MODULE-1

Investment-meaning-definition-objectives-factors affecting investment-investment process-

investment Vs gambling-investment VS speculation-investment avenues-elements of risk.

INVESTMENT
Investment is the employment of funds with the aim of getting return on it.

Investment refers to the concept of deferred consumption, which involves purchasing an

asset, giving a loan or keeping funds in a bank account with the aim of generating future
returns.

In finance, investment means the purchase of a financial product or other item of value with
an expectation of favourable future returns.

Investment Management:- IM refers to handling of financial assets and other investment by

professionals for clients which can be either individual investors or institutional investors.

IM includes devising strategies and executing trades within a financial portfolio. It includes
asset allocation, financial statement analysis, stock selection, monitoring of existing
investments and portfolio strategy and implementation

Elements of Investment

Return: Investors buy or sell financial instruments in order to earn return on them.
The return on investment is the reward to the investors.

Risk: Risk is the chance of loss due to variability of returns on an investment. In case of
every investment, there is a chance of loss. It may be loss of interest, dividend or principal
amount of investment. However, risk and return are inseparable.

Time: Time is an important factor in investment. It offers several different courses of action.
Time period depends on the attitude of the investor who follows a ‘buy and hold’ policy.

Liquidity: Liquidity is also important factor to be considered while making an investment.

Liquidity refers to the ability of an investment to be converted into cash as and when required

Tax Saving: The investors should get the benefit of tax exemption from the investments.
There are certain investments which provide tax exemption to the investor. The tax saving
investments increases the return

Objectives of Investment

1. Good rate of return:- investments ae characterised by the expectation of return. The

return may be received in the form of yield plus capital appreciation. Also the return
from investment depends upon the nature of investment, the maturity period and a host
of other factors.
 2. Minimisation of risk:- Higher risk investments may have greater long term rewards,
but in the meantime you will probably see some ups and downs. It is important to be
prepared and be aware of this in advance.
3. Growth:- If you are growth oriented, you would normally be less concerned with
safety, and do not totally depend on income from investment funds. These types of
investments in growth instruments are more likely to fluctuate in value and might have
a greater risk of loss.
4. Liquidity in time of emergency :- If a portion of the investment could be easily
converted to cash without much loss of time, it helps the investors to meet emergencies.
5. Safety of funds:- To keep money safe or capital preservation is one of the primary
reason of why people invest money. Safe investments include government issued
securities, money market instruments and securities guaranteed by banks.
6. To minimize the burden of tax: - investing in options such as ULIP, PPF, equity
linked savings scheme, etc. can be deducted from your total income. This has an effect
of reducing taxable income thereby bringing down taxable income.
7. Hedging against inflation: - the rate of return should cover against inflation to protect
against a risk in prices and fall in the purchasing value of money. The rate of return
should be higher than the rate of inflation, otherwise the investor will experience loss in
real terms. The return thus earned should assure the safety of investment, regular flow
of income and thus be a hedge against inflation.

Factors affecting investment

Investment decisions are influenced by various motives. Some people invest to acquire
control and enjoy prestige whereas some invest to display wealth however a large majority
invest with the expectation of earning return in investment. The factors that affect investment
decision are a follows.
1. Amount of investment:- The amount of funds available for investment will
influence the form of investment.
2. Purpose of investment:- The purpose of investment like tax saving, return on
investment, etc. paves way for choosing the right investment avenues.
3. Type of investment:- another important factor which influence the investor is
the selection of securities.
4. Timing of purchase:- the timing of purchase is very important. A proper
timing of purchase and sale of securities can bring profits to the investor.
5. Mood of the market:- the investment decisions depend upon the mood of the
market.
6. Company’s performance:- the decision to invest will be based on the past
performance, present working and future expectations of company’s
performance, both operationally and financially.
7. Investor’s Perception:- investment decisions depends upon the investor’s
perception on whether the present share price is fair, over-valued or under-
valued. If it is fair do hold it, if it is over-valued, then make sale decision and
if under-valued, then go for buy decision.
8. Investor’s Perception:- the investment decisions may also depend on
investor’s preferences, mood or fancies.
9. Environmental considerations:- investor’s has to take into account the
environmental factors in investment management.
 10. Consumer demand
11. Liquid asset
12. Invention and innovation
13. New product
14. Growth of population
15. State policy
16. Political climate
Importance of investment
1. Longer life expectancy with good medical care has made the decisions on investment
significant.
2. Taxation has induced an element of compulsion in investment decisions.
3. Variation in interest rates has prompted investors to opt for safw investment with
good return.
4. The ability and willingness of working people to save and invest their funds for return
has increased the importance of investment.
5. The availability of larger investment outlets and options has made investment useful
and important

Investment process

An investment is the purchase of an asset with an expectation to receive return or some other
income on that asset in future. The process of investment involves careful study and analysis
of the various classes of assets and the risk-return ratio attached to it.

