CHAPTER 2 CAPITAL MARKET AND MONEY MARKET

Capital markets are venues where savings and investments are channeled between the
suppliers who have capital and those who are in need of capital. The entities that have capital
include retail and institutional investors while those who seek capital are businesses,
governments, and people.
Capital markets seek to improve transactional efficiencies. These markets bring those who
hold capital and those seeking capital together and provide a place where entities can
exchange securities.
Capital Market – Examples
Examples of capital markets are given below.
1. Stock Market: A stock market, equity market or share market is the aggregation of
buyers and sellers of stocks, which represent ownership claims on businesses
2. Bond Market: The bond market is a financial market where participants can issue new
debt, known as the primary market, or buy and sell debt securities
3. Currency and Foreign Exchange Markets: The foreign exchange market is a global
decentralized or over-the-counter market for the trading of currencies. This market
determines foreign exchange rates for every currency.
Capital Market – Structure
Capital markets structure is made of primary and secondary markets.

● Primary markets consist of companies that issue securities and investors who
purchase those securities directly from the issuing company. These securities are
called Initial Public Offerings (IPO). Whenever a company goes public it sells its
stocks and bonds to large scales institutional investors like hedge funds and mutual
funds.
● Secondary markets are places where the trade of already issued certificates between
investors are overseen by regulatory bodies. Issuing companies play no part in the
secondary market. Examples of secondary markets are New York Stock Exchange
(NYSE), London Stock Exchange (LSE), Bombay Stock Exchange (BSE).
Capital Markets – Functions
1. Makes trading of securities easier for companies and investors.
2. It offers insurance against market risk
3. Links Borrowers and Investors: Capital markets serve as an intermediary between
people with excess funds and those in need of funds.
4. Capital Formation: The capital market plays an important role in capital formation.
By timely providing sufficient funds, it meets the financial needs of different sectors
of the economy.
 5. Regulate Security Prices: It contributes to securities' stability and systematic pricing.
The system monitors whole processes and ensures that no unproductive or speculative
activities occur. A standard or minimum interest rate is charged to the borrower. As a
result, the economy's security prices stabilize.
6. Provides Opportunities to Investors: The capital markets have enough financial
instruments to meet any investor's needs, regardless of the risk level. Capital markets
also provide investors with the opportunity to increase their capital yields. The
interest rate on most savings accounts is extremely low compared to the rate on
equities. Therefore, investors can earn a higher rate of return on the capital market,
though some risks are involved as well.
7. Minimises Transaction Cost And Time: Long-term securities are traded on the
capital market. The whole trading process is simplified and reduced in cost and time.
A system and program automate every aspect of the trading process, thus speeding up
the entire process.
8. Capital Liquidity: The financial markets allow people to invest their money. In
exchange, they receive ownership of a stock or bond. Bond certificates cannot be used
to purchase a car, food, or other assets, so they may need to be liquidated. Investors
can sell their assets for liquid funds to a third party on the capital markets.
9. Flow of Funds: it channelizes the allocation of funds from less profitable to more
profitable channels, thus leads to optimum utilisation of resources.
10. Industrial development:Capital market encourages people to invest in productive
activities leading to the development of industrial sector.
11. Generates employment: Increase in real wages and production activities like
expansion, modernisation and upgradation generates employment opportunities.
12. Economic growth with productive investments.
PLAYERS IN CAPITAL MARKET:
1. Stock Exhanges:The stock exchange in India serves as a market where financial
instruments like stocks, bonds and commodities are traded.It is a platform where
buyers and sellers come together to trade financial tools during specific hours of any
business day while adhering to SEBI’s well-defined guidelines. However, only those
companies who are listed in a stock exchange are allowed to trade in it
Major stock exchanges in India
There are two major types of Stock Exchanges in India, namely the –Bombay Stock
Exchange (BSE): This particular stock exchange was established in 1875 in Mumbai at Dalal
Street. It renowned as the oldest stock exchange not just in Asia and is the ‘World’s 10th
largest Stock Exchange’.
National Stock Exchange (NSE): The NSE was established in 1992 in Mumbai and is
accredited as the pioneer among the demutualised electronic stock exchange markets in India.
This stock exchange market was established with the objective to eliminate the monopolistic
impact of the Bombay Stock exchange in the Indian stock market.
 2. Merchant Banker: A merchant bank is a financial institution that conducts
underwriting, loan services, financial advising, and fundraising services for large
corporations and high-net-worth individuals *HNWI).
Merchant banks specialize in providing services for private corporations. Unlike retail
or commercial banks, merchant banks do not typically provide financial services to
the general public. Unlike investment banks, they focus on private companies not
public companies. Examples of large merchant banks include JPMorgan Chase,
Goldman Sachs, and Citigroup.
3. Foreign Institutional investors (FIIs) are the entities established outside India that are
responsible for making investment proposals in India. They play an important role in
the economy of a country. There are over 1450 FIIs registered under the Securities
and Exchange Board of India (SEBI).
4. A broker is an individual who is a member of the stock exchange and has been
provided a license by the stock exchange in order to trade securities in the stock
exchange on behalf of the client.
Primary dealer in Stock Market:
5. A primary dealer is a bank or other financial institution that has been approved to
trade securities with a national government. In many countries, primary dealers are
the only entities who can make a bid for newly-issued government securities. A
primary dealer in the U.S. may thus underwrite new government debt and act as a
market maker for the U.S. Federal Reserve, commonly referred to as the Fed.
6. SEBI is the regulator: SEBI as a guardian of capital market participants. So, in this
regard its main purpose would be to create such an environment for all participants
and financial market enthusiasts to ensure that the securities market functions
efficiently and works smoothly.
7. Investors and traders: Retail investors – These are investors who invest in the stock
market directly.
Institutional investors – These are typically financial institutions like banks, Asset
Management Companies (AMC), insurance companies, pension funds, etc. The investors
could be domestic or foreign.
8. Market Intermediaries
KINDS OF OWNERSHIP SECURITIES OR SHARES
1. EQUITY SHARES: An equity share, normally known as ordinary share is a part
ownership where each member is a fractional owner and initiates the maximum
entrepreneurial liability related with a trading concern. These types of shareholders in
any organization possess the right to vote.
Features of Equity Shares Capital:
∙ Equity share capital remains with the company.
∙ It is given back only when the company is closed
∙ Equity Shareholders possess voting rights and select the company’s management
∙ The dividend rate on the equity capital relies upon the obtain ability of the surfeit
capital. However, there is no fixed rate of dividend on the equity capital.

