What is the Regulator

A regulator is an authority or an institution who ensures the rational behaviour of security market participants. They make certain of the responsibilities of each of the player in the security market. They do it in order to protect the interests of investors. The regulators work to maintain the fairness and competitiveness of the marketplace where participants deliver a high quality of service. 

Various Regulators in the Indian Financial Market

Below is a list of key regulators in the Indian financial market:-

Ministry of Finance

The Ministry of Finance, within the government of India, concerns with the taxation, financial legislation, financial institutions, capital markets, budgets and centre and state finances. The finance ministry comprises the five departments which work as the major regulators in the financial market in India:-

1. Department of Economic Affairs: It works as the nodal agency of the government which work out and monitors the economic policies. The primary responsibility of this department is the annual preparation of the union budget. the  It covers monetary and fiscal policies and functioning of the capital market. It also has the responsibilities of mobilization of external resources and the issuance of bank notes and coins. 
2. Department of Expenditure: This department is responsible for the expenditure of the government of India. It administers the various financial rules and regulations such as service rules of the central government employees. It also has the responsibility of financial assistance to states and borrowing by states. 
3. Department of Revenue: It controls all the matters related to the direct and indirect union taxes. It works under the direction of Revenue Secretary. It has two major statutory bodies – The Central Board of Direct Taxes (CBDT), and The Central Board of Indirect Taxes and Customs (CBIC). 
4. Department of Financial Services: It covers Banks, Insurance, Financial services provided by the government agencies and private corporations. It also oversees the pension reforms, industrial finance and MSME. It has the statutory body Pension Fund Regulatory and Development Authority (PFRDA). 
5. Department of Investment and Public Asset Management: Its older name was Department of Disinvestment. It is responsible for the management of the centre’s investments in equities and its disinvestment in Public Sector Undertakings (PSUs). 

Ministry of Corporate Affairs

The Ministry of Corporate Affairs is concerned with the administration of The Companies Act 2013, The Companies Act 1956, The Limited Liability Partnership Act 2008 and other acts and rules and regulations which are framed for regulating the functioning of the corporate sector. It is also responsible for administering The Competition Act 2002, It also oversees the three professional bodies – Institute of Chartered Accountants of India (ICAI), Institute of Company Secretaries of India (ICSI), and the Institute of Cost Accountants of India (ICAI). 

Reserve Bank of India (RBI)

Reserve Bank of India (RBI) is an autonomous body and it is the major regulators in the financial market in India. It has the primary responsibility of administering the monetary policy of the Government of India. Its key responsibility is to make it certain the rational growth of the supply of money in the economy in order to facilitate economic growth and financial transactions. The key functionalities of the RBI are:-

• Working as a Monetary Authority
• Regulation and Supervision of the Financial System
• Managing the Foreign Exchange
• Issuance of the Currency
• Role of Development
• Regulation and Supervision of the Payments and Settlement System
• Banker’s Bank
• Banker and Debt Manager to the Government of India
• Custodian to Foreign Exchanges

Securities and Exchange Board of India (SEBI)

Securities and Exchange Board of India (SEBI) is the autonomous statutory and regulatory body of the security market of India. It has the following major tasks to perform:-

• Protection of the interests of investors in the security market.
• Promotion and development of the security market.
• Regulation of stock exchanges and related operations.
• Regulations and monitoring of stock-brokers and sub-brokers.
• Awareness of investors education training of intermediaries in the security market.
• Prohibition of insider trading in securities and unfair trade practices.

Insurance Regulatory and Development Authority if India (IRDAI)

IRDAI is also one of the major regulators in the financial market in India. It is an autonomous and statutory body of the Government of India which has the primary responsibility of promoting and regulating the insurance and re-insurance industries in the country. The major functions are IRDAI are:-

• Administering the registration of insurance companies.
• Protecting the interests of policyholders.
• Administering the intermediaries and agents in the insurance sector.
• Promotion of the industry.
• Adjudicating disputes.
• Others.

