Unit 2: Capital Market & Money Market

Financial Institutions & Markets
Unit 2 : Capital Market & Money Market
Capital Market: Meaning –Structure, Importance – Functions – Players in the Capital

Market –Instruments of Capital Market – Components of Capital Market – Recent
trends in CapitalMarket.
Money Market: Meaning –Structure, Importance – Functions – Players in the Money

Market –Instruments of Money Market – Components of Money Market – Recent trends
in Money Market.
The capital market and the money market are two essential components of the
financial system that facilitate the flow of funds between borrowers and lenders.
While both markets play a crucial role in economic activity, they differ significantly
in their purpose, maturity of instruments, risk profile, and participants.
Money Market Capital Market
Long-term (several years to

Term Short-term (less than one year) perpetual)
Financial institutions (banks, Corporations, governments,
money market funds, institutional investors, individual
Participants government agencies) investors, investment banks
Treasury bills, commercial
papers, negotiable certificates of
Instruments deposit Stocks, bonds, debentures
Structure Over-the-counter (OTC) trading Exchanges and OTC trading

Liquidity High liquidity Relatively lower liquidity
Risk Low risk Higher risk
Facilitating short-term
Purpose borrowing and lending Raising long-term capital
Returns Lower potential returns Higher potential returns
Relevance to Supports daily financial Drives economic growth and
Economy transactions development
Typically matures within a few Typically matures in several
Maturity days or months years or may be perpetual
While the capital market and money market serve distinct purposes, they are
interconnected and play complementary roles in the financial system. The capital
market provides a source of long-term financing for businesses and governments,
which in turn contributes to economic growth and stability. The money market, on
the other hand, facilitates the efficient flow of short-term funds and supports the
smooth functioning of the financial system.
Alan Job Jose

St.Francis College, Bengaluru
I. Capital Market - Meaning & Features
The capital market is a broad term that encompasses a variety of institutions,

mechanisms, and instruments that facilitate the flow of long term funds between
individuals, businesses, and the government in the form of equity or debt. It is a
crucial component of the financial system, playing a central role in economic
growth and development.
● Long-term maturity instruments: Capital market deals with instruments

having maturities of more than one year.
● Debt and Equity Investments: Capital market offers a diverse range of

instruments, including stocks, bonds, debentures, and mutual funds.
● High-risk investments: Capital market investments are generally

considered to be riskier than money market investments due to their longer
maturities.
● Price volatility: Capital market instruments are subject to higher price

volatility compared to money market instruments.
● Role in economic growth: Capital market plays a crucial role in mobilising

long-term funds for capital formation and economic growth.
II. Structure of Capital Market
The capital market is primarily divided into two segments:
Primary Market: This is where new securities are issued to raise capital. It is
also known as the new issue market. In the primary market, companies and
governments sell their newly issued shares, bonds, or other securities to
raise funds from investors.
Secondary Market: This is where existing securities are traded among

investors. It is also known as the stock market or bond market. Investors can
buy and sell securities in the secondary market, providing liquidity to
investors and enabling them to realise capital gains or losses.
III. Importance of Capital Market
The capital market plays a vital role in economic growth and development by:
1. Mobilising Savings: It channels savings from individuals and institutions

into productive investments, enabling businesses to expand, innovate, and
create jobs.
Alan Job Jose

2. Efficient Allocation of Capital: It allocates capital to its most efficient uses,

ensuring that funds are directed towards the most productive and profitable
ventures.
3. Price Discovery: It provides a platform for price discovery, reflecting the

true value of securities based on supply and demand dynamics.
4. Risk Sharing: It facilitates risk sharing between investors, allowing them to

diversify their portfolios and spread risk across different investments.
5. Economic Growth: By facilitating these functions, the capital market

contributes significantly to economic growth, job creation, and overall
prosperity.
IV. Functions of Capital Market
The primary functions of the capital market are:
1. Providing a Platform for Issuing Securities: It provides a structured and

transparent platform for companies and governments to issue new
securities to raise capital.
2. Facilitating Trading of Securities: It enables investors to buy, sell, and hold

securities, providing liquidity and facilitating price discovery.
3. Channelling Funds to Productive Investments: It directs savings from

individuals and institutions into productive investments, driving economic
growth.
4. Promoting Financial Inclusion: It provides opportunities for individuals to

participate in the financial system and invest their savings, promoting
financial inclusion and wealth creation.
5. Enhancing Economic Resilience: It contributes to economic resilience by

providing a mechanism for businesses to raise capital during difficult times
and for investors to diversify their portfolios to mitigate risk.
● Assets classified into two. Real assets and Financial assets

● Real assets are classified into 4 - Real Estate, Precious metals,
commodities and Art & Collectibles
● Real assets, such as physical commodities like gold or real estate, are not
typically considered part of the financial market in the strictest sense.
They are often traded in separate markets, such as commodity markets or
real estate markets. However, financial instruments that derive their value
from real assets, such as futures contracts or real estate investment trusts
(REITs), are traded within the financial market.
Alan Job Jose

● Financial assets that are traded on a regulated market and predominantly

exchange traded is called as securities or Securities are Financial assets
that are easily transferable and have a standardised form
● The following is the major securities -Equity share, Preference share, G -
Bond, Corporate Bond, Options, Futures, Mutual Funds, ETFs, REITs,
InvITs and SGBs
● Preference shares are predominately traded on stock exchanges, just like
common shares. However, they are typically less liquid than common
shares
● Individuals, Institutions and government act as savers in both money
market and capital market Whereas only Institutions and government act
as direct borrowers in these markets. Individuals play the role of
borrowers indirectly through financial institutions.
V. Components of the Capital Market
The Indian capital market is a complex and dynamic ecosystem that comprises
various components that work together to facilitate the long term flow of funds
between investors and companies. These components play crucial roles in ensuring
the efficient functioning of the market, protecting the interests of investors, and
promoting economic growth.
The Components of the Indian capital market can be categorised into two broad
segments:
Market Participants - Individuals and institutions that actively engage in

buying, selling, and issuing securities within the capital market.
Market Infrastructure - Physical and technological framework that

supports the trading and settlement of securities.
Instruments: The Indian Capital market trades in a variety of long-term

debt and equity instruments
Capital Market Participants
1. Issuers
Issuers are the companies or governments that issue securities to raise
capital. These can be public companies, private companies, or government
entities.
2. Investors
An investor is a person or organisation that provides capital with the
expectation of earning a return on their investment.
Alan Job Jose

Additional Information:
Detailed breakdown of investor classifications in the Indian context:
Individual Investors
1. Retail Investors: These are individuals who invest their own money
in the Indian capital market, typically with smaller investment
amounts compared to institutional investors. They may invest
directly in stocks, bonds, or mutual funds, or they may use
brokerage services to manage their investments.
2. High-Net-Worth Individuals (HNWIs): These are individuals with a

high net worth, typically defined as having investable assets
exceeding 5 crore or more. HNWIs may have access to investment
opportunities tailored to their wealth and risk profile.
3. NRIs (Non-Resident Indians): These are Indian citizens or people of

Indian origin who reside abroad and invest in the Indian capital
market. They can participate through various investment schemes,
such as the NRI Portfolio Investment Scheme (NRI-PIS) or the
Foreign Institutional Investor (FII) route.
Institutional Investors
1. Domestic Institutional Investors (DIIs): These are institutional
investors based in India who invest in Indian securities. They
include pension funds, mutual funds, insurance companies, banks,
and other financial institutions. DIIs play a significant role in
providing liquidity to the Indian capital market.
2. Foreign Institutional Investors (FIIs): These are institutional

investors based in other countries who invest in Indian securities.
They bring foreign capital into the Indian market and contribute to
its growth and development. FIIs are regulated by the Securities and
Exchange Board of India (SEBI).
3. Government and Quasi-Government Institutions: These include

government entities, such as the Public Provident Fund (PPF) and
the Employee Provident Fund (EPF), as well as quasi-government
institutions, such as Life Insurance Corporation of India (LIC) and
State-Owned Financial Institutions (SOFs).
4. Sovereign Wealth Funds (SWFs): These are investment funds owned

and controlled by governments, typically funded by the country's
surplus export earnings or foreign exchange reserves. They invest
in a wide range of assets, including securities, real estate, and
infrastructure.
Alan Job Jose

3. Investment Banks
Investment banks act as intermediaries between issuers and investors. They
play a crucial role in underwriting, managing, and marketing new issues.
Investment banks also handle large-block trades, involving the transfer of
significant quantities of securities between institutional investors.
Investment banks provide comprehensive corporate finance advisory
services to companies, assisting with capital structure optimization,
financial restructuring, and risk management strategies.
4. Merchant Banks
It is an intermediary between businesses and investors, facilitating trade
finance, project finance, and international finance. Merchant bankers are
predominantly an international trade facilitating institution which also
participates in capital markets by structuring complex financial instruments
and executing private placements and managing investments for
institutions and HNWIs.
Investment Bank Vs Merchant Bank

https://keydifferences.com/difference-between-merchant-and-investme
nt-bank.html
5. Registrars
Registrars play a critical role in the capital market by maintaining accurate
and up-to-date records of shareholder ownership, ensuring the smooth
transfer of securities between investors, and protecting the rights of
shareholders.
6. Depository Participants
Depository participants act as intermediaries between investors and the
depository system, handling the dematerialization and rematerialisation of
securities. They streamlined the process of share transfers, dividend
payments, and other corporate actions.
7. Stockbrokers
Stockbrokers act as intermediaries between investors and the stock
exchanges. They execute buy and sell orders on behalf of investors. They
also provide the additional service of Research, portfolio management, and
financial planning.
Licensed Intermediaries at stock market - Stockbroker
Indian stock exchanges are not open to the public and only allow licensed
intermediaries, such as stockbrokers to make trades. Protecting investors
Alan Job Jose

