📘 7.1 Types of Investment
Investment opportunities are classified into financial and non-financial categories. Financial instruments represent claims on future cash flows. Non-financial investments provide utility, consumption, or store of value:contentReference[oaicite:1]{index=1}.
🏦 Financial Investments
Include equities, bonds, mutual funds, derivatives. Represent contracts to receive future income. Typically regulated and liquid.
🏠 Non-Financial Investments
Includes gold, real estate, collectibles. Have intrinsic value, lower liquidity, and are less regulated. Often used for diversification and inflation protection.
🔍 Classifications of Financial Investments
📃 Based on Claim Type
- Debt: Fixed income, repayable principal + interest
- Equity: Ownership, variable returns, high risk
🏛️ Based on Market
- Public Markets: Listed stocks, bonds, MFs
- Private Markets: VC/PE, unlisted securities
⏳ Based on Maturity
- Money Market: Short-term (T-bills, CP, CD)
- Capital Market: Long-term (shares, bonds)
📘 7.2 Equity – Investment Characteristics and Role
Equity represents ownership in a company. Equity investors (shareholders) have a residual claim on company assets and earnings, and benefit from dividends and capital appreciation. Unlike debt, equity doesn’t guarantee fixed returns but offers long-term wealth-building opportunities【235:0†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
📈 Capital Appreciation
Equity values can increase as the company grows. Over time, capital appreciation is the main source of equity wealth.
💰 Dividends
Companies may share profits via dividends, though they are not guaranteed. High dividend stocks offer steady income + growth.
🗳️ Voting Rights
Equity holders participate in governance through voting (typically 1 vote per share), influencing key decisions and board appointments.
🧠 Time Diversification
Over longer time horizons, equity returns tend to stabilize due to the smoothing effect of market cycles.
📘 Preference Shares
Preference shares offer fixed dividends and rank above equity during liquidation. Typically, they lack voting rights and behave like hybrid instruments.
- Cumulative: Unpaid dividends accumulate and must be paid before equity dividends
- Non-cumulative: Skipped dividends are lost
- Participating: Eligible for extra profits post fixed dividend
- Convertible: Can be converted into equity shares
These features combine debt-like stability with some equity upside potential
🔀 Differential Voting Rights (DVRs)
Some companies issue equity with DVRs offering lower or higher voting power compared to ordinary shares. DVRs may also offer enhanced dividends to compensate for reduced control.
Example: Tata Motors issued DVRs in 2008 with 1/10th voting power and 5% higher dividend. Although common globally, DVRs are still rare in India
📘 7.3 Fixed Income
Fixed income refers to investment contracts where the issuer promises a stream of cash flows (interest + principal). These include bonds, debentures, and other debt securities issued by governments and corporates. Returns are stable but limited compared to equity:contentReference[oaicite:1]{index=1}.
🏛️ Government vs Corporate Debt Securities
🇮🇳 Government Securities (G-Secs)
Issued by Central or State Governments. Includes T-bills (short term) and Dated Securities or SDLs (long term). Considered risk-free or “gilt-edged”.
🏢 Corporate Debt
Issued by companies to raise capital. Higher returns due to credit risk. May be listed or unlisted. Investors must assess the creditworthiness of the issuer.
📊 Credit Spread
Difference between yield on corporate debt and government security of same maturity. Reflects default risk premium.
📉 High Yield vs Investment Grade
🔵 Investment Grade
- Rated BBB and above by credit agencies
- Indicates lower probability of default
- Favored by institutions like pension funds
🔴 High Yield (Junk)
- Rated below BBB
- Higher returns but higher risk of default
- Speculative and volatile in pricing
📑 SEBI Rating Scale (Sample)
- AAA: Highest safety
- AA: High safety
- BBB: Moderate safety → Minimum for Investment Grade
- BB and below: Speculative/High Risk
📘 7.4 to 7.9 – Alternative Investment Opportunities & Channels
🌾 7.4 Commodities
🌱 Soft Commodities
Grown goods like wheat, sugar, cotton. High volatility, sensitive to weather and seasonal demand. Low correlation with equity offers diversification benefits【245:0†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
🔩 Hard Commodities
Mined goods like gold, silver, oil. Gold is considered a global safe-haven. Commodities offer no income — returns come from price appreciation【245:0†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
🏠 7.5 Real Estate
Physical asset offering capital appreciation and rental income. Long-term, illiquid, high entry cost. Includes commercial & residential segments. Access via direct purchase or REITs【245:0†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
🧩 7.6 Structured Products
Customized investments using derivatives. Offers market-linked returns with various levels of downside protection. Examples: Market Linked Debentures (MLDs). Suited for HNIs with higher ticket size and risk understanding【245:0†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
⚠️ 7.7 Distressed Securities
Securities of financially distressed companies. Available at steep discounts but involve high risk. Requires expertise in valuation and restructuring. Popular with hedge funds and PMS/AIF platforms【245:2†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
🎨 7.8 Other Investment Opportunities
🖼️ Art & Collectibles
Unique, illiquid investments. Require deep knowledge. Offer diversification and potential long-term capital gains【245:2†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
🌍 Overseas Investments (LRS)
Invest up to $250,000 per year abroad. Enables currency and regional diversification through global ETFs, stocks, or funds【245:2†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
📌 7.9 Channels for Making Investments
🧾 Direct Investments
Buy stocks, bonds, gold, or property directly. Requires self-research and execution. Used by DIY investors or traders【245:2†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
👨💼 Role of RIAs
SEBI Registered Investment Advisers provide unbiased, fee-based advice. Must be certified and follow a fiduciary code of conduct. They act in the investor’s best interest【245:2†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
📊 Managed Portfolios
Invest through Mutual Funds, Portfolio Managers (PMS), or AIFs. Portfolio is professionally managed based on mandate or objective.
- Mutual Funds: SEBI-regulated pooled vehicle, open to all, high liquidity, low entry
- Portfolio Managers (PMS): Individual account, customized, high minimum investment
- Alternative Investment Funds (AIFs): Pooled high-net-worth vehicles, multiple categories, niche or complex strategies
