NISM Series XXI-B Short Notes – Part 1: Investment Landscape & Securities Markets
This is Part 1 of our 10-part NISM Series XXI-B (Portfolio Managers Certification) short notes series on PassNISM.in. These notes cover the complete NISM XXI-B syllabus to help you prepare faster and pass the exam with confidence. No case studies are included — pure concept clarity.
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Chapter 1: Investment Landscape What is Saving vs Investment?
People generally have two choices for their surplus money. They can hold it until their future spending needs arise, or they can lend it to others who need it now — in return for getting back more than they gave. Saving is simply the difference between what you earn and what you spend. Investment, on the other hand, is the act of committing your current savings with the goal of receiving a higher amount in the future.
Types of Assets
Assets are broadly divided into two buckets:
- Financial Assets: Shares, debentures, bank deposits, PPF, mutual fund investments, etc.
- Physical Assets: Gold, silver, other precious metals, real estate, diamonds, etc.
Investment Objectives
Every investor has one or more of these core objectives:
- Capital Preservation – Protecting the principal amount from loss
- Capital Appreciation – Growing the value of the investment over time
- Current Income – Earning regular income from the investment (dividends, interest, rent)
Required Rate of Return
The required rate of return is the minimum return an investor expects before choosing to invest. It can be broken down as:
Required Rate of Return = Real Risk-Free Rate + Inflation Rate + Risk Premium
- The real risk-free rate is the base return assuming no inflation and no uncertainty — it compensates for postponing consumption.
- The nominal rate of return adds the inflation component to the real rate.
- The risk premium is additional compensation demanded for bearing uncertainty. Higher the perceived risk, higher the risk premium demanded.
Types of Investment Risks
Understanding risk types is critical for NISM XXI-B. Here's a clean summary:
| Risk Type | What it Means |
|---|---|
| Business Risk | Arises from the nature of a firm's business operations. Driven by sales volatility and operating leverage. |
| Financial Risk | Uncertainty caused by use of debt financing in a firm's capital structure. |
| Liquidity Risk | Risk arising from difficulty in converting an asset to cash at close to its fair value. |
| Exchange Rate Risk | Uncertainty of return when investing in foreign currency-denominated assets. |
| Political Risk | Uncertainty from potential major changes in political or economic environment. |
| Geopolitical Risk | Risk from wars, terrorist acts, or tensions between states that disturb normal international relations. |
| Regulatory Risk | Uncertainty from changes in the regulatory framework applicable to investments. |
📌 Key Principle: Risk and return share a positive relationship. Greater risk demands higher potential return. As perceived uncertainty rises, the required risk premium also rises.
Types of Investments (Asset Classes) 1. Equity
Equity shares represent ownership in a company. Equity shareholders are residual owners — they get what's left after all other claims (debt, preference shares) are settled. They have voting rights and participate in the company's management if they hold significant stakes. Return is not contractually guaranteed — it depends on business performance.
2. Fixed Income Securities (Debt Instruments)
Debt instruments (also called fixed income instruments) promise to pay periodic cash flows (coupons) and return the principal at maturity. They can be transferable or non-transferable. Key classifications:
- Government vs Corporate Debt: Corporate bonds pay higher interest than G-Secs due to default risk.
- Investment Grade vs High Yield: Bonds rated BBB and above are investment grade; below BBB are high yield or "junk bonds."
- Money Market vs Capital Market: Securities with maturity ≤1 year (T-bills, CPs, CDs) are money market instruments. Securities with maturity >1 year are capital market instruments.
3. Commodities
- Hard Commodities (gold, silver): Global demand-supply driven. Traditionally used as reserve assets and inflation hedges.
- Soft Commodities (agricultural): Perishable and highly price-volatile; subject to business cycle risk.
4. Real Estate
The world's largest asset class. It is a major driver of economic growth, offers diversification benefits, and is historically seen as an inflation hedge. Returns come via capital appreciation and rental income.
5. Structured Products
Customized, sophisticated investment products. They use derivatives to create specific risk-return exposures and provide access to assets that are otherwise hard to reach for ordinary investors.
