Q1. Different investment avenues and its advantages.

Different avenues and investment alternatives include share market, debentures or bonds,
money market instruments, mutual funds, life insurance, real estate, precious objects,
derivatives, non-marketable securities. All are differentiated based on their different features
in terms of risk, return, term, etc. Let us see more about the investment avenues.

1. Equity Shares

Equity investments represent ownership in a running company. By ownership, we mean to

share in the profits and assets of the company, but generally, there are no fixed returns. It is
considered a risky investment, but at the same time, depending upon the situation, it is a
liquid investment due to the presence of stock markets. There are equity shares for which
there is regular trading; for those investments, liquidity is more otherwise; liquidity is not
highly attractive for stocks with less movement. Equity shares of companies can be classified
as follows:

 Blue-chip scrip
 Growth scrip
 Income scrip
 Cyclical scrip
 Speculative scrip

Advantages -

 Dividend
An investor is entitled to receive a dividend from the company. It is one of the two
primary sources of return on his investment.
 Capital Gain
The other source of return on investment apart from dividends is capital gains. Gains
arise due to a rise in the market price of the share.
 Limited liability
The liability of a shareholder or investor is limited to the extent of the investment
made. If the company goes into losses, the share of loss over and above the capital
investment would not be borne by the investor.
 Exercise control
By investing in the company, the shareholder gets ownership in the company, and
thereby he can exercise control. In official terms, he gets voting rights in the
company.
 Claim over Assets and Income
An investor of an equity share is the owner of the company, and so is the owner of the
assets of that company. He enjoys a share of the income of the company. He will
receive some part of that income in cash in dividends, and the remaining capital is
reinvested in the company.
  Rights Shares
Whenever companies require additional capital for expansion, they tend to issue
‘rights shares.’ By issuing such shares, ownership and control of existing shareholders
are preserved, and the investor receives investment priority over other general
investors. Right Shares are issued at a price lower than the current market price of the
equity share. So, an existing investor can take that advantage or renounce right in
someone’s favor to get the value of right.
 Bonus Shares
At times, companies decide to issue bonus shares to their shareholders. It is also a
type of dividend. Bonus shares are free shares given to existing shareholders, and they
are often given in place of dividends.
 Liquidity
The shares of the company which is listed on stock exchanges have the benefit of any
time liquidity. The shares can very easily transfer ownership.

2. Mutual Funds

Mutual funds are an easy and tension-free investment, and they automatically diversify the
investments. A mutual fund is an investment only in debt or equity or a mix of debts and
equity and ratio depending on the scheme. They provide benefits such as a professional
approach, benefits of scale, and convenience. Further investing in a mutual fund will get the
advantage of professional portfolio management services at a lower cost, which otherwise
was impossible. In the case of an open-ended mutual fund scheme, a mutual fund gives
investors assurance that a mutual fund will provide support to the secondary market. There is
absolute transparency about investment performance to investors. On a real-time basis,
investors are informed about the performance of the investment. In mutual funds also, we can
select among the following types of portfolios:

 Equity Schemes
 Debt Schemes
 Balanced Schemes
 Sector Specific Schemes etc.

Advantages -

 Advanced Portfolio Management

When you buy a mutual fund, you pay a management fee as part of your expense
ratio, which is used to hire a professional portfolio manager who buys and sells
stocks, bonds, etc. This is a relatively small price to pay for getting professional help
in the management of an investment portfolio.
 Dividend Reinvestment
As dividends and other interest income sources are declared for the fund, they can be
used to purchase additional shares in the mutual fund, therefore helping your
investment grow.
 Risk Reduction (Safety)
 Reduced portfolio risk is achieved through the use of diversification, as most mutual
funds will invest in anywhere from 50 to 200 different securities—depending on the
focus. Numerous stock index mutual funds own 1,000 or more individual stock
positions.
 Convenience and Fair Pricing
Mutual funds are easy to buy and easy to understand. They typically have low
minimum investments and they are traded only once per day at the closing net asset
value (NAV). This eliminates price fluctuation throughout the day and various
arbitrage opportunities that day traders practice.

3. Debentures or Bonds

Debentures or bonds are long-term investment options with a fixed stream of cash flows
depending on the quoted interest rate. They are considered relatively less risky. The amount
of risk involved in debentures or bonds depends on who the issuer is. For example, if a
government makes the issue, the risk is assumed to be zero. However, investment in long-
term debentures or bonds has risks in terms of interest rate risk and price risk. Suppose a
person requires an amount to fund his child’s education after five years. He is investing in a
debenture, with a maturity period of 8 years, annually with coupon payment. In that case,
there is a risk of reinvesting coupons at a lower interest rate from the end of year 1 to the end
of year five, and there is a price risk for an increase in the rate of interest at the end of the
fifth year, in which price of a security falls. In order to immunize risk, investment can be
made as per the duration concept.

