AVENUES OF INVESTMENT

Investment avenues can be classified as Investment in Financial Assets and

Investment in Real Assets.

Investment in Financial Assets:

1. Equity Shares: Equity shares are long-term financing sources for any
company. These shares are issued to the general public and are non-
redeemable in nature. Investors in such shares hold the right to vote, share
profits and claim assets of a company.

Equity shareholders are the real owners of the company. They have control
over the company. They bear the risk of the business at the winding up of
the company. Equity capital can be paid only after every claim has been
settled.

Features of Equity Shares:

 Residual claim on income: After paying interest, tax and preference

dividend, the remaining profit can be distributed to equity shareholders
as dividend.
 Residual claim on assets: While repaying also equity shareholders
stand last.
 Right to control: Through voting rights, equity shareholders have the
control over the affairs of the company.
 Pre-emptive rights: This right of equity shareholders makes the company
to offer additional equity shares to existing equity shareholders before it is
offered to general public.
 Limited liability: The liability of equity shareholder is limited to the
extent of face value of shares.
 Nature: They are permanent in nature.
 Owners: Equity shareholders are the actual owners of the company and
they bear the highest risk.
 Transferability: Equity shares are easily transferable. They can be
transferred with or without consideration to other person.
 Dividend: Dividend payable to equity shareholders is an appropriation of
profit. They do not get fixed rate of dividend.

Merits of Equity Shares

 Ideal for Adventurous Investors: Equity shares are appropriate for
investors who are willing to take on risk in exchange for higher returns.

PRASAD R
Assistant Professor
M.Com, NET
 No Obligation to give Dividends: The payment of dividends to equity
shareholders is optional. As a result, the company bears no burden in
this regard.
 Source of Fixed Capital: Equity capital is permanent capital because it
is repaid only when a company is liquidated. It provides a buffer for
creditors in the event of a company’s insolvency because it is listed last
on the list of claims.
 Provides Credit Standing: Equity capital provides the company with
creditworthiness and confidence in potential loan providers.
 No Charge on Assets: Funds can be raised through an equity
issue without placing a charge on the company’s current assets. If
necessary, a company may freely mortgage its assets in exchange to
obtain financing.
 Democratic Management: The voting rights of equity shareholders
ensure democratic control over the company’s management.

Demerits of Equity Shares:

 Risk of Fluctuating Returns: Due to the fluctuating returns on equity

shares, investors looking to find a consistent income may not prefer
equity shares.
 High Cost of Capital: The cost of equity shares is typically higher than
the cost of raising funds from other sources.
 Dilution of Control: The voting rights and profits of current equity
shareholders are diluted when new equity shares are issued.
 Legal Formalities: Raising money through the issuance of equity shares
involves more formalities and delays in the legal process.
 Danger of Over-capitalisation: Equity share capital is a permanent
source of capital. So, if due to poor financial planning, a company raises
excess equity capital, it may get over-capitalised and the equity capital
may remain underutilised and idle.

Types of Equity Shares:

Following are the different types of Equity Shares:

 Ordinary Shares: These are the shares a company acquires to raise funds
for long-term expenses. In such cases, investors get part ownership of the
company according to the number of shares they hold. Ordinary
shareholders have voting rights.
 Bonus Shares: Bonus shares are equity shares a company issues from its
retained earnings. In other words, a company distributes its profits as a
bonus issue. However, this doesn’t increase the company’s market
capitalization.
PRASAD R
Assistant Professor
M.Com, NET
 Rights Shares: Rights shares are for the specific premium investors of the
company. Thus, the equity stake of such holders is high. Companies offer
rights issues at discounted prices. The idea is to raise funds to meet the
firm’s financial needs.
 Sweat Equity: Company employees, including directors, hold sweat
equity shares. The company issues such shares to the employees for
value additions, excellent work done, or any other remarkable
achievements as a part of their compensation or at discounted prices.
 Employee Stock Options (ESOPs): ESOPs are part of a company’s
incentive and retention strategy. The employees can purchase shares at a
predetermined price at a future date per an ESOP’s conditions. Employees
and directors who exercise their ESOP grant option to receive these
shares.

2. Preference Shares: Preference shares are those shares which carries

fixed rate of dividend and preferential rights as to the payment of dividend
and repayment of capital. They not carry voting rights.

