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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to the Indian Financial Markets

Caselet: Ms. Kavita Rao, 45, has Rs 6 lakh she may need within 6 months for a house down payment. She wants safety of principal and modest returns. Based on the characteristics of Indian financial market segments, which instrument is most suitable for parking this money?

A short-term money market instrument suits Ms. Rao because her need arises in six months and she wants capital safety. These instruments have low maturity, low interest rate risk and high liquidity, whereas equities or long-dated bonds can lose value before she needs the money.

  1. AEquity shares of a mid-cap company
  2. BA 10-year corporate debenture traded on the exchange
  3. CA short-term money market instrument such as a liquid investment of low maturityCorrect
  4. DA long-dated government security with 30-year maturity

Explanation

A six-month need calls for low interest rate risk, high liquidity and capital safety, which short-term money market instruments offer. Equities carry price risk, and long-dated bonds carry significant interest rate risk if sold early.

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