INTRODUCTION

The investment industry exists to serve its customers. There are two main groups of
customers – investors and security issuers. Investors may be private individuals,
charities, companies, banks, collective investment schemes such as pension funds
and insurance funds, central and local governments or “supranational institutions”
such as the World Bank.

Investors in turn have investment objectives, which may be to increase wealth

(capital growth) or to provide income. Some investors will have only one of these
objectives, some will have both. For example, a high earning private individual
probably has all the income that he or she needs from employment, and wishes to
invest surplus cash to provide capital growth. A charity, however, may need the
maximum possible income that it can get from its investments in order to fund its
activities.

There are four main classes of financial instrument that investors make use of to
achieve either income or capital growth. These are:

Equities, also known as stocks or sharesDebt instruments, also known

as bonds or billsCashDerivatives.

Equities and debt instruments are collectively known as securities. In order for
there to be any securities for the investor to invest in, then some organisation,
such as a company, a bank, a government or a supranational institution, has to
issue securities. Securities issuers are the other main customer group, and the
reason that securities ...

DEFINITION..

IAS 32, Financial Instrument: Presentation]. These three terms all have specific
definitions that help entities determine which items should be accounted for as
financial instruments described in detail through this post.

Back to definition of financial instrument mentioned on the paraprace of this post;

this definition reflects the basic accounting equation that states that equity
equals assets less liabilities.

TYPES OF FINANCIAL INSTRUMENTS..

1. Equities

Equities are the type of security where ownership in a company can be represented.
Equities are traded (bought and sold) in the stock market. In India share trading
actively takes place in NSE and BSE. Some people trade on a daily basis as their
profession, whereas normal investors invest in stock market and hold a stock for
couple of months/years to book their profit.

Equities give a good amount of return on investment among all the other
instruments, but there is also a substantial risk in investing in equities, if you
invest without knowledge. Getting trained in stock trading and analysis can help
you earn good amount of side income.

2. Futures and Options

Derivatives Instruments are a Financial Contracts which solve the primary purpose
of hedging the asset price fluctuation. It Derives value from its underlying
assets, hence it is called as derivatives. There are various types of derivative
used world wide, but in India currently we have Two Exchange Traded Derivatives
namely Futuresand Options

Apart form hedging, trader uses these instruments as it offers better leverage,
convenience in holding Long and Short positions, Low Cost to trade compared to
Equity delivery and enable traders to profit sideways movement using options.

Futures contracts gives Rights with Obligations to the Traders, hence the open
position is settled on the maturity date.Option Contracts gives Rights to the Buyer
with NO OBLIGATION, hence he needs to pay some premium to the seller to get the
contract. Seller of the Option has the Obligations

Call Option Buyers – Has Rights to Buy

Put Option Buyers – Has Rights to Sell

3. Mutual Funds

In India mutual funds are very popular because the initial investment is very less
and moreover risk is also diversified. Mutual fund allows a group of people to
invest money together and have it professionally managed. Mutual funds also have
sound regulation so there is no question of insecurity. There are many thematic
mutual funds to choose from, the risk and return ratio may differ according to the
plan.

One interesting part about mutual fund is that one can start investing with only
Rs.1000/ Per month.

4. Bonds

Bonds are issued by both private and government entities to raise their working
capital. Bonds are also called as fixed income instruments. Central and state
government both issue bonds and private organizations like private companies,
private financial instruments also issue bonds to garner their funds. Government
bonds carry the lowest amount of risk but they take time to give the returns. As
far as return on investment is concerned private bonds offers betters returns but
they carry high amount of risk.

5. Deposits

Almost every Indian family has a savings account or fixed deposit or post-office
deposits. This is one of the most common ways to keep their surplus funds and to
earn with that money.

The return on investment is very low but it is almost risk free and secured.Keeping
money in deposits cannot fulfill your long term financial goal. Investing your
money smartly is very essential.

6. Cash and cash equivalents

All the securities that can be readily converted to cash within 3 months can be
called as cash and cash equivalents. In Case of immediate requirement the cash /
bank balance helps a lot, so it is good to create corpus in saving account which
can be used only in case of financial emergency. Gold can be purchased in Demat
format under ETF schemes, This are available in India, Traded in NSE and an
investor as buy even Just 1/2 Gram

Cash is Always the King

Gold are not just ornaments, it can provide Financial Confidence.

Advantages of Financial Instruments.

Overcoming Market Inefficiencies

Financial Instruments provide financing to target groups of final recipients that

have limited access to financing from the private sector. Such financing would
generate a positive effect through the support provided to the final recipients and
will contribute to the goals of the respective Operational Programme.The financial
products supplied by means of FIs are tailored to the needs and requirements of the
target final recipients and offer, in general, more favourable terms, including
with respect to pricing, maturity and/or collateral requirements.

Leverage Effect

In addition to the resources from the Operational Programmes, FIs mobilise

additional private financing which increases the total amount of the support
available to the final recipients.

Revolving Funds

Resources paid back by the financed projects, and the potential other revenue
generated from them, can be reused to provide support to other eligible final
recipients and projects.

Fiscal Discipline

The resources made available via the instruments require that the final recipients
pay them back, which leads to a more efficient use of public resources compared to
grant support, and reduces the chances that final recipients may grow addicted to
public support.

Expertise

Final recipients can benefit from the expertise of the financial intermediaries and
other private sector partners in structuring economically viable projects

Disadvantages of Financial Investment

High Expense Ratios and Sales Charges.

if you’re not paying attention to mutual fund expense ratios and sales charges;
they can get out of hand. Be very careful when investing in funds with expense
ratios higher than 1.20%, as they will be considered on the higher cost end. Be
wary of 12b-1advertising fees and sales charges in general. There are several good
fund companies out there that have no sales charges. Fees reduce overall investment
returns.

Management Abuses

churning, turnover and window dressing may happen if your manager is abusing his or
her authority. This includes unnecessary trading, excessive replacement and selling
the losers prior to quarter-end to fix the books.

Tax Inefficiency

Like it or not, investors do not have any choice when it comes to capital gain
payouts in mutual funds. Due to the turnover, redemptions, gains and losses in
security holdings throughout the year, investors typically receive distributions
from the fund that are an uncontrollable tax event.

Poor Trade Execution

if you place your mutual fund trade anytime before the cut-off time for same-day
NAV, you’ll get the same closing price NAV is for buy or sell on the mutual fund.
For investors searching for faster execution times, maybe because of short
investment horizons, day trading, or timing the market, mutual funds provide a weak
execution strategy.

Volatile Investments

Investment in BSE is subjected to many risks since the market is volatile. The
shares of a company fluctuate so many times in just a single day. These price
fluctuations are unpredictable most of the times and the investor sometimes have to
face severe loss due to such uncertainty.

Brokerage Commissions Kill Profit Margin

Every time an investor purchase or sells his shares; he has to pay some amount as a
brokerage commission to the broker, which kills the profit margin.Time Consuming
Investment in NSE is not as easy as investing in a lottery as you have to complete
many formalities in the process and hence is time consuming..