A mutual fund is a trust that pools the savings of a number of investors who share

a common fiancial goal 1. The money thus collected is then invested in capital
market instruments such as shares, debentures and other securities. [The
combined holdings of shares, debentures and securities and assets the fund owns
are known as its portfolio. Thus, the fund is owned jointly by all of the unit-
holders. The income earned through these investments and the capital
appreciation realised are shared by them in proportion to the number of units
owned by them.
Money market funds These funds invest in short-term fixed income securities such
as government bonds, treasury bills, bankers’ acceptances, commercial paper and
certificates of deposit. They are generally a safer investment, but with a lower potential
return then other types of mutual funds. Canadian money market funds try to keep
their net asset value (NAV) stable at $10 per security
.
Fixed income funds These funds buy investments that pay a fixed rate of return like
government bonds, investment-grade corporate bonds and high-yield corporate bonds.
They aim to have money coming into the fund on a regular basis, mostly through
interest that the fund earns. High-yield corporate bond funds are generally riskier than
funds that hold government and investment-grade bonds.

Equity funds These funds invest in stocks. These funds aim to grow
faster than money market or fixed income funds, so there is usually a
higher risk that you could lose money. You can choose from different types
of equity funds including those that specialize in growth stocks (which don’t
usually pay dividends), income funds (which hold stocks that pay large
dividends), value stocks, large-cap stocks, mid-cap stocks, small-cap
stocks, or combinations of these.
Balanced funds These funds invest in a mix of equities and fixed income
securities. They try to balance the aim of achieving higher returns against
the risk of losing money. Most of these funds follow a formula to split
money among the different types of investments. They tend to have more
risk than fixed income funds, but less risk than pure equity funds.
Aggressive funds hold more equities and fewer bonds, while conservative
funds hold fewer equities relative to bonds.
Index funds These funds aim to track the performance of a specific index
such as the S&P/TSX Composite Index. The value of the mutual fund will
go up or down as the index goes up or down. Index funds typically have
lower costs than actively managed mutual funds because the portfolio
manager doesn’t have to do as much research or make as many
investment decisions.
A Green Shoe Option means an option of allocating shares in excess of the shares
floated in the public issue and operating a post-issue price stabilizing mechanism for a
period not exceeding 30 days. This permission has been granted to a company to be
exercised with caution through a stabilizing agent. As per this arrangement, an issue
could be over allotted to the extent of a maximum of 15% of the issue size
. Need/Importance for a GSO[7] Public Offerings may supply a large number of
securities into a market, as a result of which, there is a risk that the price of the
securities will be highly volatile immediately after the commencement of the offering.
Price volatility is likely to be even greater in the case of an Initial Public Offering (IPO)
because there is no established Secondary Market for the securities
. The purpose of an issuer and/or a selling security holder in providing an underwriter
with an over-allotment is to allow the underwriter to stabilize the after-market for the
issuer's securities in the period immediately after the public offering begins. By allowing
an underwriter to obtain additional securities covering an over-allotment and to sell
these securities to the public, an underwriter can maintain a balance between the
demand for an issuer's securities and the supply of securities available to satisfy market
demand
. TYPES OF GSO There are three types of GSO viz., Full, Partial and Reverse Green shoes.
The number of shares the underwriter buys back determines if they will exercise a
partial Green shoe or a full green shoe. A Partial Greenshoe is when the underwriters
are only able to buy back some shares before the price of the shares increases. A Full
Greenshoe occurs when they are unable to buy back any shares before the price goes
higher.
There are some guidelines related to Green Shoe option by Security & Exchange Board
of India.  An issuer company making a public offer of equity shares can avail of green
shoe option for --Stabilizing the post-listing price of its shares. –  Possibility of
allotment for the shares to the stabilizing agent at the end of stabilizing period. A
company shall appoint one of the merchant bankers from amongst the issue
management team, as a stabilizing agent who will be responsible for the price
stabilization process.  The stabilizing agent (SA) shall enter into an agreement with the
promoters or pre-issue shareholders who will be lend their shares specifying the max.
no of shares shall not be in excess of 15% of total issue size.
Data Collection: Primary Data – Sample Survey.
Secondary Data: Articles, Websites.
 Merchant banking can be defined as a skill-oriented professional service
provided by merchant banks to their clients, concerning their financial needs,
for adequate consideration, in the form of fee.

Any person, indulged in issue management business by making arrangements

with respect to trade and subscription of securities or by playing the role of
manager/consultant or by providing advisory services, is known as a merchant
banker. The activities carried out by merchant bankers are:

 Private placement of securities.

 Managing public issue of securities
 Satellite dealership of government securities
 Management of international offerings like Depository Receipts, bonds, etc.
 Syndication of rupee term loans
 Stock broking and International financial advisory services.
In India, the functions of the merchant bankers are governed by Securities and
Exchange Board of India (SEBI) Regulations, 1992.

