Financial Markets and Risk - Essay Example

For investors who are moderate on their risk taking mentality have hybrid products to choose from. This report will deal with various investment products that are provided by financial institutions and the implications of market interest rates on investors and banks. Long term savings and investment products provided by Retail banks and Non Banking Financial Intermediaries or NBFC’s Some of the popular long term investment products provided by retail banks and NBFC’s are as follows. Fixed Deposits: Fixed deposits, as the name signifies, have a fixed tenure during which the investments cannot be withdrawn.

Withdrawal is possible in between the tenure, but in such a case the investor will have to forgo certain benefits as early withdrawal charges. Bonds: Bonds are debt instruments that are issued by government or corporate. Bonds are fixed income securities that provide a fixed rate of return over a period of time. As a result, it is less risky too. Debentures: Debentures are similar to bonds in its nature with the only difference being they are issued only by corporations. Debentures provide fixed rate of interest and comes with a lock in period of usually more than 2 years.

Mutual Funds: Mutual fund is a collective fund management system in which the amount collected from a large number of investors is invested into certain asset classes based on the nature of the fund. The investors who invest in mutual funds will get units of the fund of which the value depends on the price movement in the assets they are invested in. Pension Funds: A pension fund is a very long term investment product that is intended to give retirement income for the investors. Investors contribute a certain amount on fixed intervals which is accumulated and invested in safe asset classes.

These are returned to them at the time of their retirement. Implications of increase in general interest rates on individual savers and investors An increase in the general interest rates will have a considerable impact on the investment portfolio of investors and savers. “When interest rates are rising, both businesses and consumers will cut back on spending” (Investopedia, 2011). The cut back on spending by customers and businesses will lead to less corporate earnings than before. The poor corporate earnings will cause the stock prices to drop at the overall market.

A fall in the stock market will affect all the investment products that have the investment pie in stocks. Investors and individual savers, who have invested directly in the stock markets or invested in the stock markets through mutual funds and other products, will see their corpus going down. A rising interest rate can also affect the investors in terms of the low risky instruments like bonds. The prime relationship to be understood is that there is always an inverse relationship between the interest rates and bond prices.

When the market interest rate rises, the bonds with lesser interest rate than the market rate will turn to be less attractive for the investors. The investors receive interest at a lower rate as compared to what is offered by the market. This will not be a big issue if the investor holds the bond until its maturity. But any plans to sell the bond before the maturity will reap fewer benefits when the market interest rates are higher (Williams, 2009). The investor can definitely hold on to the bonds