Indian Financial System - Siescoms Weblog · PPT file · Web view ·...

Introduction

Composition

FunctionsSaving FunctionLiquidity FunctionPayment FunctionRisk FunctionPolicy Function

Defined as the market in which financial assets are created or transferred.

These assets represent a claim to the payment of a sum of money sometime in the future and/or periodic payment in the form of interest or dividend.

ClassificationMoney market(Short term instrument)

Capital markets(Long term instrument)

The most important distinction between the two:

The difference in the period of maturity.

Main Function To channelize savings into short term productive investments like working capital .

Instruments in Money MarketCall money marketTreasury bills marketMarkets for commercial paperCertificate of depositsBills of ExchangeMoney market mutual fundsPromissory Note

Part of the national money marketDay-to day surplus funds mainly of banks are tradedShort term in natureMaturity of these loans vary from 1 to 15 daysLent for 1 day: Call moneyLent for more than 1 day but less than 15 days: Notice moneyConvenient interest rateHighly liquid loan repayable on demand

Unsecured Promissory note.

Issued by well known companies with strong and high credit rating.

Sold directly by the issuers to investors or through agents like merchant banks and security houses.

Flexible Maturity

Low interest rates with compared to banks.

Imparts a degree of financial stability to the system.

Referred as note payable in accounting

It is a contract detailing the terms of a promise by one party (the maker) to pay a sum of money to the other (the payee).

The obligation may arise from the repayment of a loan or from another form of debt.

For example, in the sale of a business, the purchase price might be a combination of an immediate cash payment and one or more promissory notes for the balance.

Defined as short term deposit by way of usance promissory notes.

Greater flexibility to investors in the deployment of surplus funds.

Permitted by the RBI to banks

Maturity of not less than 3 months and upto 1 year.

Transferable in nature

Free negotiability and limited flexibility

Invest primarily in money market instruments of very high quality.

RBI and public financial institution can set it either directly or through its existing subsidiaries.

MMMFOpen EndedClose Ended

Provided resources needed by medium and large scale industries.Purpose for these resources

ExpansionCapacity ExpansionInvestmentsMergers and Acquisitions

Deals in long term instruments and sources of funds

Main Activity

Functioning as an institutional mechanism to channelize funds from those who save to those who needed for productive purpose.

Provides opportunities to various class of individuals and entities.

Primary Markets Secondary MarketsWhen companies need financial resources for its expansion, they borrow money from investors through issue of securities.

The place where such securities are traded by these investors is known as the secondary market.

Securities issued a)Preference Sharesb)Equity Sharesc)Debentures

Securities like Preference Shares and Debentures cannot be traded in the secondary market.

Equity shares is issued by the under writers and merchant bankers on behalf of the company.

Equity shares are tradable through a private broker or a brokerage house.

People who apply for these securities are: a)High networth individualb)Retail investorsc)Employeesd)Financial Institutionse)Mutual Fund Housesf)Banks

Securities that are traded are traded by the retail investors.

One time activity by the company. Helps in mobilising the funds for the investors in the short run.