Maintaining market order and Ensuring transparency is the reason behind

such a decision.
In 1875, the Bombay Stock Exchange (BSE) was established as the first
stock exchange in India. The BSE was initially open to the public, but it
soon became apparent that this was not an effective way to regulate the
market. Currently only licensed intermediaries from SEBI can trade in
Indian stock exchanges.
Eligibility criteria to become licensed intermediary in NSE is as follows.

https://www.nscclindia.com/membership/eligibility-criteria
8. Market Makers
Market makers play a crucial role in the Indian capital market by
maintaining liquidity and promoting efficient price discovery. They are
entities that actively buy and sell securities, ensuring that there are always
willing buyers and sellers to execute trades. By providing continuous bid and
ask quotes, market makers narrow the bid-ask spread, making it easier for
investors to enter and exit positions.
Market Makers
https://www.motilaloswal.com/blog-details/what-is-market-making-an
d-how-it-impacts-liquidity/1948
9. Portfolio Managers
Portfolio managers are professionals responsible for making investment
decisions on behalf of their clients. They analyse market conditions, select
securities, and manage portfolios to achieve specific investment objectives,
such as maximising returns or minimising risk.
Portfolio Management Services

https://scripbox.com/wealth/what-is-portfolio-management-services/#
:~:text=Portfolio%20Management%20Services%20(PMS)%20in,financia
l%20goals%20and%20optimize%20returns.
10. Custodians
Custodians are SEBI-registered market intermediaries, primarily
responsible for safe-keeping of securities (such as shares) of their clients.
They offer a variety of services to clients, such as corporate action
reconciliation, post-trading services of clearing and settlement.
Alan Job Jose

Capital Market infrastructure
1. Stock Exchanges: The Trading Hubs
Stock exchanges serve as the central platforms where buyers and sellers
meet to trade securities. They provide a transparent and orderly
environment for price discovery and execution of trades. NSE and BSE are
the prominent stock exchanges in India
History of Stock Exchange in India

https://www.sebi.gov.in/media/speeches/mar-2004/a-historical-perspec
tive-of-the-securities-market-reforms_2882.html
2. Depositories: The Guardians of Securities
Depositories play a crucial role in the dematerialization of securities,

converting physical certificates into electronic form. This process eliminates
the risk of loss, theft, or forgery and facilitates efficient trading and
settlement. India has two Depositories. NSDL and CDSL
National Securities Depository Limited (NSDL) - 1996: India's first and

largest depository, holding over 90% of the dematerialized securities in the
country.
Central Depository Services Limited (CDSL) - 1999 : Another major

depository in India, providing a range of services related to
dematerialization and settlement.
Feature Depository Depository Participant Custodian

Maintain electronic
Facilitate transfer and
Primary records of Hold securities on
dematerialization of
Function dematerialized behalf of investors
securities
securities
Recordkeeping, Demat account Safekeeping,
Key transaction opening, securities settlement, dividend
Responsibiliti processing, transfer, market data payments, corporate
es settlement access, investor actions,
facilitation services recordkeeping
Relationship Indirect Indirect relationship
Direct relationship
with relationship through brokers or
with investors
Investors through DPs other intermediaries
Banks, brokerage Banks, specialised
Example
NSDL, CDSL firms, other custodial services
Institutions
designated entities providers
Alan Job Jose
3. Clearing Houses: The Risk Mitigators
Clearing houses act as intermediaries in the settlement of trades, ensuring

the timely delivery of securities and payments. They also manage and
mitigate risks associated with trading activities.
The clearinghouse is responsible for validating all market transactions

between buyers and sellers of securities, which range from stocks and
bonds, to commodities and derivatives. Because financial markets are now
electronic in nature and global in scope, buyers and sellers require a
centralised authority to ensure that all market participants can fulfil their
promise to buy or sell a given security.
National Securities Clearing Corporation Limited (NSCCL): The clearing

house for the National Stock Exchange (NSE).
Clearing Corporation of India Limited (CCIL): The clearing house for the
Bombay Stock Exchange (BSE), Multi Commodity Exchange (MCX), and
other exchanges.
Clearing Houses
https://www.5paisa.com/finschool/finance-dictionary/clearing-house/
Clearing & Settlement Process

https://zerodha.com/varsity/chapter/clearing-and-settlement-process/
4. Regulatory Bodies: The Watchdogs of the Market
Regulatory bodies oversee the functioning of the capital market, enforcing

rules and regulations to protect investor interests and maintain market
integrity.
Securities and Exchange Board of India (SEBI): India's primary regulator for
the securities market.
Alan Job Jose

Capital Market Instruments
1. Equity Shares
2. Preference Shares
3. G-Bonds
4. Corporate Bonds
5. Mutual Funds
6. ETFs
7. Futures
8. Options
9. REITs
10. SGBs
Equity Shares - A Cornerstone of Capital Market Investments
Equity shares, also known as ordinary shares or common stock, form the backbone
of capital markets and represent ownership in a company. They provide investors
with a stake in the company's success, offering the potential for capital
appreciation and dividend income.
Equity shares are units of ownership in a company. When you purchase equity
shares, you become a part-owner of the company, entitled to a proportionate share
of its assets, profits, and voting rights.
Key Characteristics
● Ownership Representation: Equity shareholders are considered co-owners

of the company, holding a claim on its assets and earnings.
● Limited Liability: Equity shareholders' liability is limited to the amount

invested in the shares. They are not personally liable for the company's
debts beyond their investment.
● Profit Sharing: Equity shareholders have the right to participate in the

company's profits through dividends, which are distributions of the
company's earnings to its shareholders.
● Voting Rights: Equity shareholders hold voting rights, allowing them to

influence corporate decisions such as the election of directors and approval
of major corporate actions.
● Capital Appreciation Potential: Equity shares offer the potential for capital
appreciation, meaning the value of the shares may increase over time as the
company grows and its financial performance improves.
Preference Shares: A Hybrid Investment Instrument
Preference shares, also known as preferred stock, are a unique type of equity that
combines features of both stocks and bonds. They offer investors certain
Alan Job Jose
preferential rights over common shareholders, such as priority in dividend

payments and liquidation proceeds.
Key Characteristics
● Fixed Dividend: Preference shareholders receive a fixed dividend payment,

typically expressed as a percentage of the face value of the share.
● Priority in Dividend Payments and Liquidation : Preference shareholders

receive dividends before common shareholders in case of company profits.
In the event of company liquidation, preference shareholders receive their
invested capital before common shareholders.
● Non-Voting Rights: Preference shareholders typically do not have voting

rights on corporate matters, unlike common shareholders.
It is generally more common for preference shares to be issued under private

placement than through a public issue. This is because preference shares typically
have a fixed dividend and priority in liquidation, making them less attractive to
retail investors who may prefer equity shares with the potential for higher returns.
Private placement allows companies to target specific institutional investors who
are more likely to be interested in the fixed-income nature of preference shares.
Types of Preference Shares
Types Characteristics
Convertible preference Can be converted into ordinary shares at a
shares predetermined price and time
Non-convertible
Cannot be converted into ordinary shares
preference shares
Cumulative preference
Entitled to receive unpaid dividends from previous years
shares
Non-cumulative Not entitled to receive unpaid dividends from previous
preference shares years
Redeemable preference Can be bought back by the company at a predetermined
shares price
Irredeemable preference
Cannot be bought back by the company
shares
Receive dividends at a fixed rate and may also
Participating preference
participate in the company's profits alongside ordinary
shares
shareholders
Receive dividends at a fixed rate but do not participate
Non-participating
in the company's profits alongside ordinary
preference shares
shareholders
Alan Job Jose

Equity Shares Vs Preference Shares
Feature Equity Shares Preference Shares
Dividend Payments Discretionary dividends Fixed dividend
Priority in Liquidation Last in line Priority
Voting Rights Voting rights Typically no voting rights
Capital Appreciation
Higher Lower
Potential
Risk Higher Lower
Treasury Stock: Equity shares that have been repurchased by the company and
are held in its treasury. Treasury shares do not have voting rights or receive
dividends.
It is not possible to issue irredeemable preference shares in India. This is due to

the provisions of the Companies Act, 2013, which states that all preference shares
must be redeemed within 20 years of their issue. This is to protect the interests
of preference shareholders
Corporate Bonds : Navigating the Path to Fixed-Income Success
Corporate bonds are debt instruments issued by corporations to raise capital for
various purposes, such as funding expansion projects, acquiring other businesses,
or refinancing existing debt. Investors purchase corporate bonds, essentially
lending money to the issuing company, in exchange for a fixed rate of return,
known as the coupon rate, and the repayment of the principal amount at maturity.
Key Characteristics
● Coupon Rate: The coupon rate is the fixed interest rate that the company
pays to bondholders periodically, typically semi-annually or annually. It
represents the investor's return on their investment.
● Maturity Date: The maturity date is the date on which the company must
repay the principal amount of the bond to the investor. Bonds with longer
maturities generally offer higher yields to compensate for the increased
duration risk.
Alan Job Jose

