For an economy to thrive, its people and businesses must have access to reliable and efficient ways to save and invest money, borrow when needed, and protect themselves from risks. Institutions and professionals offering these solutions are part of what we call financial services. But what are financial services exactly? And how do they help individuals and businesses manage their money and achieve their goals? Let’s answer these questions.
What Are Financial Services?
Financial services is a broad term that covers a wide range of activities. In simple words, these are services offered by financial institutions to help individuals and businesses manage their money-related activities. For example, opening a savings account, applying for an education loan, buying a health insurance policy, investing in mutual funds, and transferring money, all fall under the scope of financial services.
The institutions offering these services, such as banks, insurance companies, and mutual fund houses, collectively make up the financial sector. Here, different entities interact with one another to ensure the money flows smoothly within the economy. Banks lend funds to individuals and businesses, insurance companies provide protection against risks, and investment firms divert savings from investors into the market. To better understand what are financial services, let’s have a look at some of the basic kinds of services one can use to manage, grow, and protect their money.
Types of Financial Services
Banking Services
When you hear the words ‘financial service’, banking is probably the first thing that comes to mind. They are the most accessible and widely used financial institutions, and are mainly of two types:
- Commercial Banks: These are generally just called ‘banks’. They focus on public dealings and providing loans for a variety of needs. Their common services include savings accounts, current accounts, credit cards, fixed deposits, and net banking.
- Investment Banks: These, on the other hand, are banks that specialise in helping companies raise capital, manage mergers, and provide advisory services for large-scale investments (like acquiring new companies or opening new factories). They do not usually deal directly with the general public.
Loan Services
While they are the most common and traditional lenders, banks are not the only institutions that hand out loans. Any type of financial organisation providing credit can come under this category. These include non-banking financial companies, cooperative banks, MFIs, and peer-to-peer (P2P) lending platforms.
Investment Services
These services help individuals and businesses invest their money in different types of assets in order to grow wealth, generate income, and achieve long-term financial goals. This makes sure that surplus funds are put to productive use rather than sitting idle. For example:
- Mutual Funds: Asset management companies pool money from multiple investors and invest it in securities like stocks and bonds.
- Stock Brokerage: You can buy shares of companies through individual brokers, firms, or mobile platforms. If the company does well, you can earn returns through dividends or capital appreciation. Likewise, securities such as bonds can be purchased through similar firms and brokers.
- Real Estate: Service providers such as real estate advisory firms and REITs help investors identify, analyse, and invest in properties.
- Portfolio Management Services: PMS is targeted at high net worth individuals looking to build a more customised portfolio compared to mutual funds.
- Wealth Advisory: These services consider different aspects of a client’s financial life, like investments, debt, taxes, insurance, estate planning, and retirement. A financial advisor service can help you grow and preserve your wealth with this holistic approach.
- Family Office: These companies also offer a comprehensive suite of services, but they only manage the financial affairs of ultra-high-net-worth families.
Insurance Services
Mitigating financial risks is an essential part of financial planning. Insurance works on the principle of risk transfer, as it allows one party to transfer the financial burden of unexpected events to an insurance company. The companies providing these services protect against various types of risks, such as to life, health, vehicles, and homes.
Financial Planning And Advisory Services
Financial planning services help individuals and businesses looking for a 360-degree approach to managing their finances. They cover aspects such as goal-setting, budgeting, tax management, investments, insurance coverage, debt management, and retirement and estate planning. A planner assesses their clients’ goals, risk tolerance, and investment horizon to create a personalised plan to optimise their wealth.
Similarly, one can seek guidance from business financial planning services to manage a company’s finances. These services can help in areas like cash flow management, cost control, tax compliance, expansion planning, and risk mitigation.
Foreign Exchange Services
As the name suggests, FX services deal with the management of currencies. Services such as remittance, currency exchange, and wire transfer fall under this category.
Benefits of Financial Services
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Better Money Management
Financial services make managing money quick and easy. These days, one can digitally open accounts, make payments, track income, apply for loans, invest, and file taxes. All from the comfort of their home!
Mobilises Money
Idle money tends to lose value with time due to rising inflation. Even a 2-3% savings account keeps money from sitting idly; however, to earn inflation-beating returns, one must invest through services like PMS, mutual funds, and stock brokerage. Companies, governments, and entrepreneurs use this mobilised capital to keep the economic engine running efficiently while investors protect or grow their wealth.
Credit Availability
One of the most important benefits of financial services is access to easy credit. Banks and NBFCs help individuals and businesses meet their financial needs through loans, credit cards, and other financing options. Readily available credit allows one to meet financial needs without having to liquidate assets, which in turn boosts economic activity and entrepreneurship.
