INVESTMENT ALTERNATIVES – NEGOTIABLE AND NON-

NEGOTIABLE INSTRUMENTS
Investment refers to employment of funds on assets with the aim of earning
income or capital appreciation. It is essentially a sacrifice of current money
or other resources for future benefits. There are various Investment
Alternatives available with an investor. An investor has to carefully choose
between different investment alternatives like negotiable securities (Can be
freely traded in the market) and non-negotiable securities (cannot be traded
in the market), Mutual Funds and Non-Financial Instruments or Real
Assets. Negotiable securities can be fixed income (bring fixed returns) or
variable income securities (brings variable returns).
The chart below attempts to show a basic investment strategy of an investor. Percentage of
total income to be spent on various investment alternatives are:

Different Investment Alternatives

(1) Negotiable Instruments / Securities – 
These investment alternatives can be traded in the market.
(i) Variable Income Securities

• Equity Shares: Shares which do not carry any preferential rights in

repayment of capital and dividend payments are equity shares. The rate of
dividend is not fixed and varies depending upon the profitability, financial
position and business objectives of a company. The owners of equity shares
are the owners of the company and have voting rights in the management of
the company.
The equity shares attract the interest of many Equity shares are commonly
refferred to as Common stock or ordinary shares.

Classification on the basis of nature of shares:

  Growth Shares: These stocks have a higher growth rate than the
industry growth rate on the basis of profitability. E.g. HCL
 Income Shares: These stocks have a relatively stable operations and
limited growth opportunities. E.g. Banks, FMGC, Cadbury, nestle,
Hindustan lever
 Defensive Shares: These shares are normally not affected by the
movements in the market. E.g. Pharma Stocks
 Cyclical Shares: These stocks are affected by the business cycles. The
upward and downward movements of business cycles affect the
profitability of the company and also the share price of a company.
E.g. Automobile stocks
 Speculative Shares: These shares have a lot of speculative trading.
They attract the investors in bull and bear phases of the market.
(ii) Fixed Income Securities

• Preference Shares – Shares which carry preferential rights in respect of

dividend payment and repayment of capital are preference shares. These
shares carry a fixed rate of divided and preference over equity shareholders
in dividend payment and payment of capital at the time of liquidation. They
do not carry any voting rights.
The character of preference shares are hybrid in nature. Some of its features resemble
the bond and others the equity shares.

• Debentures – These are capital market instruments used to raise medium

and long term capital funds from the public. It comprises of Periodic interest
payments over the life of the instrument and principle payment at time of its
redemption. These are for investors who wish to sacrifice liquidity for high
returns.

• Bonds – They are similar to debentures but are issued by public sector
companies. Its value in the market depends upon the interest rate and
maturity of the bond. The coupon rate is the nominal interest rate offered on
the bond which cannot be changed till its maturity. E.g. Education benefit
bond, retirement benefit bond.

• IVP’s and KVP’s – These are savings certificates issues by the post office
with the name Indra Vikas Patra and Kisan Vikas Patra. IVPs have aface
value of 500,1000, 5000 and KVPs have a face value of 1000, 5000, 10000.
The capital is doubled in 5.5 years with 13.47% rate of return. They do not
carry any tax benefits but are transferable just like bearer bonds.
• Government Securities – These are secured securities issues by the
central and state government. The rate of interest on these securities is
relatively low but they are highly liquid and safe.
The securities issued by the central, state govt. agencies are known as govt
securities or gilt edged securities. As government guaranteed security is a claim on the
government , it is secured financial instrument, which guarantees the income and the capital.

• Money Market Securities – These securities have very short term

maturity usually less than a year. E.g. Treasury bills, Commercial paper,
Certificate of Deposit
 Treasury Bills:- A treasury bill is basically an instrument of short term borrowing by
the government of India. To develop the treasury bill market and provide investors
with financial instruments of varying short-term maturities and to facilitate the cash
management requirements of various segments of the economy.
Treasury bills are o 91 days,182 days & 364 days. Since
the interest rates offered on the treasury bills are very low , individuals very rarely
invest in them.