● Credit Rating: Credit rating agencies assess the creditworthiness of the

issuing company, assigning ratings that indicate the likelihood of the
company repaying its debt obligations. Higher credit ratings generally
translate to lower interest rates and lower risk for investors.
● Face Value: The face value is the nominal value of the bond, representing the
amount the company will repay to the investor at maturity.
● Call Provisions: Some bonds may have call provisions, allowing the company
to repurchase the bonds before maturity, typically at a premium to the face
value.
● Put Provisions: Put provisions give bondholders the right to sell the bonds
back to the company at a predetermined price, usually before the maturity
date.
Advantages of Investing in Corporate Bonds
1. Fixed Income: Corporate bonds provide a predictable and stable stream of

income in the form of regular coupon payments.
2. Diversification: Bonds can diversify an investment portfolio, reducing
overall risk and providing a balance to equity investments.
3. Liquidity: Corporate bonds are generally traded on secondary markets,
offering investors the ability to sell their bonds before maturity.
4. Potential for Capital Gains: If interest rates decline, the value of existing
bonds with fixed coupon rates may increase.
Risks Associated with Corporate Bonds
1. Credit Risk: The primary risk associated with corporate bonds is the
possibility that the issuing company may default on its debt obligations,
resulting in losses for investors.
2. Interest Rate Risk: Changes in interest rates can impact the value of
corporate bonds. Bond prices generally fall when interest rates rise.
3. Inflation Risk: Inflation can erode the purchasing power of fixed income
payments, making bonds less attractive in periods of high inflation.
4. Call Risk: Call provisions can force investors to sell their bonds back to the
company before maturity, potentially at a lower price than the market value.
The terms ‘bonds’ and ‘debentures’ are used interchangeably. Both represent the
debt obligations of the entity that issues them.
Bonds and debentures have different meanings in different countries. US and UK

lead the way for usage of the terms as follows:
Alan Job Jose

US Context UK Context
Bond A Secured Debt Instrument A Debt Instrument Issued By The

Government
Debenture An Unsecured Bond A Bond issued by a Company
The extent to which the terms ‘bonds’ and ‘debentures’ are used interchangeably
in India makes it difficult to define them precisely.
The following table is an attempt to differentiate Bonds and Debentures in an

Indian context
Attribute Bonds Debentures
Issuer Governments, PSUs, Banks PSUs, Private Sector Companies
Interest Rates Low Because Safety Is Higher Than Bonds Because

Higher Safety Is Relatively Lower
Tenure Long-Term (Ranges From Short-Term (Ranges From A Few

A Few Days To Perpetuity) Days To 20 Years)
Safety Safer Than Debentures Riskier Than Bonds Because

Because Of Safe Issuers Issued By Private Sector
Companies
Convertibility Convertibility Feature Is Convertibility Feature May Be

Into Shares Not Present Present In Some Debentures
Bonds Vs Debentures - Detailed Explanation
Dezerv.in/BondsVsDebentures
Type of Debentures
Types Description Key Features
Can be repurchased by the

Redeemable Provides flexibility for the
issuing company before the
Debentures company to manage finances
maturity date
Cannot be repurchased by the

Irredeemable Offers longer investment
issuing company before the
Debentures horizon for investors
maturity date
Alan Job Jose

Can be converted into

Provides investors with the
Convertible ordinary shares of the issuing
option to participate in equity
Debentures company at a predetermined
gains
price and time
Cannot be converted into

Non-Convertible Offers a fixed coupon rate and
ordinary shares of the issuing
Debentures stable income stream
company
Recorded in the name of the Provides security for investors

Registered
investor in the company's against unauthorized
Debentures
register transfers
Offers ease of transfer but

Bearer Payable to the bearer of the
carries higher risk of theft or
Debentures debenture certificate
loss
Have a fixed coupon rate that

Specific Coupon Provides a predictable stream
remains constant throughout
Debentures of income for investors
the debenture's life
Investors earn a return

Issued at a discount to their
Zero Coupon through the appreciation in
face value and do not pay
Debentures the debenture's price as it
regular coupon payments
approaches maturity
Similar to regulations on preference shares, it is not possible to issue

irredeemable debentures in India. This is due to the provisions of the Companies
Act, 2013, which states that all debentures must be redeemed within 20 years of
their issue. While debentures and bonds differentiation are not very clear, the
Securities and Exchange Board of India (SEBI) has interpreted this rule to apply
to perpetual bonds as well.
There are some exceptions to this as well. For example, banks are allowed to
issue perpetual bonds to meet their Basel III capital requirements. These bonds
are typically referred to as Additional Tier 1 (AT1) bonds.
AT1 bonds are similar to perpetual bonds in that they do not have a maturity date.
However, there are some key differences. First, AT1 bonds can be converted into
equity shares of the issuing bank if the bank's capital ratios fall below certain
levels. Second, AT1 bonds have a coupon rate that can be suspended or reduced if
the bank's financial condition deteriorates. AT1 bonds are considered to be a
form of hybrid debt-equity instrument, as they have some characteristics of both
debt and equity. As a result, they are generally considered to be riskier than
traditional perpetual bonds.
Alan Job Jose

Check out some active bonds in India https://www.indiabonds.com/
Government Bonds: A Timeless Instrument for Risk-Averse Investors
In the realm of Indian finance, G-Bonds, also known as Government Bonds, stand
as a pillar of stability and reliability within the fixed-income market. Issued by the
Reserve Bank of India (RBI) on behalf of the Central Government, G-Bonds offer
investors a secure haven for their capital, providing a predictable stream of income
and unwavering protection against default.
Key Characteristics
● Sovereign Backing: G-Bonds are backed by the full faith and credit of the
Government of India, making them among the safest debt instruments in
the Indian financial landscape. The government's commitment to
honouring its debt obligations ensures that G-Bonds are highly
sought-after by investors.
● Fixed Coupon Rate: G-Bonds carry a fixed coupon rate, which represents the
interest payment that the government makes to bondholders periodically.
This fixed rate provides investors with a predictable and stable stream of
income, making G-Bonds an attractive option for risk-averse investors
seeking consistent returns.
● Maturity Date: G-Bonds have a predetermined maturity date, which is the

date on which the government repays the principal amount to bondholders.
G- Bonds are primarily long term investment tools issued for periods
ranging from 5 to 40 years.
● Liquidity: G-Bonds are highly liquid assets, meaning they can be easily
bought and sold in secondary markets like the National Stock Exchange
(NSE) and the Bombay Stock Exchange (BSE). This liquidity provides
investors with the flexibility to enter and exit their positions without
significant transaction costs. NDS-OM Secondary Market under RBI Retail
Direct Scheme gives a platform to ensure liquidity for G-Bonds
Advantages of Investing in G-Bonds
1. Safety and Stability: G-Bonds are considered the safest debt instruments in
India due to their government backing. This safety and stability make them
an ideal investment for risk-averse investors seeking to preserve their
capital and generate predictable income.
2. Predictable Income: The fixed coupon rate of G-Bonds provides investors

with a predictable and stable stream of income, making them a reliable
source of fixed returns.
Alan Job Jose
3. Diversification Benefits: G-Bonds can effectively diversify an investment

portfolio, reducing overall portfolio risk and potentially enhancing returns.
4. Inflation Protection: G-Bonds offer some protection against inflation, as

their coupon rates may adjust based on changes in inflation expectations.
Risks Associated with G-Bonds
1. Interest Rate Risk: Changes in interest rates can impact the value of
G-Bonds Bond prices generally fall when interest rates rise.
2. Inflation Risk: If inflation exceeds the coupon rate of G-Bonds, the

purchasing power of the fixed income payments may erode.
3. Sovereign Credit Risk: While the risk of default is extremely low for Indian
G-Bonds, a downgrade in the government's credit rating could lead to lower
bond prices.
RBI Retail Direct Scheme

https://rbiretaildirect.org.in/#/
RBI Retail Direct Scheme: Should You Invest In Government Securities?
An Investor's Guide To RBI Retail Direct Scheme | ETMONEY
Mutual Funds: The Path to Collective Investing in India
In the intricate realm of finance, mutual funds stand as a cornerstone of financial

inclusivity and wealth creation. These investment vehicles pool funds from a
diverse group of investors, allowing them to collectively invest in a portfolio of
securities, such as stocks, bonds, and money market instruments. Mutual funds
offer a convenient and accessible way for investors to participate in the financial
markets, regardless of their financial expertise or investment capital.
Key Characteristics
Professional Management: Mutual funds are managed by experienced investment

professionals who conduct thorough research and analysis to select and manage
the underlying securities within the fund. This expertise provides investors with
access to informed investment decisions without the burden of individual stock
picking.
Diversification: Mutual funds typically invest in a diversified basket of securities,

reducing the overall risk associated with any single investment. This
diversification helps mitigate the impact of market fluctuations and protect the
value of investors' capital.
Alan Job Jose

