NISM Series X-A · Chapter 7: Introduction to Investments

L1 · Foundation

Foundation — The investment universe: equity, fixed income and the alternatives

The three ways of classifying investments, equity and the full preference share taxonomy including DVRs, fixed income with government versus corporate debt and the credit rating scale, and commodities, real estate, structured products, distressed securities, art and the LRS route.

14 min read · Worth 5% of the paper · Written from pages 127–133 of the official NISM workbook · Updated 18 September 2026

7.1 Types of investment

"Broadly, investments can be classified into FINANCIAL OR NON-FINANCIAL investments. NON-FINANCIAL investments include REAL ESTATE, GOLD, COMMODITIES etc. FINANCIAL Investments are EXCHANGE OF CASH FLOWS FOR A PERIOD OF TIME. Financial instruments are essentially CLAIMS ON FUTURE CASH FLOWS".

Three ways of classifying financial investments:

Basis	The two categories
Claims on cash flows	"two generic types: DEBT AND EQUITY"
Markets they trade in	"PUBLIC VERSUS PRIVATE MARKETS"
Maturity profile	"CAPITAL MARKET VERSUS MONEY MARKET"

7.2 Equity

"Equity shares represent OWNERSHIP IN A COMPANY, giving holders PROFIT-SHARING AND VOTING RIGHTS. Shareholders are RESIDUAL CLAIMANTS, receiving PROFITS AFTER OTHER OBLIGATIONS ARE MET".

"Equity investments offer returns through DIVIDENDS AND CAPITAL APPRECIATION. Over the long term, equities provide TIME DIVERSIFICATION BENEFITS, REDUCING RISK FLUCTUATIONS AND IMPROVING RISK-ADJUSTED RETURNS".

Preference shares

"Preference shares RANK ABOVE EQUITY SHARES with respect to the PAYMENT OF DIVIDENDS AND DISTRIBUTION OF COMPANY'S NET ASSETS IN CASE OF LIQUIDATION. However, preference shares DO NOT GENERALLY HAVE VOTING RIGHTS like equity shares, UNLESS STATED OTHERWISE".

"Preference shares share some characteristics with debt securities like FIXED DIVIDEND PAYMENT. Similar to equity share, preference shares can be PERPETUAL".

The four dividend features, which combine in pairs:

Feature	Meaning
Cumulative	"the UNPAID DIVIDENDS WOULD ACCUMULATE TO BE PAID IN FULL AT A LATER TIME"
Non-cumulative	"the UNPAID OR OMITTED DIVIDEND DOES NOT GET PAID"
Non-participating	"a dividend is paid, USUALLY AT A FIXED RATE, and NOT DETERMINED BY A COMPANY'S EARNINGS"
Participating	"gives the holder the right to receive SPECIFIED DIVIDENDS PLUS AN ADDITIONAL DIVIDEND based on some PRE-SPECIFIED CONDITIONS"; may also have "LIQUIDATION PREFERENCES upon a liquidation event"

"Dividends can be cumulative, non-cumulative, participating, non-participating OR SOME COMBINATION THEREOF (i.e., CUMULATIVE PARTICIPATING, CUMULATIVE NON-PARTICIPATING, NON-CUMULATIVE PARTICIPATING, NON-CUMULATIVE NON-PARTICIPATING)".

Convertibility: "CONVERTIBLE PREFERENCE SHARES entitle shareholders to CONVERT their preference shares into A SPECIFIED NUMBER OF EQUITY SHARES".

Differential Voting Rights

"Equity shareholders participate in company governance through voting rights, typically following the 'ONE SHARE, ONE VOTE' PRINCIPLE. Some companies issue shares with DIFFERENTIAL VOTING RIGHTS (DVRs), which may offer SUPERIOR OR INFERIOR VOTING RIGHTS OR DIFFERENTIAL DIVIDENDS".

"While COMMON IN THE WEST, DVRs have seen LIMITED ADOPTION IN INDIA despite being PERMITTED SINCE 2000. TATA MOTORS was among the FIRST TO ISSUE DVRs IN 2008, offering 1/10TH VOTING RIGHTS AND A 5% HIGHER DIVIDEND. Other companies like PANTALOONS RETAIL, GUJARAT NRE COKE, and JAIN IRRIGATION SYSTEMS have also issued DVRs".

7.3 Fixed income

"Debt instruments, also called FIXED INCOME instruments, are CONTRACTS CONTAINING A PROMISE TO PAY A STREAM OF CASHFLOWS during the term of the contract".