Types of Preference Shares

The various types of preference share are discussed below:
 Cumulative preference share: Cumulative preference shares are a
special type of shares that entitles the shareholders to enjoy cumulative
dividend pay-out at times when a company is not making profits. These
dividends will be counted as arrears in years when the company is not
earning profit and will be paid on a cumulative basis, the next year when
the business generates profits.
 Non-cumulative preference shares: These types of shares do not
accumulate dividends in the form of arrears. In the case of non-
cumulative preference shares, the dividend pay-out takes place from the
profits made by the company in the current year. If there is a year in
which the company doesn’t make any profit, then the shareholders are
not paid any dividends for that year and they cannot claim for dividends
in any future profit year.
 Participating preference shares: These types of shares allow the
shareholders to demand a part in the surplus profit of the company at the
event of liquidation of the company after the dividends have been paid to
the other shareholders. In other words, these shareholders enjoy fixed
dividends and also share a part of the surplus profit of the company along
with equity shareholders.
 Non-participating preference shares: These shares do not yield the
shareholders the additional option of earning dividends from the surplus
profits earned by the company. In this case, the shareholders receive only
the fixed dividend.
PRASAD R
Assistant Professor
M.Com, NET
 Redeemable Preference Shares: Redeemable preference shares are
shares that can be repurchased or redeemed by the issuing company at a
fixed rate and date. These types of shares help the company by providing
a cushion during times of inflation.
 Non-redeemable Preference Shares: Non-redeemable preference shares
are those shares that cannot be redeemed during the entire lifetime of the
company. In other words, these shares can only be redeemed at the time
of winding up of the company.
 Convertible Preference Shares: Convertible preference shares are a type
of shares that enables the shareholders to convert their preference shares
into equity shares at a fixed rate, after the expiry of a specified period as
mentioned in the memorandum.
 Non-convertible Preference Shares: These type of preference shares
cannot be converted into equity shares. These shares will only get fixed
dividend pay-out and also enjoy preferential dividend pay-out during the
dissolution of a company.

Features of Preference Shares:

 They Can Be Converted Into Common Stock: Preference shares can be

easily converted into common stock. If a shareholder wants to change its
holding position, they are converted into a predetermined number of
preference stocks.
 Dividend Pay-outs: Preference shares allow shareholders to receive
dividend pay-outs when other stockholders may receive dividends later or
may not be receiving dividends.
 Dividend Preference: When it comes to dividends, preference
shareholders have the major advantage of receiving dividends first
compared to equity and other shareholders.
 Voting Rights: Preference shareholders are entitled to the right to vote in
case of extraordinary events. However, this happens in only some cases.
Generally, purchasing a company’s stock does not give one voting rights
in the company’s management.
 Preference in Assets: While discussing a company’s assets in the case of
liquidation, preference shareholders have priority over non-preferential
shareholders.

Advantages of Preference Shares:

 Appeal to cautious investors: Preference shares can be easily sold to

investors who prefer reasonable safety of their capital and want a
regular and fixed return on it.

PRASAD R
Assistant Professor
M.Com, NET
 No obligation for dividends: A company is not bound to pay dividend on
preference shares if its profits in a particular year are insufficient. It can
postpone in case of cumulative preference shares. No fixed burden is
created on the company’s finances.
 No interference: Generally, preference shares do not carry voting rights.
Therefore, a company can raise capital without dilution of control.
 Trading on equity: The rate of dividend on preference share is fixed.
Therefore, with the rise in its earnings, the company can provide the
benefits of trading on equity to equity shareholders.
 No charge on assets: Preference shares do not create any mortgage or
charge on the assets of the company. So, the company can keep its fixed
assets free for raising loans in future.
 Flexibility: A company can issue redeemable preference shares for a fixed
period. The capital can be repaid when it is no longer required in
business.