Affordability: Mutual funds are relatively affordable, allowing investors to start

with small investments and gradually increase their contributions over time. This
accessibility makes mutual funds an attractive option for investors of all income
levels.
Liquidity: Most mutual funds offer open-ended structure, allowing investors to

redeem their units at the fund's net asset value (NAV) on any business day. This
liquidity provides investors with the flexibility to exit their positions when needed.
Variety of Options: Mutual funds offer a wide range of investment options to cater
to different risk appetites and investment goals. These options include equity
funds, debt funds, hybrid funds, and index funds, providing investors with the
flexibility to choose a fund that aligns with their financial objectives.
Advantages of Investing in Mutual Funds in India
Diversification Benefits: Mutual funds reduce individual stock risk by investing in a

diversified portfolio of securities, mitigating the impact of market fluctuations.
Professional Management: Experienced fund managers handle the investment

decisions, providing investors with access to expert guidance without the burden of
individual stock picking.
Affordability and Convenience: Mutual funds offer low investment minimums,

allowing investors to start small and gradually increase their contributions.
Transparency: Mutual funds provide regular disclosures, including NAVs, portfolio

holdings, and performance reports, ensuring transparency and accountability.
Tax Benefits: Mutual funds offer tax advantages, such as tax-deferred growth and
capital gains tax benefits, depending on the type of fund and investment period.
Risks Associated with Mutual Funds in India
Market Risk: Mutual funds are subject to market fluctuations, and their NAVs can
rise or fall depending on the performance of the underlying securities.
Expense Ratio: Mutual funds charge an expense ratio to cover management fees
and other operational costs, which reduces the overall returns to investors.
Management Risk : Actively managed funds may not always outperform their
benchmark indices, resulting in lower performance , which represents the
deviation from the benchmark's performance.
Liquidity Risk: While open-ended funds offer liquidity, there may be instances of
temporary illiquidity, especially during periods of market turmoil.
Investor Behaviour: Emotional investing and impulsive decisions can negatively

impact the long-term performance of mutual fund investments.
Alan Job Jose
ETFs: Embracing Efficiency and Diversification in Indian Investing
In the dynamic world of finance, Exchange Traded Funds (ETFs) have emerged as a
compelling investment option, offering investors a blend of efficiency,
diversification, and convenience. These investment vehicles track a specific market
index, sector, or asset class, providing investors with exposure to a basket of
securities without the burden of individual stock selection. ETFs have gained
significant traction in India, offering investors a versatile tool for portfolio
construction and wealth creation.
Key Characteristics
Passive Management: ETFs are passively managed funds, meaning they seek to
replicate the performance of a specific benchmark index or market segment. This
passive approach eliminates the need for active stock picking and reduces the
associated management costs.
Transparency: ETFs offer a high degree of transparency, providing investors with

regular disclosures, including daily NAVs, portfolio holdings, and performance
metrics. This transparency enhances investor confidence and facilitates informed
decision-making.
Low Expense Ratios: ETFs typically have lower expense ratios compared to actively
managed funds, as they do not incur the costs associated with stock research and
selection. This cost-effectiveness translates into higher returns for investors.
Tax Efficiency: ETFs are considered to be tax-efficient investment vehicles due to

their structure and the way they distribute capital gains. This tax efficiency can
enhance the overall returns for investors over time.
Liquidity and Tradability: ETFs are traded on stock exchanges, offering investors
with high liquidity and tradability. This liquidity allows investors to easily enter
and exit positions as market conditions evolve.
Advantages of Investing in ETFs in India
Diversification Benefits: ETFs provide instant diversification by tracking a broad

market index or sector, mitigating the impact of individual stock risk.
Cost-Effectiveness: ETFs offer lower expense ratios compared to actively managed

funds, enhancing the overall returns for investors.
Transparency and Predictability: ETFs offer high transparency and predictability,

as their performance is closely tied to the underlying benchmark index.
Tax Efficiency: ETFs are considered to be tax-efficient investment vehicles,

potentially boosting long-term returns.
Alan Job Jose

Accessibility and Convenience: ETFs are easily accessible through various

investment platforms and brokerage firms, making them convenient for investors
of all levels.
Risks Associated with ETFs in India
Tracking Error: While ETFs aim to replicate the performance of their underlying
benchmark index, there may be instances of tracking error, where the fund's
performance deviates from the benchmark.
Market Risk: ETFs are subject to overall market fluctuations, and their NAVs can
rise or fall depending on market conditions.
Expenses and Fees: Although expense ratios are typically lower for ETFs, there may
be additional fees associated with trading and brokerage services.
Index Selection: The performance of an ETF is closely tied to the performance of

the underlying index. Investors should carefully evaluate the index methodology
and historical performance before investing.
Commodity and Currency Risks: For ETFs tracking international indices or

commodities, currency fluctuations can impact the fund's performance.
Futures: Harnessing the Power of Price Expectations
In the dynamic world of finance, derivatives play a crucial role in managing risk
and enhancing returns. Among these derivatives, futures stand out as versatile
instruments that enable traders to speculate on the future price movements of
underlying assets, such as commodities, currencies, and stock indices. Futures and
Options were introduced in India in the year 2000.
Key Characteristics
● Standardised Contracts: Futures contracts are standardised agreements that

specify the underlying asset, contract size, delivery date, and trading venue.
This standardisation ensures transparency and facilitates efficient trading.
● Margin Trading: Futures trading typically involves margin trading, where

traders deposit a percentage of the contract value as margin. This initial
deposit serves as collateral for the contract and limits potential losses.
● Price Discovery: Futures markets facilitate price discovery, reflecting market

expectations for the future price of the underlying asset. This price discovery
mechanism provides valuable information to market participants.
● Hedging Tool: Futures contracts are primarily used for hedging, allowing
traders to protect themselves against adverse price movements in the
underlying asset. For instance, farmers can use futures contracts to lock in a
selling price for their crops, mitigating the risk of falling prices.
Alan Job Jose
● Arbitrage Opportunities: Futures markets also present arbitrage

opportunities, where traders exploit price discrepancies between futures
contracts and the underlying asset in different markets.
Advantages of Investing in Futures
1. Hedging: Futures contracts can be used to hedge against the risk of adverse
price movements in the underlying asset. For example, a farmer can sell a
futures contract for their crop to lock in a selling price, protecting
themselves from falling prices.
2. Speculation: Futures contracts can be used to speculate on the future

direction of the underlying asset's price. Traders who believe that the price
will rise can buy futures contracts, while those who believe the price will fall
can sell futures contracts.
3. Arbitrage: Futures contracts can be used to exploit price discrepancies

between the futures market and the spot market. This is known as arbitrage,
and it can be a profitable strategy for traders who are able to identify these
discrepancies.
4. Leverage: Futures contracts are traded on margin, which means that traders
only need to deposit a percentage of the contract value to open a position.
This leverage can magnify both profits and losses.
5. Liquidity: Futures markets are typically very liquid, which means that it is
easy to enter and exit positions. This liquidity makes futures contracts a
good choice for traders who need to be able to quickly adjust their positions.
Risks Associated with Futures
1. Price Risk: The primary risk of futures trading is price risk. This is the risk
that the price of the underlying asset will move against the trader's position.
If the price moves in the opposite direction, the trader will lose money.
2. Margin Risk: Futures trading involves margin, which means that traders
only need to deposit a percentage of the contract value to open a position.
However, this also means that traders can lose more money than they have
invested if the price moves against them.
3. Counterparty Risk: Counterparty risk is the risk that the other party to the
futures contract will not fulfil their obligations. This could happen if the
other party becomes insolvent or defaults on the contract.
4. Trading Costs: Futures trading involves commissions and other fees, which
can eat into profits.
Alan Job Jose

5. Complexity: Futures trading is a complex investment strategy that requires

a deep understanding of the risks involved.
Badla System
https://www.iima.ac.in/publication/badla-system-reappraisal#:~:text=The%20
badla%20system%2C%20which%20allowed,the%20SEBI%20in%20March%20
1994.
Options: Tailored Protection and Potential Gains in the Market
In the dynamic world of finance, options stand out as versatile instruments that
empower traders to navigate market uncertainties and potentially enhance their
returns. Options contracts grant the buyer the right, but not the obligation, to buy
or sell an underlying asset at a predetermined price (known as the strike price) on
or before a specified date (known as the expiration date). This unique feature of
options provides traders with flexibility and strategic opportunities in the Indian
financial landscape.
Key Characteristics
● Right, not an Obligation: Options contracts provide the buyer with the right,
but not the obligation, to exercise the contract. This flexibility allows traders
to make informed decisions based on market conditions.
● Strike Price: The strike price is the predetermined price at which the buyer
has the right to buy or sell the underlying asset. It represents a pivotal point
for determining the profit or loss potential of the option contract.
● Expiration Date: The expiration date is the last day on which the buyer can
exercise the option contract. After the expiration date, the contract expires,
and the buyer loses the right to exercise their option.
● Premium: The premium is the price that the buyer pays to the seller for the
option contract. The premium reflects the market's assessment of the
probability that the option will be exercised, the volatility of the underlying
asset, and the time to expiration.
● Types of Options: There are two primary types of options: call options and
put options. A call option gives the buyer the right to buy the underlying
asset at the strike price, while a put option gives the buyer the right to sell
the underlying asset at the strike price.
Alan Job Jose