Characteristics of Equity Shares

∙ Maturity
∙ Claims / right to income
∙ Claim on assets
∙ Right to Control or Voting Right
∙ Pre-emptive Right
∙ Limited liability
 Advantages of Equity Shares Capital
a) Equity Shares does not create a sense of obligation and accountability to pay a rate
of dividend that is fixed.
b) Equity Shares can be circulated even without establishing any extra charges over
the assets of an enterprise.
c) It is a perpetual source of funding and the enterprise has to pay back; exceptional
case – under liquidation.
d) Equity shareholders are the authentic owners of the enterprise who possess the
voting rights.

2. PREFERENCE SHARES Preference shares are a long-term source of finance for a

company. They are neither completely similar to equity nor equivalent to debt. The
law treats them as shares but they have elements of both equity shares and debt. For
this reason, they are also called ‘hybrid financing instruments’. These are also known
as preferred stock, preferred shares, or only preferred in a different part of the world.
There are various types of preference shares used as a source of finance.
Features of preference shares
a) Maturity
b) Claim on income
c) Claim on assets
d) Control
e) Hybrid from securities
Advantages:
a) Appeal to Cautious Investors: Preference shares can be easily sold to investors who prefer
reasonable safety of their capital and want a regular and fixed return on it.
b) No Obligation for Dividends: A company is not bound to pay dividend on preference
shares if its profits in a particular year are insufficient. It can postpone the dividend in case of
cumulative preference shares also. No fixed burden is created on its finances.
c) No Interference: Generally, preference shares do not carry voting rights. Therefore, a
company can raise capital without dilution of control. Equity shareholders retain exclusive
control over the company.
d) Trading on Equity: The rate of dividend on preference shares is fixed. Therefore, with the
rise in its earnings, the company can provide the benefits of trading on equity to the equity
shareholders.
e) No Charge on Assets: Preference shares do not create any mortgage or charge on the assets
of the company. The company can keep its fixed assets free for raising loans in future.
f) Flexibility: A company can issue redeemable preference shares for a fixed period. The
capital can be repaid when it is no longer required in business. There is no danger of over-
capitalisation and the capital structure remains elastic.
g) Variety: Different types of preference shares can be issued depending on the needs of
investors. Participating preference shares or convertible preference shares may be issued to
attract bold and enterprising investors.
DEBENTURE
Debenture is used to issue the loan by government and companies. The loan is issued at the
fixed interest depending upon the reputation of the companies. When companies need to
borrow some money to expand themselves they take the help of debentures.
Important features of Debentures:
∙ Debentures are instruments of debt, which means that debenture holders become creditors
of the company. They are a certificate of debt, with the date of redemption and amount of
repayment mentioned on it. This certificate is issued under the company seal and is known as
a Debenture Deed.
∙ Debentures have a fixed rate of interest, and such interest amount is payable yearly or half-
yearly.
∙ Debenture holders do not get any voting rights. This is because they are not instruments of
equity, so debenture holders are not owners of the company, only creditors. The interest
payable to these debenture holders is a charge against the profits of the company. So these
payments have to be made even in case of a loss.
Advantages of Debentures:
a) One of the biggest advantages of debentures is that the company can get its required funds
without diluting equity. Since debentures are a form of debt, the equity of the company
remains unchanged.
b) Interest to be paid on debentures is a charge against profit for the company. But this also
means it is a tax-deductible expense and is useful while tax planning.
c) Debentures encourage long-term planning and funding. And compared to other forms of
lending debentures tend to be cheaper.
d) Debenture holders bear very little risk since the loan is secured and the interest is payable
even in the case of a loss to the company.
e) At times of inflation, debentures are the preferred instrument to raise funds since they have
a fixed rate of interest.
Disadvantages of Debentures:
a) The interest payable to debenture holders is a financial burden for the company. It is
payable even in the event of a loss
b) While issuing debentures help a company trade on equity, it also makes it to dependent on
debt. A skewed Debt-Equity Ratio is not good for the financial health of a company
c) Redemption of debentures is a significant cash outflow for the company which can
imbalance its liquidity
d) During a depression, when profits are declining, debentures can prove to be very expensive
due to their fixed interest rate
Types of Debentures: There are various types of debentures that a company can issue.
a) Secured Debentures: These are debentures that are secured against an asset/assets of the
company. This means a charge is created on such an asset in case of default in repayment of
such debentures. So in case, the company does not have enough funds to repay such
debentures, the said asset will be sold to pay such a loan. The charge may be fixed, i.e.
against a specific assets/assets or floating, i.e. against all assets of the firm.
b) Unsecured Debentures: These are not secured by any charge against the assets of the
company, neither fixed nor floating. Normally such kinds of debentures are not issued by
companies in India.
c) Redeemable Debentures: These debentures are payable at the expiry of their term. Which
means at the end of a specified period they are payable, either in the lump sum or in
installments over a time period. Such debentures can be redeemable at par, premium or at a
discount.
d) Irredeemable Debentures: Such debentures are perpetual in nature. There is no fixed date
at which they become payable. They are redeemable when the company goes into the
liquidation process. Or they can be redeemable after an unspecified long time interval.
e) Fully Convertible Debentures: These shares can be converted to equity shares at the option
of the debenture holder. So if he wishes then after a specified time interval all his shares will
be converted to equity shares and he will become a shareholder.
f) Partly Convertible Debentures: Here the holders of such debentures are given the option to
partially convert their debentures to shares. If he opts for the conversion, he will be both a
creditor and a shareholder of the company.
g) Non-Convertible Debentures: As the name suggests such debentures do not have an option
to be converted to shares or any kind of equity. These debentures will remain so till their
maturity, no conversion will take place. These are the most common type of debentures,
BOND:

⚫ A bond is a long term security issued by an organisation which does not carry a risk
for the investors. The rate of interest is generally fixed and known to investors.
Usually bonds are issued by government wherein it will be risk free investments and
always honor obligations on its bonds
Characteristics of Bonds

● Face Value

Face value implies the price of a single unit of a bond issued by an enterprise. Principal, nominal, or

par value is used alternatively to refer to the price of bonds. Issuers are under a legal obligation to

return this value to the investor after a stipulated period.

Bond example - an investor chooses to purchase a corporate bond at face value of Rs. 6,500. The

company issuing the bond is thus obliged to return Rs. 6,500 plus interest to the investor after

maturity of the tenor. Note that the face value of a bond is different from its market value as market

operations influence the latter.

● Interest or Coupon Rate

Bonds accrue fixed or floating rates of interest across their tenure, payable periodically to creditors.

Bond interest rates are also called coupon rates as per the tradition of claiming interests on paper

bonds in the form of coupons.

Interest earned on a bond depends on various aspects such as tenure, the issuer’s repute in the

public debt market.

● Tenure of Bonds
Tenure or term refers to the period after which bonds mature. These are financial debt contracts

between issuers and investors. Financial and legal obligations of an issuer to the investor or creditor

are valid only until the tenure’s end.

They can thus be segregated as per the tenure applicable for them. Bonds with maturity periods

below 5 years are called short-term bonds, whereas a tenure of 5-12 years is attributed to

intermediate-term bonds. Long-term bonds refer to the ones with terms higher than 12 years. Also,

longer tenures suggest the participation of issuing companies in prevailing businesses in the trade

market in the long-term.

● Credit Quality

The credit quality of a bond refers to the creditors’ consensus on the performance of a company’s

assets in the long-term. It is determined by the degree of confidence that investors have in an

organisation’s bonds. Credit rating agencies classify bonds based on the risk of a company defaulting

on debt repayment.

These agencies assign risk grading to private players in the market and categorise bonds into

investment grade and non-investment grade debt instruments. Investment grade securities are

susceptible to lower yields due to a steady market risk factor, whereas non-investment grade

securities offer high returns at considerable risks.

● Tradable Bonds

Bonds are tradable in the secondary market. The ownership can thus shift among various investors

within a given tenure. These creditors often sell their bonds to other entities when market prices

exceed the nominal values as they have an option to secure bonds with high yield and appropriate

credit ratings.
Kinds of Bonds

Bonds are classified into different categories as per the model of return and validities of legal

obligations. The prevailing types of bonds in the public debt market are -

Types of Description

Bonds

Fixed-
interest ● Fixed-interest bonds are debt instruments which accrue consistent
Bonds
coupon rates throughout their tenure. These predetermined interest

rates benefit investors with predictable returns on investment

irrespective of alterations in market conditions.

● Creditors have the benefit of being aware of the receivable interest

amount periodically within the long term investment schedule.

 Floating-
interest ● These bonds incur coupon rates which are subject to market fluctuations
Bonds
and elastic within their tenures.

● The return on investment through interest income is thus inconsistent as

it is determined by market factors such as inflation, condition of the

economy, and confidence of investors in an entity’s bonds.

government Securities Market

Government Securities Market is also known as the Gilt-edged market.
government and semi-government securities, which are backed by RBI. The governmet
securities are guaranteed by the government and are risk free. As the security are they are
known as giltedged i.e., the best quality securities. The returns are guarranteedby the
government and there is no scope for speculation and manipulation. The Government
securities have a fixed maturity period and fixed rate of interest.
The investors in the Gilt edged securities are predominantely institution like Commercial
Banks, LIC, GIC

Types of Gilt-Edged Securities

Government Bonds
Government bonds are debt securities issued by national governments. They are
generally backed by the full faith and credit of the issuing country, making them low-
risk investments.