Funtiions of merchant bank

1. Portfolio Management: Merchant banks provides advisory services to the

institutional investors, on account of investment decisions. They trade in
securities, on behalf of the clients, with the aim of providing them portfolio
management services.
2. Raising funds for clients: Merchant banking organisation assist the clients in
raising funds from the domestic and international market, by issuing securities
like shares, debentures, etc., which can be deployed for starting a new project
or business or expansion activities.
3. Promotional Activities: One of the most important activities of merchant
banking is the promotion of business enterprise, during its initial stage, right
from conceiving the idea to obtaining government approval. There is some
organisation, which even provide financial and technical assistance to the
business enterprise.
4. Loan Syndication: Loan Syndication means service provided by the merchant
bankers, in raising credit from banks and financial institutions, to finance the
project cost or working capital of the client’s project, also termed as project
finance service.
5. Leasing Services: Merchant Banking organisations renders leasing services to
their customers. There are some banks which maintain venture capital funds to
help entrepreneurs
Book Building: Every business organisation needs funds for its business
activities. It can raise funds either externally or through internal sources. When
the companies want to go for the external sources, they use various means for the
same. Two of the most popular means to raise money are Initial Public Offer
(IPO) and Follow on Public Offer.

Book Building may be defined as a process used by companies raising capital

through Public Offerings-both Initial Public Offers (IPOs) and Follow-on Public
Offers (FPOs) to aid price and demand discovery. It is a mechanism where,
during the period for which the book for the offer is open, the bids are collected
from investors at various prices, which are within the price band specified by the
issuer. The process is directed towards both the institutional investors as well as
the retail investors. The issue price is determined after the bid closure based on
the demand generated in the process,
Process :1. The Issuer who is planning an offer nominates lead merchant
banker(s) as ‘book runners’

. 2. The Issuer specifies the number of securities to be issued and the price band
for the bids.

3. The Issuer also appoints syndicate members with whom orders are to be
placed by the investors.

4. The syndicate members put the orders into an ‘electronic book’. This process
is called ‘bidding’ and is similar to open auction.

5. The book normally remains open for a period of 5 days.

6. Bids have to be entered within the specified price band.

7. Bids can be revised by the bidders before the book closes.

While book building is used to raise capital for the company’s business
operations, reverse book building is used for buyback of shares from the market.
Reverse book building is also a price discovery method, in which the bids are
taken from the current investors and the final price is decided on the last day of
the offer. Normally the price fixed in reverse book building exceeds the market
price.
A coupon rate is the yield paid by a fixed-income security; a fixed-income
security's coupon rate is simply just the annual coupon payments paid by the
issuer relative to the bond's face or par value. The coupon rate is the yield the
bond paid on its issue date. This yield changes as the value of the bond
changes, thus giving the bond's yield to maturity.

A bond's coupon rate can be calculated by dividing the sum of the security's
annual coupon payments and dividing them by the bond's par value. For
example, a bond issued with a face value of $1,000 that pays a $25 coupon
semiannually has a coupon rate of 5%. All else held equal, bonds with higher
coupon rates are more desirable for investors than those with lower coupon rates

A zero-coupon bond is a debt security that doesn't pay interest (a coupon) but
is traded at a deep discount, rendering profit at maturity when the bond is
redeemed for its full face value.

Some zero-coupon bonds are issued as such, while others are bonds that have
been stripped of their coupons by a financial institution and then repackaged as
zero-coupon bonds. Because they offer the entire payment at maturity, zero-
coupon bonds tend to fluctuate in price much more than coupon bonds.

The movement of interest rates in the markets impacts the value of a bond.
When interest rates increase, the price of a bond falls, and vice versa.
Regardless of the direction of interest rate movements in the economy, the rates
on a bond are usually fixed. These fixed rates are referred to as coupon rates,
and they determine the interest income a bond holder will receive periodically on
his or her fixed income investment. If interest rates rise, new issues will have a
higher coupon rate than existing issues. A bond with a coupon close to the yields
currently offered on new bonds of a similar maturity and credit risk is known as a
current coupon bond

