Investment and alternatives

In its broadest sense, an investment is a sacrifice of current money or other resources for future benefits. Numerous avenues of investments are available today. You can either deposit money in a bank account or purchase a long term government bond or invest in the equity shares of a company or contribute to a provident fund account or buy a stock option or acquire a plot of land or invest in some other form.

The two key aspects of any investment are time and risk. The sacrifice takes place now and is certain. The benefit is expected in the future and tends to be uncertain. In some investments (like government bonds) the time element is the dominant attribute. In other investments like stock options the risk element is the dominant attribute. In yet other investments (like equity shares) both time and risk are important.

Almost everyone owns a portfolio of investments. The portfolio is likely to comprise financial assets (bank deposits, bonds, stocks, and so on) and real assets (motorcycle, house, and so on). The portfolio may be the result of series of haphazard decisions or may be the result of deliberate and careful planning.

Our economic well being in the long run depends significantly on how wisely or foolishly we invest. This article is listing some of the investment alternatives useful in systematic and rational investment management. It seeks to improve ones abilities in the field of investments.

Non-marketable Financial Assets: A good portion of financial assets is represented by non marketable financial assets. These can be classified into the following broad categories:

1. Bank deposits
2. Post office deposits
3. Company deposits
4. Provident fund deposits

Equity Shares: Equity shares represent ownership capital. As an equity shareholder, you have an ownership stake in the company. This essentially means that you have a residual interest in income and wealth. Perhaps the most romantic among various investment avenues, equity shares are classified into the following broad categories by stock market analysts:

1. Blue chip shares
2. Growth shares
3. Income shares
4. Cyclical shares
5. Speculative shares

Bonds: Binds or debentures represent long term debt instruments. The issuer of a bond promises to pay a stipulated stream of cash flow. Bonds may be classified into the following categories:

1. Government securities
2. Savings bonds
3. Government agency securities
4. PSU Bonds
5. Debentures of private sector companies
6. Preferences shares

Money Market Instruments: Debt instruments which have a maturity of less than one year at the time of issue are called money instruments. The important money market instruments are:

1. Treasury bills
2. Commercial paper
3. Certificates of deposit

Mutual Funds: Instead of directly buying equity shares and/or fixed income instruments, you can participate in various schemes floated by mutual funds which, in turn invest in equity shares and fixed income securities. There are three broad types of mutual fund schemes:

1. Equity schemes
2. Debt schemes
3. lanced schemes

Life insurance: In a broad sense, life insurance may be viewed as an investment. Insurance premiums represent the sacrifice, and the assured sum, the benefit. The important types of insurance policies in India are:

1. Endowment assurance policy
2. Money back policy
3. Whole life policy
4. Term assurance policy.

Real estate: For the bulk of the investors the most important asset in their portfolio is a residential house. In addition to a residential house, the more affluent investors are likely to be interested in the following types of real estate:

1. Agricultural land
2. Semi urban land
3. Commercial property

Precious Objects: Precious objects are items that are generally small in size but highly valuable in monetary terms. Some important precious objects are:

1. Gold and silver
2. Precious stones
3. Art objects

Financial Derivatives: A financial derivative is an instrument whose value is derived from the value of an underlying asset. It may be viewed as a side bet on the asset. The most important financial derivatives from the point of view of investors are:

1. Options
2. Futures