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