FUNDAMENTALS OF INVESTMENT IN CAPITAL MARKET (OEC)

UNIT 3. INVESTMENT AVENUES

MEANING OF INVESTMENT
Investment is an asset or item accrued with the goal of generating income or
recognition. In an economic outlook, an investment is the purchase of goods that are
not consumed today but are used in the future to generate wealth. In finance, an
investment is a financial asset bought with the idea that the asset will provide income
further or will later be sold at a higher cost price for a profit.

NATURE OF INVESTMENT
The characteristics of Investment are outlined below:
1. Return: Return refers to expected rate of return from an investment. It is an
important characteristic of investment and is the major factor which influences the
pattern of investment that is made by
the investor. Investor always prefers high rate of return for his investment. Returns
could be in the form of dividend, interest, capital gain etc Returns depend upon the
factors such as nature of the investment, the maturity period, stability of earmings
etc.

2. Risk: It is one of the major characteristics of an investment. Risk refers to the loss
of principal amount of an investment. It refers to the possibility of incurring a loss in a
financial transaction.Risk is inherent in any investment. Risk and return of an
investment are related. The higher the nsk, the higher is the return.
Risks may be regarding :
Loss of capital.
Delay in repayment.
Non-payment of interest.
Variability in returns.

Risk of an investment depends on the following factors:

Maturity period greater the maturity period, larger the risk.
The lower credit worthiness.
Nature of the investment.
Example: Equity shares carry higher risk and debt instruments bond/debentures
carry power risk compared to equity.

3. Safety: Safety is another feature which an investor desires for his investments.
Safety implies the certainty of return of capital without loss of money or time. Every
investor expects to get back his capital on maturity without loss and without delay. In
other words Safety refers to the protection of investor's principal amount and
expected rate of return.
If investor prefers less risky securities, so chooses Government bonds. In case,
investor prefers high rate of return then will choose private Securities and Safety of
these securities is low.

4. Liquidity: An investment is easily saleable or marketable without loss of money

without loss of time is said to be possess liquidity. Liquidity means that investment is
easily realizable, saleable or marketable. When the liquidity is high, then the return
may be low. Example: UTI units. An investor generally prefers liquidity for
investments, safety of fundsthrough a minimum risk and maximization of return from
the investment.
5. Marketability: Marketability is buying and selling of Securities in market. Or other
ways transferability or sale ability of an asset. Securities listed in a stock market
which are more easily marketable than which are not listed and public limited
company's shares are more easily transferable than those of private limited
companies.

6. Capital Growth: Capital growth has become an important characteristic of

investment. Growth of investment depends upon the industry growth. Capital Growth
refers to appreciation of investment.

7. Stability of Income: Another major characteristic feature of the Investment is the

stability of income. Stability of income looks for different path just as security of
principal. Every investor considers stability of monetary income. It refers to constant
return from an investment.

8. Tax Shelter: Initial tax benefit: It is the tax relief enjoyed by the investor at the
time of making the Investment. Continuing tax benefit: A continuing tax benefit
represents the tax shield associated with the periodic returns from the Investment.
Terminal tax benefit: Relief from taxation when an investment is realized or
liquidated Ex: withdrawal from a public provident fund account is not subject to tax.

OBJECTIVES OF INVESTMENT
Objectives of Investment can be summarized as follows:

1. Primary Objectives
(i) Safety
Perhaps there is truth to the axiom that there is no such thing as a completely safe
and secure investment. Yet we can get close to ultimate safety for our investment
funds through the purchase of government-issued securities in stable economic
systems or through the purchase of the highest quality corporate bonds issued by
the economy's top companies. Such securities are arguably the best means of
preserving principal while receiving a specified rate of return.

The safest investments are usually found in the money market and include such
securities as Treasury bills (T-bills), certificates of deposit (CD), commercial paper or
bankers acceptance slips or in the fixed income (bond) market in the form of
municipal and other government bonds and in corporate bonds.
It is important to realize that there's an enormous range of relative risk within the
bond market. At one end are government and high-grade corporate bonds, which are
considered some of the safest investments around, at the other end are junk bonds,
which have a lower investment grade and may have more risk than some of the
more speculative stocks. In other words, it's incorrect to think that corporate bonds
are always safe but most instruments from the money market can be considered
very safe.

(ii) Income
The safest investments are also the ones that are likely to have the lowest rate of
income return, or yield. Investors must inevitably sacrifice a degree of safety if they
want to increase their yields. This is the inverse relationship between safety and
yield as yield increases, safety generally goes down and vice versa
(iii) Growth of capital
Growth of capital is most closely associated with the purchase of common stock,
particularly growth securities, which offer low yields but considerable opportunity for
increase in value. For this reason, common stock generally ranks among the most
speculative of investments as their return depends on what will happen in an
unpredictable future. Blue-chip stocks, by contrast, can potentially offer the best of all
worlds by possessing reasonable safety, modest income and potential for growth in
capital generated by long-term increases in corporate revenues and earnings as the
company matures,

2. Secondary Objectives
(i) Tax Minimization: An investor may pursue certain investments in order to adopt
tax minimization as part of his or her investment strategy A highly-paid executive, for
example, may want to seek investments with favourable tax treatment in order to
lessen his or her overall income tax burden. Making contributions to an insurance or
other tax-sheltered retirement plan, such as pension plan, can be an effective tax
minimization strategy.

