Department of business and Industrial

Management G.H. Bhakta Management

Academy MBA

SEMESTER 5th (Evening) Subject. : Investment

Management
Topic:- Non security form of investment
Submitted To:- Janki Mistry
Submitted By. : - Bagde Monalisa Govindbhai
Roll no:-1
 Non security form of Investment
Non-Security
Meaning:-
A non-security is an alternative investment that is not traded on a
public exchange as stocks and bonds are. Assets such as art, rare coins, life
insurance, gold, and diamonds all are non-securities.

Non-securities by definition are not liquid assets. That is, they cannot be easily
bought or sold on demand as no exchange exists for trading them.

Non-securities also are known as real assets.

Understanding Non-Securities
Individual markets exist for non-securities, ranging from auctions to private
listings. However, these are generally specialized sources. Non-securities cannot
be purchased on a public exchange such as the NYSE or the NASDAQ.

Non-securities, also called real assets, are investments that are not available for
purchase or sale on public exchanges.

They may, however, be a component of an investment that trades publicly, such as

an ETF.

Diamonds and fine art are examples of non-security investments.

While they do not trade on public market exchanges, they may be components of
packaged investment offerings that are traded on public exchanges, such as
exchange-traded funds (ETFs).

High-net-worth investors may have comprehensive portfolios that include valuable

non-security assets such as fine art, precious metals, and real estate. Investors may
also buy funds that manage portfolios of real assets such as gold. These funds trade
on public exchanges.
The SPDR Gold Shares ETF is one example. The portfolio is fully invested in gold
bullion. This ETF lowers the barriers for investors who would like to hold gold real
assets in their portfolio.

However, non-security assets do not themselves undergo an institutionalized

process for public trading on exchanges. This makes them highly illiquid
investments, in contrast to securities such as stocks, mutual funds, and bonds.

Valuation of Non-Securities
The valuation process for non-securities also differs. Market experts in each type
of non-security typically appraise them to estimate their valuations. In some cases,
non-securities may require authentication and registration to support their use and
potential sale.

These assets, however, do not require the backing of an underwriter or bank and
involve much less documentation and paperwork.

Personal Financial Assets as Non-Securities

Some personal financial assets such as life insurance and annuities could be
considered non-securities.

Investors have the option to invest in these non-security assets through an

insurance company. Life insurance and annuities are two types of non-security
assets that are not publicly traded but rather contractual agreements made with a
sponsoring company.

Life insurance and annuities require regular premium payments that help to build
out a portfolio that offers a payout in the future. Life insurance plans can be used to
provide for dependents following the death of a family member. Annuity plans
may also offer provisions for life insurance. However, they are often used as
vehicles for retirement savings with consistent annuity payouts scheduled to follow
a targeted payout date.

That makes them assets, although they are not securities.

A Security Investment is freely transferable and salable. It also includes the risk of
loss in value. Security investments include mutual funds, stocks, government
bonds etc.

A Non-Security Investment is a kind of non-marketable security, wherein the

ownership cannot be transferred. Non-security investments include life insurance,
artwork, gold, diamonds, bank guarantees etc.

Unlike Security investments, Non-Security investments do not need the backing of

a bank or of an underwriter. It involves much less documentation and paper-work
when compared to Security investments.

Attributes of a Non- Security

1. Highly Illiquid
One of the most important features is that the security has no available market for
which to trade or sell it. Since there is insufficient liquidity in the market for such
security, in many cases, it has to be held until maturity. 

2. Transferability
Some types of securities may not be transferable to other individuals and may be
required to be held by the registered owner until maturity. For example, U.S.
Saving Bonds are required to be held until maturity. 

3. High return
Lack of marketability and illiquidity are attributes that make investors require a
higher rate of return on non-marketable securities.

 
The Need for Non-Marketable Securities
Non-securities are primarily issued to ensure stability in ownership of the
securities. Other reasons for issuing such a type of securities include the need for a
long-term investment horizon.

Non-marketable securities are often issued at a lower price than face value, with
the securities being redeemable at face value on maturity. The variance between
the face value and issue price of the security represents a higher yield or return for
the investor.

Use of Non-Securities
An investor is interested in a long-term investment and is looking to invest to save
for his 4-year-old son’s college education. He has two options – invest in U.S.
Gold.

Based on his preferences, needs, and time horizon, Gold are better suited for the
investor. They are a long-term investment and can be transferred to their son. Also,
the Gold carries minimum risk.

