Financial Instruments in India

In India, many families save money on a monthly basis from their income mainly to secure their future. Putting ones money in savings account or locker will not help the money to multiply. One can multiply their money by Investing. An individual can invest money in various financial instruments which are available in India.

Financial Instruments

International Accounting Standards defines financial instruments as any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial instruments act as channels to invest the money. There are various financial instruments available on the market currently. It acts as a tool to raise funds. For investment purpose, there are many ways to save money. An investor has to choose the best investment option to fetch the best return on the invested money.

 

 

Meaning

Financial instruments provide an efficient flow of money and transfer of capital throughout the world. These tools can be real or virtual documents representing agreement involving any monetary value. It has a monetary value, and it constitutes a legally enforceable agreement between two or more parties regarding a right to payment of money.

Types of Financial Instruments

Financial Instruments are classified into two types namely.

1. Cash Instruments - The value of the cash instruments are directly influenced and determined by the markets. These are the kind of securities which are easily transferred.

2. Derivative Instruments - The value and characteristics of derivative instruments are based on the underlying components such as assets, interest rates or indices. These can be over-the-counter derivatives or exchange-traded derivatives.

 

Types of Financial Instruments in India

1. Equities

It is a type of security that represents the ownership of a company. Equities are traded in stock markets. It can also be purchased through Initial Public Offerings (IPO), whenever a company issues shares to the public for the first time. In India, share trading actively happens in stock exchanges; prominent ones are BSE (Bombay Stock Exchange) and NSE (National Stock Exchange).

It is one of the best options to invest in equities over an extended period as it will fetch good returns. It is also subject to market-related risk, and one needs to do thorough research before investing in equities.

Equity shares constitute permanent capital for the firm and it cannot be redeemed during the lifetime of the company and as per the Companies Act of 1956, a company cannot purchase its own shares during its existence. At the time of liquidation, the equity shareholders can demand the refund of their capital amount and the same will be paid after meeting all the other prior claim including preference shareholders.

2. Mutual Funds

In India, Mutual Funds are top-rated because the initial investment amount is very less and the risk is diversified. Mutual funds allow a group of individuals to invest their money together.

The investment avenue is famous because of cost-efficiency, risk-diversification, professional management and sound regulation. The minimum amount to be invested can be as small as INR 500, and the frequency of investment is usually monthly or quarterly.

 

3. Bonds

Bonds are fixed income instruments which are issued to raise working capital. Both private entities, such as companies, financial institutions, and the central and state government institutions issue this to raise funds.

The bonds issued by the government carries the lower rate of risk but guarantees returns. The bonds issued by private institutions have high risks.

4. Deposits

Investing the money in banks or post-office is one of the standard method of savings followed in India. The risk factor involved is zero, and the return on investment is guaranteed.

 

5. Cash and Cash Equivalents

These are relatively safe and highly liquid investment options. All the securities that can be immediately converted into cash within three months are known as cash and cash equivalents. Treasury bills, gold, money market funds are cash equivalents.