There are two types of Options. Call Option and Put Option.
Call Option
A call option is a contract that gives the buyer the right, but not the
obligation, to buy an underlying asset at a predetermined price (strike price)
on or before a specified date (expiration date). The buyer of a call option
pays a premium to the seller for this right. If the buyer chooses to exercise
the option, the seller is obligated to sell the underlying asset to the buyer at
the strike price, regardless of the market price of the asset at the expiration
date.
Put Option
A put option is a contract that gives the buyer the right, but not the
obligation, to sell an underlying asset at a predetermined price (strike price)
on or before a specified date (expiration date). The buyer of a put option pays
a premium to the seller for this right. If the buyer chooses to exercise the
option, the seller is obligated to buy the underlying asset from the buyer at
the strike price, regardless of the market price of the asset at the expiration
date.
Advantages of Investing in Options in India
Hedging: Options contracts can effectively hedge against potential losses in the
underlying asset. For instance, a stock investor can purchase put options to limit
their potential losses if the stock price declines.
Income Generation: Options contracts can be used to generate income through

premium collection. By selling options contracts, traders can receive the premium
upfront, regardless of whether the option is exercised.
Leverage: Options contracts allow traders to gain exposure to the underlying asset
with relatively low capital investment compared to outright ownership. This
leverage can magnify both profits and losses.
Strategic Trading Strategies: Options contracts can be employed in various

strategic trading strategies, such as covered calls, protective puts, and straddles, to
enhance portfolio management and exploit market opportunities.
Diversification Benefits: Options contracts can add diversification to an investment

portfolio, potentially reducing overall portfolio risk and enhancing returns.
Risks Associated with Options in India
Time Decay: The value of an options contract erodes over time as the expiration
date approaches. This time decay, known as theta, can significantly impact the
profit potential of the contract.
Alan Job Jose

Volatility Risk: Options premiums are highly sensitive to changes in the volatility
of the underlying asset. Increased volatility can lead to higher premiums, but it can
also amplify potential losses.
Complexity: Options trading requires a thorough understanding of the underlying

asset, market dynamics, and options pricing models. Inexperienced traders may
face significant risks due to the complexity of options strategies.
Note : Derivatives are a versatile tool that can be used for a variety of purposes in both
the money market and the capital market. Based on the underlying asset, derivatives
are considered to be money market instruments or capital market instruments. Interest
rate swaps, interest rate futures are the common derivatives used in the money market
whereas Stock options, bond futures, commodity options, currency options are the
common derivatives used in capital markets. Money market derivatives are typically
used to hedge against interest rate risk. Capital market derivatives are used for a wider
variety of purposes, including hedging, speculation, and arbitrage.
Forwards Vs Futures Vs Options
Feature Forwards Futures Options
Exchange Traded No Yes Yes
Contract No Yes Yes

Standardisation
Settlement Cash or Physical Cash Cash
Purpose Hedging, Hedging, Hedging,

speculation speculation, speculation,
arbitrage income generation
Leverage No Yes Yes
Price Discovery Limited Significant Yes
Liquidity Limited High High
Complexity Low Moderate High
REITs: Unlocking the Potential of Real Estate Investing in India
In the dynamic realm of finance, Real Estate Investment Trusts (REITs) have
emerged as a powerful tool for investors seeking exposure to the real estate sector
without the hassles of direct property ownership. REITs are companies that own,
operate, or finance income-producing real estate assets, such as apartment
complexes, office buildings, shopping malls, and hotels. They offer investors a
convenient and accessible way to participate in the growth of the real estate market
and generate regular income from rental payments.
Alan Job Jose

Key Characteristics
Income Generation: REITs are primarily focused on generating regular income for
their investors through rental payments from their underlying real estate assets.
This income stream provides a consistent return on investment for REIT
shareholders.
Transparency: REITs are subject to stringent regulatory requirements, ensuring a

high degree of transparency and accountability. They are required to regularly
disclose financial information, including property valuations, rental income, and
operating expenses.
Liquidity: REITs are listed on stock exchanges, providing investors with a high
degree of liquidity. They can easily buy and sell REIT units through the exchange,
allowing for flexible portfolio adjustments.
Diversification Benefits: REITs offer diversification benefits by investing in a

diversified portfolio of real estate assets, reducing the impact of individual
property risks.
Professional Management: REITs are managed by experienced professionals with

expertise in real estate acquisition, financing, and management. This expertise
helps ensure the efficient operation and growth of the REIT's portfolio.
Advantages of Investing in REITs in India
Passive Income Stream: REITs provide a consistent stream of rental income for
investors, offering a passive source of returns.
Diversification Benefits: REITs offer exposure to the real estate sector without the
direct ownership risks associated with individual properties.
Inflation Hedging: Real estate assets are often considered a hedge against
inflation, as rental income tends to increase alongside inflation.
Professional Management: REITs are managed by experienced professionals,

ensuring the efficient operation and growth of the underlying real estate portfolio.
Risks Associated with REITs in India
Real Estate Market Risk: REITs are subject to the overall performance of the real
estate market. Economic downturns or sectoral fluctuations can impact the value
of the underlying assets and rental income.
Interest Rate Risk: REITs are sensitive to interest rate fluctuations, as changes in
interest rates can affect their financing costs and overall profitability.
Tenant Risk: REITs rely on rental income from tenants. If tenants default on their
rent payments, it can negatively impact the REIT's income stream.
Alan Job Jose
Liquidity Risk: While REITs are listed on exchanges, there may be instances of
temporary illiquidity, especially during periods of market turmoil.
Geographical Concentration: REITs may have geographical concentration in their

investments, increasing exposure to regional economic conditions.
InvIT - Infrastructure Investment Trust
It works similarly to REITs. The difference is it will invest in infrastructure

projects like dams, power plants, airports or national highways instead of real
estate assets
Sovereign Gold Bonds (SGBs): A Secure Gateway to Gold Investments in India
In the realm of financial investments, gold has long held a prominent position,
revered for its stability, value preservation, and hedge against inflation. While
traditional gold investments in the form of physical gold or jewellery carry storage
and security concerns, Sovereign Gold Bonds (SGBs) offer a compelling alternative,
providing investors with a safe, convenient, and transparent way to participate in
the gold market.
Key Characteristics
Government-Backed Security: SGBs are issued by the Reserve Bank of India (RBI)
on behalf of the Indian government, making them sovereign-backed securities.
This government backing provides investors with a high degree of security and
assurance.
Denominations and Tenure: SGBs are issued in denominations as low as Rs.1 gram,
making them accessible to investors of all financial levels. The tenor of the Bond
will be for a period of 8 years with exit option in 5th, 6th and 7th year.
Linked to Gold Price: The value of SGBs is linked to the price of gold, providing
investors with exposure to the gold market's performance. This linkage ensures
that the value of the bonds increases or decreases in line with gold price
movements.
Regular Interest Payments: In addition to the capital appreciation linked to gold

prices, SGBs offer regular interest payments to investors. These interest payments
are taxable as per the investor's income tax slab.
Tax Benefits: SGBs offer certain tax benefits, such as exemption from capital gains
tax if held until maturity. This tax advantage enhances the overall returns for
investors.
Alan Job Jose

Advantages of Investing in Sovereign Gold Bonds in India
Secure Investment: SGBs are government-backed securities, offering investors a

high degree of security and protection against financial risks.
Gold Price Exposure: SGBs provide investors with exposure to the gold market,
allowing them to benefit from potential gold price appreciation.
Regular Income Stream: SGBs offer regular interest payments, providing investors
with a steady income stream.
Tax Benefits: SGBs offer certain tax advantages, making them a tax-efficient
investment option.
Physical Gold Redemption: At maturity, investors have the option to redeem their
SGBs for physical gold, providing flexibility in managing their gold holdings.
Risks Associated with Sovereign Gold Bonds in India
● Gold Price Volatility: The value of SGBs is linked to gold prices, and
fluctuations in gold prices can impact the overall returns.
● Interest Rate Risk: Interest payments on SGBs are fixed, and changes in
interest rates may affect the relative attractiveness of SGBs compared to
other investment options.
● Tax Implications: Interest payments on SGBs are taxable, and investors

should consider their tax implications before investing.
● Liquidity Considerations: SGBs may not be as liquid as other investment

options, and secondary market trading may have lower liquidity compared
to primary issuance.
In addition these components, several ancillary components contribute to the overall

functioning of the capital market:
● Credit Rating Agencies: Credit rating agencies, such as CRISIL and ICRA, assess
the creditworthiness of issuers and their securities.
● Research and Analytics Firms: Research and analytics firms provide investors
with in-depth analysis and research on securities, aiding their investment
decisions.
● Financial Media: Financial media outlets, such as Bloomberg and Reuters,

disseminate market news, data, and analyses to investors and market
participants.
Alan Job Jose