A conventional bond pays interest periodically to investors until the bond

matures, at which point, investors are repaid the principal amount. Certain types
of bonds don’t pay interest; instead, the interest that accrues over the life of the
bond is paid out when the bond matures in addition to the principal. Such bonds
are referred to as deferred interest bond
1. Treasury bonds Treasuries are issued by the federal government to finance
its budget deficits. Because they're backed by Uncle Sam's awesome taxing
authority, they're considered credit-risk free. The downside: Their yields are
always going to be lowest (except for tax-free munis). But in economic downturns
they perform better than higher-yielding bonds, and the interest is exempt from
state income taxes.
2. Other U.S. government bonds :Also called agency bonds, these bonds are
issued by federal agencies, mainly (the Federal National Mortgage
Association) and (the Government National Mortgage Association). They're
different from the mortgage-backed securities issued by those same agencies,
and by (the Federal Home Loan Mortgage Corp.). Agency yields are higher
than Treasury yields because they are not full-faith-and-credit obligations of the
U.S. government, but the credit risk is considered minimal. Interest on the bonds
is taxable at both the federal and state levels, however.
4. High-yield bonds These bonds are issued by companies or financing vehicles
with relatively weak balance sheets. They carry ratings below triple-B. Default is
a distinct possibility. As a result, high-yield bond prices are more closely tied to
the health of corporate balance sheets. They track stock prices more closely than
investment-grade bond prices. "High-yield doesn't provide the same asset-
allocation benefits you get by mixing high-grade bonds and stocks,"
5. Foreign bonds These securities are something else altogether. Some are
dollar-denominated, but the average foreign bond fund has about a third of its
assets in foreign-currency-denominated debt, according to Lipper. With foreign-
currency-denominated bonds, the issuer promises to make fixed interest
payments -- and to return the principal -- in another currency. The size of those
payments when they are converted into dollars depends on exchange rates.
6. Mortgage-backed bonds Mortgage-backeds, which have a face value of
$25,000 compared to $1,000 or $5,000 for other types of bonds, involve
"prepayment risk." Because their value drops when the rate of mortgage
prepayments rises, they don't benefit from declining interest rates like most other
bonds do.7. Municipal bonds Municipal bonds -- often called "munis" are issued
by U.S. states and local governments or their agencies, and they come in both
the investment-grade and high-yield varieties. The interest is tax-free, but that
doesn't mean everyone can benefit from them. Taxable yields are higher than
muni yields to compensate investors for the taxes, so depending on your bracket,
you might still come out ahead with taxable bonds.
The Reserve Bank”s affairs are governed by a central board of directors. The
board is appointed by the Government of India for a period of four years, under
the Reserve Bank of India Act.

Main Role and Functions of RBI Monetary Authority: Formulates, implements

and monitors the monetary policy for A) maintaining price stability, keeping
inflation in check ; B) ensuring adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system: lays out parameters of

banking operations within which the country”s banking and financial system
functions for- A) maintaining public confidence in the system, B) protecting
depositors’ interest ; C) providing cost-effective banking services to the general
public.

Regulator and supervisor of the payment systems: A) Authorises setting up

of payment systems; B) Lays down standards for working of the payment system;
C)lays down policies for encouraging the movement from paper-based payment
systems to electronic modes of payments. D) Setting up of the regulatory
framework of newer payment methods. E) Enhancement of customer
convenience in payment systems. F) Improving security and efficiency in modes
of payment.

Manager of Foreign Exchange: RBI manages forex under the FEMA- Foreign
Exchange Management Act, 1999. in order to A) facilitate external trade and
payment B) promote the development of foreign exchange market in India.

Issuer of currency: RBI issues and exchanges currency as well as destroys

currency & coins not fit for circulation to ensure that the public has an adequate
quantity of supplies of currency notes and in good quality.

Developmental role : RBI performs a wide range of promotional functions to

support national objectives. Under this it setup institutions like NABARD, IDBI,
SIDBI, NHB, etc.

Banker to the Government: performs merchant banking function for the central
and the state governments; also acts as their banker.

Banker to banks: An important role and function of RBI is to maintain the

banking accounts of all scheduled banks and acts as the banker of last resort.

An agent of Government of India in the IMF.

The financial system is characterized by the presence of integrated, organized
and regulated financial markets, and institutions that meet the short term and long
term financial needs of both the household and corporate sector. Both financial
markets and financial institutions play an important role in the financial system by
rendering various financial services to the community. They operate in close
combination with each other.

The following are the four main components of Indian Financial system

1. Financial institutions
2. Financial Markets
3. Financial Instruments/Assets/Securities
4. Financial Services.

Financial institutions: Financial institutions are the intermediaries who facilitates

smooth functioning of the financial system by making investors and borrowers
meet. They mobilize savings of the surplus units and allocate them in productive
activities promising a better rate of return. Financial institutions also provide
services to entities seeking advises on various issues ranging from restructuring to
diversification plans. They provide whole range of services to the entities who want
to raise funds from the markets elsewhere. Financial institutions act as financial
intermediaries because they act as middlemen between savers and borrowers.
Were these financial institutions may be of Banking or Non-Banking institutions.

Financial Markets: Finance is a prerequisite for modern business and financial

institutions play a vital role in economic system. It's through financial markets the
financial system of an economy works. The main functions of financial markets are:
1. to facilitate creation and allocation of credit and liquidity;
2. to serve as intermediaries for mobilization of savings;
3. to assist process of balanced economic growth;
4. to provide financial convenience

Financial Instruments Another important constituent of financial system is

financial instruments. They represent a claim against the future income and wealth
of others. It will be a claim against a person or an institutions, for the payment of
the some of the money at a specified future date.

