Introduction to Indian

financial system
Unit 1
 Contents
• Financial system, need, functions, structure and constituents of Indian financial system
• Financial institutions, Financial markets, Money market, capital market, Financial
instruments and Services
• Regulatory institutions RBI, SEBI, IRDA, Financial System and economic development.
• Investment Management: Meaning, objectives of financial investment
• Types, financial & non-financial forms of investment
• Investment methods, security & non-security forms of investment
• Sources of investment information, investment instruments.
 Introduction to Financial system
• A financial system is a network of financial institutions, financial markets, financial
instruments and financial services to facilitates the transfer the funds.
• The system consist of savers, intermediaries, instruments and ultimate user of
funds. The level of economic growth is largely depends upon facilitates the state of
financial system prevailing in the economy.
• The financial system mobilies the saving and channelizing them into the productive
activity and thus influences them into economic development.
• Conclusion: financial system deals with three inter-related and interdependent
variables that is money, credit and finance.
 Meaning and definition
• A financial system is a collection of institution which allows the exchange
of funds such as banks, insurance companies and stock exchanges. The
financial system exists in the corporate, national and global level.
• Borrowers, lenders and creditors are exchanging current funds to finance
ventures either for consumption or productive investment and seeking
returns on their financial assets.
• Financial system may be defined as a set of markets and institution to
facilitate the exchange of assets and risks.
 Features of financial system
• It plays a vital role in the economic development of the country as it
encourages both savings and investment
• It helps in mobilizing and allocating one’s savings
• It facilitates the expansion of financial institutions and markets
• Plays a key role in capital formation
• It helps form a link between the investor and the one saving
• It is also concerned with the Provision of funds
 Functions of Financial system
• Facilitating saving and investment
• Intermediation between savers and borrowers
• Providing payments services
• Risk management and diversification
• Price determination and efficient market functioning
• Liquidity provision
• Capital formation
• Facilitating monetary policy
 Indian Financial System Structure
• The Indian Financial System is made up of various components that work together to facilitate the flow
of funds between savers and investors. The structure of the Indian financial system can be broadly
divided into two parts: the organized sector and the unorganized sector.
• The organized sector includes formal financial institutions such as banks, insurance companies, NBFCs,
mutual funds, stock exchanges, and pension funds. These institutions are regulated by the Reserve Bank
of India (RBI) and other regulatory bodies such as the Securities and Exchange Board of India (SEBI),
the Insurance Regulatory and Development Authority of India (IRDAI), and the Pension Fund
Regulatory and Development Authority (PFRDA).
• The unorganized sector, on the other hand, includes informal financial intermediaries such as
moneylenders, chit funds, and other unregulated entities that cater to the financial needs of the unbanked
and underserved sections of society.... Read more at: https://www.studyiq.com/articles/indian-financial-
system/
Constituents/components of Indian financial
systems
• Financial Institutions
• Financial Assets
• Financial Services
• Financial Markets
 Financial Institutions
• Commercial Banks: These are the backbone of the Indian financial system, offering
services like deposit accounts, loans, and various financial products.
• Non-Banking Financial Companies (NBFCs): They complement the role of banks
by providing credit, loans, and other financial services. NBFCs cater to specific
sectors and often serve customers that banks might not reach.
• Insurance Companies: Life, general, and health insurance companies provide risk
coverage and investment opportunities through various insurance products.
• Mutual Funds: These entities pool money from investors to invest in a diversified
portfolio of securities. They offer various schemes catering to different risk appetites.
• Pension Funds: These funds manage retirement savings, providing pension
benefits to individuals upon retirement.
• Stock Exchanges and Brokers: Entities like the Bombay Stock Exchange
(BSE) and the National Stock Exchange (NSE) facilitate trading in stocks,
commodities, and other financial instruments. Brokers act as intermediaries
between investors and exchanges.
• RBI (Reserve Bank of India): As the central bank, the RBI regulates and
supervises the monetary policy, banking operations, and the overall stability of
the financial system.
 Financial Markets
• Capital Market: Comprises the stock market and bond market where
long-term securities like stocks and bonds are traded.
• Money Market: Deals with short-term borrowing, lending, buying, and
selling of financial instruments like Treasury Bills, Commercial Papers,
and Certificates of Deposit.
• Foreign Exchange Market: Deals with the exchange of foreign
currencies, crucial for international trade and investment.
 Regulators
• RBI: Regulates and supervises banks, NBFCs, and the overall monetary policy.
• Securities and Exchange Board of India (SEBI): Regulates the securities
market, protecting the interests of investors and promoting the development of
the securities market.
• Insurance Regulatory and Development Authority of India (IRDAI):
Regulates and promotes the insurance sector in India.
• Pension Fund Regulatory and Development Authority (PFRDA): Regulates
pension funds and protects the interests of subscribers of pension schemes.
 Other entities
• Credit Rating Agencies: Evaluate the creditworthiness of entities issuing
debt instruments.
• Clearing Corporations: Ensure smooth settlement of trades in the
financial markets.
• Depositories: Facilitate holding securities in dematerialized form and
ensure smooth trading and settlement in the capital markets.
Financial system and Economic development
• Capital Mobilization and Allocation:
• 1. savings and investment
• 2. efficient allocation of capital
• Facilitating Entrepreneurship and Innovation:
• 1. access to capital
• Risk Management and Economic Stability:
• 1. risk diversification
• 2. Buffering economic shocks
• Infrastructure and Development:
• 1. funding infrastructure projects
• Encouraging Foreign Investment:
• 1. Attracting foreign capital
• Improving Living Standards:
• 1. Enhanced access to services
• Government Funding and Fiscal Management:
• 1. facilitating government borrowing
• 2. monetary policy transmission
 Investment Management
• Investment is an economic activity that is engaged in by people who have
savings, i.e. investments are made from savings, or in other words, people
invest their savings .But all savers are not investor’s .investment is an
activity which is different from saving.
• Investment is the employment of funds on assets with the aim of earning
income or capital appreciation Investment has two attributes namely time
and risk. Present consumption is sacrificed to get a return in the future.
• Investment is the sacrifice of some present value for the uncertain future
reward. An investment decision is a trade-off between risk and return. All
investment choices are made in accordance with the personal investment
ends in contemplation of an uncertain future.
• By Graham and Qadd’s Security Analysis, “Investment management is the
process of managing money including investments, budgeting, banking
and taxes, also called as money management.”
Objectives of Investment management