Feature	Description
Transferable	"a feature specified in the contract that PERMITS ITS SALE TO ANOTHER INVESTOR"
Non-transferable	"PROHIBITS SALE TO ANOTHER PARTY"

"Generally, the promised cash flow is a PERIODIC PAYMENT, but the parties involved can NEGOTIATE ALMOST ANY SORT OF CASH FLOW ARRANGEMENT".

"A debt contract also establishes the FINANCIAL REQUIREMENTS AND RESTRICTIONS that the borrower must meet and the RIGHTS OF THE HOLDER if the borrower DEFAULTS".

"Debt securities are issued by COMPANIES, MUNICIPALITIES, STATES AND SOVEREIGN GOVERNMENTS... GOVERNMENT SECURITIES FORM THE LARGEST COMPONENT OF DEBT MARKET IN INDIA AS WELL AS WORLD OVER".

Government versus corporate debt

"A GOVERNMENT SECURITY (G-Sec) is a TRADEABLE INSTRUMENT issued by the Central Government or the State Governments. It ACKNOWLEDGES THE GOVERNMENT'S DEBT OBLIGATION".

Short term — "usually called TREASURY BILLS, with original maturities of LESS THAN ONE YEAR".
Long term — "usually called GOVERNMENT BONDS OR DATED SECURITIES with original maturity of MORE THAN ONE YEAR".
"the CENTRAL Government issues BOTH treasury bills and bonds, while STATE Governments issue ONLY bonds, called STATE GOVERNMENT SECURITIES (SGSs)".
"G-Secs carry PRACTICALLY NO RISK OF DEFAULT and hence are called RISK-FREE GILT-EDGED INSTRUMENTS".

"Many corporate debt papers are LISTED ON STOCK EXCHANGES. HOWEVER, A BIGGER COMPONENT OF CORPORATE BORROWINGS LIES IN THE UNLISTED SPACE".

The credit spread

"Credit Spread could also be understood as the 'RISK PREMIUM' which the companies are PAYING TO RAISE THE DEBT, or the INVESTORS ARE CHARGING FOR BEARING DEFAULT RISK".

The rating scale

"The PROBABILITY OF DEFAULT on a fixed income paper is CAPTURED BY RATINGS given by rating agencies".

Rating	Description
AAA (Highest Safety)	"HIGHEST degree of safety regarding timely servicing of financial obligations. LOWEST credit risk"
AA (High Safety)	"HIGH degree of safety... VERY LOW credit risk"
A (Adequate Safety)	"ADEQUATE degree of safety... LOW credit risk"
BBB (Moderate Safety)	"MODERATE degree of safety... MODERATE credit risk"
BB (Moderate Risk)	"MODERATE RISK OF DEFAULT"
B (High Risk)	"HIGH RISK OF DEFAULT"
C (Very High Risk)	"VERY HIGH RISK OF DEFAULT"
D (Default)	"IN DEFAULT OR ARE EXPECTED TO BE IN DEFAULT SOON"

Note the switch in language at the boundary: ratings AAA to BBB are described in terms of degree of safety; ratings BB to D in terms of risk of default.

7.4 Commodities

	Soft commodities	Hard commodities
Definition	"GROWN like CORN, WHEAT, SOYBEAN, SOYBEAN OIL, SUGAR, and also used as INPUTS IN THE PRODUCTION OF OTHER GOODS"	"MINED like GOLD, SILVER, OIL, COPPER AND ALUMINIUM"
Volatility	"PERISHABLE hence they exhibit HIGH VOLATILITY in their prices"	—
Price drivers	"HIGHER BUSINESS CYCLE RISK as their prices are determined by the DEMAND AND SUPPLY OF THE END PRODUCTS in which they are consumed"	"determined by the interaction between GLOBAL DEMAND AND SUPPLY"
Key factor	"PREDICTION OF WEATHER is an important factor"	—
Diversification	"historically have shown LOW CORRELATION to stocks and bonds", so they "provide benefits of RISK DIVERSIFICATION"	"Gold has shown diversification benefits historically"

"Exposure to these commodities can be taken through DERIVATIVE CONTRACTS LIKE FORWARDS OR FUTURES. Hence investors must CAREFULLY UNDERSTAND THE RISK INVOLVED".

