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Investing in Shares, Mutual Funds and Debentures
The value of money is increasing by the day and with this, the cost of living goes up too so the only way to continue living the lifestyle you’re accustomed to is by doubling your income. This is not easy to do though because when you’re a salaried employee, there is a fixed amount that you are paid every month and it may not increase by a substantial amount as the years go by, especially at a time of economic recession. In this day and age there are only two ways to make money – working for another person or investing your assets and letting them work for you. Investments are of many kinds, but one must tread carefully when choosing whether to invest in shares, mutual funds or debentures because while one of them can yield high rewards it also comes with greater risk.
A mutual fund is a pool of money collected from various investors to invest in securities such as share markets, bonds, money markets and other assets.[i] Each mutual fund is managed by a professional money manager who allocates the fund’s assets and attempt to create capital or profit for the investors. A share in a mutual fund is a representation of many different stocks and the money manager uses his discretion to allocate funds depending on the predicted rate of increase and his professional knowledge. A money manager never invests all the funds in one company so a person who invests in mutual funds is sure to benefit from diversification, but they might not get the highest reward.
A share represents a unit of ownership of the company that you have invested in and the buying and selling of these shares happens in the share market.[ii] By buying shares, one is actually investing in a company so as the company grows so does the value of its shares. Selling the shares when they are high in value will most likely ensure the seller a profit. The National Stock Exchange and the Bombay Stock Exchange are the two main Indian stock markets, regulated by the Securities and Exchange Board of India (SEBI), where all the buying and selling of stock occur.
A debenture is a medium-term or long-term debt format that companies use to borrow money.[iii] Since they are loans taken out by companies or the government, investors of a debenture receive periodic interest, but it is never a huge amount. The advantages of a debenture are regular interest, convertible debentures and payment of debenture before stockholders in case of bankruptcy however, they come with interest risk exposure, fixed-rate debentures, relying on creditworthiness of companies and inflationary risks of the coupons where the debt’s interest rate does not keep up with the rate of inflation.
Therefore, investing in the share market offers the highest returns but it also involves the highest risk because if share prices fall the investor will be at a huge loss. Mutual funds, on the other hand, are professionally managed and this means multiple investments with medium risk and medium rewards. Debentures involve the lowest risk because of the fixed and reliable interest but this means that there will be low returns.
[i]Adam Hayes, Mutual Fund, Investopedia, (September 4, 2019, 8:50 PM), https://www.investopedia.com/terms/m/mutualfund.asp.
[ii]What is Share Market, KarvyOnline, (September 4, 2019, 9:14 PM), https://www.karvyonline.com/knowledge-center/beginner/share-market/what-is-share-market.
[iii]What is a debenture?, Reviso, (September 4, 2019, 9:27 PM), https://www.reviso.com/accountingsoftware/accounting-words/debenture.
- Mutual Funds
- Debentures
- Shares