Gold Investment in India

Gold is one of the most preferred investments in India.

High liquidity and inflation-beating capacity are its strong selling points, not to

mention charm, prestige, and so on. Gold prices shoot up when the markets face
turbulence. Though there are phases when markets witness a fall in gold prices, it
won’t last for long, and always makes a strong comeback.

Why Should Invest in Gold

Safety, liquidity, and returns are the three criteria most risk-averse investors look
for before investing. While gold meets the first two criteria without any hiccups, it
doesn’t perform poorly at the last one either. Here is why you should invest in
gold:

 Investing in gold is worthwhile because it is an inflation-beating investment.

Over time, the return on gold investment has been in line with the rate of
inflation.
 Gold has an inverse relation with equity investments. For example, if the
equity markets start going down, gold would perform well. Considering gold
as an investment option in your investment portfolio will be a buffer to the
overall volatility of your portfolio.

How to Invest in Gold

The ‘golden question’ here is – how does one invest in gold? Traditionally, it was
by buying physical gold in the form of coins, bullions, artefacts, or jewellery.
However, there are newer forms of gold investments nowadays, such as gold
ETFs (exchange-traded funds) and gold mutual funds.

Gold ETFs are similar to buying an equivalent sum of physical gold but without
the hassles of having to store the physical gold. Hence, there is no risk of
theft/burglary as the gold is stored in Demat (paper) form. Gold funds involve
investing in gold mining companies.

Let’s understand different ways of investing in gold from the following

table:
Gold Gold ETFs (Exchange Traded Gold Funds
Funds)

Investment in physical The investor buys a The investment is made in

gold proportionate value of gold but bullion and companies involved
not in the physical form in mining gold

No need for Demat The investor needs a Demat No need for a Demat account to
account account invest

Market fluctuations Changes in the gold prices Changes in the gold prices don’t
directly affect the prices affect that of gold ETFs affect gold funds directly
of gold

No additional charges Gold ETFs involve asset There’s a minimum charge to

other than the physical management and brokerage fees manage the gold funds.
gold itself

Risks of theft and Gold ETFs remove the burden Eliminates the risk of
burglary associated with of trading gold in the physical theft/burglary and buffers
storing physical gold form investments to changing market
fluctuations

No paperwork required Paperwork required for Paperwork is required for

for investing investing in gold ETFs investing in gold funds

Systematic Investment No SIP option SIP available

Plan (SIP) not available

Best suited for Best suited for investors who Best suited for investors who
conventional investors have the required time and expect high returns by taking
skillset to trade calculated risks
 What are Gold Funds
By investing in gold funds, you invest in stocks of companies operating in gold and
gold-related activities. Gold mutual funds include silver, platinum, and other
metals in their investment basket.

A mutual fund manager on behalf of an asset management company manages the

gold fund, unlike gold ETFs. They make use of the fundamental trading analysis to
buy and sell stocks to maximize returns for investors. Returns from gold funds
depend on market conditions to an extent.

Gold mutual funds eliminate the risk of returns considerably by distributing

investments over a wide range of investment options. In other words, mutual funds
work on the principle of diversifying, i.e. not putting all eggs in one basket.
Investors need to weigh their risk appetite and goals before choosing such a mutual
fund.

Gold Investment vs Mutual Funds

Particulars Gold Investment Mutual Fund

Definition Gold is a precious high-value metal Pools investors’ money in equities, debts
that is liquid in nature and other market instruments to multiply
the money

Management Investments are made and managed Experts manage the investment
by the investor professionally to create wealth and reduce
risks

Risk Physical carrying and storage of gold Investment in mutual funds can be made
Involved involves high risks of theft and with safe and secure methods
burglary

Returns Gold does not pay any dividends Mutual funds yield substantial returns to the
 investor

Investment Taking an average cost of Rs.31,000 Mutual fund investment is affordable and
Cost per 10 grams, one needs to carefully flexible. One can start investments from
think before making an initial Rs.1,000
investment in gold; considering the
high price to begin investing

Diamonds as an Investment

The reason is quite obvious and actually makes lots of sense:

Diamonds don't take up room
Diamonds have forever been used as an excellent means of transfer. The fact that
such a small item can be worth so much money is astounding. You can easily keep
a one million dollar diamond in the smallest of safes.
A diamond is durable - It doesn’t break or wear off
As the hardest substance on earth you do not have to worry about anything
happening to it. All you have to do is to make sure you do not lose it! (and even
that can be insured).