"Hard commodities like GOLD AND SILVER have been the investment avenues FOR CENTURIES, AS RESERVE ASSETS. Due to its GLOBAL ACCEPTABILITY gold has acquired the status SAFE HAVEN ASSET. It is viewed as an attractive investment IN TIMES OF ECONOMIC UNCERTAINTY AND GEOPOLITICAL CRISIS".

The footnote on correlation: "a technical term used to MEASURE MOVEMENT BETWEEN TWO VARIABLES. The benefits of diversification rests on correlation between investments. LOWER THE CORRELATION between investments, HIGHER THE BENEFITS OF DIVERSIFICATION i.e. REDUCTION IN RISK".

7.5 Real estate

"a SIGNIFICANT ASSET CLASS... a SIGNIFICANT DRIVER OF ECONOMIC GROWTH. It offers SIGNIFICANT DIVERSIFICATION OPPORTUNITIES. It has been HISTORICALLY VIEWED AS A GOOD INFLATION HEDGE".

"Investors can invest with CAPITAL APPRECIATION as an investment objective AS WELL AS to GENERATE REGULAR INCOME BY WAY OF RENTS. It is usually a LONG-TERM INVESTMENT".

The classifications: "COMMERCIAL real estate or RESIDENTIAL real estate. It can be further broken down into terms of TIER I, TIER II AND TIER III CITIES".

"Real estate investments often involve LARGE COMMITMENTS. REAL ESTATE FUNDS OR REAL ESTATE INVESTMENT TRUSTS (REIT) have emerged as a good option to enable investors to take exposure to this asset class WITH SMALLER OUTFLOW COMMITMENTS".

7.6 Structured products

"CUSTOMIZED AND SOPHISTICATED INVESTMENTS. They provide investors RISK-ADJUSTED EXPOSURE to traditional investments OR TO ASSETS THAT ARE OTHERWISE DIFFICULT TO OBTAIN. Structured products GREATLY USE DERIVATIVES to create desired risk exposures".

"Many are designed to provide risk-adjusted returns LINKED TO EQUITY MARKET INDICES, SECTOR INDICES, BASKET OF STOCKS with some particular theme, CURRENCIES, INTEREST RATES, COMMODITY or a BASKET OF COMMODITIES".

"can be designed for a SHORT TERM OR FOR LONG TERMS".
"the terms can be CUSTOMIZED to meet the requirements of the investing community".
"These products REQUIRE INVESTMENTS OF A LARGER DENOMINATION".
"They MAY OFFER INVESTMENT PROTECTION FROM 0% TO 100% and/or ATTRACTIVE YIELDS".

"The MOST COMMON USAGE of structured products is MARKET LINKED DEBENTURES (MLDs)".

7.7 Distressed securities

"the securities of companies that are IN FINANCIAL DISTRESS OR NEAR BANKRUPTCY. Investors can make investments in the EQUITY AND DEBT securities of PUBLICLY TRADED companies".

"These may be available at HUGE DISCOUNTS, however investments in them REQUIRE HIGHER SKILLS AND GREATER EXPERIENCE IN BUSINESS VALUATION than regular securities".

"These securities are also referred to as 'FALLEN ANGELS' and MANY TYPES OF FUNDS AND INSTITUTIONAL INVESTORS ARE PROHIBITED FROM HOLDING THESE SECURITIES because of the high risk involved".

"It is a POPULAR INVESTMENT SEGMENT AMONG HEDGE FUND MANAGERS as they have DEEP EXPERIENCE IN VALUATION AND CREDIT ANALYSIS. There are PMS AND AIF PRODUCTS on distressed securities".

7.8 Other investment opportunities

Art, paintings and collectibles

"emerging as an ATTRACTIVE LONG-TERM INVESTMENT OPPORTUNITY... generating MODERATE RETURN in the long term. It also has LOW CORRELATION with financial investment like equities and bonds, hence it provides a good risk diversification benefit".

But the drawbacks are substantial:

"these are BIG TICKET INVESTMENTS".
"art is NOT A STANDARD INVESTMENT PRODUCT AS EACH WORK IS UNIQUE".
"The market for the same is UNREGULATED".
"These investments DO NOT PROVIDE ANY INCOME and just like gold, CAPITAL APPRECIATION IS THE ONLY WAY OF REWARD".
"In terms of liquidity, this category is RELATIVELY MORE ILLIQUID".
"SPECIALIZED KNOWLEDGE IN ARTS IS MORE CRUCIAL than in traditional financial assets due to HIGHER LEVELS OF INFORMATION ASYMMETRY AND ADVERSE SELECTION PROBLEMS".

