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Unit 7: Investment Strategies-II

Diversifying Risk by Investing in Bond Funds Notes

Investors who want to achieve automatic diversification of their bond investments for less than
it would cost to construct a portfolio of individual bonds can consider investing in bond mutual
funds, unit investment trusts or exchange-traded funds. These vehicles each have specific
investment objectives and characteristics to match individual needs.

Swapping for Other Objectives

A tax loss is not the only reason to swap a bond. Investors can also swap to improve credit
quality, increase yield or improve call protection. Remember to factor the sell and buy transaction
costs into your estimations of return.

Where to Hold your Bond Investments: Taxable or Tax-deferred Accounts?

In a taxable investment account, your capital gains and investment income are subject to taxation
in the year they are earned. In a qualified tax-deferred account such as an IRA or some college
savings account, income and capital gains are not taxed until you start taking withdrawals,
presumably at a future date.
Bonds and bond funds can be held in either type of account, but some investors will have a
reason to choose one account type over the other. Municipal investments, for example, are best
held in a taxable account, where they can serve to reduce the taxable returns. Taxable zero
coupon bonds are best held in a tax-deferred account because their annual interest credits are
taxable when earned, even though the investor does not actually receive them until the bond
matures.

Since the maximum tax on capital gains was reduced to 15% in 2003, total return investors in a
high income tax bracket may find advantages to holding their bonds in a taxable account. Others
may prefer to invest for maximum income in their tax deferred accounts. The best solution
depends on your individual circumstances and tax situation. Your tax or investment advisor can
help you analyze the alternatives and reach the best solution.

Task Prepare a project report on various types of bonds in Indian Financial market and
study their performance for the last six months.

7.5 Investment in Stocks

Fundamentals of Stock

Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the
company’s assets and earnings. As you acquire more stock, your ownership stake in the company
becomes greater. Whether you say shares, equity, or stock, it all means the same thing.

Being an Owner

Holding a company’s stock means that you are one of the many owners (shareholders) of a
company and, as such, you have a claim (albeit usually very small) to everything the company
owns. Yes, this means that technically you own a tiny sliver of every piece of furniture, every
trademark, and every contract of the company. As an owner, you are entitled to your share of the
company’s earnings as well as any voting rights attached to the stock.

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