● Investor Education Initiatives: Investor education initiatives, often undertaken

by SEBI and other organisations, aim to enhance financial literacy and empower
investors to make informed investment decisions.
The Indian capital market is a complex and ever-evolving ecosystem, with each
component playing a vital role in its functioning. The effective interaction and
coordination of these components ensure the efficient allocation of capital, the
protection of investor interests, and the overall growth and development of the
Indian economy.
VI. Recent trends in CapitalMarket
The Indian capital market has witnessed several notable trends in recent years,
reflecting the dynamic nature of the financial landscape and the evolving
preferences of investors. Here are some key trends that have shaped the Indian
capital market in recent times:
1. Rise of Digitalization: Technology has revolutionised the way investors

interact with the capital market. Online trading platforms, mobile
applications, and digital investment products have made investing more
accessible and convenient, particularly for retail investors.
2. Growing Popularity of Mutual Funds: Mutual funds have emerged as a

preferred investment avenue for a large segment of Indian investors,
offering diversification, professional management, and ease of access to
various asset classes.
3. Increased Participation of Foreign Institutional Investors (FIIs): FIIs have

played a significant role in providing liquidity and depth to the Indian
capital market. Their participation has been driven by India's strong
economic growth prospects and attractive valuations.
4. Emergence of New Investment Products: The Indian capital market has

seen the introduction of innovative investment products, such as
exchange-traded funds (ETFs), structured products, and derivatives,
catering to diverse risk-return profiles and investment strategies.
5. Enhancing Regulatory Framework: Regulatory bodies like the Securities and

Exchange Board of India (SEBI) have taken steps to strengthen the
regulatory framework, improve investor protection, and promote market
transparency.
6. Focus on Financial Inclusion: Financial inclusion initiatives have gained

prominence, aiming to bring more individuals into the formal financial
system and increase their participation in the capital market.
7. ESG Investing: Environmental, social, and governance (ESG) considerations

are becoming increasingly important for investors, leading to the growth of
ESG-focused investment products and strategies.
Alan Job Jose
8. Rise of Alternative Investment Funds (AIFs): AIFs have emerged as a

popular investment vehicle for sophisticated investors seeking exposure to
alternative asset classes like private equity, real estate, and venture capital.
9. Increasing Focus on Risk Management: Risk management practices have

become more sophisticated, with investors and intermediaries adopting
advanced techniques to mitigate investment risks.
These trends are likely to continue shaping the Indian capital market in the coming
years, driving innovation, enhancing investor participation, and contributing to
the overall growth and development of the Indian economy.
VII. Money Market - Meaning and Features
The money market is a specialised financial market where short-term debt

instruments are bought and sold. These instruments are used by governments,
banks, and other financial institutions to meet their short-term liquidity needs. It
serves as a platform for trading highly liquid and low-risk debt instruments with
maturities typically ranging from overnight to one year. The money market is
characterised by its high liquidity, meaning that the instruments traded can be
easily converted into cash. The money market plays a pivotal role in maintaining
the stability of the financial system and enhancing economic efficiency.
The money market is an over-the-counter market, meaning that transactions are

not conducted through a centralised exchange. Instead, trades are negotiated
directly between participants, which can include banks, financial institutions,
government agencies, and large corporations. This OTC structure provides
flexibility and customization of transactions, but it also makes price transparency
less prevalent compared to exchange-based markets.
The money market is also a dealer market, meaning that there are specialised
dealers who facilitate trades by acting as intermediaries between buyers and
sellers.
● Short-term maturities: The money market deals with debt instruments with
maturities of one year or less.
● High liquidity: The instruments traded in the money market are highly
liquid, meaning they can be easily converted into cash.
● Low risk: The instruments traded in the money market are considered to be
low risk due to their short maturities and the creditworthiness of the issuers.
● Over-the Counter Market : Transactions are not conducted through a

centralised exchange instead negotiated directly between the parties.
● Dealers Market : It is characterised by the presence of specialised dealers

who facilitate trades by acting as intermediaries between buyers and sellers.
Alan Job Jose
VIII. Importance of the Money Market
1. Economic Stability: The money market facilitates the management of

short-term liquidity needs, ensuring that financial institutions can meet
their obligations and maintain financial stability.
2. Monetary Policy Transmission: The central bank utilises the money market
to influence interest rates, a key tool in implementing monetary policy,
impacting economic activity and inflation.
3. Economic Efficiency: The money market promotes efficient allocation of

capital by channelling funds from surplus units to deficit units, ensuring
that resources are utilised effectively.
4. Risk Management: The money market provides opportunities for

institutions to hedge against interest rate risks, mitigating potential
financial losses.
5. Benchmarks for Interest Rates: Money market instruments serve as

benchmarks for pricing other financial instruments, facilitating informed
financial decisions.
IX. Functions of the Money Market
1. Short-term Lending and Borrowing: The primary function of the money

market is to facilitate short-term lending and borrowing between
institutions, ensuring that funds are readily available to meet liquidity
needs.
2. Monetary Policy Implementation: The central bank influences interest rates

by buying or selling money market instruments, a key mechanism in
implementing monetary policy objectives.
3. Financial Intermediation: The money market acts as an intermediary

between savers and borrowers, efficiently channelling funds from surplus
units to deficit units.
4. Liquidity Management: Financial institutions manage their short-term

liquidity positions by trading in the money market, ensuring they have
sufficient funds to meet their obligations.
5. Price Discovery: The money market provides a platform for price discovery,
reflecting market expectations of future interest rates and influencing
pricing of other financial instruments.
X. Components of the Money Market
Alan Job Jose

The money market in India plays a crucial role in the country's financial system,
facilitating short-term lending and borrowing, promoting economic stability, and
supporting monetary policy implementation. It comprises various components
that work together to ensure the smooth functioning of the market and its ability
to meet the needs of financial institutions and the broader economy
The Components of the Indian money market can be categorised into three broad
segments:
Market Participants - Individuals and institutions that actively engage in

buying, selling, and issuing securities within the capital market.
Market Infrastructure - Physical and technological framework that

supports the trading and settlement of securities.
Market Instruments: The Indian money market trades in a variety of

short-term debt instruments, typically with maturities of one year or less.
Money Market Participants
1. Commercial Banks
2. Financial Institutions
3. Corporations
4. Government Agencies
5. Money Market Dealers
6. Primary Dealers
Commercial Banks
Banks are the primary players in the money market, acting as both borrowers and
lenders. They borrow funds from surplus units, such as depositors, and lend them
to deficit units, such as corporations and individuals. Banks play a central role in
channelling funds between different segments of the economy and maintaining
overall liquidity.
State Bank of India (SBI),HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Axis Bank
Financial Institutions
Financial institutions other than commercial banks, such as insurance companies,

pension funds, and mutual funds, also participate actively in the money market.
These institutions invest in money market instruments, such as Treasury Bills and
Certificates of Deposit, to manage their short-term cash flows and earn a steady
income.
Life Insurance Corporation of India (LIC), ICICI Prudential Life Insurance Company,
UTI Mutual Fund, ICICI Prudential Mutual Fund
Alan Job Jose

Corporations
Large corporations may participate in the money market to borrow short-term

funds for various purposes, such as working capital requirements, expansion
projects, or bridge financing. They issue Commercial Paper (CP), an unsecured debt
instrument, to raise funds from the money market.
Government Agencies
Government agencies, including the Reserve Bank of India (RBI) and Development
Financial Institutions like the National Bank for Agriculture and Rural
Development (NABARD), play a crucial role in the money market. The RBI, as the
central bank, conducts open market operations to influence interest rates and
manage liquidity in the market. NABARD, on the other hand, provides refinance
facilities to banks and other financial institutions through issuance of Commercial
Papers
Money Market Dealers
Money market dealers, also known as brokers or intermediaries, play a vital role in
facilitating transactions between buyers and sellers of money market instruments.
They provide liquidity and price transparency, ensuring the efficient functioning of
the market.
J.M. Financial Services, Edelweiss Broking, YES Securities,Emkay Global Financial

Services
Primary Dealers
Primary dealers play a pivotal role in the financial system, acting as intermediaries
between the central bank and the broader money market. These designated
financial institutions, typically large banks and investment firms, maintain direct
access to the central bank's open market operations, enabling them to execute
transactions in government securities and support the implementation of
monetary policy.
List of Primary Dealers in India - Total 21 in India

https://www.rbi.org.in/commonperson/English/Scripts/PrimaryDealers.aspx
These diverse participants, from banks and financial institutions to corporations

and government agencies, contribute to the dynamics of the Indian money market.
Their interactions and transactions ensure the smooth flow of funds, support
economic growth, and contribute to overall financial stability. The money market,
in turn, provides a platform for these institutions to manage their short-term
liquidity needs, optimise their financial strategies, and contribute to the broader
economy.
Alan Job Jose

