Portfolio Management - An Introduction and Process

INTRODUCTION OF INVESTMENT:
An investment is an asset or item that is purchased with the hope that it will generate income or will
appreciate in the future. Investments can be stocks, bonds, mutual funds, interest-bearing accounts, land,
derivatives, real estate, gold silver etc. anything an investor believes will produce income (usually in the
form of interest or rents) or become worth more.

DEFINITION OF INVESTMENT:
➢ "An investment operation is one which, upon through analysis promises safety of principal and
an adequate return. Operations not 7meeting these requirements are speculative.”
-By Graham and Qadd's Security Analysis
➢ Investment management is the process of managing money, including investment, budgeting,
banking and taxes, also called as money management.

MEANING AND CONCEPT OF INVESTMENT:

Investment is a term for several closely related meanings in finance and economics.
1) Investment according to Theoretical Economics: Investment means the production of capital goods
- goods which are not consumed but instead used in future production.
Example include: Building, A rail road, A factory clearing land, Putting oneself through college.

2) Investment according to Finance Term: Investment means buying of assets. For example.
• Buying stocks and bonds, Investing in real estate, Mortgages.
These investments may then provide a future income and increase in value (i.e., investing in real estate).

NATURE AND CHARACTERISTICS OF INVESTMENT:

Investment refers to invest money in financial physical assets and marketable assets. Major
investments feature such as risk, return, safety, liquidity, marketability conceal ability, capital
growth, purchasing power, stability and the benefits.

The above figure indicates that an important characteristic of investment.

1) Risk: Risk refers to the loss of principal amount of an investment. It is one of the major
characteristics of an investment.
The risk depends on the following factors:
➢ The investment maturity period is longer; in this case, investor will take larger risk.
➢ Government or Semi Government bodies are issuing securities which have less risk.
➢ In the case of the debt instrument or fixed deposit, the risk of above investment is less due to
their secured and fixed interest payable on them. For instance, Debentures.
➢ In the case of ownership instrument like equity or preference shares, the risk is more due to their
unsecured nature and variability of their return and ownership character.
➢ The risk of degree of variability of returns is more in the case of ownership capital compare to
debt capital.
➢ The tax provisions would influence the return of risk.

2) Return: Return refers to expected rate of return from an investment. Return is an important
characteristic of investment. Return is the major factor which influences the pattern of investment
that is made by the investor. Investor always prefers to high rate of return for his investment.

3) Safety: Safety refers to the protection of investor principal amount and expected rate of return. Safety
is also one of the essential and crucial elements of investment. Investor prefers safety about his
capital. Capital is the certainty of return without loss of money or it will take to retain it. If investors
prefer less risk securities, he chooses Government bonds. In the case, investors prefer high rate of
return investor will choose private securities and safety of these securities is low.

4) Liquidity: Liquidity refers to an investment ready to convert into cash position. In other words, it is
available immediately in cash from. Liquidity means that investment is easily realisable, saleable or
marketable. When the liquidity is high, then the return may be low. For example, UTI units. An
investor generally prefers liquidity for his investments, safety of funds through a minimum risk and
maximisation of return from an investment.

5) Marketability: Marketability refers to buying and selling of securities in market. marketability

means transferability or sale ability of an asset. Securities are listed in a stock market which are more
easily marketable than which are not listed. Public Limited company’s shares are more easily
transferable than those of private limited companies.

6) (6) Conceal ability: Conceal ability is another essential characteristic of the investment. Conceal1
ability means investment to be safe form social disorders, government confiscations or unacceptable
levels of taxation; property must be concealable and leave no record of income received from its use
or sale. Gold and precious stones have long been esteemed for these purposes, because they combine
high value with small bulk and are readily transferable.

7) Capital Growth: Capital growth refers to appreciation of investment. Capital growth has today
become an important character of investment. It is recognising in between connection between
 corporation and industry growth and very large capital growth. Investors and their advisers constantly
seeking 'growth stock' in the right industry and bought right time.