Treasury Bonds
Treasury bonds are long-term debt securities issued by the government's treasury
department. They generally have a maturity period of more than ten years and pay a
fixed interest rate to bondholders. Investors consider them among the safest fixed-
income investments.

Sovereign Bonds
Sovereign bonds are debt securities issued by a country's government in foreign
currencies. They carry slightly higher risk than domestic treasury bonds, as they are
subject to currency fluctuations and the creditworthiness of the issuing country.

Corporate Bonds
Corporate bonds are debt securities issued by companies to raise capital for
business expansion or other purposes. They typically offer higher yields than
government bonds, as they carry a higher risk of default.

Sovereign Gold Bond (SGB)?

1. What is Sovereign Gold Bond (SGB)? Who is the issuer?

SGBs are government securities denominated in grams of gold. They are substitutes for
holding physical gold. Investors have to pay the issue price in cash and the bonds will be
redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government
of India.

The quantity of gold for which the investor pays is protected, since he receives the ongoing
market price at the time of redemption/ premature redemption. The SGB offers a superior
alternative to holding gold in physical form. The risks and costs of storage are eliminated.
Investors are assured of the market value of gold at the time of maturity and periodical
interest. SGB is free from issues like making charges and purity in the case of gold in
jewellery form. The bonds are held in the books of the RBI or in demat form eliminating risk
of loss of scrip etc.
The Bonds are issued in denominations of one gram of gold and in multiples thereof.
Minimum investment in the Bond shall be one gram with a maximum limit of subscription of
4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar
entities notified by the government from time to time per fiscal year (April – March). In case
of joint holding, the limit applies to the first applicant. The annual ceiling will include bonds
subscribed under different tranches during initial issuance by Government and those
purchased from the secondary market. The ceiling on investment will not include the
holdings as collateral by banks and other Financial Institutions

Sovereign Gold Bond Benefits

Hassle free: Ownership of gold without any physical possession (No risks and no cost of
storage)

Tax treatment: The capital gains tax arising on redemption of SGB to an individual has been
exempted. The indexation benefits will be provided to long term capital gains arising to any
person on transfer of bond.

Tradability: Bonds will be tradable on stock exchanges within a fortnight of the issuance on
a date as notified by the RBI.

Transferability: Bonds shall be transferable by execution of an Instrument of transfer in

accordance with the provisions of the Government Securities Act

INSURANCE:
insurance is a contract, a legal agreement between two parties, i.e., the individual named
insured and the insurance company called insurer. In this agreement, the insurer promises to
help with the losses of the insured on the happening contingency. The insured, on the other
hand, pays a premium in return for the promise made by the insurer. insurance is a contract,
a legal agreement between two parties, i.e., the individual named insured and the insurance
company called insurer. In this agreement, the insurer promises to help with the losses of the
insured on the happening contingency. The insured, on the other hand, pays a premium in
return for the promise made by the insurer.

Principles of Insurance

1. Utmost Good Faith

2. Proximate Cause
3. Insurable Interest
4. Indemnity
5. Subrogation
 6. Contribution
7. Loss Minimization
Principle of Utmost Good Faith

The fundamental principle is that both the parties in an insurance contract should act in good
faith towards each other, i.e. they must provide clear and concise information related to the
terms and conditions of the contract.

The Insured should provide all the information related to the subject matter, and the insurer
must give precise details regarding the contract.

Example – Jacob took a health insurance policy. At the time of taking insurance, he was a
smoker and failed to disclose this fact. Later, he got cancer. In such a situation, the Insurance
company will not be liable to bear the financial burden as Jacob concealed important facts.

Principle of Proximate Cause

This is also called the principle of ‘Causa Proxima’ or the nearest cause. This principle
applies when the loss is the result of two or more causes. The insurance company will find
the nearest cause of loss to the property. If the proximate cause is the one in which the
property is insured, then the company must pay compensation. If it is not a cause the property
is insured against, then no payment will be made by the insured.

Example –

Due to fire, a wall of a building was damaged, and the municipal authority ordered it to be
demolished. While demolition the adjoining building was damaged. The owner of the
adjoining building claimed the loss under the fire policy. The court held that fire is the
nearest cause of loss to the adjoining building, and the claim is payable as the falling of the
wall is an inevitable result of the fire.

In the same example, the wall of the building damaged due to fire, fell down due to storm
before it could be repaired and damaged an adjoining building. The owner of the adjoining
building claimed the loss under the fire policy. In this case, the fire was a remote cause, and
the storm was the proximate cause; hence the claim is not payable under the fire policy.

Principle of Insurable interest

This principle says that the individual (insured) must have an insurable interest in the subject
matter. Insurable interest means that the subject matter for which the individual enters the
insurance contract must provide some financial gain to the insured and also lead to a financial
loss if there is any damage, destruction or loss.

Example – the owner of a vegetable cart has an insurable interest in the cart because he is
earning money from it. However, if he sells the cart, he will no longer have an insurable
interest in it.

To claim the amount of insurance, the insured must be the owner of the subject matter both at
the time of entering the contract and at the time of the accident.

Principle of Indemnity
This principle says that insurance is done only for the coverage of the loss; hence insured
should not make any profit from the insurance contract. In other words, the insured should be
compensated the amount equal to the actual loss and not the amount exceeding the loss. The
purpose of the indemnity principle is to set back the insured at the same financial position as
he was before the loss occurred. Principle of indemnity is observed strictly for property
insurance and not applicable for the life insurance contract.