Money Market Infrastructure
1. Payment Systems
2. Clearing and Settlement System
3. Regulator
Payment Systems
Efficient payment systems are essential for facilitating the flow of funds within the
money market. In India, the National Electronic Fund Transfer (NEFT) and the
Real-Time Gross Settlement (RTGS) systems are the primary payment rails for
money market transactions. These systems enable the quick and secure transfer of
funds between banks and other financial institutions.
Clearing and Settlement System
The clearing and settlement system is the backbone of the money market, ensuring
the timely and secure transfer of funds and securities. In India, the clearing and
settlement of money market instruments is handled by the Clearing Corporation of
India (CCIL). CCIL maintains a centralised platform for netting and settlement of
trades, reducing counterparty risk and enhancing overall market stability.
Regulator
The Reserve Bank of India (RBI) is the primary regulator of the money market in
India. It issues guidelines and regulations to ensure the orderly functioning of the
market, promote fair competition, and protect market participants from fraud and
abuse. The RBI also oversees the activities of key market intermediaries, such as
money market dealers and primary dealers.
Money Market Instruments
1. T - Bills
2. Commercial Paper
3. Certificate of Deposits
4. Call/Notice/Term Money
5. Repurchase Agreements
T-bills: A secure haven for your funds, fueling India's growth.
Treasury bills (T-bills) are short-term debt instruments issued by the Government
of India through the Reserve Bank of India (RBI). They serve as a crucial tool for the
government to manage its short-term cash flow requirements and as a benchmark
for other money market instruments. T-bills are highly liquid and considered
risk-free investments due to the strong creditworthiness of the Indian
government.
Alan Job Jose
Characteristics
● Maturity: T-bills in India have 3 maturities ranging 91 days 182 days and
364 days. This short-term nature makes them attractive investments for
institutions and individuals seeking low-risk and highly liquid placements
for their funds.
● Issue and Auction: T-bills are issued through an auction process conducted
by the RBI. The auction determines the yield or discount rate, which is the
interest rate that investors earn on their T-bill investments.
● Discounting: T-bills are issued at a discount, meaning they are sold at a

price below their face value. The investor receives the face value upon
maturity, effectively earning the difference between the purchase price and
face value as interest.
● Taxation: T-bills are considered short-term investments and are taxed at

the investor's marginal income tax rate under the heading income from
other sources.
● Risk-free Investment: T-bills are considered risk-free investments due to

the strong creditworthiness of the Indian government. The government has
a long history of honouring its debt obligations, making T-bills a safe haven
for investors.
● Electronic Form : T- bills exist in electronic form rather than physical

certificates. To hold dematerialized securities, you need a Demat account.
● Weekly Auctions : T - Bills are auctioned on a weekly basis. The auction

opens by 10:00 AM on Monday and closes by 6:00 PM on Tuesday
● Minimum Investment : T- bills can be purchased for a minimum

investment of 10000 and its multiples. Bids can be placed through brokers,
NSE go Bid app or RBI Retail Direct Scheme
● Secondary Market : T-bills can be traded in the secondary market through

NDS -OM platform or from exchange. The volume of transactions in the
exchange is very minimal to consider it as a product traded in exchange
Advantages Disadvantages
Risk-free investment backed by the Sensitive to changes in interest rates,
Indian government value declines when rates rise
Highly liquid and easily bought and Returns may not adequately protect
sold against inflation
Alan Job Jose

Easily purchased through banks and Taxed at the investor's marginal

online auctions income tax rate
Reduces overall risk and balances out Offers low returns compared to other
riskier investments investments
Commercial Paper : A trusted instrument, empowering corporates, enriching

investors.
Commercial Paper (CP) is a short-term, unsecured promissory note issued by

corporations with high credit ratings to raise funds for their working capital
requirements or expansion projects. In India, CP plays a crucial role in the money
market, providing a flexible and cost-effective financing option for corporate
borrowers.
Introduced in India for the first time in the year 1990. Institutional investors are
the majority buyers of CP
Characteristics
● Maturity: CP has maturities ranging from 15 days to 364 days, making it a

short-term debt instrument.
● Issuance: CP is issued by corporations with strong credit ratings, typically

large and well-established companies. There are also restrictions like
networth of 4 crore or more on the eligibility of companies to issue CPs.
Banks and FI’s are prohibited from issuance and underwriting of CP’s.
● Unsecured: CP is an unsecured debt instrument, meaning it is not backed by

any collateral. This makes the issuer's creditworthiness a critical factor for
investors.
● Issue and Pricing: CP is issued through a process of negotiation between the

issuing company and investors. The pricing of CP is determined by the
issuer's credit rating, the prevailing market interest rates, and the maturity
date. CP issues happens through private placements
● Discounting: CPs are issued at a discount, meaning they are sold at a price
below their face value. The investor receives the face value upon maturity,
effectively earning the difference between the purchase price and face value
as interest.
● Liquidity: CP is a relatively liquid instrument, as it is actively traded in the

secondary market. This makes it an attractive option for investors seeking
short-term placements for their funds.
● Secondary Market : CPs can be traded in the secondary market through NDS
-OM platform. CPs can also be listed in exchange. Check additional info for
more information about listing of CPs in Exchange.
Alan Job Jose
● Electronic and Physical form : CPs are issued in both electronic and paper
form. Hence Demat account is not a mandatory requirement
● Minimum Investment : CP can be issued in denominations of Rs. 5 lakh or

multiples thereof.
● Credit Rating : It has to be mandatorily rated by an agency should have

minimum credit rating shall be P-2 of CRISIL or such equivalent rating by
other agencies.
Advantages Disadvantages
Unsecured debt instrument, not backed by
High creditworthiness of issuers
collateral
Actively traded in secondary
Limited liquidity for certain maturities
market
Offers competitive returns than Interest income is taxable at investor's
Bank Deposits or T-bills marginal tax rate
Reduces overall portfolio risk May require minimum investment amounts
Advantages of CP for Corporate Borrowers
● Cost-effectiveness: CP is generally considered a cost-effective financing

option compared to bank loans or debentures, as it avoids the fees and
commissions associated with traditional financing methods.
● Flexibility: CP offers flexibility in terms of maturity dates and issuance

amounts, allowing companies to tailor their financing needs.
● Diversification of Funding Sources: CP provides an alternative source of

financing, diversifying a company's debt profile and reducing reliance on
traditional bank loans.
Significance of CP in the Indian Economy
● Promotes Financial Inclusion: CP expands access to financing for

corporations, particularly those that may not have direct access to
traditional banking channels.
● Enhances Market Efficiency: CP contributes to the efficiency of the money

market by providing an alternative source of financing and facilitating the
transfer of funds between corporations and investors.
● Supports Economic Growth: CP plays a role in supporting economic growth

by providing corporations with the necessary financing to meet their
short-term funding needs.
Alan Job Jose

First time CPs are listed on exchange in 2019 by Aditya Birla Finance
https://www.nseindia.com/aditya-birla-finance-becomes-first-company-to-li
st-commercial-paper-on-nse
Aditya Birla Finance's listing of commercial paper (CP) on the National Stock
Exchange (NSE) goes against the usual idea that money markets are
over-the-counter (OTC) markets. Traditionally, money market instruments,
such as CP, are traded directly between participants, bypassing a centralised
exchange.
Aditya Birla Finance's decision to list its CP on the NSE was a strategic move to
enhance the visibility and liquidity of its paper. By listing on an exchange, the CP
became accessible to a wider pool of investors, including institutional investors
and retail investors. This increased transparency and price discovery, potentially
leading to better pricing for the company.
The listing also signified a growing trend towards on-exchange trading of money
market instruments in India. The NSE and other exchanges have been actively
promoting on-exchange trading, recognizing the benefits of increased
transparency, liquidity, and price discovery.
While OTC markets still dominate money market transactions in India,

on-exchange trading is gaining traction. The listing of Aditya Birla Finance's CP
marked a significant step in this direction and could encourage other companies
to follow suit.
Certificates of Deposit (CDs): Embrace the power of fixed income with flexibility
Certificates of Deposit (CDs) are fixed-income financial instruments issued by

banks and financial institutions in India. They offer investors a fixed rate of return
over a predetermined period, making them a popular choice for individuals and
institutions seeking stable and predictable returns on their investments.
Certificates of Deposit (CDs) are not fixed deposits. It is an agreement between the
depositor and the authorised Bank/financial institution confirming the amount of
deposit. It was introduced in India in the year of 1989.
Characteristics
● Fixed Maturity: CDs have a fixed maturity date, ranging anywhere between 3
months to a year.
● Minimum Investment : CDs can be issued in India for a minimum deposit of
₹1 lakh and in subsequent multiples of it.
Alan Job Jose

