Table of ContentsComponents of Formal Financial SystemInvestment for Consumption and BusinessFinancial Investment and Physical InvestmentInvestment AvenuesRisk and Return RelationshipThe Indian financial system can be broadly classified into formal financial system (organized) and informal financial system (organized) unorganized).Say no to plagiarism. Get a tailor-made essay on “Why violent video games should not be banned”?Get the original essayThe formal financial system falls under the jurisdiction of the Ministry of Finance (MOF), the Reserve Bank of India (RBI), and of the Securities Exchange Board of India. (SEBI) and other regulatory bodies. The informal financial system includes: (i) Individual money lenders such as neighbors, relatives, landowners, traders, shop owners, etc. (ii) Groups of people operating in the form of funds or associations. '. These groups operate under a system of their own rules. (iii) Partnership companies consisting of local brokers, pawnbrokers and non-bank financial intermediaries such as finance, investment and mutual fund companies. In India, the spread of the banking system to rural areas has helped expand the reach of the formal financial system. Components of the Formal Financial System The formal financial system consists of four segments, namely financial institutions, financial markets, financial instruments and financial services. intermediaries who mobilize savings and facilitate the allocation of funds efficiently. Financial institutions are classified into banking and non-banking financial institutions. Banking institutions are credit creators while non-bank financial institutions are credit providers. In India, non-bank financial institutions, namely development financial institutions (DFIs) and non-banking financial companies (NBFCs), along with housing finance companies (HFCs), are the major institutional providers of credit. Financial institutions are further classified as term finance institutions such as Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Finance Corporation of India (IFCI), Small Industries Development Bank of India (SIDBI) and Industrial Investment Bank of India (IIBI). Specialized financial institutions like Export Import Bank of India (EXIM), Tourism Finance Corporation of India (TFCI), ICICI Venture, Infrastructure Development Finance Company (IDFC) and sectoral financial institutions like National Bank for Agricultural and Rural Development (NABARD) and National Housing Bank (NHB). Investment establishments carrying out UCITS activities (UTI, Public Sector and Private Sector UCITS) and insurance activities (LIC, GIC and 67 its subsidiaries) are also classified as financial institutions. There are state-level financial institutions, such as the State Finance Corporation and the National Industrial Development Corporation (SIDC), which are owned and operated by the state governments. Financial markets are a mechanism for participants to transact financial claims. Money market and capital market are the organized financial markets in India. The money market concerns short-term securities while the capital market concerns long-term securities. The primary market deals with new issues, the secondary market is intended for the trading of outstanding or existing securities. A financial instrument is a claim against a person oran institution for the payment at a later date of a sum of money or a periodic payment in the form of interest or dividends. Financial instruments may be primary or secondary securities. Primary securities are issued by ultimate borrowers of funds to ultimate savers, for example bank deposits, mutual fund shares, insurance policies, etc. Financial instruments help financial markets and financial intermediaries play the important role of channeling funds from managers to borrowers. Financial services include business banking, leasing, hire purchase, credit rating, etc. The financial services provided by financial intermediaries bridge the gap between the lack of knowledge on the part of investors and the increasing sophistication of the market and financial instruments. The four components are interdependent and continually interact with each other. Their interaction leads to the development of a smoothly functioning financial system. Savings and investment Saving consists of refraining from consuming the present for future use. Savings are sometimes autonomous and come from households out of habit, but most of the savings are intended for specific purposes such as interest on income, future needs, unforeseen events, precautionary purposes, growth of future wealth, leading to increased living standards, etc. Investment is the exchange of money or specie for a future claim on money or the purchase of a security or a promise of payment at a later date accompanied by a regular income as in the case of a share, bond, debenture, etc. also a service like consultancy, construction, hotel or hospital and future services like in the case of consumer durable goods. Securities purchases are an investment in the economy and some investments are offset by corresponding divestments. Gross investments are the total investments made from all sources by an economy or a single economic unit and net investments are those which are the gross investment less disinvestments for an economic unit. Gross assets and investments less depreciation in the economy or in a business, business sector, or government sector constitute net investment, called capital formation. 69 Changes or fluctuations in economic activity can occur when investment spending is greater or less than saving for a given level of income. The resources allocated to the productive process, that is, to capital formation, can have a direct link with economic growth. All economic activities – agricultural, industrial or service – depend on the availability of financial resources. The amount of financial resources and the volume of capital formation depend on the intensity and effectiveness with which savings are encouraged, collected and directed towards investment. The investment objective of the public can be defined in terms of savings for: (i) Purpose of transactions (for daily needs or regular payments)(ii) For precautionary purposes (for unforeseen events or special needs )(iii) For speculative or property purposes (for capital gains and asset building).Investment for consumption and businessIncome is divided into two components, namely consumption. and investment. Unused amounts are saved and invested. Investments are also useful for current and future consumption in the case of durable consumer goods, cars,gold and silver, etc. Investments