. 

Portfolio management

This involves managing the financial portfolio of clients and giving them highly customized solutions to achieve their financial goals. These services are usually targeted at High Net Worth Investors (HNIs). In discretionary portfolio management service, the portfolio manager individually manages each client’s funds as per their needs. However, under a non-discretionary portfolio management service, the manager manages the funds as per the directions given by the client.

As per SEBI regulations, portfolio managers can charge a small fee as per the agreement for giving portfolio management services. However, they can’t charge an upfront fee to the clients. Under discretionary portfolio management, managers can invest in stocks, money market instruments, units of mutual funds and other securities. Whereas under non-discretionary portfolio management, managers may invest up to 25% of the AUM of a client in unlisted securities in addition to the securities permitted for discretionary portfolio management. 

Summing up

India’s financial services sector has experienced significant growth in the past few years. Thanks to the advancement in digitalization, increasing usage of mobile, and government reforms. India will have 6.11 lakh High Net Worth Individuals by 2025. This will help India become the 4^th largest private wealth market globally by 2028. 

Contributed by – Bhanvi Arora