FUNCTIONAL MANAGEMENT PROJECT FILE

TOPIC – DIFFERENT TYPE OF INVESTMENT SECURITIES

PREVAILING IN THE MARKET

Submitted to: Submitted by:

Dr. Shafali Iknoor Kaur
Functional Management Roll no. – 233/22
UILS 2nd year
Panjab University BCOM LLB (Hons.)

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 ACKNOWLEDGEMENT

I would like to present my heartfelt gratitude to everyone who helped me in

making this project. There are many people without their encouragement and
guidance the completion of this project would not be possible.

I take this opportunity to extend my most sincere appreciation towards my

Functional Management professor, Dr. Shaifali for her constant support and
guidance during the preparation of this project, and her thorough suggestions
and instructions that aided me in culmination of this file on the topic; Exploring
the different types of investment securities prevailing in the market. This
file would have been left lacking if not for her efforts.

I would like to extend my sincerest gratitude to the department of University

Institute of Legal Studies and the faculty.

Last but not the least; I extend my boundless regards to my friends and family
who were a constant source of encouragement during the entirety of this project.

Iknoor kaur

BCOM L.L.B (HONS.)

Roll no. – 233/22

UILS

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 TABLE OF CONTENTS

SR NO. PARTICULARS PAGE NO.

1. Introduction 4-5

2. Types of investment securities 5-15

3. Factors to consider before investing 16-17

4. Case study 1 18-19

5. Case study 2 20-22

6. Conclusion 23

7. Bibliography 24

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 INTRODUCTION
An investment is an asset or item accrued with the goal of generating income or
recognition. In an economic outlook, an investment is the purchase of goods that are
not consumed today but are used in the future to generate wealth. In finance, an
investment is a financial asset bought with the idea that the asset will provide income
further or will later be sold at a higher cost price for a profit.

There are numerous ways in which a person can invest and usually done through
Securities which are commonly thought of as tradable financial assets. Most securities
are issued by institutions (typically corporations and governments) for the purpose of
raising capital, and those that are most available to investors are traded in public
markets.

Investment securities are assets like stocks, bonds, and mutual funds that can be
bought or sold in public markets or exchanges. These securities can be held for the

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long term and traded on a quicker timeline, sometimes within the same day. For long-
term investing, experts generally advise you ignore the short-term price changes of the
various assets in your portfolio and keep your eye on long-term growth.

In India, The Securities and Exchange Board (SEBI) which was established in 1988
regulates the securities market.

The market in which securities are issued, purchased by investors, and subsequently
transferred among investors is called the securities market. The securities market has
two interdependent and inseparable segments, viz., the primary market and secondary
market. The primary market, also called the new issue market, is where issuers raise
capital by issuing securities to investors. The secondary market also called the stock
exchange facilitates trade in already-issued securities, thereby enabling investors to
exit from an investment. The risk in a security investment is transferred from one
investor (seller) to another (buyer) in the secondary markets. The primary market
creates financial assets, and the secondary market makes them marketable.

Companies issue securities to raise short and long term capital for conducting their
business operations.

Central and state governments issue debt securities to meet their requirements for
short and long term funds to meet their deficits. Deficit is the extent to which the
expense of the government is not met by its income from taxes and other sources.

Local governments and municipalities may also issue debt securities to meet their
development needs. Government agencies do not issue equity securities.

Financial institutions and banks may issue equity or debt securities for their capital
needs beyond their normal sources of funding from deposits and government grants.

Public sector companies which are owned by the government may issue securities to
public investors as part of the disinvestment program of the government, when the
government decides to offer its holding of these securities to public investors.

Mutual funds issue units of a scheme to investors to mobilise money and invest them
on behalf of investors in securities.

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Types of Investment Securities prevailing in the market

Investors may be individuals, banks, or corporates who aim to use investment

securities as investment opportunities to earn returns. For banks, they are an income
source, apart from loans given to borrowers for various purposes.
Such financial investment securities can also be used as collateral for mortgages. They
may be directly purchased from the primary and secondary market or through a
middleman like a broker or a dealer.

