Capital Market Instruments & Examples | SBI PO Prelims & Mains Preparation - Bank Exams PDF Download

Introduction

Capital Market Instruments

• 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.

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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.

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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. 

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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.