Financial Services: Efficiency of emerging financial system largely depends upon

the quality and variety of financial services provided by financial intermediaries. The
term financial services can be defined as "activites, benefits and satisfaction
connected with sale of money, that offers to users and customers, financial related
value".
 The secondary market, also called the aftermarket and follow on
public offering is the financial market in which previously
issued financial instruments such as stock, bonds, options,
and futures are bought and sold
Features : (1) It Creates Liquidity: The most important feature of the
secondary market is to create liquidity in securities. Liquidity means
immediate conversion of securities into cash. This job is performed
by the secondary market.
(2) It Comes after Primary Market: Any new security cannot be sold
for the first time in the secondary market. New securities are first
sold in the primary market and thereafter comes the turn of the
secondary market.
(3) It has a Particular Place: The secondary market has a particular
place which is called Stock Exchange. However, it must be noted
that it is not essential that all the buying and selling of securities will
be done only through stock exchange. Two individuals can buy or
sell them mutually. This will also be called a transaction of the
secondary market. Generally, most of the transactions are made
through the medium of stock exchange.
(4) It Encourages New Investment: The rates of shares and other
securities often fluctuate in the share market. Many new investors
enter this market to exploit this situation. This leads to an increase
in investment in the industrial sector of the country.

funtions : In the secondary market, securities are sold by and transferred from
one investor or speculator to another. It is therefore important that the secondary
market be highly liquid (originally, the only way to create this liquidity was for
investors and speculators to meet at a fixed place regularly; this is how stock
exchanges originated, see History of the Stock Exchange). As a general rule, the
greater the number of investors that participate in a given marketplace, and the
greater the centralization of that marketplace, the more liquid the market.
Fundamentally, secondary markets mesh the investor's preference for liquidity
(i.e., the investor's desire not to tie up his or her money for a long period of time,
in case the investor needs it to deal with unforeseen circumstances) with the
capital user's preference to be able to use the capital for an extended period of
time.
Accurate share price allocates scarce capital more efficiently when new projects
are financed through a new primary market offering, but accuracy may also
matter in the secondary market because: 1) price accuracy can reduce the
agency costs of management, and make hostile takeover a less risky proposition
and thus move capital into the hands of better managers.
 BASIS FOR SECONDARY
PRIMARY MARKET
COMPARISON MARKET

Meaning The market place for new The place where formerly
shares is called primary issued securities are
market. traded is known as
Secondary Market.

Another name New Issue Market (NIM) After Market

Type of Purchasing Direct Indirect

Financing It supplies funds to budding It does not provide

enterprises and also to funding to companies.
existing companies for
expansion and
diversification.

How many times a Only once Multiple times

security can be sold?

Buying and Selling Company and Investors Investors

between

Who will gain the Company Investors

amount on the sale of
shares?

Intermediary Underwriters Brokers

Price Fixed price Fluctuates, depends on

the demand and supply
force
the points given below are noteworthy, as far as the difference between
primary market and secondary market is concerned:

1. The securities are formerly issued in a market known as Primary Market,

which is then listed on a recognised stock exchange for trading, which is
known as a secondary market.
2. The prices in the primary market are fixed while the prices vary in the
secondary market depending upon the demand and supply of the securities
traded.
3. Primary market provides financing to new companies and also to old
companies for their expansion and diversification. On the contrary,
secondary market does not provide financing to companies, as they are not
involved in the transaction.
4. At the primary market, the investor can purchase shares directly from the
company. Unlike Secondary Market, when investors buy and sell the stocks
and bonds among themselves.
5. Investment bankers do the selling of securities in case of Primary Market.
Conversely, brokers act as intermediaries while trading is done in the
secondary market.
6. In the primary market, security can be sold only once, whereas it can be
done an infinite number of times in case of a secondary market.
7. The amount received from the securities are income of the company, but
same is the income of investors when it is the case of a secondary market.
8. The primary market is rooted in a particular place and has no geographical
presence, as it has no organisational setup. Conversely, the Secondary
market is present physically, as stock exchnage, which is situated in a
particular geographical area.
An unorganised arena of banks, financial institutions, bill brokers, money
dealers, etc. wherein trading on short-term financial instruments is
being concluded is known as Money Market. These markets are also known by
the name wholesale market.
A type of financial market where the government or company securities are
created and traded for the purpose of raising long-term finance to meet the
capital requirement is known as Capital Market.

The Capital Market includes both dealer market and auction market. It is broadly
divided into two major categories: Primary Market and Secondary Market.

Primary Market: A market where fresh securities are offered to the public for
subscription is known as Primary Market. Secondary Market: A market where
already issued securities are traded among investors is known as Secondary
Market.

Difference between

1.The place where short-term marketable securities are traded is known as

Money Market. Unlike Capital Market, where long-term securities are created
and traded is known as Capital Market.

2.Capital Market is well organised which Money Market lacks.

3.The instruments traded in money market carry low risk, hence, they are safer
investments, but capital market instruments carry high risk.