Example – The owner of a commercial building enters an insurance contract to recover the
costs for any loss or damage in future. If the building sustains structural damages from fire,
then the insurer will indemnify the owner for the costs to repair the building by way of
reimbursing the owner for the exact amount spent on repair or by reconstructing the damaged
areas using its own authorized contractors.

Principle of Subrogation

Subrogation means one party stands in for another. As per this principle, after the insured, i.e.
the individual has been compensated for the incurred loss to him on the subject matter that
was insured, the rights of the ownership of that property goes to the insurer, i.e. the company.

Subrogation gives the right to the insurance company to claim the amount of loss from the
third-party responsible for the same.

Example – If Mr A gets injured in a road accident, due to reckless driving of a third party,
the company with which Mr A took the accidental insurance will compensate the loss
occurred to Mr A and will also sue the third party to recover the money paid as claim.

Principle of Contribution

Contribution principle applies when the insured takes more than one insurance policy for the
same subject matter. It states the same thing as in the principle of indemnity, i.e. the insured
cannot make a profit by claiming the loss of one subject matter from different policies or
companies.

Example – A property worth Rs. 5 Lakhs is insured with Company A for Rs. 3 lakhs and
with company B for Rs.1 lakhs. The owner in case of damage to the property for 3 lakhs can
claim the full amount from Company A but then he cannot claim any amount from Company
B. Now, Company A can claim the proportional amount reimbursed value from Company B.

Principle of Loss Minimisation

This principle says that as an owner, it is obligatory on the part of the insurer to take
necessary steps to minimise the loss to the insured property. The principle does not allow the
owner to be irresponsible or negligent just because the subject matter is insured.

Example – If a fire breaks out in your factory, you should take reasonable steps to put out the
fire. You cannot just stand back and allow the fire to burn down the factory because you
know that the insurance company will compensate for it.

Types Of Insurance
There are two broad categories of insurance:
 1. Life Insurance
2. General insurance
Life Insurance – The insurance policy whereby the policyholder (insured) can ensure
financial freedom for their family members after death. It offers financial compensation in
case of death or disability.

While purchasing the life insurance policy, the insured either pay the lump-sum amount or
makes periodic payments known as premiums to the insurer. In exchange, of which the
insurer promises to pay an assured sum to the family if insured in the event of death or
disability or at maturity.

Depending on the coverage, life insurance can be classified into the below-mentioned types:

● Term Insurance: Gives life coverage for a specific time period.

● Whole life insurance: Offer life cover for the whole life of an individual

● Endowment policy: a portion of premiums go toward the death benefit, while the
remaining is invested by the insurer.
● Money back Policy: a certain percentage of the sum assured is paid to the insured in
intervals throughout the term as survival benefit.
● Pension Plans: Also called retirement plans are a fusion of insurance and investment.
A portion from the premiums is directed towards retirement corpus, which is paid as a
lump-sum or monthly payment after the retirement of the insured.
● Child Plans: Provides financial aid for children of the policyholders throughout their
lives.
● ULIPS – Unit Linked Insurance Plans: same as endowment plans, a part of
premiums go toward the death benefit while the remaining goes toward mutual fund
investments.
General Insurance – Everything apart from life can be insured under general insurance. It
offers financial compensation on any loss other than death. General insurance covers the loss
or damages caused to all the assets and liabilities. The insurance company promises to pay
the assured sum to cover the loss related to the vehicle, medical treatments, fire, theft, or even
financial problems during travel.

General Insurance can cover almost anything, and everything but the five key types of
insurances available under it are –

● Health Insurance: Covers the cost of medical care.

● Fire Insurance: give coverage for the damages caused to goods or property due to fire.

● Travel Insurance: compensates the financial liabilities arising out of non-medical or

medical emergencies during travel within the country or abroad
● Motor Insurance: offers financial protection to motor vehicles from damages due to
accidents, fire, theft, or natural calamities.
 ● Home Insurance: compensates the damage caused to home due to man-made
disasters, natural calamities, or other threats

Benefits of Insurance
The insurance gives benefits to individuals and organisations in many ways. Some of the
benefits are discussed below:

1. The obvious benefit of insurance is the payment of losses.

2. Manages cash flow uncertainty when paying capacity at the time of losses is reduced
significantly.
3. Complies with legal requirements by meeting contractual and statutory requirements,
also provides evidence of financial resources.
4. Promotes risk control activity by providing incentives to implement a program of
losing control because of policy requirements.
5. The efficient use of the insured’s resources. It provides a source of investment funds.
Insurers collect the premiums and invest those in a variety of investment vehicles.
6. Insurance is support for the insured’s credit. It facilitates loans to organisations and
individuals by guaranteeing the lender payment at the time when collateral for the
loan is destroyed by an insured event. Hence, reducing the uncertainty of the lender’s
default by the party borrowing funds.
7. It reduces social burden by reducing uncompensated accident victims and the
uncertainty of society.
WHAT ARE MUTUAL FUNDS?
A mutual fund is a pool of money managed by a professional Fund Manager.

It is a trust that collects money from a number of investors who share a common investment
objective and invests the same in equities, bonds, money market instruments and/or other
securities. And the income / gains generated from this collective investment is distributed
proportionately amongst the investors after deducting applicable expenses and levies, by
calculating a scheme’s “Net Asset Value” or NAV. Simply put, the money pooled in by a
large number of investors is what makes up a Mutual Fund.