"There are ART AND PAINTING BASED INVESTMENT FUNDS. Investors can take exposure through these funds".

The Liberalised Remittance Scheme

"This route allows for GEOGRAPHICAL AS WELL AS CURRENCY DIVERSIFICATION and also OPENS UP SEVERAL NEW CHOICES for investors".

Think of it like this

Preference shares sit on the fence, and the fence has a name

Preference shares rank above equity on dividends and on liquidation, carry a fixed dividend like debt, usually have no voting rights, and can be perpetual like equity. The chapter gives this half-and-half nature its proper label: "Since preference shares carry some characteristics of equity share and at the same time some of the debt securities, they are referred to as HYBRID OR BLENDED SECURITIES." When a question asks which instrument is a hybrid, this is the answer the syllabus wants.

Cumulative means the arrears follow you

The difference between the two dividend types is the whole of the risk. Cumulative: "the UNPAID DIVIDENDS WOULD ACCUMULATE TO BE PAID IN FULL AT A LATER TIME." Non-cumulative: "the UNPAID OR OMITTED DIVIDEND DOES NOT GET PAID." A skipped year on a cumulative share is a debt the company still owes; on a non-cumulative share it simply vanishes. Combine this with participating or non-participating and you get the four permutations the chapter spells out explicitly.

Tata Motors gave up nine-tenths of a vote for a bigger dividend

DVRs are easiest to remember through the chapter's own example. Tata Motors, 2008, "offering 1/10th voting rights and a 5% HIGHER DIVIDEND." The trade is explicit: less say in governance, more cash in hand. DVRs "may offer superior or inferior voting rights or differential dividends", have been permitted in India since 2000, and yet have seen "limited adoption" here while remaining "common in the West." The other Indian issuers named: Pantaloons Retail, Gujarat NRE Coke, Jain Irrigation Systems.

The credit spread is the price of doubt

One definition, two readings. Mechanically, it is "the DIFFERENCE BETWEEN THE YIELD ON A GOVERNMENT SECURITY AND THE CORPORATE SECURITY FOR THE SAME MATURITY" — note same maturity, or you are measuring the yield curve rather than credit. Economically, it is the "RISK PREMIUM which the companies are PAYING TO RAISE THE DEBT, or the INVESTORS ARE CHARGING FOR BEARING DEFAULT RISK." Widen the spread and you are watching the market lose confidence in a borrower, in real time.

BBB is the line between respectable and junk

The rating scale has a hard boundary and the language changes across it. AAA to BBB are described by their "degree of safety" — highest, high, adequate, moderate. BB to D are described by their "risk of default" — moderate, high, very high, in default. The market convention follows exactly: "bonds with rating BBB AND ABOVE AS INVESTMENT GRADE and bonds BELOW THE BBB AS HIGH YIELD OR JUNK BONDS", and "many institutional investors are PROHIBITED from investing in junk bonds."

Gold pays you nothing, and that is the point of the question

A line examiners return to: "Unlike most of the financial investments, COMMODITIES DO NOT GENERATE ANY CURRENT INCOME and the investor would have to COUNT ONLY ON CAPITAL APPRECIATION." Art behaves identically — "These investments DO NOT PROVIDE ANY INCOME and just like gold, CAPITAL APPRECIATION IS THE ONLY WAY OF REWARD." Compare with real estate, which gives both capital appreciation and rental income, and with equity, which gives dividends and appreciation.

Structured products are not capital-protected, whatever the brochure suggests

The chapter issues an unusually direct warning. Structured products "may offer investment protection FROM 0% TO 100%" — note the range starts at zero — and then: "The performance is largely driven by the underlying strategy SUBJECT TO MARKET CONDITIONS. Hence, THEY MUST NOT BE TAKEN AS CAPITAL PROTECTION OR GUARANTEED OR ASSURED RETURN PRODUCTS." They "greatly use derivatives", need "larger denomination" investments, and in India appear most often as Market Linked Debentures.

Fallen angels are for people who can value wreckage

Distressed securities "may be available at HUGE DISCOUNTS", which is precisely the trap. They "require higher skills and greater experience in BUSINESS VALUATION than regular securities", which is why "it is a POPULAR INVESTMENT SEGMENT AMONG HEDGE FUND MANAGERS as they have DEEP EXPERIENCE IN VALUATION AND CREDIT ANALYSIS", and why "many types of funds and institutional investors are PROHIBITED from holding these securities." The discount is not free money; it is payment for the work of telling a recovery from a corpse.

