Page 72 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Unit 4: Measuring Investment Return

The term ‘securities’ is used in the broadest sense, consisting of those papers that are quoted and Notes
are transferable. Under Section 2(h) of the Securities Contract (Regulation) Act, 1956 (SCRA)
‘securities’ include:
(i) Shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities
of alike nature in or of any incorporated company or other body corporate.
(ii) Government securities.
(iii) Such other instruments as may be declared by the Central Government to be securities, and

(iv) Rights or interest in securities.
Therefore, in the above context, security forms of investments include equity shares, preference
shares, debentures, government bonds, units of UTI and other mutual funds, and equity shares
and bonds of Public Sector Undertakings (PSUs).
Non-security forms of investment include all those investments, which are not quoted in any
stock market and are not freely marketable, viz., bank deposits, corporate deposits, post office
deposits, national savings and other small savings certificates and schemes, provident funds,
and insurance policies. The above investments are essentially forms of savings and should be
treated as such. In India, nearly 33% of the household savings go into such savings schemes as
Post office savings schemes, life insurance, provident funds, etc.

Another popular investment avenue is the investment in physical assets such as gold, silver,
diamonds, real estate, antiques etc. Indian investors have always considered physical assets to
be attractive investments and, particularly for hedging against inflation. India has a very long
tradition in arts and crafts in jewellery, made of gold/silver and precious stones. Moreover, it
has been observed that in times of high inflation, investors move away from financial assets
into physical assets more particularly, real estate.
On the bases of risk assets can be classified as risk free and risky assets. Although a truly risk free
assets is only in theory but they are so safe that the return on risk-free assets is very close to the
current interest rate. Government securities are considered as the risk free assets.
The following are the key options which are considered as risky and risk free assets:

4.4.1 Risk Free Assets

The following are the assets which are considered as risk free assets:

1. Government Securities
2. Treasury bills
We will study about these two in detail now.

Government Securities

Government securities (G-secs) or gilts are sovereign securities, which are issued by the Reserve
Bank of India (RBI) on behalf of the Government of India (GOI). The GOI uses these funds to meet
its expenditure commitments.

Different Types of Government Securities

Following are the different types of government securities:
(a) Dated Securities: These securities generally carry a fixed coupon (interest) rate and have a
fixed maturity period. e.g. an 11.40% GOI 2008 G-sec. In this case, 11.40% is the coupon rate
and it is maturing in the year 2008. The salient features of dated securities are:

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