Asset Classes and Financial Instruments

Indian Financial System

A financial system represents a channel through which funds are mobilized
from surplus units and routed to the deficit units. The financial system has built
its own channels over a period of time. The system constitutes of financial
assets, financial markets and financial intermediaries.

The role of financial system can broadly classfied into the following:
1. Savings function
2. Policy function
3. Credit function

Financial Markets
Financial markets play a pivotal role in allocating resources in the economy by
performing three important functions:
1. Facilitate price discovery
2. Provide liquidity
3. Reduce the cost of transacting

Types of Financial Markets

1. Money Market
2. Capital Market
- Debt Market
- Equity Market (primary and secondary, cash/spot and forward/futures)
3. Forex Market
4. Credit Market
Financial Assets
Financial assets/instruments represent the financial obligations that arise when
the borrower raises funds in the financial market. In exchange for the funds lent,
the supplier will have a claim on the income/wealth of the borrower which may
be a company, a government body or a household. This financial claim will be
packaged in the form of a certificate, receipt or any other legal document.

Financial assets represent the obligations on the part of issuer of such financial
asset. Hence, all financial assets will be equal to the financial liabilities. The
funding of assets will be done either by using savings or by borrowing. Since
borrowings represent financial liabilities, the accounting equation can be altered
as follows:
Assets = Liabilities + Capital

Types of Financial Assets

1. Money Market Instruments

- Treasury bills
- Certificates of deposit
- Commercial papers
- Commercial bills
- Bankers acceptances
- Repos and reverse repos

2. Capital Market Instruments

- Bonds
- Sovereign, International, Municipal, Mortgage-backed, Corporate bonds
- Registered, Non-registered, Secured, Unsecured
- Redeemable, Irredeemable, Senior, Subordinate, Callable, Non-callable
- Convertible, Non-Convertible, Fixed rate, Floating rste
- Zero-coupon bonds, Junk bonds, Yankee bonds, Masala bonds etc.
- Equity securities
- Ordinary shares (Common stock)
- Preference shares (Preferred stock)
- Depository receipts (ADRs, GDRs)

 Stock and Bond Market Indices

3. Derivative Market Instruments
- Options
- Futures Contracts

Financial Intermediaries

1. Commercial banks
2. Financial institutions
3. Insurance companies
4. Mutual funds
5. Non-banking financial companies
6. Non-banking financial services companies
7. Brokers, dealers, market makers
8. Speculators, gamblers etc.

Financial Regulators

There is a legal framework to regulate the financial activity, financial

institutions, foreign participants, banking and monetary aspects. Apart from
Ministry of Finance, there are four major entities in our country that are
involved in regulating the financial sector.
1. Reserve Bank of India (RBI)
2. Securities and Exchange Board of India (SEBI)
3. Insurance Regulatory and Development Authority (IRDA)
4. Pension Fund Regulatory and Development Authority (PFRDA)