Disadvantages of Preference Shares:

 Fixed obligation: Dividend on preference shares has to be paid at a fixed

rate and before any dividend is paid on equity shares. The burden is
greater in case of cumulative preference shares on which accumulated
arrears of dividend have to be paid.
 Limited appeal: Bold investors do not like preference shares. Cautious
and conservative investors prefer debentures and government securities.
In order to attract sufficient investors, a company may have to offer
higher rate of dividend on preference shares.
 Low return: When the earnings of the company are high, fixed dividend
on preference shares becomes unattractive. Preference shareholders
generally do not have the right to participate in the prosperity of the
company.
 No voting rights: Preference shares do not carry voting rights. As a
result, preference shareholders are helpless and have no say in the
management and control of the company.
 Fear of redemption: The holders of preference shares might have
contributed finance when the company was badly in need of funds. But
the company may refund their money whenever the market is favourable.
 Not tax deductible: Preference dividend is not tax deductible and hence
it is costlier than a debenture to the company.

3. Debentures: The word ‘debenture’ itself is a derivation of the Latin word

‘debere’ which means to borrow or loan. Debentures are written instruments
of debt that companies issue under their common seal. They are similar to a
loan certificate.
PRASAD R
Assistant Professor
M.Com, NET
Debentures are issued to the public as a contract of repayment
of money borrowed from them. These debentures are for a fixed period and a
fixed interest rate that can be payable yearly or half-yearly. Debentures are
also offered to the public at large, like equity shares. Debentures are actually
the most common way for large companies to borrow money.

Features of Debentures:
 Debentures are instruments of debt, which means that debenture
holders become creditors of the company
 They are a certificate of debt, with the date of redemption and amount of
repayment mentioned on it. This certificate is issued under the company
seal and is known as a Debenture Deed
 Debentures have a fixed rate of interest, and such interest amount is
payable yearly or half-yearly
 Debenture holders do not get any voting rights. This is because they are
not instruments of equity, so debenture holders are not owners of the
company, only creditors
 The interest payable to these debenture holders is a charge against the
profits of the company. So these payments have to be made even in case
of a loss.

Advantages of Debentures:
 One of the biggest advantages of debentures is that the company can get
its required funds without diluting equity. Since debentures are a form of
debt, the equity of the company remains unchanged.
 Interest to be paid on debentures is a charge against profit for the
company. But this also means it is a tax-deductible expense and is
useful while tax planning
 Debentures encourage long-term planning and funding. And compared to
other forms of lending debentures tend to be cheaper.
 Debenture holders bear very little risk since the loan is secured and the
interest is payable even in the case of a loss to the company
 At times of inflation, debentures are the preferred instrument to
raise funds since they have a fixed rate of interest

Disadvantages of Debentures
 The interest payable to debenture holders is a financial burden for the
company. It is payable even in the event of a loss
 While issuing debentures help a company trade on equity, it also makes
it to dependent on debt. A skewed Debt-Equity Ratio is not good for the
financial health of a company
 Redemption of debentures is a significant cash outflow for the company
which can imbalance its liquidity
PRASAD R
Assistant Professor
M.Com, NET
 During a depression, when profits are declining, debentures can prove to
be very expensive due to their fixed interest rate

Types of Debentures
There are various types of debentures that a company can issue, based on
security, tenure, convertibility etc. Let us take a look at some of these types of
debentures.
 Secured Debentures: These are debentures that are secured against an
asset/assets of the company. This means a charge is created on such an
asset in case of default in repayment of such debentures. So in case, the
company does not have enough funds to repay such debentures, the said
asset will be sold to pay such a loan. The charge may be fixed, i.e.
against a specific assets/assets or floating, i.e. against all assets of the
firm.
 Unsecured Debentures: These are not secured by any charge against the
assets of the company, neither fixed nor floating. Normally such kinds of
debentures are not issued by companies in India.
 Redeemable Debentures: These debentures are payable at the expiry of
their term. Which means at the end of a specified period they are
payable, either in the lump sum or in instalments over a time period.
Such debentures can be redeemable at par, premium or at a discount.
 Irredeemable Debentures: Such debentures are perpetual in nature.
There is no fixed date at which they become payable. They are
redeemable when the company goes into the liquidation process. Or they
can be redeemable after an unspecified long time interval.
 Fully Convertible Debentures: These shares can be converted to equity
shares at the option of the debenture holder. So if he wishes then after a
specified time interval all his holdings will be converted to equity
shares and he will become a shareholder.
 Partly Convertible Debentures: Here the holders of such debentures
are given the option to partially convert their debentures to shares. If he
opts for the conversion, he will be both a creditor and a shareholder of
the company.
 Non-Convertible Debentures: As the name suggests such debentures do
not have an option to be converted to shares or any kind of equity. These
debentures will remain so till their maturity, no conversion will take
place. These are the most common type of debentures.

