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Fund Based and Fee Based Financial Services

Financial services provided by institutions can primarily be categorized into fund-based and fee-based services. The distinction is crucial as it underpins the nature of the financial engagement between the institution and the client. Below is a more detailed explanation of these categories of financial services:

Fund Based and Fee Based Financial Services

Fund Based Financial Services

Fund based financial services are centered around the provision and management of funds. Financial institutions engage in lending activities, where they provide funds to individuals or entities and earn interest on the lent amount over a specified tenure. Here are several types of fund-based financial services:

  1. Leasing:

    • Leasing is a contractual arrangement where assets are provided to clients for use over a specified period in return for periodic lease payments.
    • Example: Companies leasing vehicles or equipment from financial institutions, making periodic payments as per the lease agreement.

  2. Hire Purchase:

    • In a hire purchase agreement, customers can purchase assets by making an initial down payment followed by subsequent periodic payments.
    • Example: Acquiring machinery or vehicles on hire purchase, paying a part of the cost upfront and the rest in installments.

  3. Insurance

    • Insurance services provide coverage against specified risks, offering financial protection to individuals and entities.
    • Example: Insurance companies offering life insurance, health insurance, or property insurance.

  4. Bill Discounting:

    • Bill discounting is a short-term financing facility where a bank purchases a bill of exchange from a client at a discount and makes the payment on the maturity date.
    • Example: A bank purchasing a bill of exchange from a client at a discount and making the payment on the maturity date.

  5. Consumer Credit:

    • Consumer credit involves providing funds to individuals for purchasing consumer goods like vehicles, appliances, or other products.
    • Example: Banks providing loans to individuals for purchasing vehicles or other consumer goods.

  6. Venture Capital:

    • Venture capital is a specialized fund-based service providing financing to startups and small enterprises showing potential for high growth.
    • Example: Venture capital firms providing funding to promising tech startups to help them scale their operations.

Fee Based Financial Services

Fee-based financial services do not involve the provision of funds but rather are about offering financial services or advice for a fee. Here are several types of fee-based financial services:

  1. Stock Broking:

    • Stockbroking services involve facilitating the buying and selling of securities like stocks, bonds, and other financial instruments.
    • Example: Stockbrokers buying and selling shares on behalf of clients in return for a commission.

  2. Debt Restructuring:

    • Debt restructuring services involve modifying the terms of existing debt agreements to make them more favorable for the borrower.
    • Example: Financial institutions helping borrowers restructure their debt by modifying the interest rate or repayment schedule.

  3. Credit Rating:

    • Credit rating services involve assessing the creditworthiness of individuals or entities and assigning a credit rating based on the assessment.
    • Example: Credit rating agencies assessing the creditworthiness of companies and assigning a credit rating based on the assessment.

  4. Merchant Banking:

    • Merchant banking encompasses corporate advisory services to businesses, including assistance in mergers, acquisitions, and capital market operations.
    • Example: Merchant banks advising companies on mergers and acquisitions or public offerings.

  5. Issue Management:

    • Issue management services involve assisting companies in raising capital through public offerings of securities like stocks or bonds.
    • Example: Financial institutions helping companies raise capital through public offerings of securities like stocks or bonds.

  6. Underwriting Services:

    • Underwriting services involve guaranteeing the sale of securities by acting as an intermediary between the issuing company and the public, assessing the risk and pricing of securities.
    • Example: Financial institutions providing underwriting services for public stock or bond offerings, ensuring the successful sale of securities.

In conclusion, fund-based and fee-based financial services cater to the diverse financial needs of individuals and businesses. While fund-based services focus on the provision of funds and financing, fee-based services offer expertise, advisory, and other financial services for a fee. Financial institutions often provide a blend of both fund-based and fee-based services, enabling them to offer a comprehensive range of financial solutions to their clients.

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