2.

Bonds: Besides mobilizing capital from shareholders, the other major source of funds
is borrowing. Business enterprises borrow from other firms, financial institutions,
banks, and general public with explicit conditions of payment of interest on sums
borrowed and repayment obligations. Such debt is issued in the form of bonds. Unlike
stocks, subscribers to bonds do not have right to manage the business of the issuing
firm. Like shares they too can be listed and are transferable. But all debts such as bank
borrowing are non-transferable. Bonds promise a fixed rate of return on periodic basis
as well as return of original amount supposedly from the cash to be generated from the
project.
3. Government Securities (G-Sec): Like bonds are issued by firms to augment the
resource base, government too needs finance for various purposes. They need to fund
the government expenses by borrowing from public promising certain returns and
repayment of principal at maturity. They have same features as that of bonds except
that the issuer is government. Also, these securities issued by government are
unsecured while most bonds issued by firms are secured. Despite being unsecured,
government securities are regarded as risk-free and often serve as best proxy for risk-
free rate of return.
4. Money Market Instruments: Normally debt instruments are classified according the
term of maturity. If repayment is very short (typically less than 90 days or one year),
they are termed as money market instruments. Money market instruments include
treasury bills issued by the government, commercial papers issued by highly rated
firms, and certificates of deposits issued by banks in lieu of deposits made with them.
Investment in money market instruments is large and for short term. It suits large
investors such as commercial banks, financial institutions, insurance companies, etc.
with huge funds available for short term. Investment in money market instruments is
guided by legal environment and liquidity considerations.
5. Post Office Deposits, Public Provident Funds: Large proportions of savings of
individual investors are parked in the form of Post Office deposits, in employee
provident funds and public provident funds. These savings or investments are
unsecured and non-marketable, but are backed by government for interest payment and
redemption of principal. Therefore, these investments are considered extremely safe.
They become even more attractive in terms of returns when tax rebates are attached
with them.

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6. Mutual Funds: Mutual funds are collective investment where large number of
investors pools their savings to form a corpus and invested in accordance with the
investment objectives of the fund. They can invest the corpus in shares, bonds, or any
other financial instruments in the proportions as specified by the investment objectives.
It is a form of indirect investment as funds operate on behalf of investors collectively. It
is usually managed by professional managers. Rather than issuing shares or bonds, a
mutual fund issues units to collect the corpus. The market value of units, called Net
Asset Value (NAV), is available in public domain on daily basis. These mutual funds
may be listed and traded (close-ended) or may be unlisted (open-ended). For close-
ended funds, the investor can exit through the market while open-ended funds can be
redeemed by the mutual funds. These funds periodically declare dividends and offer
choice to investors for reinvestment of dividend. Rise/fall in NAVs would provide
capital gains/losses.
7. Derivatives: Derivatives are financial instruments that derive their value from some
underlying asset. These underlying assets can be prices of stocks, bonds, currencies,
etc. or hypothetical assets such as indices, interest rates, etc. These instruments can be
used as speculation by taking a directional view of the change of value of the
underlying assets or may be used as hedging tool to contain the price risk. As prices of
derivatives are dictated by prices of the underlying assets, they can also offer arbitrage
opportunities in case of mispricing. Arbitrage helps the process of price discovery
making markets efficient, competitive, and transparent. Common derivative products
are futures and options that are tradable on an exchange though there can be other
products too that are traded over-the-counter. For common investors they normally
serve the purpose of hedging.
8. Real Assets: ‘Real assets’ is another class of assets where investors like to invest.
These include commodities like gold and silver, precious stones, land and housing.
These are non-negotiable instruments that are not traded on exchange. However, over-
the-counter markets exist for each of the asset where assets can be bought and sold and
ownership transferred. Transfer of ownership in these assets is rather slow, costly, and
cumbersome. They are tangible assets and not financial assets. To the investor, real
assets provide a comfort of some tangible asset in hand. However, financial assets on
real assets can exist in the form of derivatives.
9. Bank/Company Fixed Deposits: Most commonly understood and favored instrument
of investment is a bank deposit. Surplus funds are parked in the bank that offer fixed
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 rate of interest and with varying maturities ranging from seven days to several years.
They are unsecured, non-transferable instruments of savings issued by commercial
banks. Few non-banking finance companies and firms, both public and private sectors,
to issue fixed deposits for specific tenor promising fixed rate of return. Fixed deposits
of firms offer greater return than the deposits by banks because they are supposed to be
more risky. In other words, fixed deposits refer to the amount that the business deposit
with some other entity in the expectation of earning returns on such money deposited in
the form of interest.
10. Insurance Policies: Life insurance and other policies also occupy a place in the
investment portfolio of individuals. The motive for having insurance policies is often
not guided by return considerations because they serve an altogether purpose. They
mostly cover event risk where the payoff is given upon happening of some adverse
event. Decision to have an insurance policy is driven by security. Insurance policies
provide very nominal returns. Since insurance policies are devoid of return
considerations, they are often not a part of investment decision. They are illiquid, non-
transferable, and long term in nature.
11. Accounts Receivable: When the sales are made on a credit basis then the selling party
has the right to receive the payment from the party who purchases their product (known
as Debtor). So, for the selling party, that debtor comes under the head accounts
receivable. In short, these are the assets that creates a right to receive money in return to
the credit sales made by the business within the credit period granted by it and also
show the right to receive interest if the payment is delayed that is if the payment is not
received within the allowable credit days period, then the purchaser (Debtor) has to
repay the purchase amount plus the interest amount which is calculated at the rate
decided at the time of sale of goods.