Inflation Proof
This is actually true to most physical commodities. Real estate, gold, silver and
diamonds usually appreciate in compliance to inflation. Unlike the others,
diamonds are more durable and movable.

This is also why even if you do not want to buy diamonds for investment buy just
considering an alternative form for putting some money aside diamonds make a
good choice.

You can enjoy it while you have it

Since diamonds do not wear off and technically there is no meaning to selling a
"second hand" diamond, you can mount it and wear it while you use it for
investment purposes.

Psychology
It is physical. You can hold it, look at it and even wear it. It makes you feel safer
unlike stocks and other financial items which are rows on a computer screen.

Besides the psychology and physical aspects there are also financial advantages to
buying diamonds for investment purposes which we'll show below.

How to Invest in Diamonds

Diamond investment should fall into your category of alternative investments with
all it entails. This means that they should be a small portion of your portfolio etc.

The idea is actually quite simple. As I mentioned, investing in diamonds is based

on the fact that diamonds are physical commodities. As such, you can easily buy
them everywhere, even online. The recommendations below are the basic
guidelines, a how to invest in diamonds tips and tricks if you wish. But most
important we also cover the risks so please read thoroughly till the end…
Learn the basics
you should start at the beginning. Learn the basics, the diamond language. Start
with the 4 Cs of Diamonds. If you had your mind set on investing in colored
diamonds then I highly recommend continuing right after this article to our How to
Choose a Colored Diamond guide.

Set a budget
Keep in mind that this should be a part of your portfolio. True, unlike stocks, the
initial amount that is required is a bit higher but this is no reason to go over the
budget or over the ration of your portfolio that you had in mind.

Diversify your diamonds

don’t put all the eggs in one basket. Even though it was Warren Buffett who said
"Diversification is protection against ignorance, it makes little sense for those who
know what they’re doing", we can't all be Buffett.

In diamond investment like in other investments it may be wise to diversify your

"portfolio". If you had set your diamond investment budget on $20,000 then you
should consider buying 2 x $10,000 diamonds or even split it into three.

On top of that, don't buy two / three diamonds of the same type. If you had your
heart set up on a pink diamond then it might be smart that the second diamond will
be blue, green or even yellow. You don't know which will rise more or
alternatively which will be easier to sell later on. Also, this is great since it will
enable you to liquidate a portion of your portfolio in case you need to allocate
some of your investment funds.
  

Mixed Parcel of Natural Colored Diamonds

Compare Prices
Forgive me for repeating the obvious comparison to stocks but a diamond is not a
stock. A diamond's price is not set by thousands of buyers and sellers bidding
online in a transparent platform. However, with the huge amount of online retailers
you can easily compare asking prices for similar diamonds (this is harder to do
when it comes to colored diamonds where each diamond is different).

Buy rare yet desired - use logic

I personally don't see too much point in buying something that everyone has. I've
seen mentions about buying a round 1 carat D VS diamonds for investment but
when time comes to liquidate your investment, you are selling something that can
easily be bought elsewhere - you are competing with many other sellers (and
manufacturers).

However, if you have a special natural colored diamond, for example a blue
diamond or a pink diamond, you are on a league of your own. However, keep
thinking of "desired". For example, it will be easier to sell a cushion cut or a round
diamond (even if pink) than a marquise. It will be easier to sell a VS blue diamond
than one with I2 clarity (even though it is reflected in pricing). Use common sense
and trust your instincts about what to stay away from.
Buy only certified diamonds.
Do not trust what the seller is saying (or writing in case it is online). Keep in mind
that every minor change in a diamond's attributes means a lot of money. We highly
recommend buying diamonds specifically with GIA certificates. This is probably
the most known gemological laboratory and also a very strict one.

Besides for the buying part of the investment, consider that when it is time to sell
your diamonds your buyer will probably also want to see a GIA grading report.
When it comes to colorless diamonds the IGI is also considered quite strict but
when it comes to colored diamonds the GIA are to this day the only ones to trust.

Mounted or Loose
Most chances are that when the time comes and you wish to liquidate your
investment (sell your diamond) the person who buys it has its own agenda for it.
Maybe like you he buys it for investment but most probably it will be for a setting
that he dreamt of. This is why you would probably get zero value for your setting
and only the diamond itself will be calculated for assessing the value.

