Capital Markets

Capital Market is one of the significant aspect of every financial market. Capital Market is a market for financial assets which have a long or indefinite maturity. It consists of financial institutions like IDBI, ICICI, UTI, LIC, etc. A capital market is a market for securities (debt or equity), where business enterprises companies and government can raise long term funds. Money is provided for periods longer than a year. The capital market includes the stock market (equity) and the bond market (debt)

            Functions and role of the Capital Market

1. Speed up Economic Growth and Development: 

Capital Market enhances production and productivity in the national economy. It makes funds available for long period of time. It helps in research and development

2. Service Provisions:

Capital Market provides various types of services. It includes long term and medium term loans to industry, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum.

3. Proper Regulations Of Funds:

Capital Markets not only helps in liquidity, but it also helps in proper allocation of these resources. It can direct funds in a qualitative manner.

4. Capital Formation:

Capital Market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. It generates savings. The savings are made available to various segments such as agriculture, industry etc. This helps in increasing capital formation.

Capital Markets can be classified as:

1. Primary Markets

2. Secondary Markets

Primary Market:

Primary Market is a market to raise money from public through IPOs (Initial Public Offerings). Companies need money to expand their businesses and public helps the company by subscribing in the shares offered by the company. By investing in the share capital of the company, investors become part owners of the company. Primary market is also known as "new issue market" (NIM).

              Features of Primary Market

The primary market is the market where the securities are sold for the first time. The securities are issued by the company directly to investors. The primary market performs the crucial function of facilitating capital formation in the economy. The financial assets sold can only be redeemed by the original holder.

Secondary Market:

Secondary Market is vital to an efficient and modern capital market. The secondary market is simply a place where existing securities are bought and sold. The secondary market is further divided into equity and debt markets. Stocks are traded in the equity market, while corporate bonds are traded n debt market.

CREDIT RATING

Credit rating is primarily intended to systematically measure credit risk arising from transactions between lender and borrower. Credit risk is the risk of a financial loss arising from the inability of the borrower to meet the financial obligations towards its creditor.

In India, it is mandatory for credit rating agencies to register themselves with SEBI under SEBI Regulations 1999. There are 5 SEBI registered credit rating agencies in India, namely, CRISIL, ICRA, CARE etc which provide a rating on various categories of debt instruments.

Credit rating agencies assess the credit quality of debt issuers, on the basis of a number of quantitative and qualitative factors.

                            Rating Symbols

The ranking of credit quality is usually done with the help of rating symbols, which broadly classify instruments into investment grade. CRISIL'S credit rating falls under three categories: long term, short term and fixed deposit ratings.

High Investment Grades

AAA - (Triple A) Highest Safety

Debentures rated 'AAA' offers highest safety of timely payment of interest and principal. Though the circumstances can change the degree of safety.

AA - (Double A) High Safety

Debentures rated 'AA' offers high safety of timely payment of interest and principal. They differ in safety from 'AAA' issues only marginally.

Investment Grades

A- Adequate Safety

Debentures rated 'A' are judged to offer adequate safety of timely payment of interest and principal. However, changes in in circumstances can adversely affect such issues more than those in higher rated categories.

BBB - (Triple B) Moderate Safety

Debentures rated 'BBB' are judged to offer moderately safety of timely payment of interest and principal for the present; however, changing circumstances are more likely to happens and weakens the capacity to pay interest and repay principal than for debentures rated in higher rated categories.

Speculative Grades

BB (Double B) Inadequate Safety

Debentures rated 'BB' are judged to carry inadequate safety and principal, while there are less chances of default as compared to other speculative grades debentures in the immediate future.

B - High Risk

Debentures rated 'B' are judged to have greater susceptibility to default, while currently interest and principal payments are met. Circumstances can change and can leads to the lack of ability or willingness to pay, interest or principal.

C - Substantial Risk

The timely payment of interest and principal is possible only if favourable circumstances continue.

D - Default

Debentures rated 'D' are in default and in areas of interest or principal payments or are expected default on maturity. Such debentures are extremely speculative. 

Investment Plans

Investment plans generally refers to the services that the funds provide to investors offering different ways to invest or reinvest. Investment Plans are generally the different methods by which investor can invest in a fund. The famous amongst all investment plans are SIP(Systematic Investment Plan).
Some of investment plans offered by mutual funds in India are:

1. Automatic Reinvestment Plans (ARP)
2. Systematic Withdrawal Plans (SWP)
3. Systematic Transfer Plans (STP)
4. Value Averaging Investment Plan (VIP)
5. Systematic Investment Plans (SIP)

          Definitions Of Various Investment Plans

1. Automatic Reinvestment Plans (ARP) -  Mutual Funds generally offer two options under the same scheme - the Dividend Option and the Growth Option. The Growth Option or the Automatic Reinvestment Plan allows the investor to reinvest in additional units the amount of dividends or other distributions made by the fund, instead of receiving them in cash. Reinvestment takes place at the ex-dividend NAV. The ARP ensures that the investor reaps the benefit of compounding in their investments.

2. Systematic Withdrawal Plans (SWP) -  It provides the benefit of a regular income. It allows the investor to make systematic withdrawals from his fund investment account on a periodic basis. The investor must withdraw a specific minimum with the facility to have withdrawal amounts sent to him. The investor is usually required to maintain a minimum balance in his fund account under this plan. Investors should note that SWPs are different from Monthly Income Plans.

3. Systematic Transfer Plans (STP) -  These plans allow the investor to transfer on a periodic basis a specified amount from one scheme to another within the same fund family - meaning two schemes managed by the same AMC and belonging to the same fund. It is necessary for the investor to maintain a minimum balance in the scheme from which transfers are made. The services allows the investor to manage his investments actively to achieve his objectives. Many funds do not charge any transaction fees for this service.

4. Value Averaging Investment Plan (VIP) -  Value averaging is a technique of adding to an investment portfolio to provide greater return. Value averaging is a formula based investment technique where a mathematical formula is used to guide the investment of money into a portfolio over time. In periods of market declines, the investor contributes more, while in periods market climbs, the investor contributes less. After the investment has over-performed, the investor will be required to buy less or sell high. After the investment has under-performed, the investor will be required to buy more. Some research suggests that the method results in higher results at a similar risk, especially for high market variability and long time horizons.