What are Different Financial Instruments Available for Investment in the Indian Capital Market?

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Equirus Wealth

23 Dec 2022 5 min read

Investment#Stock Market#Mutual Funds#Investment

The Indian capital market is a well-liked investment option that offers several chances to generate profitable returns and build wealth over time. Additionally, short-term trading of financial products is an option for investors looking for rapid gains. You can select from a variety of financial products as an investor or trader. Let's take an overview of the different kinds of instruments available for investment in the stock markets.

What are financial instruments of Capital Market?

An instrument is a two-party financial contract that may be exchanged and settled. This agreement creates a financial obligation for the other party and an asset for the buyer (the seller). You should be aware, nevertheless, that not all financial products may be traded on the stock exchange. There are specific instruments that are inherently volatile. They provide returns in the form of capital appreciation and other regular income in the form of interest or dividends.

Financial instruments available for investment in Indian capital markets

  1. Mutual funds:

A mutual fund is a pool of funds from different investors, predominantly retail investors. The funds so collected are subsequently invested in market-available securities such as stocks, bonds, money market instruments, and other securities. It gives investors a chance to make relatively inexpensive investments in diversified, professionally managed securities. You can choose to have these funds managed by knowledgeable portfolio managers who will carefully evaluate their investments. The investments are aligned with the scheme investment document. As an investor, you need to assess the risk–return profile of the fund before committing your money. Mutual funds are not directly traded in the capital markets. However, they are invested in instruments that trade in the equity markets.

  1. ETFs (Exchange-traded funds):

ETFs are identical to mutual funds, with the main distinction being that ETFs are exchanged on the stock market. ETFs hold assets such as stocks, bonds, foreign currency, or commodities depending upon the mandate that they were registered with. They are traded on the stock exchange during regular trading hours. Unlike mutual funds, which are marked to market, they trace the prices of the underlying assets on a real-time basis. Thus the volatility is higher compared to mutual funds. ETFs have a significantly lower cost ratio. Due to their registration with the Securities and Exchange Board of India (SEBI), they are governed under the SEBI regulation. Mutual funds fall under the purview of AMFI (Association of mutual funds of India).

  1. Equity stocks:

Equities, which are among the most actively traded financial products on the exchange, represent a stake in the company's ownership. The investment community prefers them due to their ability to provide higher returns over the long haul. They are laced with volatility which indicates that these instruments also have a downside. They are categorized under risky assets. Here are the key features of equity stocks:

  • Provides part-ownership in the company.
  • High liquidity enables the easy sale of shares in the market.
  • Inherent volatility offers investors short-term gains based on price fluctuations.

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  1. Derivatives:

Derivatives are financial products whose value is derived from one or more underlying assets, such as stocks, interest rates, currencies, etc. They give the derivative holder the right to purchase or sell a certain amount of the underlying asset on a particular day in the future at a pre-determined price. There are different types of derivatives, such as futures, forward contracts, and options. Forward contracts are unorganized and conducted over the counter. They are usually conducted with agricultural commodities as their underlying asset. Future contracts are conducted via the stock exchange and are regulated. They provide the owner of the contract the right to buy or sell on a future date at a pre-determined price. The other type of popular derivatives are options – call option, which provides the owner of the option the right to buy the underlying asset at a pre-determined price on a future date; put option provides the owner of the option the right to sell the underlying asset at a pre-determined price on a future date.

  1. Debt securities: Debt instruments are securities issued by governments or corporates to raise money. Interest is paid on these instruments at regular intervals. The principal amount is repaid at face value at the end of the contract period. The debt instruments could be secured or unsecured.
    1. Bonds: Large corporations, as well as the Central and State governments, issue these fixed-income debt instruments to generate money. A guarantee or a tangible asset may support them. There are several, including floating bonds, bonds tied to inflation, and more.
    2. Debentures: Corporate entities issue debentures to raise money from the general public and assemble funds. Debentures are often issued to raise money for a specific purpose and are usually unsecured.

Depending on your risk profile, you can choose the right investments aligned with your financial goals.

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