4.The liquidity is high in the money market, but in the case of the capital market,
liquidity is comparatively less.

5.The major institutions that work in money market are the central bank,
commercial bank, non-financial institutions and acceptance houses. On the
contrary, the major institutions which operate in the capital market are a stock
exchange, commercial bank, non-banking institutions etc.

6.Money market fulfils short-term credit requirements of the companies such as

providing working capital to them. As against this, the capital market tends to
fulfil long-term credit requirements of the companies, like providing fixed capital
to purchase land, building or machinery.

7.Capital Market Instruments give higher returns as compared to money market

instruments.
Capital market plays an important role in mobilising resources, and diverting
them in productive channels. In this way, it facilitates and promotes the process of
economic growth in the country.

Various functions and significance of capital market are discussed below:

Link between Savers and Investors: The capital market functions as a link
between savers and investors. It plays an important role in mobilising the savings
and diverting them in productive investment. In this way, capital market plays a
vital role in transferring the financial resources from surplus and wasteful areas to
deficit and productive areas, thus increasing the productivity and prosperity of the
country.
Encouragement to Saving: With the development of capital, market, the
banking and non-banking institutions provide facilities, which encourage people
to save more. In the less- developed countries, in the absence of a capital market,
there are very little savings and those who save often invest their savings in
unproductive and wasteful directions, i.e., in real estate (like land, gold, and
jewellery) and conspicuous consumption.
Encouragement to Investment: The capital market facilitates lending to the
businessmen and the government and thus encourages investment. It provides
facilities through banks and nonbank financial institutions. Various financial
assets, e.g., shares, securities, bonds, etc., induce savers to lend to the government
or invest in industry. With the development of financial institutions, capital
becomes more mobile, interest rate falls and investment increases..

Promotes Economic Growth: The capital market not only reflects the general
condition of the economy, but also smoothens and accelerates the process of
economic growth. Various institutions of the capital market, like nonbank financial
intermediaries, allocate the resources rationally in accordance with the
development needs of the country. The proper allocation of resources results in the
expansion of trade and industry in both public and private sectors, thus promoting
balanced economic growth in the country.
Stability in Security Prices: The capital market tends to stabilise the values of
stocks and securities and reduce the fluctuations in the prices to the minimum. The
process of stabilisation is facilitated by providing capital to the borrowers at a lower
interest rate and reducing the speculative and unproductive activities.

Benefits to Investors: The credit market helps the investors, i.e., those who
have funds to invest in long-term financial assets, in many ways: It brings together
the buyers and sellers of securities and thus ensure the marketability of
investments, By advertising security prices, the Stock Exchange enables the
investors to keep track of their investments and channelize them into most
profitable lines,
The money market is a market for short-term instruments that are close substitutes
for money. The short term instruments are highly liquid, easily marketable, with little
change of loss. It provides for the quick and dependable transfer of short term debt
instruments maturing in one year or less, which are used to finance the needs of
consumers, business agriculture and the government. The money market is not one
market but is “a collective name given to the various form and institutions that deal with
the various grades of near money.”
Instruments of the Money Market:
Promissory Note: The promissory note is the earliest types of bill. It is a
written promise on the part of a businessman today to another a certain sum of
money at an agreed future data. Usually, a promissory note falls due for
payment after 90 days with three days of grace. A promissory note is drawn by
the debtor and has to be accepted by the bank in which the debtor has his
account, to be valid. The creditor can get it discounted from his bank till the date
of recovery. Bill of Exchange or Commercial Bills: Another instrument of
the money, market is the bill of exchange which is similar to the promissory
note, except in that it is drawn by the creditor and is accepted by the bank of the
debater. The creditor can discount the bill of exchange either with a broker or a
bank. The rest of the procedure is the same as for the internal bill of exchange.
Promissory notes and bills of exchange are known as trade bills.
Treasury Bill: But the major instrument of the money markets is the
Treasury bill which is issued for varying periods of less than one year. They are
issued by the Secretary to the Treasury in England and are payable at the Bank
of England. In India, the treasury bills are issued by the Government of India at
a discount generally between 91 days and 364 days. There are three types of
treasury bills in India—91 days, 182 days and 364 days.
Call and Notice Money: There is the call money market in which funds are
borrowed and lent for one day. In the notice market, they are borrowed and
lent upto 14 days without any collateral security. But deposit receipt is issued to
the lender by the borrower who repays the borrowed amount with interest on
call. In India, commercial banks and cooperative banks borrow and lend funds
in this market but mutual funds and all-India financial institutions participate
only as lenders of funds. Inter-bank Term Market: This market is exclusively
for commercial and cooperative banks in India, which borrow and lend funds
for a period of over 14 days and upto 90 days without any collateral security at
market-determined rates.
Repo Rate: The term ‘Repo’ stands for ‘Repurchase agreement’. Repo is form of
short-term, interest-bearing and collateral-backed borrowing. Interest rate for
such borrowings is termed as repo rate. Repo is basically a short-term money
market instrument which is used to raise capital for the shorter-term. In Indian
Banking terms, repo rate is the rate at which Reserve Bank of India lends money
to all the commercial banks in the country in the event of scarcity of
funds. Current repo rate is 6.25%.
Reverse Repo Rate: Reverse repo is an opposite contract to the Repo Rate.
Reverse Repo rate is the rate at which Reserve Bank of India borrows funds from
all the other commercial banks in the country. In other words, it is the rate at
which commercial banks in India park their excess money with Reserve Bank of
India for a short-term period. Current reverse repo rate is calculated at 6%.