Wealth Growth
Many types of financial services revolve around investing. Institutions and professionals offer a wide array of options to help individuals and businesses grow their wealth and achieve financial goals. Depending on their needs, investors can choose from mutual funds offered by AMCs, ULIPs offered by insurance companies, stocks, bonds, ETFs, real estate, and more.
Some of these services also assist investors throughout their investment journey. For example, a financial advisor service can assess an investor’s risk profile and recommend a personalised investment portfolio. For companies, business financial planning services can guide on how to best reinvest profits, improve cash flow, optimise resources, and build long-term value for stakeholders.
Ensures Tax Compliance And Reduces Tax Liability
For both individuals and businesses, tax regulations can be quite complex. Add in the ever-changing updates, amendments, and rules, and it becomes hard to stay fully compliant while optimising tax liability. This is another area where financial services play a crucial role. Advisors help clients by recommending tax-efficient investments, identifying eligible deductions, and making sure returns are filed accurately and on time. For individuals, this may include investing in instruments like PPF, ELSS, NPS, or life insurance policies to reduce taxable income under Section 80C.
Helps Achieve Goals
Financial planning services can provide the guidance needed to achieve financial goals through realistic strategies. They do so by assessing your current financial situation and risk profile and recommending suitable investment options that align with your situation and investment horizon. They regularly monitor and adjust your plan to ensure that you stay on track to reach your goals.
Mitigates Risk
Financial risks can cause immense harm to your financial stability. Market fluctuations can cause your investment’s value to go down, unexpected medical expenses can drain your savings, natural disasters can damage your property, and a sudden loss of income can disrupt your financial plan.
Financial services help mitigate these risks in a variety of ways. Insurance companies offer health and term insurance, thus providing financial protection against medical emergencies and the loss of income due to untimely death. Similarly, an advisor can help mitigate investment-related risks through diversification across different asset classes, emergency funds, and regular portfolio reviews.
Capital Market
Capital markets play an important role in the economy as they connect individuals looking to invest with companies seeking capital. For instance, financial services like investment banking, stockbroking, and portfolio management help businesses to secure capital for their operations while also helping investors to find profitable opportunities.
Economic Development
And finally, since financial services are central to a country’s economy, they play a key role in driving economic growth. Mobilised savings from the public are channelled into investments, and so financial institutions help fund businesses, infrastructure projects, and ventures. Easy access to credit and investment opportunities enables participants to contribute to economic activity, like creating jobs and generating income.
How To Select The Right Financial Services For Your Needs
1. Understand Your Needs
You should start by figuring out what you want to achieve. This will guide you towards the right financial products and services. For example, if your goal is to grow your wealth, you might explore investment options like mutual funds or safer government-backed schemes. If you’re planning to buy a home, you may need a loan from a reliable bank or NBFC. If you need help with GST compliance or tax filing, you’ll benefit from tax advisory services. Once you’re clear about your needs, it becomes much easier to choose the services that fit your situation.
2. Understand Risks
Financial risks cannot be eliminated, so steps must be taken to mitigate their impact. Certain risks can be transferred, for example, through insurance policies that protect against illness, accidents, or property damage. Investment-related risks, on the other hand, can be managed through diversification and by investing within your risk tolerance. That means choosing options that match your risk comfort level and financial capacity to handle market fluctuations.
3. Check Credentials
Always select financial institutions and professionals who possess the right certifications and are trusted by clients and regulatory bodies alike. Read reviews and seek recommendations from those who have firsthand experience to get an idea about the quality of service and their past track record.
4. Understand Fees
Each financial service comes with its own fees or commission structure. These costs can eat into your returns, so compare different options to make sure that there are no hidden fees involved and you’re getting the best bang for your buck.
5. Seek Professional Help
It’s clear by now that we need a variety of financial services and products to manage our finances. Rather than handling each aspect separately, you can seek guidance from a trusted financial advisor service which can connect you to all such services by creating a cohesive financial plan. For example, a financial planner can assess your goals, risk tolerance, and current situation to recommend suitable products across different areas. They might suggest policies from various insurance companies, mutual funds from different AMCs, and strategies to optimise taxes. Such planning services bring everything under one roof and make managing finances much less hectic.
Conclusion
Financial services refer to the broad range of money-related activities provided by institutions such as banks, insurance companies, mutual fund houses, and investment advisories, which help individuals and businesses manage their finances. They make it possible for all participants to save, invest, borrow, protect against risks, and plan for long-term goals easily and efficiently.
