in the 25-35 years age group may plan for purchase of a house and vehicle, an individual

belonging to the age group of 35-45 years may plan for children’s education and children’s
marriage, an individual in his or her fifties would be planning for post-retirement life. The
investment portfolio then changes depending on the capital needed for these requirements.

1.2.2 Institutions 
to the employees post their retirement. The management of pension funds may be in-house or
through some financial intermediary. Pension funds of large organizations are usually very
large and form a substantial investor group for various financial instruments.

1.2.2.3 En d o w m e n t f u n d s  

Endowment funds are generally non-profit organizations that manage funds to generate a
steady return to help them fulfill their investment objectives. Endowment funds are usually
markets etc.) to earn riskless profits arising out of the price differential if they exist.

Another category of investors include day-traders who trade in order to profit from intra-day
price changes. They generally take a position at the beginning of the trading session and
square off their position later during the day, ensuring that they do not carry any open position
to the next trading day. Traders in the markets not only invest directly in securities in the so-
called cash markets, they also invest in derivatives, instruments that derive their value from
to invest for a certain minimum investment period, for example in India, the Post Office savings
or Government small-saving schemes like the National Savings Certificate (NSC) have a
minimum maturity of 3-6 years.

Investment horizon also facilitates in making a decision between investing in a liquid or relatively
illiquid investment. If an investor wants to invest for a longer period, liquidity costs may not be
a significant factor, whereas if the investment horizon is a short period (say 1 month) then the
CHAPTER 2: Financial Markets

2.1 Introduction

There are a wide range of financial securities available in the markets these days. In this
chapter, we take a look at different financial markets and try to explain the various instruments
earlier, institutions a
like individuals or othe
professionally by fun
funds, insurance comp
capital firms and othe

Box No. 1.1:

The Indian financia
foreign institutional
comprising the th
companies, with the
 institutions has rise

1.2.2.1 M u t u a l f u n

Individuals are usual

investment outlook o
changes taking place
size to manage, it m
various possible inves
Instead, they could re
funds within a broad
to pre-specified, broa
initiatedremunerations
whose by a non-refu
from the funds, after
(specific or general) an
individual investors i
by charitable organiz
depending on their i
The investment policy
overall strategy they
1.2.2.4 I n s u r a n c e
1.2.2.2 P e n s i o n f u
Insurance companies
Pension funds are
by policyholders to po
funds of the employee
of insurance polices
and employees during
assurance or endowm
along with the death b
The investment strate
amount of future cla
towards risks and the
as well as meeting pe

1.2.2.5 B a n k s  

Assets of banks con

comprise of various f
what is called as the
(rate at which banks
not lend 100% of the
the deposits as cash
Government securitie
1.3 Constra
Cash Reserve Ratio (C
by the Reserve
Portfolio Bank
managemen
constraint
In addition (limits) wit
to the broa
profile,
based on thethe
time horiz
objectiv
portfolio advisor or
speculators and arbitm
designing the portfolio
already hold, specula
risk,
take cash levels man
simultaneous
We provide a quick o
broad categories of in
1.3.1 Liquidity

In investment deci
ease of an asset to be
different parameters,
volume of the securit
measures the units t
transaction needed t
characterized by high
generally result in low
impact
1.3.2 cost (liquidity
Investme
expected return.
The investment horiz
1.3.3
investedTaxation
in a particula
horizon helps in secu
The investment decis
desired risk exposure
concerned with the ne
with low risk, like
subject to lower tax fixe
look at riskier assets
returns. The followin
higher for longer inve
Table 1.1:
due to the high volati
Asset Typ
 A 10%
B 8%

Although asset A carr

for asset B and henc
cases taxation benefi
taxation benefits sho

1.4 Goals of

There are specific nee

marriage / education
demands for funds.
Financial markets can A
needs. Similarly,
in the money marketther
for a pension fund the
Capital markets, in c
and equities.
In addition to There
the few
capital markets.
knowledge (investors
investment size (e.g
Both bond market and
regulatory provisions
instruments are gene
etc. which also serve
Money market instru
further classified int
are mainly futures,
and bonds.

2.2 Primary

A primary market is t
from investors via iss
public in the primary
time, it is called an In
of a category that is a

Example: Reliance Po
Reliance Power Ltd. o
a Follow-up Offering
available in the secon

It is generally easier
the security is actual
case of an IPO it is ve
security. It is in the i
there is a risk of failur
issue is underpriced,
a price lower than its
About Press Blog People Papers Topics Academia Biology Academia Engineering Academia Medicine Job Board We're Hiring! Help Center

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