Capital Market Instruments with Examples - Explained

Capital Market Instruments with Examples - Explained

Introduction

It refers to the market for funds with a maturity of 1 year and above (term funds). Both the government and private sector participate in this market for investment purposes. A capital market can be a primary market or secondary market. In Primary markets, new stocks and bonds are
issued & in secondary markets, existing securities are bought and sold among investors. 

Capital Market Instruments

G-secs

  • Tradable instruments issued by the central government or state governments. 
  • They are both short term (T- bills) and long term (Dated bonds or Govt bonds)
  • Do not carry any risk of default and are hence called 'risk-free gilt-edged securities'.
  • GoI also issues savings instruments (savings bonds, NSCs or special securities (power bonds, oil bonds) but they are not fully tradable. 
  • Dated govt securities are long-term and carry a fixed or floating coupon rate which is payable at fixed time periods. The maturity of these securities can be up to 30 years
  • Dated security can be issued to any person, firm, corporates, state govt's and trusts. 
  • Foreign companies owned by NRIs and FIIs registered with SEBI can also invest in them. 
  • Floating Rate Bonds carry variable interest rates with fixed percentage pegged to some benchmark rate. 
  • Capital Indexed Bonds carry a fixed interest rate over wholesale price index or consumer price index. 
  • Inflation Indexed Bonds carry interest rates linked to inflation rates (observed from WPI earlier, now CPI) so that real return is positive from investments. 
  • Lately, RBI has allowed sovereign wealth funds, endowment funds, insurance and pension funds & foreign central banks (Federal Reserve etc) to invest in G-secs if they are registered with SEBI.

Mutual Funds

  • Mutual funds raise money from the public, pool them and invest in stock market.
  • They are regulated by SEBI.
  • Structure of a mutual fund is as follows:
    • Sponsor - the person who alone or in association with another organisation establishes a mutual fund.
    • Trust - It is registered as a trust according to provisions of Indian Trust Act, 1882 (for private trusts)
    • Trustee -a corporate body which safeguards the interests of unit holders
    • Custodian - A bank or a financial institution registered with SEBI which holds and safeguards the securities owned within a mutual fund. E.g. SBI is the custodian of SBI mutual fund.

Hedge Funds

  • A pooled investment which is professionally administered by a firm. 
  • They invest in diverse markets and use various investment styles.
  • They are comparatively more risk prone, aim at faster returns and generally avoid regulatory oversight.
  • Available only to certain investors and can't be sold to general public. 
  • They are a form of Alternate Investment Funds (AIFs).

Alternative Investment Funds (AIFs)

  • Newly created investment vehicle where investments are pooled in from real estate, hedge funds and private equity. Capital can be pooled from both Indian and foreign investors.
  •  Regulated by SEBI.
  • It excludes mutual funds, employee stock option and family trusts. 

Venture Capital

  • Money provided by financial institutions for investment in rapidly growing companies. 
  • They manage the new firms alongside investing, as per terms. 
  • It's an important source of raising capital for start-up companies. 

 Angel Investors

  • An individual who provides capital for a business starts up.
  • Usually, the investment is in exchange for convertible debt or ownership equity. 
  • They invest their own money, unlike venture capitalist who invests public money.
  • AIs can register themselves as AIFs as per SEBI.
  • Minimum investment should be Rs 25 lacs.

Chit Funds

  • An arrangement that a group of people arrive at to contribute money in a manner at periodic intervals into a kitty. 
  • A member can withdraw that money through a lucky draw, auction or other agreed ways. 
  • Usually popular in Rural India, Tier2 and Tier3 cities due to under penetration of banking services.
  • Chit funds are established under Central chit funds act, 1982.
  • An office "Registrar of Chit funds' in every state monitors their operations. 

Exchange Traded Funds (ETFs)

  • These are index funds listed and traded on stock exchanges.
  • They comprise of a basket of stocks that has a composite index and the value of that depends on underlying stocks.
  • The major benefit is that you can invest in a diverse portfolio with the simplicity of trading a single stock.
  • ETFs are increasingly becoming a popular investment option throughout the globe

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