 Commercial paper:- Commercial paper is a short term negotiable instrument with

fixed maturity period. It is an unsecured promissory note issued by the company
either directly or through banks.
The maturity period is between 3 months to 2 years. The
minimum maturity of CP was brought down from 3 months to 30 days.
 Certificate of deposite:- The Certificate of deposite is a marketable receipt of funds
deposited in a bank for a fixed period at a specified rate of interest. They are bearer
documents and readily negotiable. The denominations of the CD and the interest rate
on them are high. The minimum size of the certificate is Rs 1 lakh.

(2) Non Negotiable Instruments / Securities – These investment

alternatives cannot be traded in the market.
The non negotiable financial securities is non transferable. This is
also known as non securitised financial investments .

• Deposits: Deposits earn a fixed rate of return.

 Bank Deposits – Banks usually offer three traditional facilities, they

are; current account facility (no interest is paid), savings account (4-5%
interest is paid) and fixed account (7-8% interest is paid).
 Post Office Deposits – Fixed deposit and Income schemes at Post
offices provide around 13% to 15% interest rate.
 NBFC Deposits – NBFC`s having bet owned funds over 25 lakh can
accept deposits with maturity ranging from 3-5 years and provide
interest rate higher than commercial banks.
• Tax Sheltered Savings Scheme – These are beneficial for tax-paying
Investors. They offer tax relief to its participants according to the taxation
laws. E.g. Public Provident Fund Scheme, National savings scheme, National
Saving Certificate, Public Provident Fund Scheme, National Savings Scheme,
National Savings Certificate

• Life Insurance – It is a contract for payment of a sum of money to the

person assured or entitled on happening of an insured event or at maturity.
It also provides tax benefits to the person buying the insurance scheme. E.g.
Basic Life Insurance: Whole Life Assurance Plan, Endowment Assurance
Plan, Term Assurance Plans, Plans for Children, Pension Plans

(3) Mutual Funds

A mutual fund is a professionally-managed investment scheme, usually run

by an asset management company that brings together a group of people
and invests their money in stocks, bonds and other securities.
An investor can buy mutual fund ‘units’ which represent his/her share in a
particular scheme. These units can be purchased or redeemed as needed at
the fund’s current net asset value (NAV). These NAVs keep fluctuating,
according to the fund’s holdings. All the mutual funds are registered with
SEBI.

• Open Ended Mutual Fund Schemes – These offer its units on continuous
basis and accept funds from investors continuously. There are no
restrictions on buying or selling funds. These schemes do not have a
maturity period and are not listed on the stock exchange. These provide
liquidity to investors since repurchase facility is available.

• Closed Ended Mutual Fund Schemes – These have a fixed maturity

period and are kept open for a limited period. Once closed the units are
listed on the stock exchange. The demand and supply factors influence the
price of the units.

Types of Mutual Fund Schemes

 Growth Schemes – These funds invest money in equities and offer
high returns.
  Income Schemes – These funds invest money in fixed securities and
provide a regular return to its holders.
 Balanced Schemes – These funds provide a steady return as well as a
reasonable growth. The money is generally invested in equity and debt
instruments.
 Money Market Schemes – These funds invest money in money
market instruments like TB, CP.
 Tax Savings Schemes – These offer tax rebate to its investors. Equity
linked saving schemes and pension schemes provide exemption from
capital gains on specific investment.
 Index Schemes – These funds invest on equities of the index. The
returns are approx. equal to the return of the Index.

(4) Non-Financial Instruments or Real Assets

These Investment alternatives usually form the major part of the investor`s
portfolio. They include:

 Gold and Silver – They provide best protection against inflationary

tendencies in an economy.
 Real Estate – They provide high returns to investors but require high
investment and long term commitment. This investment alternative
includes investment on land, buildings, any personal and property.
 Antiques – They usually guarantee safety of investment. A price rise
is generally due to increased interest of collectors or increased social
importance.
 Arts –

INVESTMENT ANALYSIS – INTRODUCTION,

OBJECTIVES, PROCESS
Investment: It refers to the employment of funds on assets with the aim of
earning income or capital appreciation. It has two attributes i.e. Time &
Risk. It is essentially a sacrifice of current money or other resources for
future benefits.
Speculation – It involves taking calculated business risks for the purpose of
earning short-term profits. It involves buying and selling of assets with
expectations of getting profits from price fluctuations.
Gambling – It involves taking artificially created risk in a game of chance.