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Participants in the Security Market

Participants in the security market are the people or functionaries. These participants may be buyers, sellers or intermediaries between buyers and sellers. There are following key participants which play important roles in the security market:-

• Market Intermediaries
• Institutional Participants
• Retail Participants

Market Intermediaries

Market intermediaries are those participants in the security market which work as facilitate various market operations between buyers and sellers. The following are the important intermediaries in the security market:-

Stock Exchange

 Stock Exchange facilitates the trading between buyers and sellers. It provides a platform for buying and selling of already issued securities. In India, stock exchanges are Bombay Stock Exchange (BSE), National Stock Exchange (NSE).

Depositories: These are the institutions which hold the traded securities of investors such as shares, bonds, mutual funds etc. They hold these securities in the electronic forms. In India, there are two depositories: Central Depository Services Limited (CDSL), and National Securities Depository Limited (NSDL)

Depository Participant

A Depository Participant (DP) is an agent of the depository through which it interfaces with the investors and provides depository services. Depository participants enable investors to hold and transact in securities in the dematerialized form.

Stock Brokers: They are the registered members of the stock exchange. They facilitate buy and sell transactions of investors on stock exchanges. All the secondary market transactions are conducted through these registered stock brokers only.

Sub-Brokers: A sub-broker is an entity who is not a member of Stock Exchange but who acts on behalf of a trading member or Stock Broker as an agent for assisting the investors in buying, selling or dealing in securities through such trading member or Stock Broker with whom he is associated.

Authorised Person

An authorised person is any person, who is appointed by a stock-broker or trading member as an agent to reach out to
the investors. These may be individuals, partnership firms, LLPs or corporates.

Custodian

It is an entity that has the responsibility of holding funds and securities of large clients. The large clients may be banks, insurance companies, and foreign portfolio investors (FPIs).

Merchant Bankers

These are SEBI registered entities which act as issue managers, investment bankers or lead managers. They help the issuer of securities in accessing the security market with the issuance of securities. They are single point contact for issuers during a new issue of securities.

Underwriter

The underwriters are the entities in the security market who commit to subscribing any portion of a public offer of securities which may not be bought by investors.

Institutional Participants

Institutional participants in the security market are mainly institutional investors. It may be domestic financial institutions, banks, insurance companies, mutual funds or Foreign Portfolio Investors (FPIs). The important institutional participants in the security market are:-

Foreign Portfolio Investors (FPIs)

A Foreign Portfolio Investor (FPI) is an investor which is established or incorporated outside India and proposes to make investments in India.

P-Note Participant

These participants invest in the P-Notes or Participatory Notes. P-Not is an instrument issued by SEBI registered foreign portfolio investors to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator.

Mutual Funds

A mutual fund is a professionally managed collective investment scheme that pools money from many investors to purchase securities on their behalf.

Other Participants:-

• Insurance Companies
• Pension Funds
• Venture Capital Firms
• Private Equity Firms
• Hedge Funds
• Alternative Investment Funds
• Investment Advisers

Retail Participants

Retail participants are those individuals who buy and sell securities for their personal account, and not for another company or organization. A retail participant may be:-

• Indian Individuals
• Non-Resident Indians (NRIs)
• Person of Indian origin (PIOs)
• Qualified Foreign Investors (QFIs)

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What is the Security Market?

Security market provides a platform where a party in the need of capital issues the securities and the other party who has access capital acquires these securities by paying the capital.

Segments of the Security Market

There are two segments of the security market:-

1. Primary Market, and
2. Secondary Market

Primary Market

Primary Market is also called the new issue market because it deals with the issue of new and fresh securities. In this market, the issuer raises the capital by issuing new securities to the investors. These securities are issued by the companies, corporates or governments by selling the new stocks. The following operations are performed in the primary market:-

• Public Issue: Securities are issued to the public as a retail issue. Public issues may be Initial Public Offering (IPO) and Debt Offer (NCD, Bond Issue)
• Follow on Public Offer (FPO): An already listed company makes and public issue.
• Private Placement: Securities are issued to a specific group of persons.
• Qualified Institutional Placement (QIP): Securities are issued by already listed companies to Qualified Institutional Buyers (QIBs).
• Preferential Issue: Specified securities are issued to a selected group of persons on a private placement basis by already listed companies.
• Onshore and Offshore Offering: The securities can be issued either for domestic or international investors.
• Offer for Sale (OFS): Selling of already allotted shares by shareholders.