(ii) Marketability/Liquidity: Most of the assets which are fixed in nature are not
liquid, which means they cannot be immediately sold and easily converted into cash.
Achieving a degree of liquidity, however, requires the sacrifice of a certain level of
income or potential for capital gains. Common stock is often considered the most
liquid of investments, since it can usually be sold within a day or two of the decision
to sell. Bonds can also be fairly marketable, but some bonds are highly illiquid, or
non-tradable, possessing a fixed term. Similarly, money market instruments may
only be redeemable at the precise date at which the fixed term ends. If an investor
seeks liquidity, money market assets and non-tradable bonds aren't likely to be held
in his or her portfolio. Choosing a single strategic objective and assigning weighting
to all other possible objectives is a process that depends on such factors as the
investor's temperament, his or her stage of life, marital status, family situation, and
so forth. Out of the multitude of possibilities out there, each investor is sure to find an
appropriate mix of investment opportunities. You need only be concerned with
spending the appropriate amount of time and effort in finding, studying and deciding
on the opportunities that match your objectives.

INVESTMENT ALTERNATIVES/AVENUES
The term 'security' is a generic term used generally for those documents evidencing the
liabilities that are negotiable-that can be bought and sold in the stock market. The recipient of
money in a financial investment issues a document or a piece of paper to the investor,
evidencing the liability of the former to the latter to provide returns. There are different types
of securities conferring different sets of rights on the investors and different sets of conditions
under which these rights can be exercised. They are classified into Negotiable securities
(transferable) and non negotiable securities (non transferable)

A) NEGOTIABLE SECURITIES:
Negotiable securities are those which are marketable or transferable. The following are the
some of the negotiable securities.

(i) Equity shares: Equity share holders are the owners of the company. They have voting
rights; they elect Board of Directors who in turn appoint Management for the company. The
dividend to be paid is not fixed and it is at the discretion of the Board of Directors.

(ii) Preference shares: Preference share holders will receive fixed amount of divided as
predefined. They are redeemable (principal is paid back) at the maturity period. They are
further classified into cumulative preference shares and non cumulative preference shares.
Preference share holders do not have voting rights except where their area of interest is
concerned (cumulative preference shares). Payment of preference dividend is not a must.

(iii) Debentures Issued by corporate: Debenture holders are external to the company and
they do not have voting rights. They receive fixed income as pre defined and are redeemable
after maturity period. Payment of interest to the debenture holders is a must, irrespective of
the company performance. Thus investors are sure about their fixed income

(iv) Government securities: These are the bonds issued by Government. These instruments
are generally issued at discount and redeemed at face value. The difference between the issue
price and face value is the return for the investors. These are also known as gilt edged
securities.

(v) Money market securities: These securities are having maturity period less than one year.
Some of them are (a) treasury bills which are having features similar to gilt edge securities
(b) Commercial papers are unsecured promissory notes which are issued at discount and
redeemed at face value with a maturity period of 15- 90days. These instruments are issued by
corporate to meet their working capital requirements. (c) Certificate of a deposits are having
maturity period of 365 days.

(B) NON NEGOTIABLE SECURITIES

(i) Deposits: Deposits earn fixed rate of return. Many banks are linking their deposit rate to
the base rate or bank rate (rate at which RBI lend funds to the banks). Banks offer two types
of deposits namely fixed deposits which can be drawn only after maturity period and saving
deposits which can be drawn on demand. Saving deposit gives low rate of interest when
compared to the fixed deposit. These are most convenient for majority of the investors
because these are having maximum safety. Post office offer more customized deposits for
different investors and these deposits offer fixed rates.

(ii) Public provident fund (PPF): It earn a fixed rate of interest fixed by the government
from time to time which is exempted from the income tax under Sec B0C. The maximum
limit per annum for the deposit is Rs.1,00,000. It provides early withdrawal facilities from 7
year

(iii) Employee Provident Fund Scheme: A major vehicle of savings for salaried employees
is Provident fund scheme. Each employee has a separate provident fund account in which
both the employer and employee are required to contribute a certain amount on a monthly
basis. The employee can choose to contribute additional amounts, subject to certain
restrictions. While the contributions made by the employer and employee are fully tax
exempt under Section 80C PF contributions currently earn a compound interest rate of 8.5%,
interest is exempted from tax. Within certain limits, the employee is eligible to take loan
against the PF balance.

