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Commercial papers & the mutual
funds are the major instrument
of money market.
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Commercial paperis a short-termobligation (either secured or unsecured) of
a large credit-worthyfirm (or foreign
government).
Short-term, in this case, meansless than 270 days.
Unsecured means that no
collateral backs the security. About
half of all commercial paper in the
U.S. is asset-backed and half isunsecured.
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Obligation means a debt that must
be repaid.
Large, credit worthy firms are the
only companies that have a strong
enough reputation to persuade
buyers to invest in an unsecured
security
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Appearance :
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1. Finance paper - The largest issuers of
commercial paper are banks and financecompanies.
Banks often borrow money through the
sale of short-term commercial paper and
then lend the money at a higher interest
rate over a longer term.
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2. Industrial paper - Industrial companies use
commercial paper to finance working capital (accounts
receivable and inventory) on both a permanent or
seasonal basis, to fund operating expenses, and
occasionally to finance, on a temporary basis,
construction projects.
3. Asset-backed paper - In the past, commercial
paper has typically been unsecured (i.e. has no
collateral). This is rapidly changing and investors are
increasing insisting that some of the company's assets
be pledged as collateral, in case the company is unableto pay upon maturity of the commercial paper.
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it is quick and cost effective way of raising working capital.
Best way to the company to take the advantage of short
term interest fluctuations in the market
It provides the exit option to the investors to quit the
investment.
They are cheaper than a bank loan.
It is unsecured and thus does not create any lienson assets of the company.
It has a wide range of maturity
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It is available only to a few selected blue chip and
profitable companies.
By issuing commercial paper, the credit availablefrom the banks may get reduced.
Issue of commercial paper is very closely
regulated by the RBI guidelines.
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A is a type of
professionally-managed collective investment
vehicle that pools money from many investorsto purchase securities.
The money thus collected is then invested
in capital market instrument such as shares,
Debentures and other securities
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The mutual fund industry in India started
in 1963 with the formulation of Unit Trust Of
India, at the initiative of the Government of
India and Reserve Bank.
SBI Mutual Fund was the first non- UTI
Mutual Fund established in June 1987.
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Diversification: Investing in a single security i.e. stock or
bond can be risky, where as owning a mutual fund that
holds numerous securities reduces risk significantly.
Minimal transaction costs: Buying individual stocks
and bonds is expensive in terms of transactions costs.
Each time an investor buys or sells, they have to pay a
brokerage fees along with many other expenses. Since,
the scale of purchases and sales are huge, the
transaction cost for mutual funds are less.
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Service: Mutual fund companies may also offer
other services, including automatic investment and
withdrawal plans; automatic reinvestment of interest,
dividends, capital gains and help with taxes.
Transparency: Strict government
regulations and high disclosure policy makes it a
good investment option. This also makes it safe.
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