BBA 4th Semester
Investment Analysis & Portfolio Management
UNIT-II: Investment Alternatives
Introduction to Investment Alternatives
Investment alternatives are the various options available to investors for placing their money to earn
returns.
Depending on risk appetite, return expectations, and investment period, investors choose from
multiple alternatives.
Investment alternatives can be broadly classified into:
- Capital Market Instruments
- Money Market Instruments
- Non-Security Forms of Investments
Capital Market Instruments
The Capital Market deals with long-term investments that have a maturity period of more than one
year. Major instruments are:
1. Equity Shares
- Represent ownership in a company.
- Shareholders receive dividends and have voting rights.
- High returns but high risk.
Created by Suryansh Rastogi
BBA 4th Semester
Investment Analysis & Portfolio Management
UNIT-II: Investment Alternatives
2. Preference Shares
- Hybrid security with features of both equity and debt.
- Fixed dividend but generally no voting rights.
- Priority over equity shareholders during liquidation.
3. Debentures and Bonds
- Debt instruments where companies or governments borrow money.
- Debenture holders receive a fixed interest income.
- Bonds are considered safer compared to shares.
Money Market Instruments
The Money Market deals with short-term investments with high liquidity and maturity within one year.
Main instruments include:
1. Treasury Bills (T-Bills)
- Issued by the government to meet short-term funding needs.
- Very low-risk, sold at a discount and redeemed at face value.
2. Commercial Papers (CPs)
- Short-term unsecured promissory notes issued by corporations.
- Higher returns compared to T-bills but slightly higher risk.
Created by Suryansh Rastogi
BBA 4th Semester
Investment Analysis & Portfolio Management
UNIT-II: Investment Alternatives
3. Certificates of Deposit (CDs)
- Issued by banks to depositors for a fixed term.
- Safe investment option, better interest rates than savings accounts.
Non-Security Forms of Investment
Investments that are not in the form of marketable securities but still generate returns:
1. Real Estate
- Investment in properties like land, buildings, etc.
- Provides rental income and capital appreciation.
- Requires large capital and has low liquidity.
2. Gold
- Traditional investment, considered a hedge against inflation.
- Highly liquid but prices can be volatile.
3. Mutual Funds
- Pool of funds from investors managed professionally.
- Invested across equities, bonds, money market instruments.
- Reduces risk through diversification.
Valuation of Fixed and Variable Securities
Created by Suryansh Rastogi
BBA 4th Semester
Investment Analysis & Portfolio Management
UNIT-II: Investment Alternatives
Understanding the valuation of investments helps determine whether they are priced fairly.
Valuation of Fixed Securities (Bonds/Debentures)
- Value = Present Value of all future cash flows (interest + principal repayment).
- Formula involves discounting future cash flows at an appropriate discount rate.
Valuation of Variable Securities (Equity Shares)
- Equity valuation depends on future dividends and growth prospects.
- Models like Dividend Discount Model (DDM) are used.
Conclusion
A smart investor selects a combination of these investment alternatives based on:
- Risk appetite
- Investment goals
- Time horizon
- Expected returns
Proper understanding and valuation ensure better investment decisions.
Created by Suryansh Rastogi