8) Purchasing Power Stability: It refers to the buying capacity of investment in market. Purchasing
power stability has become one of the import traits of investment. Investment always involves the
commitment of current funds with the objective of receiving greater amounts of future funds.

9) Stability of income: it refers to constant return form an investment. Another major characteristic
feature of the investment is the stability of income. Stability of income must look for different path
just as security of principal. Every investor always considers stability of monetary income and
stability of purchasing power of income.

10) Tax Benefits: Tax benefits are the last characteristic feature of the investment. Tax benefits refer to
plan an investment programme without regard to one's status may be costly to the investor. There
are actually two problems:
➢ One concerned with the amount of income paid by the investment.
➢ Another is the burden of income tax upon that income.

OBJECTIVES OF INVESTMENT:
Depending on the life stage and risk appetite of the investor, there are three main objectives of
investment: safety, growth and income.
1) Safety: While no investment option is completely safe, there are products that are preferred by
investors who are risk averse. Some individuals invest with an objective of keeping their money safe,
irrespective of the rate of return they receive on their capital. Such near-sate products include fixed
deposits, savings accounts, government bonds, etc.
2) Growth: While safety is an important objective for many investors, a majority of them invest to
receive capital gains, which means that they want the invested amount to grow. There are several
options in the market that offer this benefit. These include stocks, mutual funds, gold, property,
commodities, etc. It is important to note that capital gains attract taxes, the percentage of which varies
according to the number of years of investment.
3) Income: Some individuals invest with the objective of generating a second source of income.
Consequently, they invest in products that offer returns regularly like bank fixed deposits, corporate
and government bonds, etc.
OTHER OBJECTIVES:
While the aforementioned objectives are the most common ones among investors today, some other
objectives include:
4) Tax exemption: Some people invest their money in various financial products solely for reducing
their tax liability. Some products offer tax exemptions while many offers tax benefits on long-term
profits.
5) Liquidity: Many investment options are not liquid. This means they cannot be sold and converted
into cash instantly. However, some people prefer investing in options that can be used during
 emergencies. Such liquid instruments include stock, money market instruments and exchange-
traded funds, to name a few.
6) Minimize risk: Investing in different types of securities help to mininmize risk. To minimize the
risks associated with investment, you should always diversify your portfolio over well researched
asset class.
SCOPE OF INVESTMENT:
Investment activity includes buying and selling of the financial assets, physical assets and marketable
assets in primary and secondary markets. Investment activity involves the use of funds or savings for
further creation of assets or acquisition of existing assets.
Investment activity refers to acquisition of assets like:
(a) Financial assets.
(b) Physical assets.
(c) Marketable assets from the primary and secondary market.

Financial Assets are:

• P.F.
• LIC scheme.
• Pension scheme.
• Post office certificates and deposits.
Physical Assets are:

• House, land, building and flats.

• Gold, silver and other metals.
• Consumer durables.
Marketable Assets are:

• Shares.
• Bonds.
• Government securities.
• Mutual Fund Schemes.
• UTI units etc.
Investment activity involves the use of funds or savings for further creation of assets or acquisition of
existing assets.

Distinguish Between Investment V/S Speculation

Basis For
Investment Speculation
Comparison
The purchase of an asset with the hope Speculation is an act of conducting a
Meaning of getting returns is risky financial transaction, in the hope of
called investment. substantial profit.
Fundamental factors, i.e., performance
Basis for Hearsay, technical charts and market
of
decision psychology
the company.
Investments are held for at least one
Speculators hold assets for short term
Time horizon year. Hence, it has a longer time horizon
only.
than speculation.
The quantity of risk is moderate in The quantity of risk is high in case of
Risk involved
investment. speculation.
Expected rate An investor expects the modest Normal A speculator expects higher profits
of Return and Stable return. Higher and unstable return.
The investor uses his own funds for
Funds A speculator uses borrowed funds.
investment purposes.
Income Stable Uncertain and Erratic
Behaviour of The psychological attitude of investors The psychological attitude of speculators
participants is conservative and cautious is daring and careless.
Speculators who expect profit from the
The investors expect profit from the
Profit change in the prices, due to demand and
changes in the value of the assets
supply forces.
Aim/Motive Mainly to earn return Mainly to earn capital gain
Investment tends to produce positive Speculation produces both positive and
Effect/ Result
return. negative result.