4. Bonds: A Bond is a fixed income instrument that represents a loan

made by an investor to a borrower.” In simpler words, bond acts as a
contract between the investor and the borrower. Mostly companies and
Government Issue bonds and investors buy those bonds as a savings and
security option.

PRASAD R
Assistant Professor
M.Com, NET
These bonds have a maturity date and when once that is attained, the
issuing company needs to pay back the amount to the investor along with a
part of the profit. This kind of dealing with bonds between the issuer and
the investor is done by brokers.

Different Types of Bonds

There are various types of Bonds. A few of them have been discussed below
in brief.
 Traditional Bond: A bond in which the entire principal can be withdrawn
at a single time after the bond’s maturity date is over is called a
Traditional Bond.
 Callable Bond: When the issuer of the bond calls out his right to redeem
the bond even before it reaches its maturity is called a Callable Bond.
 Fixed-Rate Bonds: When the coupon rate remains the same through the
course of the investment, it is called Fixed-rate bonds.
 Floating Rate Bonds: When the coupon rate keeps fluctuating during the
course of an investment, it is called a floating rate bond.
 Puttable Bond: When the investor decides to sell their bond and get their
money back before the maturity date, such type of bond is called a
Puttable bond.
 Mortgage Bond: The bonds which are backed up by the real estate
companies and equipment are called mortgage bonds.
 Zero-Coupon Bond: When the coupon rate is zero and the issuer is only
applicable to repay the principal amount to the investor, such type of
bonds are called zero-coupon bonds.
 Serial Bond: When the issuer continues to pay back the loan amount to
the investor every year in small instalments to reduce the final debt, such
type of bond is called a Serial Bond.
 Extendable Bonds: The bonds which allow the Investor to extend the
maturity period of the bond are called Extendable Bonds.
 Climate Bonds: Climate Bonds are issued by any government to raise
funds when the country concerned faces any adverse changes in climatic
conditions.
 War Bonds: War Bonds are issued by any government to raise funds in
cases of war.
 Inflation-Linked Bonds: Bonds linked to inflation are called inflation
linked bonds. The interest rate of Inflation linked bonds is generally lower
than fixed rate bonds

Advantages of Investment in Bonds

Investing in bonds offers several benefits that make them an attractive
option for many investors. The following are the benefits of investing into
bonds:

PRASAD R
Assistant Professor
M.Com, NET
 Predictable returns: Unlike stocks, bonds provide a fixed rate of return,
which makes them a more predictable investment option. The issuer
promises to pay a fixed amount of interest at regular intervals, and the
investor knows exactly how much they will receive and when they will
receive it. This predictability makes bonds an attractive option for those
investors who want a steady stream of income.
 Lower risk: Bonds are generally considered to be less risky than stocks
because the return on investment is fixed, and the issuer is contractually
obligated to pay back the principal amount of the bond upon maturity.
While there are always some risks associated with investing, the risk of
losing money in the bond market is generally lower than in the stock
market.
 Diversification: Investment in bonds helps in diversifying an investor’s
portfolio, which can reduce overall risk. Since the bond market is not
closely correlated with the stock market, investing in bonds can helps
protect against losses in the stock market. Additionally, different types of
bonds offer varying levels of risk, so investors can choose bonds according
to their risk tolerance.
 Tax advantages: Certain types of bonds offer tax advantages, such as
municipal bonds that are typically exempt from federal taxes. This can
provide additional income for investors, especially those in higher tax
brackets.
 Stability: The bond market is generally more stable than the stock
market, which can be volatile and subject to sudden fluctuations. Bonds
tend to be less sensitive to market conditions, and their value is typically
influenced more by interest rates and the issuer’s creditworthiness.

