Types of investment: or various investment alternatives /avenues

Types of investment: or various investment alternatives /avenues

Non-marketable Financial Assets:

A good portion of financial assets is represented by non-marketable financial assets. A distinguishing feature of these assets is that they represent personal transactions between the investor and the issuer. For example, when you open a savings bank account at a bank you deal with the bank personally. In contrast when you buy equity shares in the stock market you do not know who the seller is and you do not care. These can be classified into the following broad categories:

∑    Post office deposits

∑    Company deposits

∑    Provident fund deposits

∑    Bank deposits

Equity Shares:

∑    Equities are a type of security that represents the ownership in a company. Equities are traded (bought and sold) in stock markets. Alternatively, they can be purchased via the Initial Public Offering (IPO) route, i.e. directly from the company. Investing in equities is a good long-term investment option as the returns on equities over a long time horizon are generally higher than most other investment avenues. However, along with the possibility of greater returns comes greater risk. Equity shares are classified into the following broad categories by stock market analysts:

∑    Blue chip shares

∑    Growth shares

∑    Income shares

∑    Cyclical shares

∑    Speculative shares

Bonds:

Bond is a  debt instrument issued for a  period of more than one year with the purpose of raising  capital by  borrowing.

It is certificates acknowledging the money lend by a bondholder to the company. It states it maturity date, interest rate, and par value.

The  Federal government, states,  cities, corporations, and many other types of  institutions sell bonds. When an  investor buys a bond, he/she becomes a  creditor of the  issuer. However, the  buyer does not  gain any  kind of  ownership rights to the issuer, unlike in the case of  equities. On the  hand, a  bond holder has a greater  claim on an issuer's  income than a  shareholder in the case of  financial distress (this is true for all creditors). The  yield from a bond is made up of three  components: coupon interest,  capital gains and interest on interest (if a bond pays no coupon interest, the only yield will be capital gains). A bond might be sold at above or  below par (the  amount paid out at maturity), but the  market price will approach  par value as the bond approaches maturity. A riskier bond has to  provide a higher  payout to compensate for that  additional risk. Some bonds are  tax-exempt, and these are typically issued by  municipal, county or state  governments, whose  interest payments are not  subject to federal  income tax, and sometimes also state or  local income  tax.

Bonds may be classified into the following categories:

∑    Government securities

∑    Government of India relief bonds

∑    Government agency securities

∑    PSU bonds

∑    Debentures of private sector companies

∑    Preference shares

Money Market Instruments:

Debt instruments which have a maturity of less than one year at the time of issue are called money market instruments. The important money market instruments are:

∑    Treasury bills

∑    Commercial paper

∑    Certificates of deposits

Mutual Funds:

Instead of directly buying equity shares and/or fixed income instruments, you can participate in various schemes floated by mutual funds which, in turn, invest in equity shares and fixed income securities.

A mutual fund is made up of money that is pooled together by a large number of investors who give their money to a fund manager to invest in a large portfolio of stocks and / or bonds

Mutual fund is a kind of trust that manages the pool of money collected from various investors and it is managed by a team of professional fund managers (usually called an Asset Management Company) for a small fee. The  investments by the Mutual Funds are made in equities, bonds, debentures, call money etc., depending on the terms of each scheme floated by the Fund. The current value of such investments is now a day is calculated almost on daily basis and the same is reflected in the Net Asset Value (NAV) declared by the funds from time to time. This NAV keeps on changing with the changes in the equity and bond market. Therefore, the investments in Mutual Funds is not risk free, but a good managed Fund can give you regular and higher returns than when you can get from fixed deposits of a bank etc.

There are three broad types of mutual fund schemes:

∑    Equity schemes

∑    Debt schemes

∑    Balanced schemes

Life Insurance:

In a broad sense, life insurance may be viewed as an investment. Life insurance is a contract between the policy holder and the insurer, where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger payment. In return, the policy holder agrees to pay a stipulated amount (the "premium") at regular intervals or in lump sums. The important types of insurance policies in India are:

∑    Endowment assurance policy

∑    Money back policy

∑    Whole life policy

∑    Term assurance policy

Real Estate:

For the bulk of the investors the most important asset in their portfolio is a residential house. In addition to a residential house, the more affluent investors are likely to be interested in the following types of real estate:

∑    Agricultural land

∑    Semi-urban land

∑ Time share in a holiday resort

Precious Objects:

Precious objects are items that are generally small in size but highly valuable in monetary terms. Some important precious objects are:

Gold and silver Precious stones Art objects

Financial Derivative:

A financial derivative is an instrument whose value is derived from the value of an underlying asset. It may be viewed as a side bet on the asset. The most important financial derivatives from the point of view of investors are:

∑    Options

∑    Futures

Non-financial Instruments

Real estate

∑    With the ever-increasing cost of land, real estate has come up as a profitable investment proposition.

Gold

∑    The 'yellow metal' is a preferred investment option, particularly when markets are volatile. Today, beyond physical gold, a number of products which derive their value from the price of gold are available for investment. These include gold futures and gold exchange traded funds.