Objectives of Investment

Primary objectives Secondary Objectives

1. Safety 1. Marketability
2. Income 2. Liquidity
3. Growth of Capital 3. Tax Minimisation
 Need and Importance of Investment
Management
• Longer life expectancy or planning for retirement
• Increasing rates of taxation
• High interest rates
• High rate of Inflation
• Larger incomes
• Investment channels
 Financial Investments
• Stocks: Investing in shares of publicly traded companies. Investors buy ownership
stakes in the company and benefit from stock price appreciation and dividends.
• Bonds: Loans made to governments or corporations. Investors receive periodic
interest payments and the return of the bond's face value at maturity.
• Mutual Funds: Pooled funds from multiple investors used to invest in various
securities (stocks, bonds, etc.) managed by a professional fund manager.
• Exchange-Traded Funds (ETFs): Similar to mutual funds but traded on
exchanges like stocks, offering diversification and usually lower fees.
• Derivatives: Financial contracts whose value is derived from the
performance of an underlying asset, index, or interest rate. Examples
include options, futures, and swaps.
• Savings Accounts/CDs: Deposits in banks or credit unions that earn
interest over time. They are considered low-risk but offer relatively lower
returns.
 Non-Financial Investments
• Real Estate: Buying property or land for the purpose of generating income (rental property)
or appreciation in value.
• Commodities: Investing in physical goods like gold, silver, oil, agricultural products, etc.,
which can be traded on commodity exchanges.
• Collectibles: Investing in items like art, antiques, vintage cars, or rare stamps with the
expectation that their value will appreciate over time.
• Business Ventures: Investing in startups or established businesses either through direct
ownership or venture capital firms.
• Education: Investing in yourself through education and skill development to enhance
earning potential over the long term.
 Conclusions
• Both financial and non-financial investments carry their own set of risks
and potential returns. Financial investments are more liquid and can be
bought or sold more easily, while non-financial investments often require
more specialized knowledge and might have longer holding periods for
optimal returns. Building a diversified investment portfolio often includes
a mix of both types to balance risks and returns.
Difference between investor and speculator
Difference investment v/s gambling
 Investment management process
• 1. Setting of investment policy.
• 2. Analysis and evaluation of investment vehicles.
• 3. Formation of diversified investment portfolio.
• 4. Portfolio revision
• 5. Measurement and evaluation of portfolio performance.
 Process of Investment
• Investment policy: Investible fund, Knowledge and objectives are framed on the basis of rate
of return, liquidity, regularity of income.
• Investment valuation: valuation of stocks, debentures and bonds and valuation of other
assets.
• Investment/ security analysis: Economic analysis, technical analysis and efficient market
approach.
• Portfolio construction: Diversification- debt and equity diversification, industry
diversification, company diversification and selection.
• Portfolio evaluation: Appraisal, revision, securities- Creditorship and ownership securities
 Investment Methods
• Passive Investing: Strategies like index investing or ETFs that aim to replicate the
performance of a market index rather than actively picking individual stocks.
• Active Investing: Involves frequent buying and selling of assets to outperform the market,
relying on research, analysis, and market trends.
• Value Investing: A strategy focusing on buying undervalued assets with the belief that their
true worth will be recognized by the market over time.
• Growth Investing: Seeks companies or assets with high potential for growth, even if their
current valuations seem high.
• Income Investing: Aims to generate a steady stream of income through investments like
dividend-paying stocks, bonds, or real estate.
 Sources of Investment Information
• Financial News Outlets: Bloomberg, CNBC, Financial Times, etc., providing market
updates and analysis.
• Annual Reports & Company Filings: Publicly available information about companies'
financial performance and strategies.
• Brokerage Platforms: Online platforms offering market data, research reports, and analysis.
• Professional Advisers: Financial advisors, wealth managers, or consultants providing
investment advice.
• Social Media & Investment Communities: Platforms where investors share insights,
opinions, and analysis.