Topic 03 of 5 · Chapter 06 · Indian Economy
Mutual Funds, Bonds & Other Capital Market Instruments
Types of mutual funds, government securities, corporate bonds, debentures, and their role in capital formation.
1. Mutual Funds
A mutual fund pools money from many investors and invests it in a diversified portfolio of securities (stocks, bonds, money market instruments).
💡 How Mutual Funds Work
Imagine 1,000 investors each have ₹10,000 to invest. Individually, they can’t buy a diversified portfolio. But together (₹1 crore), they can hire a professional fund manager to invest in 50 different stocks.
Each investor gets “units” proportional to their investment. If the portfolio grows, the value of units increases. This is a mutual fund!
| Type | Invests in | Risk | Return |
|---|---|---|---|
| Equity Fund | Stocks | High | High (long-term) |
| Debt Fund | Bonds, government securities | Low | Moderate |
| Hybrid Fund | Mix of equity and debt | Medium | Medium |
| Liquid Fund | Money market instruments | Very low | Low |
| Index Fund | Tracks an index (Sensex/Nifty) | Market risk | Market return |
| ELSS | Equity (tax-saving) | High | High + tax benefit |
⭐ SEBI regulates mutual funds. AMFI (Association of Mutual Funds in India) is the industry body. NAV (Net Asset Value) = value of one unit of a mutual fund.
2. Bonds and Debentures
- Bond: Debt instrument issued by government or corporation. Pays fixed interest (coupon). Repays principal at maturity.
- Debenture: Unsecured bond issued by companies. Higher risk than secured bonds.
- Government Bond (G-Sec): Issued by Central Government; safest; long-term (1-40 years)
- State Development Loans (SDL): Bonds issued by State Governments
- Corporate Bond: Issued by companies; higher yield than G-Secs
3. Government Securities (G-Secs)
- Issued by Central Government to finance fiscal deficit
- Safest investment — backed by government
- Traded in secondary market
- RBI manages government securities market
- Banks must hold G-Secs as part of SLR requirement
4. Key Points for Exam
🔑 Must-Remember Facts
- Mutual funds regulated by: SEBI
- AMFI = Association of Mutual Funds in India
- NAV = Net Asset Value (value of one unit)
- ELSS = Equity Linked Savings Scheme (tax-saving mutual fund)
- G-Secs = Government Securities; safest investment
- SDL = State Development Loans (state government bonds)
- Debenture = unsecured bond issued by companies
- Bond = debt instrument; pays fixed interest (coupon)
- Liquid funds invest in money market instruments
- Index funds track Sensex or Nifty