Exploring Financial Services Beyond Banking and Insurance

When most people think of financial services, banks and insurance companies come to mind first. But India’s financial ecosystem is far more diverse. From stock markets and mutual funds to chit funds that have existed for centuries, and government schemes like MUDRA that are transforming grassroots entrepreneurship – there is a wide spectrum of financial services that consumers interact with every day. Understanding how each of these works, who regulates them, and what risks they carry is essential for anyone navigating financial decisions in India.

The stock market: organised capital at work 🔗

The stock market is a platform where buyers and sellers trade shares of publicly listed companies. In India, the two primary stock exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). When a company wants to raise capital from the public, it lists its shares on a stock exchange through an Initial Public Offering (IPO). Once listed, those shares can be bought and sold freely by investors.

The entire securities market – including stock exchanges, brokers, mutual funds, and other intermediaries – is regulated by the Securities and Exchange Board of India (SEBI), which was established as a statutory body under the SEBI Act, 1992. SEBI’s core mandate is threefold: protecting investor interests, promoting market development, and regulating market participants.

How SEBI protects stock market investors 🔗

SEBI governs the operations of stock exchanges, ensuring they function efficiently and adhere to regulatory standards. Some of its key investor protection tools include monitoring for price manipulation and insider trading, mandating timely corporate disclosures, and registering and overseeing all brokers and intermediaries. SEBI also maintains an Investor Protection Fund (IPF) at every stock exchange, which compensates investors in case of defaults by brokers. Claims are processed only after verification, and contribution to this fund comes from penalties on brokers and transaction charges. For grievances, investors can approach SEBI’s online platform – SCORES (SEBI Complaints Redress System) – to file and track complaints against listed companies, brokers, or mutual fund houses.

Mutual funds: pooled investing with regulatory oversight 🔗

A mutual fund pools money from multiple investors and invests it in a diversified portfolio of stocks, bonds, or other securities. It is managed by a professional fund manager working under an Asset Management Company (AMC). Each investor holds units proportional to their investment, and the value of those units – called the Net Asset Value (NAV) – changes based on market performance.

Mutual funds in India are regulated under the SEBI (Mutual Funds) Regulations, 1996, which have been periodically updated, most recently in 2025. SEBI regulates mutual funds across three key areas: entry and structure (registration, trustee independence), product and conduct (scheme categorisation, disclosure norms, expense ratio caps), and ongoing supervision (audits, compliance monitoring).

Key SEBI rules every mutual fund investor should know 🔗

SEBI has introduced several investor-friendly measures over the years. Every investor must complete KYC (Know Your Customer) formalities before investing. All mutual fund schemes must display a Risk-o-Meter indicating the scheme’s risk level – from low to very high – so investors are not caught off-guard. SEBI also caps the Total Expense Ratio (TER), which is the annual fee an AMC charges, and prohibits upfront commissions to distributors. A major classification reform introduced in 2017 standardised mutual fund scheme categories – for instance, a large-cap fund must invest at least 80% of its assets in the top 100 companies by market capitalisation. This prevents misleading labelling and helps investors compare schemes meaningfully.

For investors who prefer a systematic approach, Systematic Investment Plans (SIPs) allow fixed monthly contributions into a chosen fund, averaging out market volatility over time. Each transaction is subject to the applicable NAV, exit load, and tax implications.

Chit funds: an ancient savings tool with modern risks 🔗

Chit funds are one of India’s oldest financial instruments, rooted in rotating savings and credit practices that date back centuries. In a chit fund, a group of members – say, 20 people – each contribute a fixed amount every month. Each month, one member receives the total pooled amount (the “chit amount”) through a bidding process. The person who agrees to take the lowest amount wins the bid. The difference between the full pot and the winning bid is distributed as a dividend among the remaining members, after deducting the organiser’s commission.

To illustrate: if 20 members each contribute ₹1,000 per month, the monthly pot is ₹20,000. If the winning bidder agrees to take ₹15,000, the remaining ₹5,000 is divided among the other 19 members (minus the foreman’s commission). This process repeats each month until all members have received the pot once. Chit funds serve a dual purpose – they function as both a savings mechanism and a source of credit, making them especially useful in communities with limited access to formal banking.

Regulatory framework for chit funds 🔗

Chit funds in India are governed by the Chit Funds Act, 1982, a central legislation that covers registration, capital requirements, and dispute resolution. However, unlike banks or mutual funds, chit funds are not regulated by RBI or SEBI at the central level. The RBI Act, 1934 explicitly excludes chit subscriptions from the definition of “deposit,” and the SEBI Act, 1992 excludes chit funds from the definition of collective investment schemes. Regulation is therefore left to state governments, which appoint a Registrar of Chits under Section 61 of the Chit Funds Act. All chit funds must register with and obtain prior sanction from the state government. The registrar has powers to inspect accounts, investigate complaints, and cancel registrations of non-compliant operators.