Disadvantages of Investing in Bonds

While investing in bonds can offer several benefits, there are certain
disadvantages that investors should be aware of. Here are some of the main
disadvantages of investing in bonds:
 Lower returns: Compared to other types of investments, such as stocks,
bonds may offer lower returns. While the fixed rate of return can be
attractive for investors looking for steady income, returns might not be as
high as other investments, especially in a low-interest-rate environment.
 Inflation risk: It can reduce the purchasing power of the fixed returns
offered by bonds. Whenever the inflation rate is higher than interest rate
of the bond, the real return on the investment will be negative.
 Interest rate risk: Prices of bonds are inversely related to the interest
rates. When the interest rates increase, bond prices will reduce, and
investors may incur losses if they need to sell their bonds before maturity.
This risk can be higher for longer-term bonds.

PRASAD R
Assistant Professor
M.Com, NET
 Credit risk: There is always the risk of default by the issuer, especially for
lower-rated bonds. If the issuer is unable to make the interest payments
or repay the principal amount upon maturity, investors may lose their
investment.
 Liquidity risk: Some bonds may be less liquid than others, which can
make it difficult to sell them in the secondary market. This can result in
investors receiving less than the expected price for their bonds or being
unable to sell them at all.
 Market risk: The value of bonds can be affected by market conditions,
such as economic indicators and political events. These factors can cause
bond prices to fluctuate, resulting in potential losses for investors.

Differences between Bonds and Debentures:

Parameters Bonds Debentures

Debt financial Debt financial
Type
instruments instruments
Large corporations and
Issuer Private companies
government agencies
Owner Bond holder Debenture holder
Tenure Higher than debenture Lower than bonds
Fulfil long-term capital Fulfil immediate capital
Requirements
requirements requirements
Interest rate Lower than debentures Higher than bonds
Priority Higher Lower
Periodical basis and
Interest
Accrual basis based on the company’s
payment
performance
Risk Safer than debentures Riskier than bonds

5. Government Securities: Government securities or gilts are

sovereign securities, which are issued by the RBI on behalf of Government of
India. The GOI uses these funds to meet its expenditure commitments.

Types of Government Securities:

 Dates Securities: These securities generally carry a fixed interest rate

and have a fixed maturity period. Generally these are issued at face value

PRASAD R
Assistant Professor
M.Com, NET
 and interest payment is made on half yearly rest. On maturity the
security is redeemed at face value.
 Zero Coupon Bonds: These securities are issued at a discount on the face
value and redeemed at par. The tenure of these securities are fixed and no
interest is paid on these securities.
 Partly Paid Stock: These type of securities are issued at face value and
the principal amount is paid in instalment over a period of time. The rate
of interest and tenure is fixed.
 Floating Rate Bonds: These type of securities have a variable interest
rates, which is calculated as a fixed percentage over a benchmark rate.
 Capital Indexed Bonds: These securities carry an interest rate, which is
calculated as a fixed percentage over the wholesale price index.

6. Life Insurance: It is a contact for payment of a sum of money to the

person who is insured with the insurance company on the happening of
event insured against.

Advantages of Life Insurance:

 Protection: The contract for life insurance provides for the payment of an
amount on the date of maturity or on the death of policy holder,
whichever is earlier. So, it provides a protection against risk of early
death.
 Facility for savings: Life insurance contract facilitates mobilization of
savings. The insured pay the premium in easy instalments such as
monthly, quarterly, half yearly or yearly.
 Liquidity: Investment in the form of insurance policy is liquid because it
can be surrendered with the insurance company at a pre-determined
value, depending upon the premium paid or can avail loan against the
policy from the insurance company.
 Tax benefits: The person who are liable to pay tax can reduce his/her tax
liability by making investments in the form of insurance policies. The
premium paid on insurance policy can be can be claimed as deduction
under section 88 of Income Tax Act.

Disadvantages of Life Insurance:

 Current cash flow reduced.
 Low yield
 Need to have insurable interest at the inception of the policy.
 Illiquid in the short term
 Lack of flexibility.

PRASAD R
Assistant Professor
M.Com, NET
Types of Policies:

 Term Insurance Policy: This policy is pure risk cover with the insured
amount will be paid only if the policy holder dies in the period of policy
time. The intention of the policy is to protect the policy holder’s family in
case of death.
 Whole Life Policy: As the name suggests, the policy holder has t pay the
premium for whole life till his death. This policy does not address any
other need of the policy holder.
 Endowment Policy: It is the most popular life insurance plans. This
policy combines risk cover with the savings and investment. If the policy
holder dies during the tenure of the policy, the beneficiaries will get the
assured amount. Even if he survives he will receive the assured amount.
Along with the above the policy holder also get bonus.
 Money Back Policy: Money back is to provide money on the occasions
when the policy holder needs for his personal life. The occasions may ne
marriage, education, etc. Money will be paid back to the policy holder
after specific duration. A portion of sum assured is payable at regular
intervals. On survival the remaining sum assured is payable.
 Annuities and Pension: An annuity is a series of periodic payments. In
an annuity policy, the insurer agrees to pay the insured a stipulated
amount periodically.

