PFRDA

Financial Assets and their Features

Financial assets represent a claim that the investor has on benefits represented by the asset.

Equity

Equity represents ownership in the company that has issued the shares to the extent of shares held. Shareholders participate in the management of the company by exercising the voting rights associated with the shares held, however ones voice in the affairs is directly proportional to once share size.

Investment in equity is investment in a growth-oriented asset. The primary source of return to the investor is from the appreciation in the value of the investment. Dividends are declared by the company when there are adequate profits and provide periodic income to the shareholders.

The returns from equity investments are neither pre-defined nor guaranteed. They can be volatile from one period to the next and can even be negative. This makes equity investments risky, especially in the short-term. Over time, the values of well managed and profitable company see appreciation and produce good returns for the investors. Selecting the right stocks, monitoring the performance of the companies and exiting stocks at the right time, is not only an important part of successful equity investing but also a time taking active involvement process.

Debt

Debt represents the borrowings of the issuer/ borrower. The debt can be raised in the form of deposits, as done by banks or in the form of securities like bonds/ debentures as done by the Government and corporates, respectively. The terms of the debt issue determine its various features viz. coupon rate (the interest rate payable on the debt), principal (the amount of debt), tenor (the time for which the money is borrowed, post which the complete principal needs to be returned) and collateral (security of assets for the amount borrowed, if provided by the borrower).

Debt as an asset class represents an income-oriented asset. The major source of return from a debt instrument is regular income in the form of interest. The interest is typically known at the time of issue. The total returns to the investor in such securities will be from the interest income and the gain or loss in its value. Risk in debt securities primarily comes from the possibility of default by the issuer in paying interest and repaying the principal. Liquidity in debt instruments is generally low. Sub categories within debt may be associated with the institution issuing the securities i.e. Government securities (G-Secs) or Corporate securities, or the tenor of the security i.e. Short or Long term.

Cash & Cash equivalents

Cash and its equivalents are investments used for parking funds for a short period of time. The objective of investments made in such assets is preserving capital and high liquidity rather than earning returns. Cash and equivalent assets have the highest liquidity.