Distinguish Between Investment V/S Gambling

Basis For
Investment Gambling
Comparison
Gambling is something of value or an
The purchase of an asset with the hope of
Meaning event with an uncertain outcome with
getting returns is called investment.
the primary intend of winning
 additional money or
material goods.
Return Stable return. Uncertain and high return.
Time Investments are held for at least one year. Gambling is for short period of time.
Investment is a serious activity that
Gambling is more of recreational
Activity involves research and background
activity.
knowledge.
Process Investment is a continuous process. Gambling is immediate event.
Investing is ownership of something In gambling there is no ownership of
Ownership
tangible. something tangible.
Investment is based on skill and requires Gambling is based on luck and
Based on
research. emotions.
Legal / Illegal Investment is legal. Gambling is illegal.
Investment is done in establishment such Gambling is commonly found in
Done in
as banks and business. casino’s
Risk of losing money is very less in Risk of losing money is very high in
Risk
investment. gambling

MEANING OF PORTFOLIO MANAGEMENT:

Portfolio means a combination of financial assets and physical assets. The financial assets are shares,
debentures and other securities while physical assets include gold, silver, real estates, rare collections,
etc. A portfolio is planned to stabilize the risk of non-performance of various pools of investment.
Portfolio Management guides the investor in a method of selecting the best available securities that will
provide the expected rate of return for any given degree of risk and also to mitigate (reduce) the risks. It
is a strategic decision which is addressed by the top-level managers.
Investment portfolio composing securities that yield a maximum return for given levels of risk or
minimum risk for given levels of returns are termed as "efficient portfolio".
Portfolio management thus refers to investment of funds in such combination of different securities in
which the total risk of portfolio is minimized while expecting maximum return from it.

DEFINITION OF PORTFOLIO MANAGEMENT:

Portfolio management can be defined as "The process of selecting a bunch of securities that provides
the investing agency a maximum return for a given level of risk or alternatively ensures minimum risk
for a given level of return."

EVOLUTION OF PORTFOLIO MANAGEMENT:

1) Investing in corporate securities is profitable as well exciting. One should not forget the element of
risks from investing in individual security. Risk arises when there is a possibility of variation
around expected return from the security. As all securities carry varying degrees of risks, holding
more than one security at a time enables an investor to spread his risks.
2) The investor hopes that even if one security incurs a loss the rest will provide some protection from
an extreme loss. Thus, portfolios or combination of securities are thought of as a device to spread
risk over many securities.
3) In this context, portfolio is defined as: "The composite set of ownership rights to financial assets in
which the investor wishes to invest."
4) In olden days, the traditional portfolio managers diversified funds over securities of large number
of companies based on intuition. They had no real knowledge of implementing risk reduction.
5) Since 1950, a body of knowledge has been built up which quantifies the expected risk and also the
riskiness of the portfolio. The portfolio theory has been developed to provide the management a
technique to evaluate the merits and demerits of investment portfolio.

OBJECTIVES / ADVANTAGES OF PORTFOLIO / MANAGEMENT:

The main objectives of portfolio management in finance are as follows:

(1) Security of Principal Investment: Investment safety or minimization of risks is one of the most
important objectives of portfolio management. Portfolio management not only involves keeping the
investment intact but also contributes towards the growth of its purchasing power over the period.
The motive of a financial portfolio management is to ensure that the investment is absolutely safe.
Other factors such as income, growth, etc., are considered only after the safety of investment is
ensured.
(2) Consistency of Returns: Portfolio management also ensures to provide the stability of returns by
reinvesting the same earned returns in profitable and good portfolios. The portfolio helps to yield
steady returns. The earned returns should compensate the opportunity cost of the funds invested.
(3) Capital Growth: Portfolio management guarantees the growth of capital by reinvesting in growth
securities or by the purchase of the growth securities. A portfolio shall appreciate in value, in order
to safeguard the investor from any erosion in purchasing power due to inflation and other economic
factors. A portfolio must consist of those investments, which tend to appreciate in real value after
adjusting for inflation.
(4) Marketability: Portfolio management ensures the flexibility to the investment portfolio. A portfolio
consists of such investment, which can be marketed and traded. Suppose, if your portfolio contains
too many unlisted or inactive shares, then there would be problems to do trading like switching from
 one investment to another. It is always recommended to invest only in those shares and securities
which are listed on major stock exchanges, and also, which are actively traded.
(5) Liquidity: Portfolio management is planned in such a way that it facilitates to take maximum
advantage of various good opportunities upcoming in the market. The portfolio should always ensure
that there are enough funds available at short notice to take care of the investor's liquidity
requirements.
(6) Diversification of Portfolio: Portfolio management is purposely designed to reduce the risk of loss
of capital and/or income by investing in different types of securities available in a wide range of
industries. The investors shall be aware of the fact that there is no such thing as a zero-risk
investment. More over relatively low risk investment gives correspondingly a lower return to their
financial portfolio.
(7) Favourable Tax Status: Portfolio management is planned in such a way to increase the effective
yield an investor gets from his surplus invested funds. By minimizing the tax burden, yield can be
effectively improved. A good portfolio should give a favourable tax shelter to the investors. The
portfolio should be evaluated after considering income tax, capital gains tax, and other taxes.

The objectives of portfolio management are applicable to all financial portfolios. These objectives, if
considered, results in a proper analytical approach towards the growth of the portfolio. Furthermore,
overall risk needs to be maintained at the acceptable level by developing a balanced and efficient
portfolio. Finally, a good portfolio of growth stocks often satisfies all objectives of portfolio
management.

PHASES OF PORTFOLIO MANAGEMENT:

Portfolio management involves complex process which the following steps to be followed carefully:
(1) Identification of objectives and constraints.
(2) Selection of the asset mix.
(3) Formulation of portfolio strategy.
(4) Security analysis.
(5) Portfolio execution.
(6) Portfolio revision.
(7) Portfolio evaluation.

1) Identification of objectives and constraints: The primary step in the portfolio management process
is to identify the limitations and objectives. The portfolio management should focus on the objectives
and constraints of an investor in first place. The objective of an Investor may be income with
minimum amount of risk, capital appreciation or for future provisions. The relative importance of
these objectives should be clearly defined.
2) Selection of the asset mix: The next major step in portfolio management process is identifying
different assets that can be included in portfolio in order to spread risk and minimize loss.
In this step, the relationship between securities has to be clearly specified. Portfolio may contain the
mix of Preference shares, equity shares, bonds etc. The percentage of the mix depends upon the risk
tolerance and investment limit of the investor.
3) Formulation of portfolio strategy: After certain asset mix is chosen, the next step in the portfolio
management process is formulation of an appropriate portfolio strategy. There are two choices for
the formulation of portfolio strategy, namely (i) an active portfolio strategy; and ii) a passive portfolio
strategy.
An active portfolio strategy attempts to earn a superior risk adjusted return by adapting to market
timing, switching from one sector to another sector according to market condition, security selection
or a combination of all of these.
A passive portfolio strategy on the other hand has a pre-determined level of exposure to risk. The
portfolio is broadly diversified and maintained strictly.
4) Security analysis: In this step, an investor actively involves himself in selecting securities. Security
analysis requires the sources of information on the basis of which analysis is made. Securities for the
portfolio are analysed taking into account of their price, possible return, risks associated with it etc.
As the return on investment is linked to the risk associated with the security, security analysis helps
to understand the nature and extent of risk of a particular security in the market. Security analysis
involves both micro analysis and macro analysis. For example, analysing one script is micro analysis.
On the other hand, macro analysis is the analysis of market of securities. Fundamental analysis and
technical analysis help to identify the securities that can be included in portfolio of an investor.
5) Portfolio execution: When selection of securities for investment is complete the execution of
portfolio plan takes the next stage in a portfolio management process. Portfolio execution is related
to buying and selling of specified securities in given amounts. As portfolio execution has a bearing
on investment results, it is considered one of the important steps in portfolio management.
6) Portfolio revision: Portfolio revision is one of the most important steps in portfolio management. A
portfolio manager has to constantly monitor according to the market condition. Revision of portfolio
includes adding or removing scripts, shifting from one stock to another or from stocks to bonds and
vice versa.
7) Performance evaluation: Evaluating the performance of portfolio is another important step in
portfolio management. Portfolio manager has to assess the performance of portfolio over a selected
period of time. Performance evaluation includes assessing the relative merits and demerits of
portfolio, risk and return criteria, adherence of the portfolio management to publicly stated
investment objectives or some combination of these factors.