Here’s a simple way to understand the concept of a Mutual Fund Unit.

Let’s say that there is a box of 12 chocolates costing ₹40. Four friends decide to buy the
same, but they have only ₹10 each and the shopkeeper only sells by the box. So the friends
then decide to pool in ₹10 each and buy the box of 12 chocolates. Now based on their
contribution, they each receive 3 chocolates or 3 units, if equated with Mutual Funds.
And how do you calculate the cost of one unit? Simply divide the total amount with the total
number of chocolates: 40/12 = 3.33.
So if you were to multiply the number of units (3) with the cost per unit (3.33), you get the
initial investment of ₹10.

What are the functions of mutual funds in India?

1. Diversification: The saying ‘do not put all your eggs in one basket’
perfectly fits mutual funds as spreading investment across multiple
securities and asset categories lowers risk. For example, compared to direct
equity investing, where your funds are deployed in individual company
stocks, equity mutual funds invest in a basket of stocks across sectors,
thereby reducing risk.

2. Professional management: Mutual funds are managed by full-time,

professional fund managers who have the expertise, experience, and
resources to actively buy, sell, and manage investments. A fund manager
continuously monitors investments and rebalances the portfolio accordingly
to meet the scheme’s objectives.

3. Transparency: Every mutual fund has a Scheme Information Document

readily available on the fund house’s website that can give you all the
details about its holdings, fund manager, etc. In addition, the portfolio
investment value (NAV) is published daily on the AMC site, and AMFI site
for investors to track the portfolio of the mutual fund.

4. Liquidity: You can redeem your investments on any business/working day

at the NAV of the day of your redemption. So, depending on the type of
mutual fund you have invested in, you will receive your invested funds in
your bank account in 1-3 days.
However, close-ended funds allow redemption only at the time of the
maturity of the mutual fund. Similarly, ELSS mutual funds have a lock-in
period of three years.

5. Tax Savings: Investment of up to Rs. 1,50,000 in ELSS mutual funds

qualifies for tax benefit under section 80C of the Income Tax Act, 1961.
Mutual fund investments, when held for a longer term, are tax-efficient.

6. Choice: There are many options to invest in mutual funds to meet your
different needs. To name a few- Liquid funds, are for investors looking to
benefit from the safety of debt and low-interest rate risk, flexi-cap funds if
you are looking for stock diversification, and solution-oriented mutual funds
if you are looking to invest for a particular goal like retirement or children’s
education, etc.
 7. Cost-effective: Mutual funds are a low-cost investment vehicle. The pooled
investments from several investors in a mutual fund enable the fund to
invest in a basket of stocks and debt securities which otherwise may be out
of reach for the ordinary investor or require a higher investment amount.
Thus, these pooled investments provide advantages of economies of scale.
In return, lower costs to investors, such as brokerage, etc., are addressed in
the minor form of fund expenses. This is why investing in direct mutual
funds through ET Money makes sense because that helps you decrease
the cost further.

8. Returns: Mutual fund returns are not assured by mutual funds and are
subject to market risks. But over the long term, equity mutual funds have the
potential to deliver double-digit returns annually. Debt funds can also offer
higher returns as compared to bank deposits.

9. Well Regulated: In India, the mutual fund industry is regulated by the

capital market regulator Securities and Exchange Board of India (SEBI).
Therefore, mutual funds must follow stringent rules and regulations,
ensuring investor protection, risk mitigation, liquidity, and fair valuation.

TYPES OF MUTUAL FUNDS

Funds based on maturity period

Open ended funds

Open ended funds allow investors to subscribe or redeem units as per the
prevailing Net Asset Value (NAV) on a continuous basis. Basically, what you get
with open ended funds is liquidity and flexibility of time. An open-end fund is a
mutual fund scheme that is available for subscription and redemption on
every business throughout the year, (akin to a savings bank account,
wherein one may deposit and withdraw money every day). An open ended
scheme is perpetual and does not have any maturity date.

Close ended funds

Listed on the stock exchange, these funds come with a fixed maturity date, like 3-6
years. Investors can opt to subscribe to close ended funds at the time of initial
launch.A closed-end fund is open for subscription only during the initial
offer period and has a specified tenor and fixed maturity date (akin to a
fixed term deposit). Units of Closed-end funds can be redeemed only on
maturity (i.e., pre-mature redemption is not permitted). Hence, the Units
of a closed-end fund are compulsorily listed on a stock exchange after the
new fund offer, and are traded on the stock exchange just like other
stocks, so that investors seeking to exit the scheme before maturity may
sell their Units on the exchange.

Interval Funds
These funds are a hybrid of open and close ended funds. While they operate
mainly as close ended funds, these funds may trade on stock exchanges and are
open for sale or redemption at predetermined intervals at the prevailing NAV.

Funds based on investment objective

Equity/Growth Funds
If you are investing in equity growth funds, then you are largely putting your money
in stocks. The main objective of these funds is to achieve long-term capital growth.
Equity funds invest at least 65% of their corpus in equity and equity-related
securities. These funds may invest in a wide range of industries/sectors or focus on
one or more sectors. These funds are suitable to invest in if you have a higher risk
appetite and you have a long term financial goals.

Debt/Income Funds
Following a simpler approach, debt/income funds usually invest 65% of the amount
in fixed income securities such as bonds, corporate debentures, government
securities (gilts) and money market instruments. These funds are likely to be less
volatile than equity funds.

