Valuation of Fixed & Variable Income Securities: Types, Examples, and Investment Alternatives

Investment Alternatives

Investment alternatives range from financial securities to traditional non-security investments. Financial securities can be either negotiable or non-negotiable.

1. Negotiable Securities

Negotiable securities are financial instruments that are transferable. They may provide either variable income or fixed income.

Variable Income Securities

Equity Shares – Equity shares are among the most popular investment choices. In the stock market, equity shares are generally classified into the following categories:

1. Growth Shares – Shares of companies with profitability growth higher than the industry average.
2. Income Shares – Shares of companies with stable operations and limited growth prospects. Examples: banking stocks, FMCG companies like Cadbury, Nestlé, and Hindustan Lever.
3. Defensive Shares – Stocks that remain relatively unaffected by economic downturns. Example: pharmaceutical companies, which saw high returns in the late 1990s due to consistent demand.
4. Cyclical Shares – Shares whose performance depends on business cycles. For instance, automobile sector stocks fluctuate with economic upswings and downswings.
5. Speculative Shares – Shares heavily traded for speculative purposes, often gaining attention during bull and bear markets.

Fixed Income Securities

Fixed income securities offer predictable returns and are often preferred by conservative investors. These include:

1. Preference Shares – Once considered inferior to equity, these now attract investors due to conversion options and preferential dividend rights. Example: Siemens issued ₹150 crore worth of preference shares.
2. Debentures – Issued by corporations, debentures provide higher returns but lower liquidity. Example: TISCO and Gujarat Industries Power have issued debentures.
3. Bonds – Similar to debentures but typically issued by public sector undertakings. Bond value depends on interest rates and maturity. Example: ICICI and IDBI bond issues.
4. IVPs and KVPs – Savings certificates issued by post offices (Indira Vikas Patra & Kisan Vikas Patra). IVPs are bearer instruments transferable by delivery. However, they do not offer tax benefits.
5. Government Securities (Gilt-Edged Securities) – Issued by central/state governments or quasi-government bodies. They offer lower returns but are highly secure and liquid.
6. Money Market Securities – Short-term instruments (less than one year) such as Treasury Bills, Commercial Papers, and Certificates of Deposit.

2. Non-Negotiable Securities

Non-negotiable financial investments are not transferable and are also known as non-securitized financial investments. Examples include deposit schemes and tax-sheltered schemes.

(A) Deposits

Deposits provide a fixed rate of return but are not negotiable instruments.

1. Bank Deposits – Includes current, savings, and fixed deposits. Regulated by the RBI, these are considered safe and are preferred by risk-averse investors.
2. Post Office Deposits – Similar to bank deposits, offering fixed deposits and monthly income schemes.
3. NBFC Deposits – Non-Banking Financial Companies have gained significance in recent years as intermediaries, offering various deposit options.

(B) Tax-Sheltered Savings Schemes

These schemes provide tax relief to investors. Popular options include:

1. Public Provident Fund (PPF)
2. National Savings Scheme (NSS)
3. National Savings Certificate (NSC – VIII Series)

(C) Life Insurance

Life insurance is both a protection and investment tool. It involves a contract where the insurer pays a lump sum either upon maturity, at fixed intervals, or upon the death of the insured.

Fixed vs. Variable Income Securities

Feature	Fixed Income Securities	Variable Income Securities
Definition	Provide a predetermined, fixed return over a period of time.	Returns fluctuate based on company performance and market conditions.
Examples	Bonds, Debentures, Government Securities, Preference Shares, Money Market Instruments.	Equity Shares (Growth, Income, Defensive, Cyclical, Speculative).
Risk Level	Low to moderate – less affected by market volatility.	High – directly influenced by market performance.
Return Type	Fixed interest or dividend payments.	Dividends and capital gains vary with performance.
Investor Preference	Preferred by conservative and risk-averse investors.	Preferred by aggressive investors seeking growth.
Liquidity	Generally, less liquid (may require holding till maturity).	High liquidity, as equities are actively traded in stock markets.
Capital Appreciation	Limited – primary benefit is steady income.	High potential for capital appreciation but with higher volatility.
Tax Benefits	Some instruments (like PPF, NSC) offer tax benefits.	Tax benefits are limited and depend on government policies.

FAQ's

What are variable income securities?

Variable income securities, such as equity shares, do not guarantee fixed returns. Their value and dividends depend on company performance and market conditions.

Which are the safest fixed income securities?

Government securities (gilt-edged securities) are considered the safest due to government backing, though they usually offer lower returns.

Are debentures and bonds the same?

Both are debt instruments. Debentures are typically issued by corporations, while bonds are often issued by public sector undertakings.

What are non-negotiable securities?

Non-negotiable securities cannot be transferred. Examples include bank deposits, post office deposits, PPF, and life insurance policies.

Which investment is better for tax savings?

Tax-sheltered schemes like PPF, NSC, and NSS offer attractive tax benefits while ensuring moderate returns.

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