Advantages -

 Fixed Returns on Investment

Fixed investment in Bonds yields regular interests at timely intervals. Also, once a
bond matures, you receive the principal amount invested earlier. The best advantage
of investing in Bonds is that the investors know exactly how much the returns will be.
 Less Risky
Although Bonds and stocks are both securities, the clear differences between the two
are that the former matures in a specific period, while the latter typically remain
outstanding indefinitely. Also, the bondholders are paid first over stockholders in case
of liquidity.
 Less volatile
Investing in bonds is safer than the stock market, which also has several other risks.
Although a bond’s value can fluctuate according to current interest rates or inflation
rates, these are generally more stable compared when compared to stocks.
 Clear Ratings
Unlike stocks, bonds are universally rated by credit rating agencies. This gives further
assures investors about the right time for investing in bonds. Based on the clear
ratings, you can choose to buy bonds of any issuer with a better face value of bonds.
However, it’s still recommended to conduct your own research before investing.
 Investor Protection is one of the major advantages of Bonds
 Bondholders are also secured against many failures. Legal protection is something
investors can benefit from investing in Bonds. If a company goes bankrupt, its
bondholders will often receive some money back in the form of a recovery amount.

4. Life Insurance and General Insurance

They are one of the crucial parts of good investment portfolios. Life insurance is an
investment for the security of life. The main objective of other investment avenues is to earn
a return, but the primary goal of life insurance is to secure our families against the
unfortunate events of our death. It is popular among individuals. Other kinds of general
insurance are helpful for corporates. There are different types of insurance which are as
follows:

 Endowment Insurance Policy

 Money Back Policy
 Whole Life Policy
 Term Insurance Policy
 General Insurance for any kind of assets.

Advantages –

 It provides protection to the family.

 It acts as a provision for old age, retirement, etc.
 It provides tax benefits under section 80c.

5. Real Estate

Every investor has some part of their portfolio invested in real assets. Almost every
individual and corporate investor invest in residential and office buildings. Apart from these,
others include:

 Agricultural Land
 Semi-Urban Land
 Commercial Property
 Raw House
 Farm House etc

Advantages –

 Generates Cash Flow

If you are planning to invest in Real Estate, you can either invest in a residential
property or a commercial property. Renting out the features assure you monthly cash
flow as per the property location.
 Home Loan Tax Benefit
Home loans allow multiple tax benefits which significantly help you to reduce your
tax outgo. Indian government always encourages the citizens to make an investment
 in residential properties, home loans are eligible under Section 80C for tax
deductions.
 Simple and Controlled
Real estate is a straightforward and secure investment that also ensures a stable
investment. It also gives the investor a complete authority about each and everything
involved in the venture. As the investor is in charge of the property, all the decision
making and outcomes lie in their hands.
 Property Appreciation
When the market rates are rising, and the property rates appreciate, you can make a
quick selling decision. Real estate values tend to change and increase over time and
can help you earn tremendous profits when its time to sell. Real Estate investment is
safe as it promises a stable cash flow.

6. Precious Objects

Precious objects include gold, silver, and other precious stones like diamonds. Some artistic
people invest in art objects like paintings, ancient coins, etc.

Advantages -

 Tangible Assets
How many investments can you hold in your hand? Physical metals can’t be
destroyed by fire, water, or even time (silver does require occasional care). And
physical metals are unlike commodities, because they don't need feeding, fertilizer, or
maintenance.
 A Store of Value
Many mainstream advisors claim stocks outperform gold. But that’s not actually
accurate. While precious metals are usually thought of as a defensive asset, this shows
you can actually earn a profit on them. That’s because gold is inversely correlated to
traditional asset classes. When investors become risk-averse or are uncertain about the
future of the economy or markets, gold is naturally pursued and thus tends to do well
when other assets don’t. This makes gold an excellent diversification tool for an
investment portfolio.
 Can’t Be Hacked or Erased
How much of your wealth is in digital form today? If your online world comes
crashing down, or even if you’d just like some diversification away from the web,
physical metals can provide that.
 Are Value Dense
This is especially true with gold. You can hold $50,000 of gold coins in the palm of
your hand. They actually take up less space than a stack of dollar bills of equal value.
This means you can store physical gold in a relatively small space.
 Can Be Private and Confidential
How many assets can you say that about in today’s world? If you want a little privacy
or confidentiality, physical metals are one of the very few investable assets that can
offer this.
  Require No Specialized Knowledge
If you don’t know how to spot a real diamond, aren’t familiar with the painter Van
Gogh, or don’t collect comic books, just buy some physical metals. You don’t need
any special skills or training to purchase bullion.
 Are Portable
You can take physical metals with you literally anywhere in the world. This is
naturally easier with gold than silver, but if you need some traveling money or wish to
store some metal in another country, you can do that with physical metals. You can
even make crossing borders easier with this form of gold.