Balanced Funds
With an aim to provide stability of returns and capital appreciation, balanced
mutual funds invest in both equities and fixed income instruments. These funds
generally tend to invest around 60% in equity and 40% in debt instruments such as
bonds and debentures.

Money Market/Liquid Funds

If you are looking for a fund that offers liquidity and capital preservation with
moderate income, then this is a suitable choice. Money market/liquid funds invest in
safer short-term instruments such as Treasury Bills, Certificates of Deposit and
Commercial Paper for less than 91 days. These funds are ideal to invest in if you are
a corporate or an individual investor and wish to earn moderate returns on surplus
funds.

Gilt Fund
Gilt mutual funds invest exclusively in government securities. The Gilt funds do not
carry a credit risk - where the issuer of the security can default. However, it comes
with an interest rate risk i.e. risk due to the rise or fall in interest rates.

Other Funds
Tax saving funds

The Income Tax Act offers tax deduction under specific provisions of the Income
Tax Act, 1961. Designed to generate capital growth, ELSS mutual funds invest
primarily in equities and largely suit investors with a higher risk appetite for capital
appreciation. Spread over medium to long-term, tax saving funds comes with a lock-
in period of 3 years.

Index Funds
Index funds are attached to a particular index such as the BSE SENSEX or the S&P
CNX NIFTY. Their performance is linked to the results of that index. Here, the
portfolio comprises stocks that represent an index and the weightage assigned to
each stock is in line with the identified index. Hence, the returns will be more or
less similar to those generated by the Index.

Sector-specific Funds
Sector-specific funds invest in the securities of a specific sector or industry such as
FMCG, Pharmaceuticals, IT, etc. The returns on these funds are directed by the
performance of the respective sector/industries.
Sector funds allow an investor to diversify funds across multiple companies within
an industry. These funds tend to be riskier as the performance is directly linked to
that of the overall sector.

AMFI
The organisation was incorporated on 22nd August 1995, and ever since then it

helps to set various regulations that maintain the ethics and transparency of Mutual

Funds among Indian investors.

What is the Role of AMFI in a Mutual Fund?

The most important role of AMFI in Mutual Fund is to help protect the interest of

Indian investors, as well as that of the asset management companies. It also aids in

making investments transparent and more accessible to attract more people to it.

To promote transparency regarding the Mutual Fund market, even the

advertisements put forth by AMFI inform investors about the risks associated with

them.
 MONEY MARKET:

The money market is an organized exchange market where

participants can lend and borrow short-term, high-quality debt
securities with average maturities of one year or less. It enables
governments, banks, and other large institutions to sell short-term
securities to fund their short-term cash flow needs. Money markets also
allow individual investors to invest small amounts of money in a low-
risk setting. Some of the instruments traded in the money market
include Treasury bills, certificates of deposit, commercial paper, federal
funds, bills of exchange, and short-term mortgage-backed securities
and asset-backed securities.

Function Of Money Market

 1. Provides funds– the money market provides short term funds for

borrowing at a lower rate of interest. The private and the public

institutions can borrow money from the money market to finance capital

requirements and fund business growth through the system of finance

bills and commercial paper. The govt. can also borrow funds the money

market by issuing treasury bills. However, money market issues money

market instruments like commercial papers, treasury bills and so on and

helps in development of trade, industry and commerce within and

outside India.

2. Central Bank Policies- The central bank is responsible for guiding the

monetary policy of a country and taking measures to ensure a healthy

financial system. Through the money market, the central bank can

perform its policy-making function efficiently.

For example, the short-term interest rates in the money market represent the

prevailing conditions in the banking industry and can guide the central bank in

developing an appropriate interest rate policy. Also, the integrated money markets

help the central bank to influence the sub-markets and implement its monetary policy

objectives.

⚫ Helps government- the money market instruments helps the government

raise money for financing government projects for public welfare and

infrastructure development. The govt. can borrow short term funds by issuing

treasury bills at low interest rates. On the other hand, if the government were

ton issue paper money or borrow short term funds by issuing treasury bills at

low interest rates. On the other hand, if the govt. were to issue paper money

or borrow from the central bank, it would lead to inflation in the economy.
 ⚫ Helps in Financial Mobility- the money market helps in financial mobility by

enabling easy transfer of funds from one sector to the other. Financial mobility

is essential for the development of industry and commerce in the economy.

⚫ Promote Liquidity and Safety- this is one of the most important functions of

money market, as it provides safety and liquidity of funds. It also encourages

saving and investments. These investments instruments have shorter maturity

which means they can readily be converted to cash. The money market

instruments are issues by entities with good credit score which a=makes them

safe investment option.

⚫ Economy in use of cash- as the money market deals in near-money assets

and not proper money; it helps in economizing the use of cash. It provides a

convenient and safe way of transferring funds from one place to another,

there by immensely helps commerce and industry in India.

INSTRUMENTS OF MONEY MARKET:

1. Treasury Bills

Treasury bills are money market instruments issued by the Government of India as a

promissory note with guaranteed repayment at a later date. Funds collected through

such tools are typically used to meet short term requirements of the government,

hence, to reduce the overall fiscal deficit of a country.

They are primarily short-term borrowing tools, having a maximum tenure of 364

days, available at zero coupons (interest) rate. They are issued at a discount to the

published nominal value of government security (G-sec).