IMPORTANCE : Repo and reverse repo are the monetary measures used by the
Reserve Bank of India to deal with the deficiency of funds and liquidity in the
market. It is one of the vital money control mechanisms used by the central bank
of the country.

Bank lending and investment rates are decided based on the repo rate and reverse
repo rate.

Repo and reverse repo are the most effective and efficient tools used by the
Reserve Bank of India to achieve price stability and to boost economic
development. Repo rate and reverse repo rate are among the most crucial
monetary policy instruments available to the RBI.

Liquidity Regulator: Under the liquidity framework designed by Reserve Bank of

India, many facilities are offered to commercial banks to meet their requirement of
immediate liquidity or deficiency of funds. The main motive of the liquidity
framework is to avoid any liquidity crisis in the Indian banking system. This popular
system of liquidity framework is generally known as repo. In the similar way,
Reserve Bank of India has a framework for surplus funds/cash in the banking
system which ensures there is no excess liquidity in the system.

Price Stability: Reserve Bank of India has to control the rate of inflation and
stimulate the economic growth and strike a balance between both inflation and
economic growth by revising the repo rate on a half yearly or quarterly basis. It is
important for the country’s economic growth. And it’s equally important to avoid the
higher rate of inflation in the country. This is where repo rate and reverse repo
plays a crucial role by helping Reserve Bank of India strike a balance between
both inflation and economic growth.
 Equity market consists of funds that shareholders invest in a company plus a
certain amount of profit earned by them that is retained by the company for further
growth and expansion.
Equity is a primary asset class when it comes to investing and diversifying one’s
portfolio. Trading in equity needs in-depth analysis and research of
the share market, services that Angel Broking offers to all of its investors.
Additionally, derivatives allow equity to diversify beyond just shares into securities
such as bonds, commodities and currencies.

Benefits of Equity

 Share market investments, in comparison to other types of assets, have given

one of the best returns during inflation. This enables investors to maintain their
current lifestyles without cutting costs even when the prices of goods are steadily
increasing.
 Equity, while being a risky investment, offers higher returns than a savings account
or a fixed deposit because the profit that may be earned is virtually unlimited
 It is possible to minimize risks and maximize profits through the use of equity
derivatives, specifically by trading in the Options market

Types of Equity Markets

 Primary Market: Every company that proposes to go public must come out with
an initial public offering (IPO). During the IPO, the company offers a certain portion
of its equity to the public. After the closing of the IPO, the shares are listed on one
of the stock exchanges, which are an important component of the stock market.
The primary exchanges in India are the National Stock Exchange (NSE) and the
Bombay Stock Exchange (BSE).

 Secondary Market: After the listing of the IPO shares, these are traded on the
secondary market. This platform offers the initial investors an option to exit their
investments. In addition, investors who failed to procure shares during the IPO can
purchase these from the secondary market. Trading in the Indian stock market is
commonly done through brokers. The brokers act as intermediaries between the
stock exchanges and the investors.

Equity for a Shareholder Apart from knowing the value of equities in which one
has invested, it is also important to know the value of personal share of equity,
which may be calculated by subtracting total liabilities owed from total assets
owned.

Equity = value of assets – value of liabilities

Debt comprises of money borrowed by an outside party for a certain period of time to
meet any requirement. Obviously the person lending the money expects a return on the
same, and this is paid out in the form of interest.There are a few parameters which you
would need to look at while judging what option to pick from the basket of products
available. These would be yield, taxation, duration, lock in period to name a few.

TYPES OD DEBT Fixed deposits are debt investments with a pre defined tenure and
rate of return. They are arguably considered to be the safest form of investment for
majority of Indians. Though they generally do not have a lock-in, but premature
withdrawal reduces the rate of return. The rate of return tends to be higher for longer
durations, though it is not necessarily so at all times. Fixed deposits can be issued either
by banks or by companies.

Gilt funds invest in government bonds of a long tenure, with an average maturity of 7-10
years. These are obviously very safe as they are backed by government of India, however
due to the long tenure they are subject to interest rate risk, and the value of bond holdings
could decrease if interest rates rise in the future. However, they do provide a regular
source of income through dividends which are declared consistently every year.