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There are various types of securities – Equity securities, Debt securities, Derivative
securities, Hybrid securities, ETFs and Mutual Funds

1. Equity securities/stocks – These include shares and stocks of a company. A

company’s capital is divided into various small units and each such unit is a
share. The monetary value of these shares is called equity. Thus, equity
securities represent the ownership of a company. This means that if you own
the share of a company, then you have become one of the shareholders or
owners of that company. Possessing equity securities has various benefits –
higher dividends, voting rights, control over the company’s decisions, claim
over the assets of the company, etc. A major benefit of owning equity securities
is its liquidity. This means that in case of emergency, the securities can be
easily sold off for cash in the stock market. The two primary types of stocks to
invest in are equity stock and preferred stock. Equity stock often includes
voting right and participation eligibility in certain matters. Preferred stocks
have first claim to dividends and must be paid before common shareholders.

2. Debt securities - Debt securities are borrowed funds of a company that are
used to raise capital from the public. These instruments are issued by a
company in the form of bonds, debentures, treasury bills etc. to lenders for a
certain period of time in exchange of an amount. These are also known as fixed
income securities. Debt securities have a fixed rate of interest called a ‘coupon
rate’. This is paid upon the maturity of the issue along with the principal sum.
Debt securities are negotiable in nature, which means that the funds can be
transferred from one party to another upon agreement. These instruments are
generally considered as low-risk investments and hence, guarantee a certain
fixed percentage of return.

There are various types of debt securities or instruments available in India for
investment purposes.

i) Bonds

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 Bonds are a type of debt securities that guarantees an investor the return of
the principal amount along with the agreed interest at the end of the
maturity period. A bond is issued to the lender equivalent to the value of the
money lent to the issuing institution. These form the most popular and
commonly used debt instrument. Bonds are generally long term in nature.
By investing in bonds, you are lending money to the issuer for a specific
duration. During the loan period, the lender receives interest payments.
When you hold the bond for the contract's term, it matures and you receive
your principal back.
Although bonds tend to have a lower return than stocks, they also pose a
lower risk. However, bonds are not all risk-free.

Some types of bonds are:

a) A zero coupon bond- they does not pay any coupon value during the
term of the bond. The bond is issued at a discount to the face value, and
redeemed at face value. The effective interest earned is the difference
between face value and the discounted issue price. A zero coupon bond

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 with a long maturity is issued at a very big discount to the face value.
Such bonds are also known as deep discount bonds.
b) Fixed-rate bonds pay consistent interest amounts until maturity. The
bondholders earn predictable and guaranteed returns regardless of the
prevailing market conditions. For example, An investor purchased a ten-
year fixed-rate government bond of Rs. 1000, issued on 20th April 2013
which offers a coupon rate of 7.5%. The investor will get a fixed interest
of Rs. 75, annually every April, till 20th April 2023.
c) Floating-rate bonds do not pay fixed returns each period. Instead, the
interest rates vary, depending on the set benchmark, during the tenure.
For example, an investor purchased an 8-year floating rate bond issued
in 2015. The bond pays interest of 40 points higher than the prevailing
National Savings Certificate interest rate. This means the NSC interest
rate is the benchmark and any fluctuation in it directly affects the
coupon payment of this bond.
d) Perpetual bonds are those debt securities which do not have a maturity.
In this type of bond, the issuer does not repay the principal amount to
the bondholders. Though, they keep paying steady coupon payments to
the bondholders till perpetuity.
e) These types of bonds aim at minimizing the impact of inflation on the
face value and coupon payments. The principal is adjusted according to
the inflation and coupon payments are made based on the adjusted
principal. For example, an investor purchases an Inflation-linked bond
with a face value of Rs. 100. After a year, the inflation-adjusted
principal amounts to Rs. 107. Therefore, the coupon will be paid
considering Rs. 107 for that period.
f) The investors holding convertible bonds get the right to convert the
bond to a predefined number of equity shares in the issuing company at
a particular time from the tenure. Though, the investor can also opt to
receive the principal repayment at the maturity, if they don’t want to
exchange it with shares.