Secondary Market

The secondary market provides a platform for trading of already issued securities. It allows the investors to exit from their investment and new investors to buy already allotted securities. In this market, the previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The secondary market has the following segments:-

• Over-The-Counter-Market (OTC Market): In this Market, trades are directly negotiated between two or more counterparties. In this type of market, the securities are traded and settled over the counter among the counterparties directly.
• Exchange Traded Market: In this segment, trading and settlement are done through the stock exchanges.

The following operations are performed in the secondary market:-

• Trading: This is a formal contract to buy or sell securities.
• Clearing and Settlement: These are the post-trading operations. Clearing means ascertaining the net obligations of buyers and sellers for a specific time period. The settlement is the next step of settling obligations by buyers and settlers such that paying the money in case of buy or delivery of securities in case of sell.

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What is Security?

Security is a financial instrument that holds a monetary value and issued to raise the funds for a company, corporate or government. It is a medium of exchange between two entities. Securities are purchased by those who have money and want to invest their money. It lets the investor exchanging their money into financial assets which will provide a return on investment. A security may be shares, stocks, bonds, debentures of a company, corporate or government. It may also be a unit issued by any investment scheme such as a mutual fund. 

Security Market

  The security market is a market-place which conducts the flow of capital from those who want to invest to those who require investment. It enables the transfer of financial assets from entities having it in excess to the entities who have a productive requirement. It offers a channel for exchange of savings and investments.

    A security market comprises the following:-

• Borrowers: Entities who sell the securities.
• Investors: Entities who buy the security.
• Intermediaries: Entities who facilitate the transfer of funds and securities.
• Regulators: Institutions who enforces the rules and regulations.

Types of Securities

The securities in the Indian market are categorized broadly into three categories:-

1. Equity Securities: These types of securities are shares of a company into which the fractional ownership of the company is divided among investors. The shareholders bear the risk of companies performance and benefitted from its profit.  These securities are issued by the company and individuals and institutions invest into it. This investment is made by the investors either directly or through the stock exchange. The investments in equity shares are regulated by the Security and Exchange Board of India (SEBI). 
2. Debt Securities: Bonds, debentures, Notes are termed as debt security. These are issued by companies, corporates, and governments when they are in need of capital. These instruments are issued in view of long-term debt. Bonds are supported by the collaterals while debentures may or may not be supported by collaterals. In some issues, debentures are converted into equity shares of the company.
3. Derivatives: This security is a contract which derives the value from the performance of the equity. The derivative may be an asset or index. 

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What are Offshore Funds?

An offshore fund is an investment fund (or mutual fund) that invest in international market. This fund may be a unit trust or a limited partnership or investment fund of an asset management company. These funds are specialized in investing the asset in securities of foreign companies or corporations. The offshore funds have non-resident investors. They are monitored and regulated by the regulations of the country where they are registered. In India, they are regulated by the directives of the Reserve Bank of India (RBI).

These funds have the international domicile and they provide the investment exposer in offshore market. They offer cost benefits to its investors in form of lower taxes because of collective investment. In India, these funds are available as country-specific funds or thematic funds. An offshore fund is required to have the following functionaries:-

• An Administrator
• A Fund Manager
• A Custodian
• A Prime Broker
• An Authorised Representative

Advantages of Offshore Funds

These funds provide the following advantages:-

• It provides the opportunity to invest in the companies which are not listed for stock trading in the country.
• Direct investments to foreign companies or foreign securities have so many regulations and taxations. An offshore fund provides this facility in an indirect mode easily and at a lower cost,

Risks with Offshore Funds

There are following risks associated with these funds:-

• Currency Risk: Fluctuation in the foreign currency exchange rate affects the investment value.
• Shifting of Offshore Fund Activities
• Amendments in the taxation system from foreign countries.

Disclaimer: This post does not give any advice or recommendation. Mutual Fund investments are subject to market risk. Please read all the related documents carefully before investing. It is also advised to consult your financial advisor for necessary suggestions. 

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What are Gilt Funds?

