Investment avenues

Bonds
Bonds represent long term debt instruments.
The issuer of the bonds promises to pay a
stipulated stream of cash flows. This generally
involves periodic interest payments over the life of
the instrument and principle payment at the time of
redemption. Bonds are also called as fixed income
bearing securities. This includes government
securities, RBI savings bonds, private sector
debentures, PSU bonds, and preference shares.
 Following are the fixed income bearing
securities
• Government securities; debt securities issued by the central
government, state government and quasi government agencies
are referred as government securities or gilt edged securities.
• Three types of instruments are issued.
1. An investment that resembles a company debenture.
It carries the name of the holder’s and is registered with the
PUBLIC DEBT OFFICE. The PDO pays interest to the holders
registered with it on the specified date of payment
2. A promissory note issued to the original holder which contains a
promise by the President of India or the Governor of the state to
pay as per the given schedule. It can be transferred to a buyer by
an endorsement by the seller.
3. A bearer security where the interest and other payments are
made to the holder of the security.
• Government securities have maturities ranging from 3 to 20 years and carry
interest rates that usually vary between 8 to 10 percent. These securities
carry tax benefits but traditionally it will not appeal to the individual
investors because of low rates of interest and long maturity dates.

• Savings bonds
• It is a popular investment RBI Savings Bonds have the following features.
1. Individuals, HUFs and NRIs can invest in these bonds.
2. Maturity period is 5 years from the date of issue
3. There are two option ; the cumulative option and non cumulative option
4. The interest rates fluctuates payable half yearly
5. The interest earned is taxable. The bonds are exempt from wealth tax.
6. Bonds are transferable
7. Nominations for bonds are available
8. Bonds can be offered as security to banks for availing loans
• Private sector debentures
• Debentures are instruments meant for raising long term debt. The obligation
of a company towards its debenture holders is similar to that of borrower
who promises to pay interest and principal at specified times. The important
features of debentures are as follows;
• When a debenture issue is sold to the investing public , a trustee is
appointed through a deed. The trustee is usually a bank or any other
financial institution. The trustee is responsible for the protection of the
debenture holders interest.
• Debentures are secured by a charge on immovable property.
• All debentures issued with a maturity period more than 18 months must be
necessarily credit rated . For the purpose of the redemption debenture
• redemption reserve is created. The redemption amount should be equal to
50%of the amount of issue before redemption commences
• Earlier the interest rate on debentures was subjected to the ceiling fixed by
the ministry of finance. No such ceilings applies now. A company is free to
choose the interest rate. The rate may fixed or floating. In the latter case it is
based on Bench mark rate.
• Debentures sometimes carry a ‘call’ feature which provides the
issuing company with an option to redeem the debentures at a
certain price before the maturity date. Sometimes the
debentures may have ‘put’ feature which gives the holder the
right to seek redemption at a specified times at predetermined
rates
• Debentures may have a convertible clause which gives the
debenture holder the option to convert the debentures into
equity shares on certain terms and conditions that are pre
specified.
Public sector undertaking Bonds
• PSUs issue debentures that are referred as PSU bonds. There
are two broad varieties of PSU bonds; taxable bonds and tax
free bonds. While PSUs are free to set the interest rates on
taxable bonds, they cannot offer more than a certain rates of
interest on tax free bonds which is fixed by the ministry of
finance. More important a PSUs can issue tax-free bonds only
with the approval of the Ministry of Finance.
• In general PSUs bonds have the following investor friendly
features;
1. There is no deduction of tax at source on the interest paid on
these bonds
2. They are transferable by mere endorsement and delivery
3. There is no stamp duty applicable on transfer,
4. They are traded on the stock exchanges.
 Preference Shares
• Preference shares are the represent a hybrid security that
partakes some of the characteristics of equity shares and some
attributes of debenture. The silent features of preference shares
are as follows;
1. Preference shares carry a fixed rate of dividend. Till recently the
maximum rate of dividend payable on preference shares was 14%
p.a. this has now been relaxed.
2. Preference dividend is payable only out of distributable profits.
When there is loss the company need not pay the dividends.
3. Divided on preference shares is generally cumulative. Dividend
skipped in one year has to be paid subsequently before equity
dividend can be paid.
4. Preference shares are redeemable the redemption period is
usually 7 to 12 years.
5. Currently the preference dividend is tax exempt.
 Equity shares

• equity shares represents ownership capital. Equity

shareholder collectively own the company. They bear the
risk and enjoy the rewards of ownership. Of all the forms
of securities equity shares appear to be more romantic.
While fixed income investment avenues may be more
important to the most investors, equity shares seem to
capture their interest the most. The potential rewards
and penalties associated with the equity shares make
them an interesting, even exciting, proposition.
 Rights of equity share holders.

• As the owners of the company equity shareholders

1. Equity shareholders have a residual claim to the income of the firm.
This means t hat the profit after tax less preference dividend
belongs equity shareholders.
2. Equity shareholders elect the board directors and have the right to
vote on every resolution placed before the company. The board of
directors in turn appoints the top management of the firm. Hence
equity shareholders exercise an indirect control over the operations
of the firm. In practice equity shareholders scattered, ill organized,
passive and indifferent as they often are fail to exercise their
collective power effectively
3. Equity shareholders enjoy the preemptive right which enables them
to maintain their proportional ownership by purchasing the
additional equity shares issued by the firm.
4. Equity shareholders have a residual claim over the assets of the
company in the event of liquidation.
Classification of equity shares
stock market classification of equity shares
• the stock market parlance it is customary to classify equity shares
as follows;
1. Blue chip shares;
shares of large, well established and financially strong companies with an
impressive record of earnings and dividends.
2. Growth shares ; shares of companies that have fairly entrenched position in
growing market and which enjoy an above average rate of growth as well as
profitability.
3. Income shares; shares of companies that have fairly stable operations,
relatively limited growth opportunities and high dividend payout ratios.
4. Cyclical shares; shares of companies that have a pronounced cyclically in
their operations.
5. Defensive shares; shares of companies that are relatively unaffected by the
ups and downs in general business conditions
6. Speculative shares; shares that tend to fluctuate widely because there is a
lot speculative trading in them.
 Peter lynch’s classification
• Slow growers; large and ageing companies that are expected to
grow slightly faster than the gross national product
• stalwarts giant companies that are faster than slow growers
but are not agile climbers
• Fast growers small , aggressive new enterprises that grow at
10 to 25 % a year.
• cyclicals companies whose sales and profit rise and fall in a
regular though not completely predictable, fashion.
• Turnarounds companies which are steeped in a accumulated
losses but which shows the sigh of recovery. Turnaround
companies have the potential to make up lost ground quickly.
• Asset plays ; companies that have valuable assets which have
been somewhat overlooked by the stock market.
•
Nature of equity shares