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Unit 4: Measuring Investment Return

provident funds, trusts, research organizations, Nepal Rashtra Bank and individuals can invest Notes
in government securities.

Advantages and Disadvantages of Investing in Gilts

Advantages
1. The main advantage of investing in G-secs is that there is a minimal default risk, as the
instrument is issued by the GOI.
2. G-secs, especially dated securities, offer investors the opportunity to invest in very long-
term debt (at times with maturity over 20 years), which is usually not available from the
private sector.
3. Although some issues of G-secs tend to be illiquid, there is adequate liquidity in most
other issues. In fact, buying and selling from/to a primary dealer can take care of the
liquidity risk.

Disadvantages
The main disadvantage of investing in G-secs is the same as in the case of investing in any other
debt instrument i.e. possibility of higher interest rates and inflation. While higher interest rates
will lead to erosion in value of the bond, a rise in inflation will eat into the real return (though
this can be taken care of by buying capital indexed bonds, for example).

Treasury Bills

Treasury bills are short-term money market instruments, which are issued by the RBI on behalf
of the GOI. The GOI uses these funds to meet its short-term financial requirements of the
government. The salient features on T-Bills are:

(a) These are zero coupon bonds, which are issued at discount to face value and are redeemed
at par.
(b) No tax is deducted at source and there is minimal default risk.

(c) The maximum tenure of these securities is one year.

4.4.2 Risky Assets

Investment under all the assets other than the government securities are considered as more
risky assets. The given below are the key assets which have higher risk:

1. Equity Shares: Equity shares represent equity capital, which is the ownership capital
because equity shareholders collectively own the company. The ownership of equity
shares or stocks confers upon the shareholders the benefits of such ownership, which is a
residuary claim on the profits and assets of the company after the claims of others have
been satisfied. The shareholders are the last category of those with claims on the company
to receive any of its earnings and if the company is dissolved, the last to receive any assets.
Equity shareholders also enjoy the right to control the company through the board of
directors and have the right to vote on 1 every resolution placed before the general body.
Yet another right enjoyed by the equity shareholders is the pre-emptive right that obliges
the company to give the existing equity shareholders the first opportunity to purchase,
proportionately, additional equity shares called the ‘right shares’.

Equity shares are the first security to be issued by a corporation and, in the event of
bankruptcy, the last to be retired. Equity shares, also called common stock, represent a

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