Key terms in this chapter

Convertible preference share: One entitling the shareholder to convert into a specified number of equity shares.
Correlation: A measure of movement between two variables. The lower the correlation between investments, the higher the diversification benefit and the greater the reduction in risk.
Credit spread: The difference between the yield on a government security and a corporate security of the same maturity. It is the risk premium companies pay, or investors charge, for bearing default risk, and widens with the probability of default.
Cumulative preference share: One where unpaid dividends accumulate and must be paid in full at a later time, unlike a non-cumulative share where an omitted dividend is never paid.
Differential Voting Rights (DVR): Shares offering superior or inferior voting rights or differential dividends. Permitted in India since 2000 but with limited adoption. Tata Motors issued DVRs in 2008 with 1/10th voting rights and a 5 per cent higher dividend.
Direct investment: Buying securities issued by companies and governments, or commodities such as gold and silver, directly rather than through a pooled vehicle.
Distressed securities: Securities of companies in financial distress or near bankruptcy, available at huge discounts but requiring high valuation skill. Also called fallen angels, and popular with hedge fund managers.
Financial investment: An exchange of cash flows for a period of time. Financial instruments are essentially claims on future cash flows, and divide into debt and equity.
Government Security (G-Sec): A tradeable instrument issued by the Central or State Governments acknowledging a debt obligation. It carries practically no default risk and is called a risk-free gilt-edged instrument.
Hard commodities: Mined commodities such as gold, silver, oil, copper and aluminium, whose prices are set by global demand and supply.
High-touch versus light-touch regulation: Mutual funds are stringently regulated because they serve retail investors, while AIFs and PMS are lightly regulated because their investors are expected to understand complex strategies and risks.
High yield or junk bonds: Bonds rated below BBB. Many institutional investors are prohibited from investing in them because of the high default risk.
Hybrid or blended security: The term used for preference shares, because they carry some characteristics of equity and some of debt securities.
Investment grade: Bonds rated BBB and above, described in terms of their degree of safety rather than their risk of default.
Liberalised Remittance Scheme (LRS): The route permitting an individual to invest up to USD 250,000 abroad every year, allowing geographical and currency diversification.
Managed portfolio: An investment vehicle that pools money from investors and invests on their behalf, giving professional expertise at much lower cost. The four in India are mutual funds, AIFs, portfolio managers and collective investment schemes.
Market Linked Debenture (MLD): The most common form of structured product in India.
Non-financial investment: Investments such as real estate, gold and commodities, which are not claims on cash flows.
Participating preference share: One giving the holder a specified dividend plus an additional dividend on pre-specified conditions, and possibly a liquidation preference. A non-participating share pays a fixed rate unrelated to earnings.
Preference share: A share ranking above equity for dividends and for distribution of net assets on liquidation, usually without voting rights, carrying a fixed dividend and capable of being perpetual.
Real Estate Investment Trust (REIT): A vehicle enabling investors to take exposure to real estate with smaller outflow commitments than direct property purchase.
Registered Investment Adviser (RIA): A professional licensed by SEBI under the 2013 RIA Regulation, paid fees by investors, accountable only to them, bound by a strict code of conduct and required to disclose conflicts of interest.
Residual claimant: The position of an equity shareholder, who receives profits only after all other obligations of the company have been met.
Rich man's mutual fund: The popular nickname for AIFs and PMS, which require minimum investments of Rs 1 crore and Rs 50 lakh respectively.
Safe haven asset: The status gold has acquired through global acceptability, making it attractive in times of economic uncertainty and geopolitical crisis.
Soft commodities: Grown commodities such as corn, wheat, soybean, sugar, used as inputs in producing other goods. Being perishable they are highly volatile, carry business cycle risk, and depend on weather prediction.
State Government Securities (SGSs): The dated securities issued by State Governments, which unlike the Centre do not issue treasury bills.
Structured products: Customized, sophisticated investments using derivatives heavily to create risk-adjusted exposures linked to indices, currencies, rates or commodities. They may offer protection from 0 to 100 per cent and must not be treated as capital protected or guaranteed.
Time diversification: The benefit equities provide over the long term by reducing risk fluctuations and improving risk-adjusted returns.
Transferable debt contract: A debt instrument whose contract permits its sale to another investor. A non-transferable contract prohibits such sale.

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Original explanatory writing based on the official NISM workbook for Series X-A, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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