Different avenues and alternatives of investment 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.
Table of Contents
- 1 Investment Avenues
- 2 Steps or Process of Selecting Investment Alternatives
Are you searching for investment alternatives for parking idle funds? This article provides a comprehensive list of such investment alternatives. Investment in any of the alternatives depends on the needs and requirements of the investor. Corporates and individuals have different needs. Before investing, these alternatives of investments need to be analyzed in terms of their risk, return, term, convenience, liquidity etc.
Equity investments represent ownership in a running company. By ownership, we mean share in the profits and assets of the company but generally, there are no fixed returns. It is considered as a risky investment but at the same time, depending upon situation, it is liquid investments due to the presence of stock markets. There are equity shares for which there is a regular trading, for those investments liquidity is more otherwise for stocks have less movement, liquidity is not highly attractive. Equity shares of companies can be classified as follows:
- Blue chip scrip
- Growth scrip
- Income scrip
- Cyclical scrip
- Speculative scrip
Debentures or Bonds
Debentures or bonds are long-term investment options with a fixed stream of cash flows depending on the quoted rate of interest. They are considered relatively less risky. An amount of risk involved in debentures or bonds is dependent upon who the issuer is. For example, if the issue is made by a government, the risk is assumed to be zero. However, investment in long term debentures or bonds, there are risk in terms of interest rate risk and price risk. Suppose, a person requires an amount to fund his child’s education after 5 years. He is investing in a debenture having maturity period of 8 years, with coupon payment annually. In that case there is a risk of reinvesting coupon at a lower interest rate from end of year 1 to end of year 5 and there is a price risk for increase in rate of interest at the end of fifth year, in which price of security falls. In order to immunize risk, investment can be made as per duration concept. Following alternatives are available under debentures or bonds:
- Government securities
- Savings bonds
- Public Sector Units bonds
- Debentures of private sector companies
- Preference shares
Money Market Instruments
Money market instruments are just like the debentures but the time period is very less. It is generally less than 1 year. Corporate entities can utilize their idle working capital by investing in money market instruments. Some of the money market instruments are
- Treasury Bills
- Commercial Paper
- Certificate of Deposits
Mutual funds are an easy and tension free way of investment and it automatically diversifies the investments. A mutual fund is an investment only in debt or only in equity or mix of debts and equity and ratio depending on the scheme. They provide with benefits such as professional approach, benefits of scale and convenience. Further investing in mutual fund will have advantage of getting professional management services, at a lower cost, which otherwise was not possible at all. In case of open ended mutual fund scheme, mutual fund is giving an assurance to investor that mutual fund will give support of secondary market. There is an absolute transparency about investment performance to investors. On real time basis, investors are informed about performance of investment. In mutual funds also, we can select among the following types of portfolios:
- Equity Schemes
- Debt Schemes
- Balanced Schemes
- Sector Specific Schemes etc.
Life Insurance and General Insurance
They are one of the important 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 objective of life insurance is to secure our families against unfortunate event of our death. It is popular in individuals. Other kinds of general insurances are useful for corporates. There are different types of insurances which are as follows:
- Endowment Insurance Policy
- Money Back Policy
- Whole Life Policy
- Term Insurance Policy
- General Insurance for any kind of assets.
Every investor has some part of their portfolio invested in real assets. Almost every individual and corporate investor invest in residential and office buildings respectively. Apart from these, others include:
- Agricultural Land
- Semi-Urban Land
- Commercial Property
- Raw House
- Farm House etc
Precious objects include gold, silver and other precious stones like the diamond. Some artistic people invest in art objects like paintings, ancient coins etc.
Derivatives means indirect investments in the assets. The derivatives market is growing at a tremendous speed. The important benefit of investing in derivatives is that it leverages the investment, manages the risk and helps in doing speculation. Derivatives include:
- Swaps etc
Non-marketable securities are those securities which cannot be liquidated in the financial markets. Such securities include:
- Bank Deposits
- Post Office Deposits
- Company Deposits
- Provident Fund Deposits
Steps or Process of Selecting Investment Alternatives
Investment Alternatives with their Attributes
Investment alternatives for any person are divided into a real asset and financial asset. Real assets deal with property, precious objects etc. Though real asset takes a large portion of money when it comes to investment, major efforts for making investment decision are dedicated to financial assets. Any investment has two aspects – time and risk. An investment in an asset is a sacrifice of current consumption to get some return in future. Assets are expected to generate cash flows and the probabilities of variation in the expected cash flow in future give rise to risk. So, all the alternatives are analyzed for their time and risk factor before selecting a particular asset for investment.
Analysis and Selection of Assets in a Portfolio
Broadly, the investment in the financial asset can be divided into equity, debt, and cash or cash equivalent. These alternatives play an important role in building a portfolio. One asset helps in offsetting the weakness of other. But, even within these broad financial assets, there are many alternatives available. So, now the question arises, “where to invest?” or “which asset to select?” Just building portfolio will not ensure the better return. So, before deciding the specific securities among different asset class proper analysis should be carried on. In the case of stocks, generally fundamental or technical analysis is adopted. Whereas, in the case of debt, factors like yields, rating, tax shelter, and liquidity are taken into consideration. A part of the portfolio is also allocated to cash and cash equivalent for liquidity and contingencies or any sudden opportunity.
Allocation of Funds by Portfolio Theory of Diversification
The riskiness of an asset can be measured alone and also of a portfolio. The magic of diversification can be seen when assets are assessed in a portfolio. So, portfolio theory emphasizes that instead of investing your money into one asset, spread it between different investment alternatives. However, what amount should be allocated to what asset class or alternative depends on individual’s investment objective and constraint? Within the parameter of one’s objectives, a better return can be achieved with the help of proper investment management.
As soon the money is divided into different assets, the attributes of all these assets form a base for assessing portfolio, for e.g. risk & return of individual investment avenue. The expected return of a portfolio is the weighted average of the expected returns on the individual asset with weights as the percentage of portfolio or the amount of investment in the individual asset. Please note that the portfolio risk is not the weighted average of the risks of individual securities. Rather risk is measured by taking into consideration the covariance of securities. Therefore, mixing asset classes can help moderate the risk.
Investment management does not just end with building the portfolio, but the work starts here. Now, one needs to regularly monitor, review and upgrade it. Investor should make sure that at correct time investment is made and at correct time investment is sold. Also, performance evaluation of the same is crucial because feedback of results can only ensure you whether you have made right investment decisions or not. No time is too late to build a portfolio because it can be tailored as per the needs and objectives of the individual. However, a better return can be achieved, if one believes and follow the process of investment management.Last updated on : February 9th, 2019