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.
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