Liquid funds As the name suggests liquid funds are meant to maintain client’s liquidity
while offering better returns than bank deposits. The average maturity of these funds is
much lower at about 45-90 days, as they invest in treasury bills or short term debt papers.
The idea here is to park your funds while deciding on better opportunities or with an idea
of maintaining the liquidity. Fixed Maturity Plans The concept of a fixed maturity plan
is not entirely different from a fixed deposit. The products have a fixed life, after which
the amount has to be repaid with the interest. The amount has to remain in the fund for
the entire duration and premature exit would invite quite large exit loads. They offer
fairly decent returns, often exceeding return on fixed deposits by a small margin.
Durations range from above a month to 3 years or more.
A Central Bank is an integral part of the financial and economic
system. They are usually owned by the government and given certain
functions to fulfil. These include printing money, operating monetary
policy, lender of last resort and ensuring the stability of financial
system.

ROLE AND FUNTIONS Issue money. The Central Bank will have responsibility for
issuing notes and coins and ensure people have faith in notes which are printed, e.g.
protect against forgery. Printing money is also an important responsibility
because printing too much can cause inflation.

Lender of Last Resort to Commercial banks. If banks get into liquidity shortages then
the Central Bank is able to lend the commercial bank sufficient funds to avoid the bank
running short. This is a very important function as it helps maintain confidence in the
banking system. If a bank ran out of money, people would lose confidence and want to
withdraw their money from the bank.

Lender of Last Resort to Government. Government borrowing is financed by selling

bonds on the open market. There may be some months where the government fails to sell
sufficient bonds and so has a shortfall. This would cause panic amongst bond investors
and they would be more likely to sell their government bonds and demand higher interest
rates. However, if the Bank of England intervene and buy some government bonds then
they can avoid these ‘liquidity shortages’.

Target growth and unemployment. As well as low inflation a Central Bank will
consider other macroeconomic objectives such as economic growth and unemployment.
For example, in a period of temporary cost-push inflation, the Central Bank may accept a
higher rate of inflation because it doesn’t want to push the economy into a recession.

Operate monetary policy/interest rates. The Central Bank set interest rates to target
low inflation and maintain economic growth. Every month the MPC will meet and
evaluate whether inflationary pressures in the economy justify a rate increase. To make a
judgement on inflationary pressures they will examine every aspect of the economic
situation and look at a variety of economic statistics to get a picture of the whole
economy

Unconventional monetary policy. The Central Bank may also need to use other
monetary instruments to achieve macroeconomic targets. For example, in a liquidity trap,
lower interest rates may be insufficient to boost spending and economic growth. In this
situation, the Central Bank may resort to more unconventional monetary policies such
as quantitative easing. This involves creating money and using this money to buy bonds;
the aim of quantitative easing is to reduce interest rates and boost bank lending
ROLE OF FINANCIAL SYSTEM IN THE ECONOMIC DEVELOPMENT OF THE COUNTRY
An effective financial system in the country offers a variety of financial products and
services to suit the different requirements of the investing public and corporate. The
financial system plays the following role in the economic development of the country &
provides the following benefits

1. Help to form huge financial resources through mobilization of savings of the public
and corporate
2. Promote investment in agriculture, manufacturing and service industries by providing
the necessary finance for the cultivation of land, production of goods and provision of
services
3. Transfer surplus funds from one part of the economy to another keeping in mind the
national priorities
4. Encourage people to divert their physical assets into financial assets and make it
available for balanced growth of trade, commerce, agriculture, manufacturing and
service industries
5. Provide mechanism to control the risk and uncertainties 6. Multiply the monetary
resources by the process of credit creation
7. Provide a variety of financial assets to suit the different needs of investing public and
corporate 8. Encourage entrepreneurial skills among the public 9. Increase the growth
rate of the economy

Functions Pooling of Funds In a financial system, the Savings of people are

transferred from households to business organizations. With these production
increases and better goods are manufactured, which increases the standard of
living of people. Capital Formation Business require finance. These are made
available through banks, households and different financial institutions. They
mobilize savings which leads to Capital Formation.
Facilitates Payment The financial system offers convenient modes of payment
for goods and services. New methods of payments like credit cards, debit cards,
cheques, etc. facilitates quick and easy transactions.
Provides Liquidity In financial system, liquidity means the ability to convert into
cash. The financial market provides the investors the opportunity to liquidate their
investments, which are in instruments like shares, debentures, bonds, etc. Price
is determined on the daily basis according to the operations of the market force
of demand and supply.
Short and Long Term Needs The financial market takes into account the
various needs of different individuals and organizations. This facilitates optimum
use of finances for productive purposes.
Risk Function The financial markets provide protection against life, health and
income risks. Risk Management is an essential component of a growing
economy.
Foreign Exchange Market and its Functions
The foreign exchange market is a market in which foreign exchange
transactions take place.
Transfer of Purchasing Power The Primary function of a foreign exchange
market is the transfer of purchasing power from one country to another and
from one currency to another.
The international clearing function performed by foreign exchange markets
plays a very important role in facilitating international trade and capital
movement.
Provision of credit The credit function performed by foreign exchange markets
also plays a very important role in the growth of foreign trade, for international
trade depends to a great extent on credit facilities. Exporters may get pre shipment
and post shipment credit. Credit facilities are available also for importers. The
Euro dollar market has emerged as a major international credit market.