generally promote greater consumption in the future because they lead to higher income and greater capital appreciation in future years. Investment and Speculation Purchases of assets such as stocks and securities may be for investment, speculation, or both. Investment is long term in nature while speculation is short term. All investments are risky to some extent, but speculation is riskier because it involves short-term trading, buying and selling which can sometimes lead to profits and losses at other times. Financial investment and physical investment Savings in the household sector which represents the bulk of savings. are measured by the total financial savings and savings in physical assets. Savings in financial form include foreign currency savings, bank deposits, non-bank deposits, life insurance funds, provident and pension funds, claims on the government, shares and debentures, UTI units, mutual funds and trade debts. Money and deposits are voluntary savings driven by transactions and precautionary motives and are governed by income and other incentives. Savings in life insurance, provident funds and pension funds are contractual savings governed by precautionary and emergency reasons. The claims on the state are compulsory deposits, tax credits and investments in government bonds, etc. Savings in the form of units, stocks and bonds, etc. represents 71 voluntary savings and is used to invest directly or indirectly in the business sector. Gross savings in the household sector represent about 19 percent of GDP. This represents more than a third of physical assets and three quarters of financial assets. Savings in physical form include agricultural implements, implements, tractors, consumer durable goods, gold, silver, etc. among rural households and elements such as real estate, buildings, etc. among all households. Savings in physical form are less productive while savings in financial form are more productive to varying degrees depending on the efficiency of their growth. The household sector in India has become the largest contributor to gross domestic savings. A sustained annual growth rate of 10 percent can be achieved with appropriate policies aimed at increasing domestic savings on the one hand and attracting a greater flow of foreign capital on the other. India. Some of them are tradable and liquid while others are riskier and less secure. Risk and return are the main characteristics that an investor must face and manage. The investor must choose among these 72 the appropriate paths according to his objectives, preferences, needs and abilities to take the minimum risk and maximize returns. Return Return is the main driver for incentivizing investment and is probably the one that supports it. Market participants are always tempted to look for better investment alternatives for higher returns or returns. But measuring investment performance represents a challenging task in the investment literature due to the presence of idiosyncratic variables with respect to the periodicity of performance measurement and performance – return horizon. If the two coincide (which never happens), the measurement criteria become very simple and straightforward. Risk Proportionate to investment objectives, risks divert investment flows withincreased agility. Conservatism is embedded in the psychological texture of investors when making investment decisions. Portfolio investing is primarily designed to mitigate risk through diversification. Relationship Between Risk and Return Risk and returns are positively related variables. These are part of the investment process: a higher return always comes with a higher risk, so lower risk generates a lower return. In such circumstances, investors are faced with a dilemma: choosing between favoring one and distracting themselves for the other. We are therefore destined to face the drama orchestrated by the risk-return duo. The preference for one over the other determines the contour of the investment philosophy followed by investors and fund managers. A conservative investor anticipates the reduction of risk over the increase in return and therefore seeks investment alternatives adapted to his level of risk tolerance. Aggressive investors, on the other hand, place more emphasis on return amplification and are easily exposed to risk. They therefore seek investment alternatives commensurate with this risk and return tolerance and preference. The investor must choose among them the appropriate avenues according to his objectives, preferences, needs and capacities to take the minimum risk and maximize returns. Financial investment avenues are classified under the following heads: company shares, debentures, deposits, etc. Bank Deposits and SchemesUTI and Mutual Fund Schemes.Postal Deposits/Certificates etc.Government and Semi-Government Bonds/SecuritiesPSU Stocks and Bonds.Recent Trends in Indian Securities Market Transfer of Resources from Those Who Have Resources surplus to others who have a productive need for it is perhaps the most efficient way to achieve results through the securities markets. The securities market offers channels for allocating savings to investment and thus separates these two activities. As a result, savers and investors are not limited by their individual capacities, but by the respective capacities of the economy to invest and save, which improves savings and investments in the economy. Securities markets channel savings toward the most productive investments, which increases the rate of return on investment. Thus, the securities market promotes economic growth by increasing the quantities of real savings and capital formation from a given level of national income and also by increasing investment productivity by improving the allocation of investable funds . The securities market has two interdependent and inseparable segments, the new issues (primary) and the stock markets (secondary). The primary market allows the distribution of new securities, while the secondary market trades in previously issued securities. Primary signals, which bring together all information about the issuer and its activity, including associated risks, generated in the secondary market, help the primary market in the allocation of funds. Issuers of new securities in the primary market to raise funds for investment and/or to satisfy certain obligations. They do this either by public issue or by private placement. This is a public issue so anyone and everyone can subscribe to the securities. If the broadcast is made to selected people, it is then called private placement. If the securities are issued exclusively to 1997..