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 g) Callable bonds are high coupon paying securities that give the issuer the
right to call back the bonds at a pre-agreed price and date.
h) Puttable bonds give the bondholder the right to return the bond and ask
for repayment of principal at a pre-agreed date before maturity. Since
the benefit offered is for investors, these bonds pay lower returns.

ii) Debentures
Debentures are one of the types of bonds that government entities or
corporations use to raise capital. Debentures are also a creditorship
instrument, as the holders of the debentures are the creditors of the
company. Interest on the debentures is also required to be paid by the
companies to the holders at the pre-agreed time intervals, i.e., whether for
profit or loss, the company must pay interest to the debenture holders.

Debt securities can take the common forms of secured or unsecured

corporate debentures. Secured corporate debentures can be backed by
company assets, such as a mortgage or company equipment. In this
scenario, secured debt (also called investment-grade) would be
preferred. Debentures also hold the feature of convertibility which means
that the debenture holder can convert their debenture into the shares of the
company of equal value. Some debentures are payable after a specific time
interval as per the pre-decided terms. Sometimes, such debentures can be
redeemed early by the holders at the company’s discretion. These are
known as Redeemable debentures. On the other hand , Non – redeemable or
perpetual debentures are not repayable during the lifetime of the company,
with no obligation from the company’s side to pay the principal amount of
the same. They sometimes carry the call/put options.

Other types of investment securities can include money-market securities

for quick conversion to cash.
i. Commercial Papers

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 Commercial papers form unsecured debt securities with a fixed
maturity period that should not exceed 270 days. Thus, these are
short-term lending instruments and are often issued at a discount
from face value.
ii. Certificates of deposit
Certificates of deposit are a form of debt instrument that are issued
by financial institutions and banks. These provide a high rate of
interest for depositing a certain sum of money in your bank account
for a fixed period of time. The issue of CDs is done in a
dematerialized format, with the help of a demat account in an
electronic format.

iii. Bills of exchange

Bills of exchange is nothing but a note that orders one party to pay a
specified sum of money to another party at either a fixed date or
upon demand. It is legally binding in nature and involves three
parties – the drawer of the bill, the drawee (party that is supposed to
pay the amount) and the payee (party that is to receive the amount).

3. Derivative securities - The term derivative refers to a type of financial

contract whose value is dependent on an underlying asset, group of assets, or
benchmark. A derivative is set between two or more parties that can trade on
an exchange or over-the-counter (OTC). These contracts can be used to trade
any number of assets and carry their own risks. Prices for derivatives derive
from fluctuations in the underlying asset. These financial securities are
commonly used to access certain markets and may be traded to hedge against
risk. Derivatives can be used to either mitigate risk (hedging) or assume risk
with the expectation of commensurate reward (speculation). Derivatives can
move risk (and the accompanying rewards) from the risk-averse to the risk
seekers. The Chicago Mercantile Exchange (CME) is among the world's
largest derivatives exchanges.

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 There are many different types of derivatives that can be used for risk
management, speculation, and leveraging a position. The derivatives market is
one that continues to grow, offering products to fit nearly any need or risk
tolerance.

There are two classes of derivative products: "lock" and "option." Lock
products (e.g., futures, forwards, or swaps) bind the respective parties from the
outset to the agreed-upon terms over the life of the contract. Option products
(e.g., stock options), on the other hand, offer the holder the right, but not the
obligation, to buy or sell the underlying asset or security at a specific price on
or before the option's expiration date. The most common derivative types are
futures, forwards, swaps, and options.

i) Futures

A futures contract, or simply futures, is an agreement between two parties for

the purchase and delivery of an asset at an agreed-upon price at a future date.
Futures are standardized contracts that trade on an exchange. Traders use a
futures contract to hedge their risk or speculate on the price of an underlying
asset. The parties involved are obligated to fulfill a commitment to buy or sell
the underlying asset.

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 ii) Cash Settlements of Futures

Not all futures contracts are settled at expiration by delivering the underlying
asset. If both parties in a futures contract are speculating investors or traders, it
is unlikely that either of them would want to make arrangements for the
delivery of a large number of barrels of crude oil. Speculators can end their
obligation to purchase or deliver the underlying commodity by closing
(unwinding) their contract before expiration with an offsetting contract.