6. Distressed Securities
Securities of companies in financial distress or near bankruptcy. Often available at steep discounts, but require advanced skills in business valuation and carry significantly higher risk.
Channels for Making Investments Direct Investment
The investor directly purchases securities issued by companies, government, or buys commodities from dealers. Securities can also be bought through Registered Investment Advisors (RIAs).
Managed Portfolio (Indirect Investment)
Investors pool their money into investment vehicles that invest on their behalf. Available managed portfolio options in India include:
- Mutual Funds
- Alternative Investment Funds (AIFs)
- Portfolio Managers (PMS)
- Collective Investment Schemes
Chapter 2: Introduction to Securities Markets Role of Securities Markets
The securities market is an institutional framework that enables efficient flow of capital in an economy. A household with savings can fund a business's capital needs through securities markets — connecting surplus units (savers) with deficit units (borrowers).
A security represents the terms of exchange of money between two parties. Securities are issued by companies, financial institutions, or government and purchased by investors.
Primary Market
The primary market is where companies raise fresh capital from investors. Types of primary market offerings:
| Type | Description |
|---|---|
| Public Issue | Securities offered to the general public |
| IPO | First sale of a company's shares to the public |
| FPO | A listed company making a fresh issue or offer for sale to the public again |
| Rights Issue | Shares offered to existing shareholders in proportion to their holdings |
| Private Placement | Securities issued to a select group — neither a public issue nor a rights issue |
| Preferential Issue | Shares or convertible securities issued by a listed company to a select group |
| QIP | Private placement by a listed company to Qualified Institutional Buyers (QIBs) |
| Bonus Issue | Free shares given to existing shareholders based on their current holding |
| OFS (Offer for Sale) | Existing shareholders sell their already-allotted shares — no fresh capital raised |
| ESOP | Employee Stock Ownership Plans — stake given to employees as incentive |
| FCCBs | Foreign Currency Convertible Bonds — dollar-denominated debt with equity conversion option |
| Depository Receipts (DRs) | Shares of a local company listed/traded on a foreign stock exchange, issued in foreign currency |
Secondary Market
The secondary market provides liquidity to instruments issued in the primary market. An active secondary market promotes growth of the primary market because investors know they can exit whenever needed.
- OTC Markets: Trades negotiated directly between counterparties.
- Exchange Traded Markets: Trading and settlement done through a stock exchange.
- Trading: A formal contract to buy/sell securities.
- Clearing: Determining net obligations of buyers and sellers for a time period.
- Settlement: The actual payment of money (for buys) or delivery of securities (for sells) to settle obligations.
Market Participants Market Infrastructure Institutions & Intermediaries
- Stock Exchanges – Trading platforms for already-issued securities
- Depositories – Hold securities in electronic form
- Depository Participants (DPs) – Agents of the depository interfacing with investors
- Trading Members / Stock Brokers – Registered members of stock exchanges
- Authorized Persons – Agents of brokers, registered with exchanges
- Custodians – Hold funds and securities of large clients
- Clearing Corporations – Safeguard investor interests by guaranteeing settlement
- Clearing Banks – Intermediary between clearing members and clearing corporation
- Merchant Bankers – SEBI-registered; act as issue managers and lead managers
- Underwriters – Commit to subscribe any unsold portion of a public offering
Institutional Participants
Mutual Funds, Pension Funds, Insurance Companies, AIFs, Foreign Portfolio Investors (FPIs), Investment Advisors, EPFO, National Pension Scheme, Family Offices, Corporate Treasuries
Retail Participants
Individual investors who participate in the market for personal wealth creation goals.
Quick Revision Box – Part 1
- Investment = committing savings today for higher future returns
- Required return = Real risk-free rate + Inflation + Risk premium
- Primary market = fresh capital raising; Secondary market = liquidity & exit
- IPO ≠ FPO ≠ OFS — know the differences clearly
- PMS minimum investment = ₹50 lakhs
- Equity = residual ownership; Debt = contractual payment obligation
👉 Continue Reading: Part 2: Investing in Stocks & Fixed Income Securities
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