Types of Financial Instruments
Let us now discuss some common financial instruments:
Equity shares: An equity share or commonly known as stock represents the ownership of a fraction of a company. Stocks are bought and sold on the exchanges among investors or traders. Example: Reliance Industries (RELIANCE) is a stock traded on the exchange.
Bonds: A bond is a fixed-income instrument. Bonds are agreements to lend money to a company for a certain period against which the company needs to pay a fixed interest. A company sells these securities to get the money it needs to grow.
Mutual Funds: Mutual funds are another financial security that is one of the most popular investment options currently. When an Asset Management Company (AMC) pools investments from different individuals that have a common investment objective. Mutual funds are professionally managed, so it is elementary for novice investors to start their financial journey. In recent years the mutual fund industry has grown almost two-fold within a span of five years.
G-Secs: Government Securities or G-Secs are debt instruments issued by the government to borrow money. In case of a bond you lend money to a company, similarly in case of G-Secs you lend to the Government and in return they pay a fixed rate of interest for a predetermined period of time.
SGBs: Sovereign Gold Bonds or SGBs are government instruments denominated in terms of Gold. These are substitutes for holding physical golds. Investors buy SGBs in return for capital appreciation as well as earn fixed interest every six months.
ETFs: An Exchange Traded Funds (ETFs) are a basket of financial instruments which may include stocks, commodities, bonds or a mixture of different instruments. Thus, ETFs offer diversification to investors. There are also ETFs that track an index, sector, commodity, or other asset. Example: HDFC Sensex ETF
REITs: REITs (Real Estate Investment Trust) is a financial instrument that owns a portfolio of income-generating properties. This is very similar to a mutual fund where money is pooled from investors to invest in financial securities; in the case of REITs, pooled money is invested in real estate.
In India, REITs were introduced in 2019. After 2 years, three REITs are available for Indian investors (Mindspace, Embassy Park & Brookfield). Similar to an investment in common stocks, profits are generated in the form of dividends & capital appreciation. SEBI is the regulator of REITs in India.
InVITs: Power Grid InVIT & India Grid InVIT are two names that are all over the news recently. So let us see what InVITs are?
Infrastructure Investment Trust (InVITs) is a financial instrument that offers a direct investment route into infrastructure projects for both individual & institutional investors. The structure of InvITs is closely related to mutual funds & REITs. Therefore, InVITs are a collective investment scheme that offers a direct investment into infrastructure. SEBI is the regulator of InVITs India.