But does it mean that you shouldn't mount it? Not necessarily. Not everyone can
imagine how a diamond looks when mounted. A good and smart setting can very
much be a great tool that will help you sell the diamond. Good settings can
emphasis the color and hide inclusions. In fact, most of the extremely rare
diamonds that you hear about selling in auctions by Christie's and Sotheby's are
mounted. And let's not forget that when mounted you can enjoy it while you have
it.

Small note, it is practically impossible to grade diamonds while mounted. True, if

you followed our instructions you had bought a diamond with a GIA certificate
that states its attributes - but still, an experienced buyer might very well ask you to
remove it from its setting. In this case I recommend you to do it as a contingency
to him purchasing the diamond if all is ok.
Advantages of Investing in Colored Diamonds.
As mentioned above it is in my personal opinion that trying to sell a 1 carat D VS1
diamond will be quite difficult. Don't get me wrong, a 1 carat D VS will probably
be easier selling than a 1 carat D Flawless because a D FL costs so much more
while providing the end customer so little added value that the amount of people
that are willing to pay this premium is very limited. For those who don't know, in
VS1 diamonds you cannot see the inclusions without a loupe and for the non-
professionals probably even with a loupe.

It is a delicate equation. You need to find the right diamond that has enough
demand and on the other side of the equation there are only few sellers -
investment grade diamonds. Colored diamonds by definition fall exactly into that
category. The supply is limited being that only 1 out of 10,000 diamonds is a
natural colored diamond and the demand is constantly rising.

They are unique and sought after. It seems that the equation keeps tilting the right
way and as a diamond investor - time is on your side.

Natural Yellow Diamonds - standing out in the crowd

This also takes us directly into the second advantage which is (to our opinion) that
there are more reasons for colored diamonds prices to increase than in regular
colorless diamonds.

There is an expectance for a strong increase in demand for diamonds (all

diamonds) from the evolving markets such as China and India where the middle
class is growing every year.
What are The Disadvantages and Risks to Investing in Diamonds?
There are three major risks and disadvantages when it comes to diamond
investment -

1. Price Transparency –

While other merchandises such as gold and silver have a price index that can
be followed and checked in the stock exchange - diamonds do not! There is
the Rapaport price list which most diamond dealers rely on but this is not
enough on its own. The list is used as a benchmark and even if you can get a
copy, it won't be useful for several reasons. It takes into account only the
basic factors of carat weight, clarity and color.

At the end, the price is determined by the market - supply and demand.
Merchants buy certain diamonds above the price list and also below it. A
10% difference means a lot. Also, this list refers only to white colorless
diamonds and there is no current list (or benchmark) to colored diamonds.

The way to overcome this downside is doing a lot of research. Buy from a
reputable merchant of is known to be fair and make sure to compare prices
online.

2. Lack of Tradability –

Buying a diamond is relatively easy. However, selling one is a completely

different story. There are some companies who buy diamonds just as there
are some who buy gold but these will pay on the lower side of prices. You
can always try and sell it on Craig's list and similar. Or, you can try selling it
to other retailers but they will probably be tough negotiators and you'll have
to beat their supplier either in pricing or in the rarity of your gem.

The last option which is reserved to the high-end pieces is trying to sell your
diamond through the auction houses. Diamond auctions arranged by
Christie's and Sotheby's are luring lots of diamond investors and collectors.
The problem with those is that they mostly accept the unique gems and that
their fee is considered expensive by some.
3. Patience is a Virtue

Diamonds are not stocks. There is little to no chance that the value of the
diamond you bought will spike 30% the next year (not that it happens too
often in stocks as well). Consider the diamonds you bought in the part of
portfolio that is intended for long term investment. Remember, good things
come to those who wait!

Conclusion:-
All investments have their own set of pros and cons. investing in physical gold
needs safety and security to preserve the same from theft. Investing in gold
comes with a bunch of disadvantages; the other viable investment option that
one can consider is mutual funds. They are also more tax-efficient as compared
to traditional investments, and have the potential to provide much higher returns
when the markets are favorable.

Any investment involves a portion of speculation. All you can do is try to make
a smart one based on all of the information you can obtain.

If we try to conclude all that was written above, not surprisingly, diamonds as
an investment have their pros and of course their cons. I strongly believe that
their upside and potential easily overcomes their cons. Just be aware of the
downsides and use it wisely to minimize the risks involved.