An investment process is a set of guidelines that govern the behavior of investors in a way
which allows them to remain faithful to the tenets of their investment strategy, that is the key
principles which they hope to facilitate out-performance.

There are 5 investment process steps that help you in selecting and investing in the best asset

class according to your needs and preferences. The steps are:

1. Framing Investment Policy

2. Investment Analysis

3. Valuation of Securities

4. Portfolio Construction,

5. Evaluation

1. Framing the policy investment:- Before making any investment one must formulate an
investment policy for systematic functioning. The main components of an investment
policy include its funds, objectives and knowledge.
• Investible funds:- In order to frame the investment policy, the client should have a
clear information about the availability of funds and the sources of funds
 • Objectives:- The investment objectives should be made clear, whether it is need for
regular income, required rate of return, tax saving, need for liquidity, etc.
• Knowledge:- One should be aware of different investment alternatives, various stock
markets and financial structure of the country and must have sufficient knowledge
about the functions of brokers, mode of operations, related taxes and charges, etc.
2. Investment analysis:- after suitableinvestment policy has been formulated, the next
step is to conduct market industry as well as company analysis to scrutinize the
securities one plans to buy.
a. Market analysis:- market analysis helps the investors to understand the general
economic scenario
b. Industry analysis:- Industry analysis helps to analyse the economic significance
and growth potential of an industry
c. Company analysis: - Company analysis helps to gain knowledge regarding a
company’s earnings, profitability, operating efficiency, capital structure, top
management, market share, etc. which is very essential for investors as these
factors directly affect the stock prices of the company.
3. Valuation:- the next step is to determine the expected risks and returns from an
investment. The intrinsic value of a share is measured through the book value and
price earnings ratio of the share. And it is then compared with the market value to
make an investment decision. Here an effort is also to make a future value of the
investment.
4. Portfolio construction:- A portfolio is the combination of different securities. A
portfolio is constructed in such a way that it meet the investor’s needs and objectives
with the aim of delivering maximum return with minimum risk. To reduce risk and
ensure safety of principal, a portfolio is diversified by creating with optimum mix of
debt and equity instruments, securities from different companies and industries
chosen on the basis of expected returns.
5. Asset allocation:- In the end the funds are allocated to the selected securities.
6. Evaluation:- Portfolio performance is periodically evaluated to measure and compare
the variability of returns from different sources. Portfolio appraisal is done with
respect to two criterion risk and return. On the basis of evaluation, revisions are made
in portfolio. This process is periodically done to keep stable return in investment.

Investment and Speculation

Investment means the purchase of a financial product or other item of value with an
expectation of future return.
The term speculation is defined as a trading activity that engaged in a risky financial
transaction in the expectation of making enormous profit, from the fluctuations in the market
value of financial assets.
Particulars Investment Speculation
Time horizon Long term in nature Short term
Risk Limited or moderate risk High risk
Source of income Earning of enterprise Change in market price
Stability of income Very stable Absent or Uncertain
 Use of fund Use own fund Use borrowed capital
Type of contract Creditor Ownership
Psychological Conservative and cautious Daring and careless
attitude
Rate of Return Consistent/moderate rate of Expect high return for high
return risk borne in it.
Investment Based on performance of the Based on hearsay, technical
decision company chart and market psychology

Investment and Gambling

Investment means the purchase of a financial product or other item of value with an
expectation of future return.
Gambling is defined as staking something on a contingency. It is also called betting
wagering. It means risking money on an event that has an uncertain outcome heavily
involving chances.
Points of difference Investment Gambling
Planning horizon Longer planning horizon Short planning horizon
Basis of decision Scientific analysis of Based on tips/ rumours/
intrinsic worth of the chances
security
Nature Planned activity Unplanned activity
Risk Commercial risk Artificial risk
Return expectation Risk-return, Trade-off Negative returns are
determines return expected
Motive Safety of principles and Entertainment while
stability of returns earning
Types Bank savings, stocks, Casinos, lotteries, sports
shares, etc betting, horse racing, etc.,
horse racing, etc.