(iv) Life insurance schemes: Life insurance is a contract for payment of a sum of money to
the person assured (or to the person entitled to receive the same) on the happening of event
insured against. Usually the contract provides for the payment of amount on the date or at
specified dates at periodic intervals or if unfortunate event happens. Different tax benefits are
available for different schemes. The following are popular policies offered by the insurance
companies.
a. Endowment assurance policy
b. Money back policy
c. Whole life policy
d. Term assurance policy
(C) MUTUAL FUNDS
(i) Equity Mutual Fund : A Mutual Fund is a trust that pools the savings of a number of
investors who share a common financial goal. The money thus collected is then invested in
capital market instruments such as shares, debentures and other securities. The income earned
through these investments and the capital appreciation realized is shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable
investment for the common man as it offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively low cost.

(ii) Money Market Mutual Funds: A monary market fuit is a solely in money market
instruments. Money market instruments are forms of debt that mature in less than one year
and are very liquid. Treasury bills make up the bulk of the money market instruments.
Securities in the money market are relatively risk-free. Money market funds are generally the
safest and most secure of mutual fund investments. The goal of a money-market fund is to
preserve principal while yielding a modest return. Money-market mutual fund is akin to a
high-yield bank account but is not entirely risk free. When investing in money market fund,
attention should be paid to the interest rate that is being offered

(iii) Exchange Traded Funds (ETFs): It represent a basket of securities that are traded on
an exchange. An exchange traded fund is similar to an index fund which invests primarily in
securities of companies that are traded in select market index. An ETF will invest in either all
of the securities or a representative sample of the securities included in the index. The
investment objective of an ETF is to achieve the same return as a particular market index.

(D) REAL ASSETS:

For the bulk of investors the most important asset in their portfolio is a residential house. In
addition to house, the more affluent investors are likely to be interested in the fallowing types
of real assets
a. Agriculture land
b. Semi-urban land
c. Commercial property
d. A resort home

(E) PRECIOUS STONES & METALS

Precious objects are items that are generally small in size but highly valuable in monetary
terms. The important precious objects are
a. Gold and Silver
b. Precious stones

(F) FINANCIAL DERIVATIVES:

A Financial derivative is an instrument whose value is derived from the value of an
underlying asset. It may be viewed as a side bet on the asset. Those are
a. Forwards
b. Futures
c. Options
d. Swaps

(G) ART & ANTIQUES

It is a less known but very attractive source of investment. Generally those people
who have good knowledge of art and antiques do invest their money in it. It is a part
of their hobby rather than an investment. It is viewed as na asset who has less
liquidity and its rate of return could not be measured exactly. Sometimes it is difficult
to sell them, but sometimes it can fetch high profits. It includes Paintings, sculptures,
old coins, old currency notes, stamps, antique jewellery and other collectibles
FEATURES OF BANK FIXED DEPOSIT
1. Safety: Bank Fixed Deposits are considered safe investments because they are
backed by the guarantee of the issuing bank. In case of bank failure, depositors are
protected up to a certain limit by deposit insurance schemes such as the Deposit
Insurance and Credit Guarantee Corporation (DICGC) in India.
2. Fixed Period: Fixed Deposits have a predetermined maturity period, which can
range from a few days to several years. During this period, the deposited amount
remains locked-in with the bank, and premature withdrawal may attract penalties.
3. Fixed Interest: The interest rate offered on Fixed Deposits is fixed at the time of
investment and remains unchanged throughout the tenure of the deposit. This
provides investors with a guaranteed and predictable return on their investment,
irrespective of fluctuations in market interest rates.
4. Popular Among the Public: Fixed Deposits are widely popular among investors,
including individuals, families, and senior citizens, due to their simplicity, safety, and
reliability. They are often perceived as low-risk investment options suitable for
conservative investors seeking stable returns.
5. Flexible Investment Amount: Investors have the flexibility to choose the amount
to invest in Fixed Deposits, starting from a minimum threshold set by the bank. This
makes Fixed Deposits accessible to investors with varying financial capacities,
allowing them to invest according to their individual preferences and goals.
6. Automatic Renewal Option: Many banks offer the option of automatic renewal of
Fixed Deposits upon maturity. This means that the principal amount, along with the
accrued interest, is reinvested for the same duration as the original deposit.
Automatic renewal eliminates the need for investors to manually renew their
deposits, providing convenience and continuity of investment.
7. Nomination Facility: Fixed Deposit holders have the option to nominate a
beneficiary who will receive the proceeds of the Fixed Deposit in the event of the
depositor's demise. Nomination ensures that the funds are smoothly transferred to
the nominee without the need for legal formalities, providing an added layer of
security and ease of asset transfer.

Post Office RD – Meaning

Post Office Recurring Deposit (RD) is a savings scheme offered by the India Post, the
government-operated postal system. It is a popular investment option for individuals looking
to save regularly and earn fixed returns on their savings.