PROPERTIES OF FINANCIAL ASSET

A property is a characteristic that is inherent to the asset itself. The intrinsic property
of an asset directly influences the price, use, and value of that particular asset. Also referred
to as a characteristic of an individual asset, it is unique to that asset.

1. Intrinsic Properties

This property of financial assets is a characteristic that is inherent to the asset itself.

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 · Income-generating Property: The property that enables an asset to generate income is
called an income-generating property.

· Desirability property. This refers to an asset’s unique quality or features that make it
more attractive to investors. For example, a branded product can be much more
desirable than a generic one; thus, its price will also be higher.

· Liquidity. It is measured by the ease and speed with which an asset can be converted
into cash. For instance, government bonds are usually considered a highly liquid asset.

2. Market-based Properties

This is the behaviour of the market in which an asset is found. The actions of buyers and
sellers affect a financial asset’s price, use, and value. They are also categorized as some
of the following:

· Marketability: It is a measure to ascertain the ease of trading an asset. The more

· Trading volume: The number of trades in an asset over a specific time period; the
greater the trading volume, the greater the liquidity.

· Minting period: it is the time taken to complete a transaction for financial assets.
This is usually affected by the liquidity and trading volume of an asset.

· Borrowing power: This is the availability and price of credit in a particular market.
For instance, real estate has a lower borrowing power in comparison to stocks or
bonds.

3. Investment-based Properties

This refers to the financial returns on investment. Some of the properties of financial
assets are based on their expected return. For example, expecting a stock to return 8%
may be regarded as a very good investment.

DIFFERENCE BETWEEN FINANCIAL ASSETS AND REAL ASSETS

Fig 1.4: Difference between Financial Assets and Real Assets

Bases Real Assets Financial Assets

Productive Real assets have own productive Financial Assets do not have own
capacity capacity productive capacity

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Liquidity They are less liquid and available in They are more liquid and traded
traditional markets through stock exchanges

Place in B/S They are shown in assets side of They are shown in assets as well as in
balance sheet liabilities side of balance sheet.

Movement They are difficult to move from one They are easy to move from one
place to another place. place to another place.

Depreciation Real assets are depreciable Financial assets are non- depreciable

1.14 CHECK YOUR PROGRESS

1. Horse racing, card games, and the lottery are all instances of ______.
a) Investing
b) Gambling
c) Speculating
d) Arbitrage
2. ______ is associated with buying low and selling high, resulting in a significant capital
gain.
a) Speculation
b) Gambling
c) Investing
d) Arbitrage
3. The ______ market assists existing investors in selling their stocks.
a) Primary market
b) Commodity market
c) Capital market
d) Secondary market
4. The market value of the shares is decided by
a) The investment markets
b) The government
c) Shareholders
d) The respective companies

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 5. Which of these authorities supervises India’s capital markets?
a) Securities Exchange Board of India (SEBI).
b) Reserve Bank of India (RBI).
c) The Insurance Regulatory and Development Authority (IRDA).
d) Agriculture and Rural Development National Bank (NABARD).

Answer to Check Your Progress

1. b
2. a
3. d
4. a
5. a

1.15 SUMMARY
The world is constantly changing, and with it, the way we invest. In the past, it was
enough to simply put your money in a savings account and let it sit there. But today, with
inflation and interest rates so low, that's no longer a viable option. If you want to grow your
wealth, you need to invest your money. But investing can be a daunting task. There are so
many different options out there, and it can be hard to know where to start. That's why it's
important to do your research and find an investment strategy that's right for you. There are a
few things to keep in mind when choosing an investment strategy. First, you need to consider
your risk tolerance. Second, you need to think about your time horizon. How long do you
have to invest your money? If you're planning for retirement, you can afford to take on more
risk. But if you need the money in the next few years, you'll want to choose more
conservative investments.
Once you've considered your risk tolerance and time horizon, you can start to explore
different investment options. There are a few things to keep in mind when choosing
investments. First, you need to diversify your portfolio. This means investing in a variety of
different assets, such as stocks, bonds, and real estate. This will help to reduce your risk if
one asset class performs poorly. Second, you need to re-balance your portfolio regularly. This
means selling some of your winners and buying more of your losers. This will help to keep
your portfolio in line with your risk tolerance and time horizon.
Investing can be a complex and time-consuming process. But it's important to
remember that it's a marathon, not a sprint. The sooner you start investing, the more time

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