Types/ Avenues of Investments

Investment is made with the objective of wealth creation and several mentioned instruments
fulfil their objectives, in accordance to the risk associated with it. An investor must
understand the risk appetite, time horizon and tax treatment on different investment avenues
to make a judicious investment call.
While the universe of investments is a vast one, here are the most common investment
avenues.
1. Fixed Deposits
Fixed deposits are regarded as one of the most popular investments in India. They provide a
fixed rate of return for a specific period and considered as a low-risk option.
Banks offer FDs. The interest rate varies from one deposit to another and changes from time
to time. Although FDs have a lock-in period, most financial institutions permit loans and
overdraft facilities against them.

2. Recurring Deposits
Like FDs, Recurring Deposits (RDs) allow an investor to save a specific sum in periodic
instalments. You can deposit a fixed sum every month for a specific period with a bank. Like
FDs, RDs are also low-risk and provide guaranteed returns.

3. Mutual Funds

A mutual fund is a professionally managed investment fund that pools money from many
investors to purchase securities. They can put their money into one or more kinds of
securities. Mutual Funds can put their money into stocks, debt or both and even in gold. They
can be actively managed or passive funds.
Mutual fund schemes vary depending on the type of assets they focus on – equity funds
invest in stocks, debt funds invest in fixed-income instruments, and hybrid funds invest in
both. Investors can make a lumpsum investment or direct a certain sum periodically
through Systematic Investment Plans (SIPs). The returns you receive could depend on the
fund’s performance.

4. Equity

Equity as an asset class is gaining traction but it is not everyone’s cup of tea. It is probably
the most volatile asset class with no guaranteed returns. Investment in equity is not just
restricted to stock selection, but timing of entry and exit is very important. However, in the
longer run, stock markets can be the best performing asset class with much superior alpha.

While putting your money into equity, investors shall opt for strict stop loss to curtail the
extent of damage. It is advised to have an expert opinion and view before buying stocks. To
put your hard earned money into direct equity, one needs to have a demat account.

5.Bonds or Debentures

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 who the issuer is. They include
Government securities, savings bonds, public sector unit bonds etc.
6.Stocks
Stocks refer to purchasing shares in a company, giving the investor ownership stake. It can be
profitable when the company grows in future. Investing in stocks for the long-term aids in
capital appreciation. Short-term trading, however, can be riskier.
A buyer of a company's stock becomes a fractional owner of that company. Owners of a
company's stock are known as its shareholders and can participate in its growth and success
through appreciation in the stock price and regular dividends paid out of the company's
profits.

7. Public Provident Fund

The PPF is a long-term savings scheme backed by the Government of India with a lock-in
period of 15 years. However, PPF investments are eligible for tax deductions and are also
relatively safe. The government usually revises the PPF interest rate every quarter. Investors
are also eligible for partial withdrawals and loans against the PPF upon meeting certain
conditions.

8. Employee Provident Fund

The EPF is a retirement savings scheme specifically for salaried employees. Monthly
contributions are made from an employee’s salary, while the employer contributes an
equivalent amount to the corpus. EPFs are eligible for a tax deduction under Section 80C of
the Income Tax Act, 1961 and the final amount after maturity is tax-free.

9. National Pension Scheme

NPS is a retirement pension scheme introduced by the Government of India. Through regular
investments, you can build a corpus that can provide you with a regular pension after
retirement. Investors can also withdraw from the fund partially after retirement.

10. Real Estate

Buying property is one of the most popular investment alternatives in the country. However,
a property for self consumption should never be considered as an investment. Investment in
real estate is not just limited to housing as the segments like office, commercial real estate,
warehousing, student housing, data centers, shared spaces is also gaining traction amongst the
investors.

ELEMENTS OF RISK

Risk refers to the degree of uncertainty or potential financial loss inherent in an investment decision.

The different types of investment risks are

1. Market risk:- Risk of an investment that loses value due to events that affect the entire
market. It include
a. Equity Risk
b. Interest rate risk
c. Currency risk
2. Liquidity Risk:- The risk of being not able to sell the securities at a fiar price and converting
into cash
3. Concentration risk:- The risk of loss on the invested amount because it was invested in only
one security or one type of security.
4. Credit risk:- The risk of default of the bond issued by government or the company where the
issuer of the bond may face difficulty due to which it may not be able to pay the interst or
principal to the bond investor.
5. Reinvestment Risk:- The risk of loosing higher returns on the principal or income because of
the low rate of interest.
6. Inflation risk:- The risk of loss of purchasing power because the investments donot earn
higher returns than inflation
7. Horizon risk:- The risk of shortening of investment horizon due to personal events like loss of
job , marriage or buying a house, etc.
8. Foreign Investment risk:- The risk of investing in foreign countries.