A Gilt Fund is an investment fund (or mutual fund) that invest the asset only in government securities, mostly in government bonds. This is in order to satisfy the risk security for investors. These funds are debt funds because they invest in debt securities. It is not necessary for a guilt fund to invest only in government bonds, but it may invest the asset in corporate bonds as well. These funds preserve the capital along with moderate returns.

How Gilt Funds Work?

   When an investor invests in the fund, the fund manager of the company collective invests these assets of the investors in the bonds issued by the government. These bonds may be of the central government or state governments. Mostly, the investment is made in the government bonds, but it may be invested in the corporate bonds also. The interest earned from the bonds is returned to investors in form of income from investment. These investments have medium to long-term horizon and considered as the safest investment in securities.

Top Gilt Funds in India

Following is the list of top Gilt Funds based on Crisil ranking:-

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Disclaimer: This post does not give any advice or recommendation. Mutual Fund investments are subject to market risk. Please read all the related documents carefully before investing. It is also advised to consult your financial advisor for necessary suggestions. 

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What is a Hybrid Mutual Fund?

A mutual fund that invests in both equities and debts is termed as hybrid mutual funds. They provide a diversified portfolio of investment to the investors comprising a variety of instruments typically including equities, and bonds. The diversification in these funds is provided in order to achieve a balanced return on investments and manage the risk.

Hybrid Mutual Funds are the mixture of Equity Mutual Funds and Debt Mutual Funds. In Equity Mutual Funds, the major asset class is the equity and in Debt Mutual Funds, the major asset class is debt while constructing the portfolio.

Types of Hybrid Mutual Funds

There are following types of hybrid mutual funds:-

Aggressive or Balanced Mutual Funds

An Aggressive Mutual Fund is a type of mutual fund that which includes both equity and debt instruments in the portfolio but it focuses on risk instruments, i.e. equities. They invest 65-80% of total asset in equities.

Conservative Hybrid Funds

These funds invest 75-90% of the total asset in bond instruments and rest in equity stocks,

Arbitrage Funds

Arbitrage funds are those types of mutual funds which take benefits of the price difference between different exchanges. These funds make a profit by buying and selling the securities on a price difference between cash and derivatives market. It buys stock in the cash segment of the stock market on a lower price and sells this stock in the future segment on a higher price and vice-versa.

Capital Protection Funds

These mutual funds invest majority of its asset in debt instruments particularly zero-coupon debts, and a small fraction of asset in equities. These funds are generally close-ended funds and have a fixed maturity date.

Equity Savings Funds

These mutual funds invest in debt instruments, equities and equity arbitrage. They maintain 65% focus on equities.

Dynamic Asset Allocation or Balanced Advantage Funds

These funds keep changing the focus between equity and debts depending on the market conditions. The allocation of asst varies between asset classes.

Multi Asset Allocation Funds

These hybrid mutual funds invest in at least three asset classes. At lease 10% of the total asset is allocated in each class. The variety of asset classes may be equity, debt, cash, or mutual funds.

Fixed Maturity Plans

These are close-ended funds that invest in both debt and equity.They have a fixed maturity period.

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What is the Real Estate Investment Trust (REIT)?

Real Estate Investment Trusts or REITs are the companies that own income-producing commercial real estates. It allows individuals to buy shares in these real estates for which the investors receive an income over a fixed interval of time. These companies manage properties such as offices, shopping complexes, hospitals, warehouses, hotels etc. and a variety of commercial properties in their portfolio. The stocks of these companies are traded on the exchanges. They pay to investors the income in form of dividends generally in every six months period. 

    The REIT lease their owned properties on rent. They distribute 90% of this collected rents as income in form of dividends to the shareholders. There are 3 types of REITs:-

1. Equity REIT: The equity REITs buy, own, and manage income-producing real estate properties directly. They generate revenue primarily through rent.
2. Mortgage REIT: Mortgage REITs do not but properties directly.  They lend money to real estate owners and operate indirectly through mortgage-backed securities. They generate revenue primarily through interest margin.
3. Hybrid REIT: Hybrid REITs work in both ways – equity and mortgage.

What are the Infrastructure Investment Trusts (InvITs)?

Infrastructure Investment Trust or InvIT is very much similar to REIT. They both work on the same concept but we can say that the InvIT is the modified version of REIT. InvIT invests in infrastructure projects including roadways, highways etc while REIT invests in the commercial real estate properties. 