Provision of Heding Facilities The other important of the foreign exchange

market is to provide hedging facilities. Heding refers to covering of foreign trade
risks, and it provides a mechanism to exporters and importers to guard themselves
against losses arising from fluctuations in exchange rates.

Methods of Affecting International Payments There are important methods to

effect international payments.
Transfers Money may be transferred from a bank in one country to a bank in
another part of the world be electronic or other means

Cheques and Bank Drafts International payments may be made be means of

cheques and bank drafts. The latter is widely used. A bank draft is a cheque drawn
on a bank instead of a customer’s personal account. It is an acceptable means of
payment when the person tendering is not known, since its value is dependent on
the standing of a bank which is widely known, and not on the credit worthiness of
a firm or individual known only to a limited number of people.

Foreign Bill of Exchange A bill of exchange is an unconditional order in writing,

addressed by one person to another, requiring the person to whom it is addressed to
pay a certain sum or demand or on a specified future date. There are two important
differences between inland and foreign bills. The date on which an inland bill is
due for payment is calculated from the date on which it was drawn, but the period
of a foreign bill runs fro m the date on which the bill was accepted
HEDGING:
Financial activities
 ~ Hedging covers the risk arising out of changes in the exchange rate. It is
especially essential for firms having large amounts receivables or
commitments to pay in foreign currencies.
 ~ The strategy of hedging involves increasing the currency that is likely to
appreciate and decreasing the currency that is likely to depreciate.
 ~ It also involves decreasing liabilities in the currency that is likely to
appreciate and increasing liabilities in the currency that is likely to
depreciate.
*SPECULATION:
 ~ Speculation involves purchase and sale of foreign exchange in the
forwards market with the intention of making profit by taking advantage of
changes in foreign exchange rates.
 ~ They speculate on the basis of their own calculation of the difference
between the forward rate and spot rate that may prevail at a future date.
 ~ Speculators try to minimise their loss by entering in spot and forward
agreements simultaneously.
 ~ Speculation may have stabilising or destabilising effect.
 ~ Stabilising speculation refers to purchase of foreign currency when the
domestic price of a foreign currency when the domestic price of a foreign
currency falls with the expectation of its increase in the future.
 ~ Destabilising speculation refers to sale of foreign currency when the
exchange rate falls with the expectation that it would fall further. This
magnifies exchange rate fluctuations and proves highly disruptive to the
international flow of trade and investment.
*ARBITRAGE:
 ~ Arbitrage refers to purchase of an asset in a low price market and its sale
in a higher price market.
 ~ This process leads to equalisation of price of an asset in all the segments of
the market.
 ~ Arbitrageurs take advantage of the different exchange rates prevailing in
various foreign exchange markets due to different interest rates.
 ~ They purchase foreign currency from the foreign exchange market with
lower exchange rate and sell the same in market with a higher exchange rate.
 ~ Arbitrage is also possible within the country where two banks offer two
different bids and asking rate.
 ~ When arbitrage involves only two currencies or two countries, it is called
two-point arbitrage. It increases the supply of dearer currency.
A financial intermediary is an institution or individual that serves as a
middleman among diverse parties in order to facilitate financial transactions.
Common types include commercial banks, investment banks, stockbrokers,
pooled investment funds, and stock exchanges. Financial intermediaries
reallocate otherwise uninvested capital to productive enterprises through a
variety of debt, equity, or hybrid stakeholding structures.[1][2]
Through the process of financial intermediation, certain assets or liabilities are
transformed into different assets or liabilities.[2] As such, financial intermediaries
channel funds from people who have surplus capital (savers) to those who
require liquid funds to carry out a desired activity (investors).[3]
A financial intermediary is typically an institution that facilitates the channeling
of funds between lenders and borrowers indirectly.[4] That is, savers (lenders)
give funds to an intermediary institution (such as a bank), and that institution
gives those funds to spenders (borrowers). This may be in the form
of loans or mortgages.
1. Funtions Creditors provide a line of credit to qualified clients and collect
the premiums of debt instruments such as loans for financing homes,
education, auto, credit cards, small businesses, and personal needs.
Converting short-term liabilities to long term assets (banks deal with large
number of lenders and borrowers, and reconcile their conflicting needs)
2. Risk transformation[citation needed]
Converting risky investments into relatively risk-free ones. (lending to
multiple borrowers to reduce the risk)
3. Convenience denomination
Matching small deposits with large loans and large deposits with small
loans
Types

 Banks
 Mutual savings banks
 Savings banks
 Building societies
 Credit unions
 Financial advisers or brokers