Investment Objectives
 Return – Income from investment
 Risk – Risk of an investment refers to the variability of returns from
different investment alternatives
 Liquidity – It depends upon marketability and trading facilities
associated with an investment. It refers to the ease of converting as an
asset into liquid cash
 Hedge against Inflation – Returns from investments provide
protection against inflationary tendencies present in the economy
 Safety – Investment alternatives are subjected to a sound legal and
regulatory framework

Investment Alternatives: Negotiable and Non-negotiable

Securities
Investment Process
 Framing of Investment policy – Funds, Objectives, Knowledge
 Investment Analysis – Economic Analysis, Market Analysis, Industry
Analysis, Company Analysis
 Valuation – Industrial value and Future Value
 Portfolio construction – Diversification, Selection and allocation of
funds to an optimum mix of various debt and equity instruments.
 Portfolio Evaluation – Appraisal and Revision

(1) Framing of investment policy – Before making any investment one

must formulate an investment policy for systematic functioning. The main
components of an investment policy include –

 Investible Funds – Availability of funds, Source of funds i.e. Savings

or borrowing (if funds are borrowed then the rate of return on
investment must be higher than the rate of borrowing)
 Objectives – Required rate of return, Need for regular income, risk
perception, need for liquidity, capital appreciation or safety of
principle
 Knowledge – One should be aware of different investment
alternatives, various stock markets, and financial structure of the
 country and must have sufficient knowledge regarding functions of
brokers, mode of operations, related taxes and charges etc.
(2) Investment Analysis – After a suitable investment policy has been
formulated, the next step is to conduct market, industry as well as company
analysis to scrutinize the securities one plans to buy.

 Market Analysis – A market analysis helps an investor to understand

the general economic scenario. Economic variables like Gross
domestic product (GDP), inflation, Recession etc. help an investor to
depict stock prices and stock trends and fluctuations. One can set
entry and exit points through technical analysis.
 Industry Analysis – An industry analysis helps analyze the economic
significance and growth potential of an industry. Factors like growth
rate, growth potential and contribution of an industry in an economy
helps an investor to make an informed decision.
 Company Analysis – Knowledge regarding a company`s earnings,
profitability, operating efficiency, capital structure, top management,
market share etc. is essential for an investor, as these factors have a
direct impact on the stock prices of the company and the return to
investors. Companies with high market share are capable of creating
wealth in form of capital appreciation for an investor.
(3) Valuation – The next step is to determine the expected risks and returns
from an investment. The intrinsic value of a share is measured through the
book value and price-earnings ratio of a share. The intrinsic value of a share
is then compared with its market value to make an investment decision. An
effort is made to determine the future value of the investment.
Intrinsic value = Book Value + P/E Ratio compared with the market price
(4) Portfolio Construction – A portfolio is a combination of different
securities. A portfolio must be constructed in such a way that it meets the
investor`s needs and objectives with the aim to deliver maximum returns
with minimum risk. The goal is to create an optimum mix of debt and equity
instruments. The reduce the risk and ensure the safety of principal a
portfolio is diversified by creating a portfolio with an optimum mix of debt
and equity instruments, securities from different companies and industries
are chosen on the basis of expected returns. In the end, funds are allocated
to the selected securities.
(5) Evaluation – Portfolio performance is periodically evaluated to measure
and compare the variability of returns from different securities. Portfolio
appraisal involves evaluating the portfolio with respect to two key dimension
– Risk and Return. On the basis of appraisal results, revisions are made to
the portfolio. Low yielding securities with high risk are replaced with low
risk and high yielding securities. This process is done periodically to keep
stable returns.