ROLE OF PORTFOLIO MANAGER:

A Portfolio Manager is a professional who is responsible for making investment decisions and carrying
out investment activities on behalf of individuals or institutions. These clients invest their money into
the portfolio managers investment policy in order to invest for future needs e.g., fund for retirement
needs/future liabilities or to meet the on-going needs. A portfolio manager is one who helps an individual
invest in the best available investment plans for guaranteed returns in the future.
Following is roles and responsibilities of a portfolio manager:
1) A portfolio manager plays a pivotal role in deciding the best investment plan for an individual as per
his income, age as well as ability to undertake risks. Investment is essential for every earning
individual. One must keep aside some amount of his/her income for tough times. Unavoidable
circumstances might arise anytime and one needs to have sufficient funds to overcome the same.
2) A portfolio manager is responsible for making an individual aware of the various investment tools
available in the market and benefits associated with each plan. Make an individual realize why he
actually needs to invest and which plan would be the best for him.
3) A portfolio manager is responsible for designing customized investment solutions for the clients. No
two individuals can have the same filaricidal needs. It is essential for the portfolio manager to first
analyse the background of his client. Know an individual's earnings and his capacity to invest. Sit
with your client and understand his financial needs and requirement.
4) A portfolio manager must keep himself abreast with the latest changes in the financial market.
Suggest the best plan for your client with minimum risks involved and maximum returns. Make him
understand the investment plans and the risks involved with each plan in a jargon free language. A
portfolio manager must be transparent with individuals. Read out the terms and conditions and never
hide anything from any of your clients. Be honest to your client tor a long-term relationship.
5) A portfolio manager ought to be unbiased and a thorough professional. Don't always look for your
commissions or money. It is your responsibility to guide your client and help him choose the best
investment plan. A portfolio manager must design tailor made investment solutions for individuals
who guarantee maximum returns and benefits within a stipulated time frame. It is the portfolio
manager's duty to suggest the individual where to invest and where not to invest? Keep a check on
the market fluctuations and guide the individual accordingly.
6) A portfolio manager needs to be a good decision maker. He should be prompt enough to finalize the
best financial plan for an individual and invest on his behalf.
7) Communicate with your client on a regular basis. A portfolio manager plays a major role in setting
financial goal of an individual. Be accessible to your clients. Never ignore them. Remember you
have the responsibility of putting their hard-earned money into something which would benefit them
in the long run.
8) Be patient with your clients. You might need to meet them twice or even thrice to explain them all
the investment plans, benefits, maturity period, terms and conditions, risks involved and so on. Don't
ever get hyper with them.
9) Never sign any important document on your client's behalf. Never pressurize your client for any plan.
It is his money and he has all the rights to select the best plan for himself.
10) Determination of a viable project mix that meets the target of the organization.
11) Ensuring a mix of projects that balance various factors such as research versus development, short
term versus long term, risk versus reward, etc.
12) Regular monitoring of the planning and execution of the optimal selected projects.
13) Evaluating the performance of portfolio and various ways for improving it.
14) Analysing the recent opportunity against the existing portfolio.
15) Providing recommendations to decision makers at every level of the process management.
INVESTMENT ALTERNATIVES/AVENUES/ENVIRONMENT IN INDIA:
There are many types of investments and investing styles to choose from. Mutual funds, ETFs, individual
stocks and bonds, closed-end mutual funds, real estate, various alternative investments and owning all
or part of a business are just a few examples.
(1) Equity shares: Equity investments represent ownership in a running company. By ownership, we
mean share in the profits and assets of the company but generally, there are no fixed returns. It is
considered as a risky investment but at the same time, they are most liquid investments due to the
presence of stock markets.
(2) Debentures or Bonds: Debentures or bonds are long term investment options with a fixed stream
of cash flows depending on the quoted rate of interest. They are considered relatively less risky. An
amount of risk involved in debentures or bonds is dependent upon which the issuer is. For example,
if the issuer is government, the risk is assumed to be zero. Following alternatives are available under
debentures or bonds:
• Government securities.
• Savings bonds.
• Public Sector Units bonds.
• Debentures of private sector companies.
(3) Mutual Fund: A mutual fund is a professionally-managed investment scheme, usually run by an
asset management company that brings together a group of people and invests their money in stocks,