Many derivatives are, in fact, cash-settled, which means that the gain or loss in
the trade is simply an accounting cash flow to the trader's brokerage account.
Futures contracts that are cash-settled include many interest rate futures, stock
index futures, and more unusual instruments such as volatility futures or
weather futures.

iii) Forwards

Forward contracts, or forwards, are similar to futures, but they do not

trade on an exchange. These contracts only trade over-the-counter.
When a forward contract is created, the buyer and seller may customize
the terms, size, and settlement process. As OTC products, forward
contracts carry a greater degree of counterparty risk for both parties.
Once created, the parties in a forward contract can offset their position
with other counterparties, which can increase the potential for
counterparty risks as more traders become involved in the same
contract.

iv) Swaps

Swaps are another common type of derivative, often used to exchange

one kind of cash flow with another. For example, a trader might use

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 an interest rate swap to switch from a variable interest rate loan to a
fixed interest rate loan, or vice versa.

v) Options

An options contract is similar to a futures contract in that it is an

agreement between two parties to buy or sell an asset at a
predetermined future date for a specific price. The key difference
between options and futures is that with an option, the buyer is not
obliged to exercise their agreement to buy or sell. It is an opportunity
only, not an obligation, as futures are. As with futures, options may be
used to hedge or speculate on the price of the underlying asset.

4. Hybrid securities - Hybrid securities are a broad group of securities that

combine the characteristics of the two broader groups of securities, debt and
equity. These are defined under Section 2(19A) of the Companies Act, 1956.
Until a specific date, hybrid securities pay a consistent (either fixed or
adjustable) rate of return or dividend; after that time, the holder has a variety
of options, including converting the securities into the underlying share. Thus,
in contrast to a share of stock (equity), the holder benefits from a fixed (as
opposed to residual) cash flow, and in contrast to a fixed interest security
(debt), the holder has the opportunity to convert the security to the underlying
equity.

Hybrid securities are a way for banks and companies to borrow money from
investors. The most common type of hybrid security is a convertible bond that
has features of an ordinary bond but is heavily influenced by the price
movements of the stock into which it is convertible. In addition to convertible
bonds, another popular type of hybrid security is convertible preference
shares, which pay dividends at a fixed or floating rate before common stock
dividends are paid, and can be exchanged for shares of the underlying
company's stock.

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 5. Mutual Funds - Mutual fund is a vehicle to mobilize moneys from investors,
to invest in different markets and securities, in line with the investment
objectives agreed upon, between the mutual fund and the investors. In other
words, through investment in a mutual fund, a small investor can avail
professional fund management services offered by an asset management
company. It is a fund created to invest in various equity or debt securities or a
mix of both and funded by its unit-holders. Unit-holders are the investors who
are the ultimate owners of the mutual fund. The idea is to diversify risk as the
risk gets diluted by investing in a portfolio rather than in a single stock.

6. Exchange traded funds (ETF)- They are a type of mutual fund that combines
features of an open-ended fund and a stock. Units are issued directly to
investors when the scheme is launched. Post this period, units are listed on a
stock exchange like a stock and traded. Units purchased at the time of launch or
bought from the stock markets are credited to the demat account of the
investor. Transactions are done through brokers of the exchange. Investors
need a broking account and a demat account to invest in ETFs. The prices of

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 the ETF units on the stock exchange will be linked to the NAV of the fund, but
prices are available on a real-time basis depending on trading volume on stock
exchanges.

Gold Exchange Traded Funds (ETFs) are ETFs with gold as the underlying
asset.It provides a way to hold gold in electronic rather than in physical form.
Typically, each unit of ETF represents one gram of gold. The fund holds
physical gold and gold receipts representing the units issued. Price of the units
will move in line with the price of gold.

Factors to be considered before buying / investing in securities

1. The risk appetite of every investor is different from another. The risk
appetite depends on the investor’s income, personal liabilities or expenses,
and savings expenses, and savings of the investor. For example, a young
investor with no personal liabilities to entertain and who earns and saves
goods his risk appetite is more than an investor with more fixed personal
liabilities and thus saves less money.

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 Investors having a good risk appetite can invest in more risky securities, say
equity, than investors having a low-risk appetite. They may consider
investing in fixed-income securities, which are usually not short-
term investment securities.