7. Mutual Funds: Mutual funds is a financial intermediary that allows a

group of investors to pool their money together with a predetermined
investment objective. Mutual fund will have a fund manager who is
responsible for investing the pooled money in specific securities like shares,
debentures and bonds.

Apart from the above mentioned, an investor can also invest in various other
avenues like Money Market Instruments, Bank Deposits, Post Office
Schemes and Small Savings Certificate.

Investment in Physical Assets

1. Gold: Gold is one of the most valuable assets in any economy. It has
been used in India primarily as a form of savings by housewives. Although it
is said to appreciate many times, yet in India it is more of a sense of security
and a fixed asset rather than for the use of sale or purchase to make profit.
Gold investment may be in the form of gold coins, gold bars or gold
jewellery.

PRASAD R
Assistant Professor
M.Com, NET
Advantages of Gold:
 Maintains long term value: Market cycles have their ups and downs, but
gold has maintained its long term value.
 Safe Refuge: During times of calamities like wars or economic crisis,
there may be a negative effect on investments like currencies, bonds and
equities, but may have an opposite effect on the value of gold. Also gold is
not a liability of any Government or corporation and hence it does not run
a risk of becoming worthless due to unexpected events.
 Inflation hedge: The value of gold, in terms if real goods and services
that it can buy, has remained remarkably stable whereas the purchasing
power of many currencies has generally declined.
 Effective Diversifier: Gold is an excellent portfolio diversifier because its
performance tends to move independently of other investments and key
economic factors.
 Both tangible and liquid: Gold is an asset that is both tangible and
liquid. That is it can be seen physically and also can be sold easily.

2. Silver: Silver is sold in the form of kilograms in India. Silver may be

owned in the form of coins, utensils, glass, bowls, plates, trays or jewellery.
But generally the above mentioned are very difficult to re-sell them and get
the value of investment. Silver bars are legal in India and can be used for
selling. The sale price of silver bars are quoted in the stock exchange list.

3. Diamonds: Diamonds purchased in raw form and through a wholesaler

may be the best investment. Since the price of diamonds keep on increasing
they have a good investment value. The investor must be extremely careful
because to a large extent the value of diamond is based on judgement.
Investing in diamonds should be done only through professional advice and
when an investor has money to hold for a number of years. Immediate
purchase and sale of diamonds will not fetch price increase.

4. Real Estate: Real estate is very useful as a portfolio for both income
and capital gains. Real estate can create income streams as well as potential
long term capital gains. Real estate investments can be made directly, with a
purchase in your own name or through investments in limited partnerships,
mutual funds, or real estate investment trusts.

Advantages of Real Estate:

 Potential for high return: Real estate can create streams of income
and capital gains in long term, hence there are chances of getting very
high returns in the long run.

PRASAD R
Assistant Professor
M.Com, NET
  Potential tax advantage: If a residential property is purchased for
personal use by borrowing housing loan from bank, then the interest
paid on the loan can be deducted while calculating tax liability. There
may be deduction for property taxes also. If a property is income
producing, other expenses may be deducted such as depreciation,
insurance, and repairs.
 Hedge against inflation: Some consider real estate as a good hedge
against inflation, because real estate prices have always shown a
upward trend even under adverse circumstances.
 Positive cash flow: Good quality carefully selected income property
will generally produce a positive cash flow.

Disadvantages of Real Estate:

 Limited marketability: There is generally limited marketability in real

estate because factors like nature and location of the property play vital
role.
 Lack of liquidity: There is also lack of liquidity because there is no
guarantee that the property can be disposed off at its original value,
especially if it is done within a short period of time.
 Large initial investment: Real estate requires relatively large initial
investment.

****************

PRASAD R
Assistant Professor
M.Com, NET