bonds and other securities. The biggest advantage of investing through a mutual fund is that it gives
small investors access to professionally-managed, diversified portfolios of equities, bonds and other
securities, which would be quite difficult to create with a small amount of capital.
(4) Public Provident Fund: The Public Provident Fund is a savings-cum-tax-saving instrument in India,
introduced by the National Savings Institute of the Ministry of Finance in 1968. The aim of the
scheme is to mobilize small savings by offering an investment with reasonable returns combined
with income tax benefits.
(5) National Saving Certificate: National Savings Certificates, popularly known as NSC, is an Indian
Government Savings Bond, primarily used for small savings and income tax saving investments in
India. It is part of the postal savings system of Indian Postal Service (India Post). These can be
purchased from any Post Office in India by an adult (either in his/her own name or on behalf of a
minor), a minor, a trust, and two adults jointly. These are issued for five- and ten-year maturity and
can be pledged to banks as collateral for availing loans. The holder gets the tax benefit under Section
80C of Income Tax Act, 1961.
(6) Preference Share: Preference shares are shares which are preferred over common or equity shares
in payment of surplus or dividend i.e., preference shareholders are the first to get dividends in case
the company decides to pay out dividends. Owners of preference shares gets fixed dividend.
However, in the event of liquidation of the company they are paid after bond holders and creditors,
but before equity holders.
(7) Life insurance and general insurance: They are one of the important parts of good investment
portfolios. Life insurance is an investment for the security of life. The main objective of other
investment avenues is to earn a return but the primary objective of life insurance is to secure our
families against unfortunate event of our death. It is popular in individuals. Other kinds of general
insurances are useful for corporates. There are different types of insurances which are as follow:
 • Endowment Insurance Policy.
• Money Back Policy.
• Whole Life Policy.
• Term Insurance Policy.
• General Insurance for any kind of assets.
(8) Real Estate: In India investing in real estate is considered as the best form of investment but only
after gold. Historically real estate has performed well in India. Investing in metros has become very
expensive so 1t ls advisable to invest in outskirts. For example, Vashi, Vasai, Bhiwandi around
Mumbai.
(9) Gold: The only form of investment which most of our mothers and fathers would believe in. Gold is
considered as the best investment in India, that is the only reason why India is the highest consumer
of gold in the world.
(10) Post Office Savings: The Post Office Savings Account is the deposit scheme offered by the
department of post on which fixed interest is paid. The individual investors deposit a good portion
of their financial assets in a postal savings account in order to earn a fixed rate of interest on the
investments.
(11) Public deposits: Public deposits refer to the unsecured deposits invited by companies from the
public mainly to finance working capital needs. A company wishing to invite public deposits makes
an advertisement in the newspapers.
(12) Corporate deposit: A Corporate deposit is an interest-bearing deposit bank product offered to
corporate banking customers by banks and accredited financial institutions. Corporate deposit target
customers can include large Commercial companies, public institutions, government agencies and
large non-profits.
(13) Sukanya Samriddhi Account: Sukanya Samriddhi Account (literally Girl Child Prosperity
Account) is a Government of India backed saving scheme targeted at the parents of girl children. The
scheme encourages parents to build a fund for the future education and marriage expenses for their
female child. The scheme currently provides an interest rate of 8.3% (for July 2017 to October 2017)
and tax benefits. The account can be opened at any India Post office or branch of authorised
Commercial banks.
(14) ULIP: A ULIP is an insurance plan where the premium paid is invested in equity, debt, or money
market instruments. Subject to certain conditions, the premium paid towards this policy is allowed
as a deduction u/s 80C of the Income Tax Act. So, ULIP premiums can be deducted from your
taxable income up to the permissible limit u/s 80C, which is currently at Rs. 1.5 lacs.
TYPES OF INVESTORS:
A risk profile is an evaluation of an individual or organization's willingness to take risks, as well as the
threats to which an organization is exposed. A risk profile is important for determining a proper
investment asset allocation for a portfolio. Organizations use a risk profile as a way to mitigate potential
risks and threats.
Following are the six types of risk profile investor:
(1) Type A Investor- Conservative:
Investment objective:
• This type of investor seeks to protect your capital and is somewhat concerned when this does not
occur.
• They have a very basic understanding of the investment markets and their operations.
• The term risk means 'danger'.
• When they make a financial decision, they usually focus on the possible losses.
• They seek moderate returns and do not wish to take on more than a low level of risk.
• They are willing to take very low risks

