INVESTMENT MANAGEMENT

MODULE NO 1
CONCEPT OF INVESTMENT

Introduction to Investment:

Investment is the employment of funds with the aim of getting return on it. In general terms,
investment means the use of money in the hope of making more money. In finance, investment
means the purchase of a financial product or other item of value with an expectation of favorable
future returns. Investment of hard earned money is a crucial activity of every human being.
Investment is the commitment of funds which have been saved from current consumption with
the hope that some benefits will be received in future. Thus, it is a reward for waiting for money.
Savings of the people are invested in assets depending on their risk and return demands.
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.
Various investment options are available, offering differing risk-reward tradeoffs. An
understanding of the core concepts and a thorough analysis of the options can help an investor
create a portfolio that maximizes returns while minimizing risk exposure. The “Investor” can be
an individual, a government, a pension fund, or a corporation. Similarly, this definition includes
all types of investments, including investments by corporations in plant and equipment and
investments by individuals in stocks, bonds, commodities, or real estate. This text emphasizes
investments by individual investors. In all cases, the investor is trading a known rupee amount
today for some expected future stream of payments that will be greater than the current outlay.

Attributes of investment:

Investment attributes are the key characteristics or features that help investors evaluate and
compare different investment options. Understanding these attributes is crucial for making
informed investment decisions.

1. Risk
 Definition: The possibility of losing part or all of the invested capital. Different investments
carry varying levels of risk.
 Market Risk: The risk of investments losing value due to economic developments or other
events that affect the entire market.
 Credit Risk: The risk that a borrower will default on their obligations.
 Liquidity Risk: The risk of not being able to sell an investment quickly without a
significant loss in value.

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 Interest Rate Risk: The risk that changes in interest rates will affect the value of
investments, particularly bonds.

2. Return

 Definition: The gain or loss generated by an investment over a particular period. Returns
can be in the form of income (dividends, interest) or capital appreciation.
 Capital Gains: Profit from selling an investment for more than its purchase price.
 Dividends: Regular payments made by a company to its shareholders out of its profits.
 Interest Income: Earnings from lending money or investing in debt instruments like bonds.

3. Liquidity

 Definition: The ease with which an investment can be converted into cash without
significantly affecting its value.
 High Liquidity: Stocks of large, publicly traded companies can be sold quickly on stock
exchanges.
 Low Liquidity: Real estate properties may take months to sell without a price drop.

4. Time Horizon

 Definition: The length of time an investor expects to hold an investment before needing to
access the funds.
 Short-Term: Investments held for less than three years, such as savings accounts or short-
term bonds.
 Medium-Term: Investments held for three to ten years, such as certain bonds or balanced
mutual funds.
 Long-Term: Investments held for more than ten years, such as stocks or real estate.

5. Tax Efficiency

 Definition: The impact of taxes on the returns of an investment. Some investments are more
tax-efficient than others.
 Tax-Deferred Accounts: Retirement accounts like 401(k)s or IRAs where taxes are
deferred until withdrawal.
 Tax-Free Investments: Municipal bonds in the U.S., where interest income is often exempt
from federal taxes.

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6. Inflation Protection

 Definition: The ability of an investment to protect against the eroding effects of inflation.
 Real Assets: Real estate and commodities like gold often maintain or increase in value
during inflationary periods.
 Inflation-Linked Bonds: Bonds whose principal or interest payments adjust with inflation,
such as Treasury Inflation-Protected Securities (TIPS).

7. Income Stability

 Definition: The predictability and consistency of income generated from an investment.

 Bonds: Typically offer stable, predictable interest payments.
 Dividend-Paying Stocks: Companies with a history of stable or increasing dividends can
provide reliable income.

8. Diversification

 Definition: The practice of spreading investments across different asset classes, sectors, or
geographies to reduce risk.
 Reduces the impact of poor performance in any single investment.
 Helps achieve a more stable overall portfolio return.

9. Growth Potential

 Definition: The ability of an investment to increase in value over time.

 Equities: Stocks of companies with strong growth prospects can offer significant capital
appreciation.
 Real Estate: Properties in developing areas can appreciate significantly as the area grows.

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Difference between financial and economic investment

Difference between investment and speculation

Investment Speculation
Short-term bets on financial assets to
Definition Money allocation for an asset purchase.
gain quickly.
The investor’s main objective is to achieve small recurring returns The speculator seeks to achieve small
Aim
in the long term, such as the payment of dividends. profits in the short term.
Speculators usually change assets in
Generally, the investor keeps the assets in his portfolio for a long
Time the short term, in minutes, hours, or a
time, years and even a lifetime.
few days.
Thorough analysis of fundamental factors, including company Technical analysis mainly combined
Analysis ratios, competitive and industry conditions, and technical factors with fundamental and market
throughout the asset’s history. sentiment.
Income
Stable. Erratic.
Certainty
High risk. The higher the risk, the
Risks Moderate risk. The lower the risk, the lower the return.
higher the potential gains.

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Features of good investment

A good investment exhibits several key characteristics that help assess its potential for
generating returns and minimizing risks. Here are some fundamental traits that define a
promising investment:

Positive Expected Return: A good investment offers the potential for positive returns over time.
This return should ideally outpace inflation and provide growth on the invested capital.

Manageable Risk: While all investments carry some level of risk, a good investment involves
an acceptable level of risk relative to the potential return. Diversification, thorough research, and
understanding risk factors are crucial in managing this aspect.

Liquidity: The ability to convert an investment into cash quickly without significant loss is
important. Liquidity ensures that you can access funds when needed without compromising the
value of your investment.

Stability and Consistency: Investments that demonstrate stability and consistency in

performance over time are considered favorable. This can include consistent dividend payouts,
predictable growth patterns, or stable market value.

Transparency and Information Accessibility: A good investment provides clear and readily
available information about its fundamentals, operations, financial health, and market trends.
Transparency helps investors make informed decisions.

Alignment with Goals and Strategy: An investment should align with an individual's or
institution's goals, time horizon, and risk tolerance. For instance, short-term goals may favor
more liquid and less volatile investments, while long-term goals may accommodate higher risk
for potential higher returns.

Tax Efficiency: A good investment minimizes the impact of taxes, either through tax-deferred
growth (such as retirement accounts) or by being structured in a way that reduces tax liabilities.

Quality Management or Governance: Investments in companies or ventures benefit from

strong leadership, effective management, and good corporate governance. A company's
management quality often directly influences its performance and potential for growth.

Scalability and Growth Potential: Investments with potential for growth and scalability offer
the possibility of increasing returns over time. Factors like market demand, innovation, and
adaptability contribute to this aspect.

Cost-Effectiveness: Minimizing expenses associated with an investment, such as management

fees, transaction costs, or operational expenses, is essential. Lower costs can enhance overall
returns.

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Environmental, Social, and Governance (ESG) Factors: Increasingly, investors consider an

investment's impact on environmental, social, and governance factors. Investments that exhibit
responsible practices and sustainable approaches often attract favor due to their long-term
viability.

Adaptability to Market Conditions: A good investment can withstand various market

conditions and economic cycles. It might not be overly susceptible to short-term fluctuations and
can endure changing trends.

Investment Process

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Financial instruments:

Money market instruments:

Capital market instruments

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