Previous Year Question
In India, which of the following can trade in Corporate Bonds and Government Securities?
Insurance companies
Pension Funds
Retail Investors
Select the correct answer using the codes given below:
1 and 2
2 and 3
1 and 3
1, 2 and 3
Correct Answer: D
Detailed Solution
Insurance companies, pension funds and retail investors can all invest or trade in corporate bonds and government securities.
Statement 1 is correct. Insurance companies invest a portion of the premiums collected by them in accordance with prescribed investment regulations. IRDAI regulations permit investment in Central and State Government securities, approved securities and, subject to specified conditions, corporate bonds and debentures.
Government securities provide insurance companies with relatively safe and regular income. Corporate bonds may offer higher returns, but they also carry credit risk relating to the issuer.
Statement 2 is correct. Pension funds regulated by PFRDA may allocate their investments among prescribed asset classes. These include government securities, State Development Loans, corporate debt and other permitted financial instruments.
Pension funds aim to accumulate a long-term retirement corpus. Government securities and corporate debt are used to balance safety, returns and liquidity within their portfolios.
Statement 3 is correct. Retail investors can purchase corporate bonds through the debt segments of stock exchanges, authorised brokers and public issues.
RBI introduced the RBI Retail Direct Scheme to provide retail investors with direct access to government securities. An individual investor can open a Retail Direct Gilt Account and invest in:
Central Government dated securities
Treasury Bills
State Government securities
Sovereign Gold Bonds
Corporate bonds represent a company’s debt obligation, while government securities represent borrowing by the Central or State Government. Both are debt instruments, though their credit-risk and return characteristics differ.