(2) Type B Investor - Moderately Conservative:

Investment objective:
• This type of investors is prepared to establish a diversified portfolio to partially protect you from
inflation and tax.
• They have a general understanding of the investment markets, but would like to have a broader
understanding in order to explore the possibilities.
• The term risk means 'uncertainty'.
• When they make a financial decision, they are more focused on the possible losses, but also keep
in the mind the possible gains.
• They are prepared to accept a moderate level of risk (and therefore volatility) in the overall capital
value of your investments.
• They are generally a low-risk taker

3) Type C Investor - Balanced:

Investment objective:
• This type of investors wishes to adopt a diversified portfolio to somewhat protect them from
inflation and tax.
• They have a reasonable understanding of the investment markets and their operation.
• The term risk means 'possibilities'.
• When they make a financial decision, they are more focused on the possible gains, but also keep
in mind the possible losses.
• They can accept that there will be some level of volatility in the value of your investments.
• They are a moderate risk taker and can accept some moderate levels of investment risk.
(3) Type D Investor- Moderate Growth:
Investment objective:
• This type of investors wants to invest in a broad spread of quality investments, but predominantly
in growth assets to achieve higher growth.
• They understand that investment markets can and will fluctuate and that different market sectors
offer different levels of risks, income and growth.
• Their investment time horizon is for the long-term, 7 years or more.
• The term risk means 'opportunity'.
• When they make a financial decision, they usually focus on the possible gains.
• They are a high-risk taker and can accept higher levels of investment risks.
• They are seeking to achieve a reasonably high rate of growth on the capital invested.
(5) Type E Investor- Growth:
Investment objective:

• This type of investors is interested in capital growth and accumulating wealth more quickly
relative to your investment timeframe.
• They understand the cyclical nature of investments and accept that there will be a very high level
of volatility in the value of your investments.
• They are experienced in all major investment markets and have a very good understanding of the
investment markets. They are aware of the factors that may affect investment performance in
investment markets.
• Their investment time horizon is for the long-term, 7 years or more.
• The term risk means 'thrill'.
• When they make a financial decision, they always focus on the possible gains.
• They can accept very high levels of variability in investment returns, as they understand that the
higher the risks associated with investments, potentially the higher level of returns expected.
(6) Type F Investor - Shares:

• These types of investors are interested in capital growth and accumulating wealth more quickly
relative to your investment timeframe.
• They understand the cyclical nature of investments and accept that there will be a very high level
of volatility in the value of your investments.
• They are experienced in all major investment markets and have a very good understanding of the
investment markets. They are aware of the factors that may affect investment performance in
investment markets.
• Their investment time horizon is for the long-term, 7 years or more.
• The term risk means 'thrill".
• When they make a financial decision, they always focus on the possible gains.
• They can accept very high levels of variability in investment returns, as they understand that the
higher the risks associated with investments, potentially the higher level of returns expected.
FACTORS CONDUCIVE FOR INVESTMENT IN INDIA:
Investments are evaluated to decide or choose the right investment. Evaluation of investment involves
evaluating the attributes of investments. Return, risk, liquidity, tax benefits and convenience are the key
attributes taken into consideration before investing in any particular type of investment.
Investments are an integral part of any business. Every company has investments in many forms whether
they are in projects or assets. Income from investments has a direct impact on the profitability of the
company and it is one of the primary responsibilities of a finance manager to effectively invest the
company's funds in optimizing its profits.
In essence, for effective investment, investment alternatives need to be analysed or evaluated. Following
attributes of investments can be taken into consideration for evaluating the investments.
(1) Rate of return: A good rate of return on an investment is the first and the foremost condition for
effective investment. The rate of return is the ratio of the sum of annual income and price appreciation
for the purchasing price of the asset or investment.
• Rate of return = Annual income + Capital Gain / Investment
• The rate of return on various investment avenues would vary widely.

(2) Risk: The rate of return from different investment options varies a lot. More the risk and more are
the profits. It is a general phenomenon that more return is expected out of a high-risk investment.
The risk means the uncertainty of returns. It can be calculated with the help of variance, standard
deviation and beta.

(3) Liquidity: Liquidity means marketability of an investment. For example, equity shares of a big
company can be easily liquidated in the stock markets. On the other hand, money invested in an asset
(machinery) cannot be liquidated as easily as the equity share. An investment is considered highly
marketable or liquid it can be easily transacted with low transaction cost and low-price variation. A
finance manager looks for more liquid investments when the funds are available for the short period.
Liquidity is always given a preference because it helps the managers remain flexible.

(4) Tax Benefits: It is true for some investments and not for all. Most of the countries have tax incentives
for particular investments except tax-free countries. So, for investments which have tax benefits, it
is an important consideration because taxes form a major part of their expenses.
Tax benefits are mainly of 3 types:
• Initial tax benefits. This is the tax gain at the time of making the investment, like life insurance.
• Continuing tax benefit. Is the tax benefit gained on the periodic return from the investment, such
as dividends.
• Terminal tax benefit. This is the tax relief the investor gains when he liquidates the investment.
For example, a withdrawal from a provident fund account is not taxable.

(5) Convenience: Convenience means ease of investment. When an investment can be made and looked
after easily, we consider it as convenient investing. For example, it is easy to invest in equity shares
compared to real estate because real estate involves a lot of documentation and legal requirements.
(6) Safety: While no investment option is completely safe, there are products that are preferred by
investors who are risk averse. Some individuals invest with an objective of keeping receive on their
capital. Such near-safe products include fixed deposits, savings accounts, government bonds, etc

(7) Growth: While safety is an important objective for many investors, a majority of them invest to
receive capital gains, which means that they want the invested amount to grow. There are several
options in the market that offer this benefit. These include stocks, mutual funds, gold, property,
commodities, etc. It is important to note that capital gains attract taxes, the percentage of which varies
according to the number of years of investment.
(8) Marketability: Marketability refers to buying and selling of securities in market. Marketability
means transferability or saleability of an asset. Securities are listed in a stock market which are more
easily marketable than which are not listed. Public Limited Companies shares are more easily
transferable than those of private limited companies.

(9) Purchasing Power Stability: It refers to the buying capacity of investment in market. Purchasing
power stability has become one of the import traits of investment. Investment always involves the
commitment of current funds with the objective of receiving greater amounts of future funds.

(10) Liquidity: Liquidity refers to an investment ready to convert into cash position. In other words,
it is available immediately in cash from. Liquidity means that investment is easily realisable, saleable
or marketable. When the liquidity is high, then the return may be low for example, UTI units. An
investor generally prefers liquidity for his investments, safety of funds through a minimum risk and
maximisation of return from an investment.