2. Investors who expect the urgent need for money or liquidity will invest
in short term investment securities that are more liquid securities than
investors who can lock in their investment. The motivator to investors
locking their securities for a longer term is the extra return generated in the
name of liquidity lost. Thus, there is no in case of sale of investment
securities before maturities in such cases.
3. Personal traits of an investor such as age, tradition, etc. also determine the
type of investment securities to be acquired. A young person can take the
risk and will invest in long-term securities rather than a retired employee
whose primary aim is to generate monthly cash flow to meet his day-to-day
expenses.
4. If the objective is to earn regular cash flow, then dividend or interest-paying
securities are better options, whereas if the objective is to earn from price
rise, growth stocks need to be considered.

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Case study -1
“Best conservative hybrid mutual funds to invest in 2024”

Many mutual fund advisors believe that 2024 is going to be the year of hybrid funds.
Because of the uncertainties regarding the global economy and ever rising Indian
stock market, advisors have been advising investors to move cautiously. In such a
scenario they believe that investing in hybrid mutual funds - schemes that invest in
equity and debt - may serve investors, especially new and inexperienced investors,
better.
Conservative hybrid funds are the entry to the world of hybrid funds. These schemes
invest mostly in debt and a small percent in equity. As per the Sebi mandate,
conservative hybrid schemes must invest 75-90% in debt instruments and 10-25% in
stocks. These schemes are ideal for investors looking to invest a small part of their
corpus in equity to earn some extra returns.
Conservative hybrid schemes, as the name suggests, are meant for investors with a
conservative risk profile.

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Why do people prefer investing in these funds?

Conservative hybrid funds deliver better returns than pure debt funds or traditional
fixed income instruments like FDs because of the inclusion of the equity component
of the schemes. Compared to other variants of hybrid funds, which have a greater
equity exposure, the portfolio of conservative hybrid funds is less risky because the
concentration of debt instruments neutralizes the risks posed by the equity element to
a large extent. Should you be looking at earning decent returns (better than pure debt
and FDs) with low chances of capital erosion due to market volatilities, conservative
hybrid funds can be the solution to your investment requirements. These funds
maintain a well-diversified portfolio of both equity and debt. The debt elements
provide stability and ensure stable returns while the equity element works as a catalyst
for enhancing returns.

Things to consider when investing in conservative hybrid funds

 While conservative hybrid funds have a low-risk factor owing to the high
volume of debt components, they are not risk-free. This is because any fund or
investment vehicle that has equity exposure is bound to carry some risks.
However the risk factor is much lower than other kinds of hybrid funds with
higher equity exposure and pure equity funds.

 Fund houses and fund managers are a decisive factor in the performance of
your fund and hence it is imperative you do your homework before choosing a
fund for investment. Also, there are various costs entailed in mutual fund
investments such as expense ratio, entry load, exit load that could cumulatively
impact your overall returns. Before parking your money in a fund, you should
have an estimate of the costs you would have to bear as an investor.

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Case study -2

Financial year 2023-24 (FY24) has turned out to be a rewarding one for investors who
put their money in initial public offerings (IPOs).

Eighty per cent, or 60 of the 75 companies that made their debut on the mainboard this
financial year, ended their listing day with gains.

An IPO is an initial public offering, in which shares of a private company are made
available to the public for the first time. An IPO allows a company to raise equity
capital from public investors. The active participation of retail investors has been a
key driver of this IPO boom, often resulting in massive oversubscriptions. This
reflects a growing appetite for equities among retail investors and a heightened
confidence in the Indian economy. Anticipating a surge in demand, both domestic and

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foreign investors are showing keen interest in primary markets, setting the stage for a
flurry of new listings. We anticipate that equity raise through IPOs in FY25 could
exceed 1-trillion. This figure could potentially increase even further if there are no
global shocks affecting the Indian market," said Mahavir Lunawat, managing director
(MD) at Pantomath Capital Advisors. According to their estimates, a total of 56
companies have filed their offer documents with the Securities and Exchange Board of
India (Sebi), aiming to raise 170,000 crores. Currently, 19 companies, they said, have
already secured Sebi approval to raise 7,25,000 crores. Around 37 more companies
eyeing a substantial $45,000 crore are awaiting regulatory clearance.