Types of treasury Bills:

14 day treasury bills.

91 day treasury bills.

182 day treasury bills.

364 day treasury bills.

Features of Treasury Bills

Minimum Investments.As per the regulations put forward by the RBI, a minimum of

Rs. 25,000 has to be invested by individuals willing to procure a short term treasury

bill.

Zero Coupon Securities:

Trading:The RBI, on behalf of the central government, auctions such securities every

week (on Wednesday) in the market, depending upon the total bids placed on major

stock exchanges.

What are certificates of deposit?

A certificate of deposit (CD) is a savings account that holds a fixed amount of money
for a fixed period of time, such as six months, one year, or five years, and in
exchange, the issuing bank pays interest. When you cash in or redeem your CD, you
receive the money you originally invested plus any interest. Certificates of deposit
are considered to be one of the safest savings options. A CD bought through a
federally insured bank is insured up to $250,000. The $250,000 insurance covers all
accounts in your name at the same bank, not each CD or account you have at the
bank.

Features of COD

● Certificate of deposit in India can be issued for a minimum deposit of Rs. 1

lakh or in subsequent multiples of it.

● Certificates of deposit are issued by the Scheduled Commercial Banks

(SCBs) and All-India Financial Institutions. The Cooperative Banks and the

Regional Rural Banks(RRBs) are not eligible for issuing a CD.

● There is a term period of 3 months to 1 year for CDs that are issued by SCBs,

whereas the term period ranges from 1 year to 3 years for CDs issued by

financial institutions.

● CDs in dematerialised forms can be transferred through endorsement or

delivery, similar to dematerialised securities.

● There is no lock-in period for a certificate of deposit.

● It is fully taxable under the Income Tax Act.

Commercial Paper in India

On 27th March 1989, commercial paper in India was introduced by RBI in the Indian
money market. It was initially recommended by Vaghul working Group on the basis
of the following points.

● The registration of commercial papers should only be granted to companies having Rs. 5

cores and above net worth with excellent dividend payment record.

Meaning of Commercial Paper

Commercial paper is an unsecured, short period debt tool issued by a company,
usually for the finance and inventories and temporary liabilities. The maturities in this
paper do not last longer than 270 days. These papers are like a promissory note
allotted at a huge cost and exchangeable between the All-India Financial Institutions
(FIs) and Primary Dealers (PDs).

Advantages of Commercial Paper

● Contributes Funds – It contributes extra funds as the cost of the paper to the issuing

company is cheaper than the loans of the commercial bank.

● Flexible – It has a high liquidity value and flexible maturity range giving it extra flexibility.

● Reliable – It is highly reliable and does not have any limiting condition.

● Save Money – On commercial paper, companies can save extra cash and earn a good

return.

● Lasting Source of Funds– Maturity range can be customised according to the firm’s

requirement, and matured papers can be paid by selling the new commercial paper.

CALL MONEY /MOney At Short Notice:

Call money is any type of short-term, interest-earning financial loan that the borrower has to pay

back immediately whenever the lender demands it.

● The call money is the most important segment of the Indian financial system.

● Call money allows banks to earn interest, known as the call loan rate, on their surplus

funds.

● It consists of overnight money and money at short notice for a period of upto 14 days.

● The call money market essentially serves the purpose of equilibrating the short-term

liquidity position of banks and other participants.

Features of Call Money Market

● Call money market is also known as the “Notice Money” Market.

● The call money market is a highly liquid market.
● Call money market is highly risky and volatile.
● No security or collateral is required to cover the transactions in the call money market.
● It is basically an “Over-the-counter” market without the intermediation of brokers.
● The participants in the call money market are-scheduled commercial banks, non-
scheduled commercial banks, foreign banks, state, district and urban cooperative banks,
brokers and dealers in the securities market, and primary dealers.
●

⚫ IPO:

⚫ Stock market launch is one of the type of public offering in which shares of a
company usually are sold to institutional investors. This is in turn sold to the general
public on a securities exchange.
 Hiring the
Bank

Submitting
Finalizing the documents
IPO

Handing out
Road Show the preliminary
Prospectus

⚫ It is helpful in enlarging and diversifying equity base.

⚫ Useful in enabling cheaper access to capital

⚫ Increasing exposure, prestige and public image

⚫ Helps in attracting and retaining better management and employees through liquid
equity participation

⚫ Facilitating acquisitions

⚫ Creating multiple financing opportunities: equity, convertible debt, cheaper bank

loans etc.
Disadvanatges of IPO
Significant legal, accounting and marketing costs, many of which are ongoing which is a
drawback.

⚫ Requirement to disclose financial and business information.

⚫ Meaningful time, effort and attention required of management.

⚫ Risk that requires funding will not be raised.

 Leasing is a process by which a firm can obtain the use of a certain fixed assets for
which it must pay a series of contractual, periodic, tax deductible payments.

⚫ Leasing property can offer important advantages over purchasing. It conserves the
lessee’s capital since the lessor in effect is financing 100% of the deal. Leasing can
avoid the risk of obsolescence if structured so the lessee can simply return the
property to the lesser at the end of the lease.

⚫ Public dissemination of information which may be useful to competitors, suppliers

and customers.

⚫ There is loss of control and stronger agency problems due to new shareholders.

⚫ There is an increased risk of litigation, including private securities class actions and
shareholders derivatives actions.