Financial Services and Markets
What the exam tests here
How savings become investment: money market versus capital market, primary versus secondary market, SEBI's role, mutual funds, demat and the payments infrastructure.
Core rules and concepts
- Money market is for instruments up to one year: Treasury Bills (14, 91, 182, 364 days, issued at a discount, no coupon), commercial paper (unsecured, by corporates), certificate of deposit (by banks), call money, repo and reverse repo.
- Capital market is long-term: equity shares, preference shares, debentures, bonds. Primary market issues new securities (IPO, FPO, rights issue, private placement); the secondary market trades existing ones on NSE/BSE.
- SEBI was set up under the SEBI Act, 1992; it regulates mutual funds under the SEBI (Mutual Funds) Regulations, 1996 and insider trading under the PIT Regulations, 2015.
- Demat holding is with NSDL or CDSL; equity settlement is T+1.
- Mutual fund NAV = (total assets − liabilities) ÷ units outstanding. Open-ended funds allow continuous entry and exit; ELSS has a 3-year lock-in; ULIPs are insurance products regulated by IRDAI, not SEBI.
Worked example
A scheme holds assets of ₹52 crore and liabilities of ₹2 crore, with 5 crore units outstanding. NAV = (52 − 2) crore ÷ 5 crore = ₹10 per unit. An investor putting in ₹25,000 with a 1% entry load pays ₹10.10 per unit and receives 25,000 ÷ 10.10 = 2,475.25 units. Reasoning: net assets first, then divide by units; entry load raises the effective purchase price.
Traps that cost marks
- Saying T-bills carry a coupon.
- Confusing money-market instruments with capital-market ones.
- Treating NAV as a market-driven share price.
- Describing mutual fund returns as guaranteed.