Status of REIT and InvIT in India

The Government of India approved the creation of REIT in the year 2014. The government and the Securities and Exchange Board of India (SEBI) through various notifications are in the process to ease the investment process easy for individual and for foreign investors. 

Advantages of REIT and InvIT

• Liquidity
• Diversification
• Transparency 
• Dividends
• Performance

Limitations of REIT and InvIT

• Low growth
•  Taxation on Dividends
• Market Risk
• High Fees

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What are Investment Funds?

An investment fund is a collective investment of money pooled from multiple investors. It manages a variety of asset classes like equity, commodities, bonds etc. and invest money on behalf of investors. The fund houses which manage these funds hire professional managers to manage these funds professionally. These managers are known as fund managers or investment managers. The diversification in asset class benefits the investors in risk management. Since the money is invested in a class of assets, it reduces transaction costs.

Types of Investment Funds

There are following types of investment funds:

Mutual Funds

These funds pool money from investors and invest in securities such as equity, bond etc. The investors may be retail investors or institutional investors. These funds provide a high level of diversification in their asset class. These funds are categorised into two main categories – open-ended and closed-ended. Open-ended funds do not have any fixed time period while closed-ended funds have a fixed time period of investments. These funds are not traded on any exchange and their daily unit price is updated after the closing of the stock market. An investor can directly invest in mutual funds or it can be done through and ARN.

Exchange Traded Fund (ETFs)

These are very much similar to the mutual funds but they are different in working. They are traded on the exchange like stocks and their unit price is updated throughout the day. They have a fixed asset class that means, before launching, the scheme makes it cleary fix the investment class. These funds invest in stocks, commodities, bonds, or currencies. Most ETFs track an index like Nifty 50. Investors buy or sell these funds through a stock broker. 

Fund of Funds

This investment fund manages a portfolio of other investment funds. It does not directly invest in securities, commodities or currencies. It is sometimes known as multi-manager investment. These funds are of two types – fettered and unfettered. Fettered funds manage a portfolio of funds of the same company while unfettered funds manage the portfolio of funds of different companies.

Hedge Funds

A hedge fund is an offshore investment fund which is engaged in the speculations using borrowed capital. These funds tend to invest in high-risk securities and involve multiple investment strategies 

Private Equity Funds

It is a special type of investment fund which is not listed on any exchange. It is composed of funds and investors that directly invest in private companies. or it may be engaged in buyouts of public companies. It comprises the limited partners who own the 99% of the shares of the company. 

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What are Arbitrage Funds?

Arbitrage funds are those types of mutual funds which take benefits of the price difference between different exchanges. These funds make a profit by buying and selling the securities on a price difference between cash and derivatives market. It buys stock in the cash segment of the stock market on a lower price and sells this stock in the future segment on a higher price and vice-versa.

Let us consider an example. Let the price of 1 share of a company XYZ is Rs 1,000 in the cash segment of the stock market and at the same time, the share price of XYZ is Rs 1020 in the future segment of the stock market. Let the fund manager of this arbitrage mutual fund buys the share of XYZ company and shorts future contract to sell the shares at Rs 1020. At the end of the month, when the prices coincide, the fund manager sells the shares in the future market and makes a profit of Rs 20 per share. This process is also reversed by the fund managers in order to make the profit.

Advantages of Arbitrage Funds

Following are the advantages of the arbitrage funds:-

• Low Risk, especially on long-term investments.
• High stability, due to investment in debt securities.
• Adaptable to the volatility in the market.

Disadvantages of Arbitrage Funds

Following are the disadvantages of this fund:-

• They are not profitable stable markets.
• High expense ratio.
• Unpredictable payoff.

Top Ranked Arbitrage Funds

Following are the top-ranked mutual funds by Crisil:-

1. IDFC Arbitrage Fund (Direct) – Rank: 1
2. Kotak Equity Arbitrage Fund (Regular) – Rank: 1
3. Reliance Arbitrage Fund (Direct) – Rank: 2
4. Invesco India Arbitrage Fund (Regular) – Rank: 2
5. HDFC Arbitrage Fund (Direct) – Rank: 3

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