Types of Investment · Equity · Fixed Income · Commodities · Real Estate · Structured Products · Distressed Securities · Channels for Investing
Investments are broadly classified as financial (exchange of cash flows over time — claims on future cash flows) or non-financial (real estate, gold, commodities, etc.). Financial instruments fall into two generic types based on the nature of the claim: debt and equity. They can also be classified by market (public vs. private) or by maturity profile (capital market vs. money market).
Equity shares represent ownership in a company — profit-sharing and voting rights. Shareholders are residual claimants (paid after all other obligations). Returns come from dividends and capital appreciation; over the long term equities provide time-diversification benefits, reducing risk fluctuations and improving risk-adjusted returns.
| Feature | Detail |
|---|---|
| Ranking | Rank above equity shares for dividend payment and asset distribution on liquidation; typically no voting rights (unless stated) |
| Hybrid nature | Share traits of both debt (fixed dividend) and equity (can be perpetual) — called "hybrid/blended" securities |
| Cumulative vs Non-cumulative | Cumulative: unpaid dividends accumulate and are paid later; Non-cumulative: omitted dividends are simply lost |
| Participating vs Non-participating | Non-participating: fixed-rate dividend only; Participating: fixed dividend + additional dividend on pre-specified conditions (may also carry liquidation preference) |
| Convertible | Can be converted into a specified number of equity shares |
Debt/fixed income instruments are contracts promising a stream of cash flows over the contract term. They may be transferable or non-transferable, and establish the borrower's obligations and the holder's rights on default. Classified by issuer into government and corporate debt securities; G-Secs form the largest component of the debt market in India and globally.
| Aspect | Government Securities (G-Sec) | Corporate Debt Securities |
|---|---|---|
| Issuer | Central Govt. (T-Bills + Bonds), State Govts. (only SGSs/dated securities) | Companies (non-government issuers) |
| Maturity | Short term (T-Bills, <1 yr) or long term (dated securities, >1 yr) | Various maturity profiles |
| Default risk | Practically nil — "risk-free, gilt-edged" | Carries default risk — pays a "credit spread" / risk premium over G-Secs |
| Listing | — | Many listed on exchanges, but a larger portion remains unlisted |
| Rating | Description |
|---|---|
| AAA (Highest Safety) | Highest degree of safety in timely servicing of obligations; lowest credit risk |
| AA (High Safety) | High degree of safety; very low credit risk |
| A (Adequate Safety) | Adequate degree of safety; low credit risk |
| BBB (Moderate Safety) | Moderate degree of safety; moderate credit risk |
| BB (Moderate Risk) | Moderate risk of default |
| B (High Risk) | High risk of default |
| C (Very High Risk) | Very high risk of default |
| D (Default) | In default or expected to default soon |
Grown crops — corn, wheat, soybean, soybean oil, sugar — also used as inputs for other goods. Perishable, hence highly volatile; subject to higher business-cycle risk (prices driven by demand-supply of end products); weather prediction is key. Historically low correlation with stocks/bonds → portfolio diversification benefit. Exposure typically via derivatives (forwards/futures).
Mined goods — gold, silver, oil, copper, aluminium. Prices set by global demand-supply interaction. Gold/silver have been investment avenues for centuries as reserve/safe-haven assets, attractive in economic uncertainty or geopolitical crisis, with historical diversification benefits. Unlike most financial investments, commodities generate no current income — only capital appreciation.
A significant asset class and driver of economic growth, offering diversification and historically viewed as a good inflation hedge. Investors seek capital appreciation and/or regular rental income; usually a long-term investment. Classified as commercial or residential real estate, and further by city tiers (Tier I/II/III). Large capital commitments are typical, but Real Estate Funds / REITs let investors gain exposure with smaller outlays.
Customized, sophisticated investments offering risk-adjusted exposure to traditional investments or hard-to-access assets, heavily using derivatives to engineer desired risk profiles. Often linked to equity indices, sector indices, stock baskets/themes, currencies, interest rates, or commodities. Can be short- or long-term, customizable, large-denomination, and may offer 0% to 100% capital protection and/or attractive yields — but performance depends on the underlying strategy and market conditions; they should NOT be viewed as capital-protected, guaranteed, or assured-return products. The most common form: Market Linked Debentures (MLDs).
Securities of companies in financial distress or near bankruptcy — equity and debt of publicly traded firms, often available at huge discounts. Require higher skill and experience in business valuation than regular securities. Also called "fallen angels"; many funds/institutional investors are prohibited from holding them due to high risk. Popular among hedge fund managers (deep valuation/credit-analysis expertise); accessible via PMS and AIF products, useful for risk diversification by experienced investors.
Emerging long-term option with moderate returns and low correlation to equities/bonds (good diversification). However: big-ticket, non-standard (each work unique), unregulated market, no income (capital appreciation only), relatively illiquid, and requires specialized art knowledge due to high information asymmetry/adverse selection. Accessible via art-investment funds.
Allows individuals to invest abroad up to USD 2,50,000 per year — enabling geographical and currency diversification and access to new investment choices.
Per SEBI's RIA Regulations (2013), only SEBI-licensed qualified professionals can call themselves "advisers" — distributors (MF distributors, brokers, insurance agents) can no longer use that title. RIAs are fee-paid, accountable solely to investors, follow a strict code of conduct, must disclose conflicts of interest, perform risk profiling, assess needs, and develop financial plans — helping investors build optimal portfolios and inculcate investment discipline.
| Aspect | Mutual Funds (MFs) | Alternative Investment Funds (AIFs) | Portfolio Managers (PMS) |
|---|---|---|---|
| Regulator | SEBI (all three) | ||
| Minimum investment | Low (retail-friendly) | Rs. 1 crore | |
| Minimum investment (PMS) | Rs. 50 lakh | ||
| Regulatory touch | High-touch (stringent) | Light-touch (less stringent) | |
| Target investor | Retail investors | Institutional / High Net-worth Investors (sophisticated) | |
| Investment restrictions | More restrictions | Relatively fewer restrictions | |
| Popular nickname | — | "Rich man's mutual fund" | |
All three are indirect/managed-portfolio investment routes providing professional expertise at lower cost than building expertise individually. Other managed-portfolio vehicles include Collective Investment Schemes (CIS).
1. Which of the following best describes a "non-cumulative" preference share?
2. As per the standard credit rating convention, bonds rated below which level are classified as "junk" or "high yield" bonds?
3. Why are gold and silver often referred to as "safe haven" assets?
4. Under the Liberalised Remittance Scheme (LRS), an individual can invest abroad up to:
5. What is the minimum investment amount typically required to invest in an Alternative Investment Fund (AIF) in India?