7. Non-marketable securities

Non marketable securities are those securities that cannot be liquidated in the financial
markets. Such securities include:

 Bank Deposits - Bank deposits consist of money placed into banking institutions for
safekeeping. These deposits are made to deposit accounts such as savings accounts,
checking accounts, and money market accounts. The account holder has the right to
withdraw deposited funds, as set forth in the terms and conditions governing the
account agreement.
 Post Office Deposits - The post-office term deposit (POTD) is similar to a bank fixed
deposit, where you save money for a definite time period, earning a guaranteed return
through the tenure of the deposit. At the end of the deposit's tenure, the maturity
amount comprises the capital deposited and the interest it earns.
 Company Deposits - A company deposit or a company fixed deposit aims at
providing interest higher than a bank fixed deposit. Let us learn more about it. Like a
bank fixed deposit, a company fixed deposit is a deposit with a company, typically a
non-banking finance company (NBFC) at a fixed rate of return over a fixed tenure.
 Provident Fund Deposits – Public Provident Fund (PPF) is a retirement savings
scheme offered by the Government of India with the aim of providing a secure post-
retirement life to everyone. The minimum deposit you must make in the account per
financial year is Rs. 500 and it can go up to Rs. 1.5 lakh.

8. Money Market Instruments

Money market instruments are like debentures, but the time period is less. It is generally less
than one year. Corporate entities can utilize their idle working capital by investing in money
market instruments. Some of the money market instruments are

 Treasury Bills - Treasury bills or T-bills, which are money market instruments, are
short term debt instruments issued by the Government of India and are presently
issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero
coupon securities and pay no interest. Instead, they are issued at a discount and
redeemed at the face value at maturity. For example, a 91 day Treasury bill of ₹100/-
 (face value) may be issued at say ₹ 98.20, that is, at a discount of say, ₹1.80 and
would be redeemed at the face value of ₹100/-. The return to the investors is the
difference between the maturity value or the face value (that is ₹100) and the issue
price
 Commercial Paper - All India Financial Institutions (AIFIs), NonBanking Finance
Companies (NBFCs), Scheduled Commercial Banks, Merchant Banks, Co-operative
Banks, and Mutual Funds all issue CBs, which were first issued in 1990. It took the
place of the country's old Bill Market, which had been in operation since 1952. The
seller (drawer) issues commercial bills to the buyer (drawee) for the value of items
delivered by him. These bills have a maturity of 30 days, 60 days, or 90 days. If the
seller needs funds, he might prepare a bill and send it to the buyer for approval
 Certificate of Deposits - The seller (drawer) issues commercial bills to the buyer
(drawee) for the value of items delivered by him. These bills have a maturity of 30
days, 60 days, or 90 days. If the seller needs funds, he might prepare a bill and send it
to the buyer for approval.

Q2. Risk returns trade off in investing.

The risk-return tradeoff states that the potential return rises with an increase in risk. Using
this principle, individuals associate low levels of uncertainty with low potential returns, and
high levels of uncertainty or risk with high potential returns. According to the risk-return
tradeoff, invested money can render higher profits only if the investor will accept a higher
possibility of losses.

The risk-return tradeoff is the trading principle that links high risk with high reward. The
appropriate risk-return tradeoff depends on a variety of factors including an investor’s risk
tolerance, the investor’s years to retirement and the potential to replace lost funds. Time also
plays an essential role in determining a portfolio with the appropriate levels of risk and
reward. For example, if an investor has the ability to invest in equities over the long term, that
provides the investor with the potential to recover from the risks of bear markets and
participate in bull markets, while if an investor can only invest in a short time frame, the
same equities have a higher risk proposition.

Investors use the risk-return tradeoff as one of the essential components of each investment
decision, as well as to assess their portfolios as a whole. At the portfolio level, the risk-return
tradeoff can include assessments of the concentration or the diversity of holdings and whether
the mix presents too much risk or a lower-than-desired potential for returns. When an
investor considers high-risk-high-return investments, the investor can apply the risk-return
tradeoff to the vehicle on a singular basis as well as within the context of the portfolio as a
whole. Examples of high-risk-high return investments include options, penny stocks and
leveraged exchange-traded funds (ETFs). Generally speaking, a diversified portfolio reduces
the risks presented by individual investment positions. For example, a penny stock position
may have a high risk on a singular basis, but if it is the only position of its kind in a larger
portfolio, the risk incurred by holding the stock is minimal.

Risk-Return Tradeoff at the Portfolio Level

That said, the risk-return tradeoff also exists at the portfolio level. For example, a portfolio
composed of all equities presents both higher risk and higher potential returns. Within an all-
equity portfolio, risk and reward can be increased by concentrating investments in specific
sectors or by taking on single positions that represent a large percentage of holdings. For
investors, assessing the cumulative risk-return tradeoff of all positions can provide insight on
whether a portfolio assumes enough risk to achieve long-term return objectives or if the risk
levels are too high with the existing mix of holdings.