● Issuance : Scheduled Commercial Banks (SCBs) and All-India Financial

Institutions are eligible to issue a CD. Cooperative Banks and RRBs cannot
issue a CD.
● Electronic Form : CDs are issued in dematerialized forms and are

transferable through means of endorsement or delivery.
● No Lock in : There is no lock-in required for a CD. Still Banks are not
permitted to buy back a CD before its maturity. You can sell it in the
secondary market for liquidity
● No Loan against CD : One cannot issue a loan against a CD.
● CDs cannot be publicly traded. It can be traded on OTC market and then can
be transferred from DEMAT accounts
● Personalised Payouts : You can choose the payout schedule - monthly,

quarterly or annually.
Call/Notice/Term Money: The pulse of the financial system, driving financial

activities
Call/Notice/Term Money, also known as the money market, is a segment of the

financial system where short-term funds, typically with shortest maturity , are
borrowed and lent by banks and financial institutions. It plays a crucial role in
facilitating the smooth functioning of the financial system by providing a platform
for managing liquidity and regulating interest rates.
Call Money: Call money refers to unsecured overnight loans between banks
and financial institutions.
Notice Money: Notice money refers to unsecured loans between banks and
financial institutions with maturities ranging from 2 to 14 days.
Term Money: Term money refers to unsecured loans between banks and
financial institutions with maturities exceeding 14 days.
Characteristics
● Short-term Maturities: These instruments have maturities ranging from

overnight to one year, making them suitable for managing short-term
liquidity needs.
● Participants : Commercial banks are the major participants in this

instrument. Primary Dealers also take part in call/notice/term money
● No Retail Participation
● Eligible participants are free to decide the interest based on negotiation

Alan Job Jose
● NDS - Call is an RBI platform to facilitate call/notice/term money

transactions. Transactions outside NDS-Call should be reported within 15
minutes on the platform. It is administered by CCIL.
Repurchase Agreements
Repurchase Agreements (Repos), are short-term borrowing and lending contracts

involving the sale of securities with an agreement to repurchase them at a
predetermined price and date. Repos play a crucial role in the money market,
facilitating liquidity management among banks, financial institutions, and the RBI.
Repos by default stands for RBI purchasing securities of financial institutions and
lending money to the financial institutions. It will act as the benchmark for interest
rates on lending in the country
Reverse Repos stands for RBI borrowing money from commercial banks and pays
interests by pledging its securities for a short tenure. This acts as the benchmark of
interest rates on deposits in the country.
Repurchase agreements (repos) can be made between two private parties, without the
involvement of the RBI. These are called "private repos" or "over-the-counter (OTC)
repos." Used by banks and FIs to manage their short-term liquidity needs and hedge
against interest rate risk.
Characteristics
● Collateralized Borrowing: The securities act as collateral, ensuring the

lender's right to receive the principal amount upon repurchase.
● Short-term Maturities: Repos typically have short-term maturities, ranging

from overnight to 14 days
● Interest Rate Benchmark: Repo rates, the interest rates associated with
repos, serve as a benchmark for short-term interest rates in the Indian
financial system.
● Open Market Operations: The RBI actively uses repos as a tool for open
market operations, influencing liquidity conditions and managing interest
rates.
● No Retail Participation
Repo rate - Rate at which RBI lends to commercial banks
Reverse Repo rate - Rate at which banks lend to RBI
Bank rate - Rate at which RBI lends to banks without collateral
Alan Job Jose

Promissory Notes, Commercial Bills, and Banker's Acceptances are not

considered money market instruments. They are trade-facilitating instruments
that serve a different purpose in the financial system.
Trade-facilitating instruments are instruments that help facilitate trade

between businesses. They provide a mechanism for businesses to defer payment
for goods or services, allowing them to manage their cash flow more effectively.
Money Market Trade-Facilitating

Feature
Instruments Instruments
Facilitate trade between
Purpose Raise short-term funds
businesses
Varies depending on the
Maturity Up to one year
transaction
Less liquid than money
Liquidity Highly liquid
market instruments
Liquid funds are also money market instruments . Liquid Mutual Funds are
mutual funds that invest in money market instruments like T-bills, Commercial
Paper or Certificate of Deposits.
Cash Management Bills(CMBs)

https://www.5paisa.com/CMBs
There are other financial instruments and assets that are outside the purview of the
capital or money market.These instruments and assets often serve different purposes
and have distinct characteristics compared to securities. It includes bank deposits, loans,
saving instruments (EPF, PPF,SSY,SCSS), Insurance, Currencies, Cryptocurrencies, NFTs,
P2P lending, digital gold and crowdfunding.
XI. Recent trends in Money Market
The Indian money market is undergoing a period of transformation, driven by a

combination of domestic and global factors. Technological advancements,
Alan Job Jose

regulatory reforms, and the evolving role of market participants are shaping the
dynamics of the money market
1. Active Central bank : RBI actively involved in the money market to stabilise
the economy by influencing the supply and cost of short-term credit. Open
Market Operations have become the major tool of monetary policy
2. Electronic Trading Platforms: Electronic trading platforms have become the

dominant channel for money market transactions, facilitating efficient price
discovery and execution. e-Kuber, NDS - OM, RBI Retail Direct, NSE go Bid
are all such developments
3. Regulatory Reforms : Reforms like Liquidity Adjustment Facility (LAF)

Reforms and Implementation of Basel III enhanced flexibility and
transparency in liquidity management. These beefed up the capital buffers
held by banks, influencing their risk appetite and money market activities.
4. Increased Participation of Non-Bank Financial Institutions (NBFIs): NBFIs

have become increasingly active in the money market, expanding their
lending and borrowing activities.
5. Evolution of Corporate Treasury Management: Corporates are adopting

sophisticated treasury management practices to optimise their short-term
liquidity needs and manage interest rate risks.
6. Retail participation : Retail participation in the money market is on the rise,

driven by factors such as increased financial literacy, the rise of digital
platforms, and the growing demand for alternative investment options.
7. On-exchange trade : On-exchange trade of money market instruments is

gaining traction due to its enhanced transparency, liquidity, and efficiency.
Electronic trading platforms facilitate seamless order execution and price
discovery, while clearing and settlement mechanisms ensure timely and
secure transactions. This trend is expected to continue as more money
market instruments are listed on exchanges.
The money market will continue to evolve as new technologies emerge, regulatory
frameworks adapt, and market participants innovate. Understanding these trends
is crucial for navigating the complexities of the money market and making sound
investment decisions.
Alan Job Jose


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Financial Institutions & Markets

Unit 2 : Capital Market & Money Market

Unit 2 : Capital Market & Money Market

Capital Market: Meaning –Structure, Importance – Functions – Players in the Capital

Money Market: Meaning –Structure, Importance – Functions – Players in the Money

Money Market Capital Market

Long-term (several years to

Structure Over-the-counter (OTC) trading Exchanges and OTC trading

Alan Job Jose

I. Capital Market - Meaning & Features

The capital market is a broad term that encompasses a variety of institutions,

● Long-term maturity instruments: Capital market deals with instruments

● Debt and Equity Investments: Capital market offers a diverse range of

● High-risk investments: Capital market investments are generally

● Price volatility: Capital market instruments are subject to higher price

● Role in economic growth: Capital market plays a crucial role in mobilising

II. Structure of Capital Market

The capital market is primarily divided into two segments:

Secondary Market: This is where existing securities are traded among

III. Importance of Capital Market

1. Mobilising Savings: It channels savings from individuals and institutions

Alan Job Jose

2. Efficient Allocation of Capital: It allocates capital to its most efficient uses,

3. Price Discovery: It provides a platform for price discovery, reflecting the

4. Risk Sharing: It facilitates risk sharing between investors, allowing them to

5. Economic Growth: By facilitating these functions, the capital market

IV. Functions of Capital Market

The primary functions of the capital market are:

1. Providing a Platform for Issuing Securities: It provides a structured and

2. Facilitating Trading of Securities: It enables investors to buy, sell, and hold

3. Channelling Funds to Productive Investments: It directs savings from

4. Promoting Financial Inclusion: It provides opportunities for individuals to

5. Enhancing Economic Resilience: It contributes to economic resilience by

● Assets classified into two. Real assets and Financial assets

Alan Job Jose

● Financial assets that are traded on a regulated market and predominantly

V. Components of the Capital Market

Market Participants - Individuals and institutions that actively engage in

Market Infrastructure - Physical and technological framework that

Instruments: The Indian Capital market trades in a variety of long-term

Capital Market Participants

Alan Job Jose

Detailed breakdown of investor classifications in the Indian context:

2. High-Net-Worth Individuals (HNWIs): These are individuals with a

3. NRIs (Non-Resident Indians): These are Indian citizens or people of

2. Foreign Institutional Investors (FIIs): These are institutional

3. Government and Quasi-Government Institutions: These include

4. Sovereign Wealth Funds (SWFs): These are investment funds owned

Alan Job Jose

Investment Bank Vs Merchant Bank

Licensed Intermediaries at stock market - Stockbroker

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Maintaining market order and Ensuring transparency is the reason behind

Eligibility criteria to become licensed intermediary in NSE is as follows.

Portfolio Management Services

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Capital Market infrastructure

1. Stock Exchanges: The Trading Hubs

History of Stock Exchange in India