Issues and challenges in the chit fund industry 🔗

The regulatory gap has been a persistent problem. High-profile frauds – including the Saradha Group scam in West Bengal and the Rose Valley scam – exposed millions of ordinary investors to severe losses. In the Saradha case, a SEBI investigation found that the entity was effectively operating a collective investment scheme without approval, even though it presented itself as a chit fund. Ponzi-like structures, financial illiteracy among participants, and a lack of operational transparency have made unregistered or fraudulent chit schemes particularly dangerous for economically vulnerable populations.

Data analysis of chit fund companies has also revealed that approximately 35% of subscribers have defaulted at least once during their tenure, exposing both organisers and fellow subscribers to credit risk. Since chit fund payments are not government-insured, participating in unregistered schemes carries significantly higher risk than a bank savings account. In 2019, Parliament passed the Chit Funds (Amendment) Act, 2019 to streamline operations and enhance protections for investors, particularly those from economically weaker sections. If you suspect fraud, the correct recourse is to approach the Registrar of Chits, the Economic Offences Wing (EOW), or a consumer court.

The MUDRA scheme: funding India’s micro-entrepreneurs 🔗

Not every financial need involves investment. For millions of small business owners across India – street vendors, artisans, small manufacturers, service providers – the biggest barrier to growth is access to affordable credit. This is the gap that the Pradhan Mantri MUDRA Yojana (PMMY) was designed to fill when it was launched in April 2015.

MUDRA stands for Micro Units Development and Refinance Agency Ltd. It is an NBFC set up by the Government of India that functions as a refinancing institution – meaning it does not lend directly to borrowers. Instead, it provides refinance support to banks, NBFCs, Regional Rural Banks (RRBs), Small Finance Banks, and Microfinance Institutions (MFIs), which in turn extend collateral-free loans to micro and small enterprises engaged in manufacturing, trading, services, and agriculture-allied activities.

The three loan categories under PMMY 🔗

MUDRA loans are divided into categories that reflect the stage of business development. Shishu covers loans up to ₹50,000, meant for businesses at the earliest stage. Kishore covers loans from ₹50,001 to ₹5 lakh, for businesses that have already begun operations. Tarun covers loans from ₹5 lakh up to ₹10 lakh for more established enterprises. Following the Union Budget 2024-25 announced on July 23, 2024, the Finance Minister enhanced the MUDRA loan limit to ₹20 lakh and introduced a new category called Tarun Plus – available to entrepreneurs who have already availed and successfully repaid a Tarun loan. This enhancement took effect from October 24, 2024, with credit guarantee coverage provided under the Credit Guarantee Fund for Micro Units (CGFMU).

Why MUDRA matters for micro-businesses 🔗

Before PMMY, small entrepreneurs often depended on informal moneylenders who charged exploitatively high interest rates. MUDRA changed this by bringing them into the formal credit system without the burden of collateral. Since its launch, over 52 crore loans worth ₹32.61 lakh crore have been sanctioned under PMMY, and women account for 68% of all beneficiaries – reflecting the scheme’s significant role in advancing women-led enterprises. Borrowers can apply through any scheduled commercial bank, RRB, NBFC, or MFI, or online through the Udyamimitra portal. Interest rates vary by lender and loan category, typically ranging from 7.30% to 18% per annum. Importantly, MUDRA does not work through agents – borrowers are advised to deal directly with lending institutions and avoid anyone claiming to be a MUDRA agent.

Comparing the four financial services: a consumer perspective 🔗

Each of these financial services operates in a distinct space and serves different consumer needs. Stock markets and mutual funds are investment-oriented – they carry market risk and are suited to those with surplus savings and a risk appetite. Mutual funds offer a more managed, diversified entry point for retail investors compared to direct stock trading. Chit funds blend savings with credit access and are deeply embedded in India’s informal economy, but require careful verification of registration status before participation. MUDRA, on the other hand, is a credit delivery mechanism specifically targeting the unbanked and underserved micro-enterprise segment.

From a consumer protection standpoint, the level of formal regulation varies significantly across these services. Stock markets and mutual funds have robust SEBI oversight and clear grievance mechanisms. Chit funds operate under a more fragmented, state-level regulatory structure with historically weaker enforcement. MUDRA loans, being government-backed and channelled through regulated institutions, come with built-in safeguards like the CGFMU guarantee cover. Understanding this regulatory landscape helps consumers make informed choices and know where to seek redress when things go wrong.

What do you think? Given that chit funds fall outside the direct purview of both RBI and SEBI, do you believe India needs a dedicated central regulatory authority for them – similar to what SEBI does for mutual funds? And considering that 68% of MUDRA beneficiaries are women, what structural factors might explain this, and what does it tell us about women’s access to formal credit in India?

References

1. https://www.sebi.gov.in/
2. https://www.ispp.org.in/how-do-sebis-policies-and-regulations-protect-investors/
3. https://www.bajajamc.com/knowledge-centre/sebi-regulations-for-mutual-funds-in-india
4. https://prsindia.org/theprsblog/chit-funds-q-a
5. https://www.drishtiias.com/to-the-points/paper3/chit-fund
6. https://en.wikipedia.org/wiki/Chit_fund
7. https://www.mudra.org.in/
8. https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=2068019
9. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2119781
10. https://www.udyamimitra.in/