. On a calendar-year basis, the largest IPO (in terms of quantum of funds raised) in
2023 was from Mankind Pharma R4,326 crore, this was followed by Tata
Technologies Rs 3,043 crore and JSW Infrastructure 2,800 crore, data from PRIME
Database suggests.

New-age technology firms, too, were few at just two companies Yatra and Mamaearth
tapping the primary market via IPOs," said Pranav Haldea, managing director at
PRIME Database. Investors are actively investing in stocks, with a focus on both
active trading and long-term investments.

Reasons of boom in IPO

Vibrant Markets and Investor Confidence: The active participation of retail
investors and growing confidence in the Indian economy have contributed to the IPO
boom.
Robust Foreign Exchange Reserves: India's relatively robust foreign exchange
reserves have played a role in fostering investor confidence and attracting foreign
investment.
Buoyant Stock Markets and Positive Sentiment: Factors such as buoyant stock
markets, ease of doing business, and a growing appetite for Indian investments have
contributed to the surge in IPO activity.
Macroeconomic Factors and Structural Reforms: A mix of macro factors and
structural reforms has fueled the growth in the Indian IPO landscape.
Positive Sentiment and High Valuations: The rush to the public stage isn't just about
raising capital but also about high valuations driven by positive sentiment.

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Why do investors invest mostly in stock in India?
Stocks offer the potential for high returns compared to traditional investment options
like fixed deposits. Investing in stocks is seen as an effective way to grow wealth over
the long term. Investors are more concerned about future plans. In a developing
economy like India, public investments and investor sentiment play crucial roles in
economic growth, making stocks an attractive investment option. The Indian stock
market offers significant opportunities for investors to capitalize on the country's
economic growth and emerging industries. Investing in stocks allows investors to
diversify their investment portfolio, reducing overall risks. Stocks can align with long-
term financial goals, and holding investments for extended periods can help investors
achieve these objectives. But we cannot ignore the importance of other investment
securities which help to raise finance. There are various factors that effect the choices
of the investors. Indian market is a huge market and with correct techniques and
decisions one can flourish in this market and take the advantage of growing economy.

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 Conclusion
There are many options available to investors today, especially in growing country
like India. One can diversify across these different types of investment securities,
investors can build well-rounded portfolios tailored to their financial objectives and
risk tolerance levels.

Investors should conduct thorough research, consider their investment goals and risk
tolerance, and seek professional advice if needed before investing in any securities.

Remember, each investment comes with its own set of risks and potential rewards, and
it's essential to align your investment strategy with your financial goals and risk
tolerance. Consider the risk profiles of each sector. Technology stocks may be more
volatile due to rapid changes in consumer preferences and technological disruptions,
while traditional industries may offer stability but lower growth potential.

Compare the returns of companies in traditional sectors like energy and healthcare.
Assess variables such as regulatory changes, commodity prices (for energy), and
demographic trends (for healthcare). A blend of both tech and traditional stocks can
provide a balanced approach to investment.

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 Bibliography
Websites
 https://www3.mtb.com/wilmington-advisors/products-and-services/what-are-
investment-securities
 https://www.investopedia.com/terms/i/investment.asp
 https://www.schwab.com/learn/story/what-are-different-types-investment-
securities
 https://www.indiainfoline.com/knowledge-center/bonds/different-types-of-
bonds
 https://www.investopedia.com/terms/d/derivative.asp
 https://www.investopedia.com/terms/h/hybridsecurity.asp
 https://economictimes.indiatimes.com/mf/analysis/best-conservative-hybrid-
mutual-funds-to-invest-in-
2024/articleshow/105920104.cms?utm_source=contentofinterest&utm_mediu
m=text&utm_campaign=cppst
 https://www.nism.ac.in/knowledge_base/understand-the-basics-of-securities-
markets/
 economictimes.com - India's IPO Boom: A sign of vibrant markets and
growing investor confidence
 indiatoday.in - IPO boom to Dalal Street's dream run: Events that shaped
India's economy in 2023
 linkedin.com - India's IPO Boom: A Frenzy or the Dawn of India's Time to
Shine

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