Investment – An Introduction

Historical Background
Kinds of Investments
Evolution of
Investment Laws
History of Investment

 Industrialization
 Privatization
 Globalisation
 Competition
 Development
 Savings vs Investment
Definition

 The action or process of investing money for profit.

 Investment refers to current commitment of funds
for a specified time period to derive benefits in
future.
 Any vehicle into which funds can be placed with
the expectation that it will generate positive income
and/or that its value will be preserved or increased.
 CURRENT SACRIFICE --------FUTURE REWARD.
Definition

 Investment may be defined as an activity that

commits funds in any financial/physical form in
the present with an expectation of receiving
additional return in the future.
 This possibility of variation in the actual return
is known as investment risk. Thus every
investment involves a return and risk.
 Investment is an activity that is undertaken by those
who have savings. Savings can be defined as the
excess of income over expenditure. However, all
savers need not be investors. For example, an
individual who sets aside some money in a box for a
birthday present is a saver, but cannot be considered
an investor. On the other hand, an individual who
opens a savings bank account and deposits some
money regularly for a birthday present would be called
an investor.
Types of investments

 Investments may be classified as -

 Financial investments

 Economic investments.
Financial Investments

 In the financial sense, investment is the commitment of

funds to derive future income in the form of interest,
dividend, premium, pension benefits, or appreciation in
the value of the initial investment. Hence, the purchase
of shares, debentures, post office savings certificates,
and insurance policies are all financial investments.
Such investments generate financial assets. These
activities are undertaken by anyone who desires a
return and is willing to accept the risk from the financial
instrument.
Economic Investments

 Economic investments are undertaken with an

expectation of increasing the current economy’s capital
stock that consists of goods and services. Capital stock
is used in the production of other goods and services
desired by the society. Investment in this sense implies
the expectation of formation of new and productive
capital in the form of new constructions, plant and
machinery, inventories, and so on. Such investments
generate physical assets and also industrial activity.
These activities are undertaken by corporate entities
that participate in the capital market.
Characteristics of investment

 The features of economic and financial

investments can be summarised as
 return,
 risk,
 safety, and
 liquidity.
Objectives of investment
 The main objective of an investment process is to minimise risk
while simultaneously maximising the expected returns from the
investment and assuring safety and liquidity of the invested
assets.
 Given an investment environment, an investor’s preference will be
for investment opportunities that give the highest return.
 The objective of safety and liquidity helps an investor to design a
retirement plan.
 Investments are, hence, made with the objective to provide a
hedge or protection against inflation over the investment duration.
 The third objective of investment is the utilisation of tax incentive
schemes offered by the government.
WHY IS INVESTING IMPORTANT?

 Savings v/s Investing

 There are primarily three investment
objectives:
 safety, returns and liquidity.
 In ideal scenario, this means that one would
like the investment to be absolutely safe, while
it generates handsome returns and also
provides high liquidity.
Types of investors

 Investors can be classified on the basis of their

risk bearing capacity.
 The risk bearing capacity of an investor is a
function of personal, economic, environmental,
and situational factors such as income, family
size, expenditure pattern, and age.
 Investors can also be classified on the basis of
groups as individuals or institutions.
Investment Avenues
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• Fixed Income • Equity Shares

Securities • Mutual Fund
• Deposits Schemes
• Life Insurance • Tax-Sheltered
Policies Schemes
• Precious Objects • Real Estate
• Financial • Money Market
Derivatives Investments
 Investment Return - The future benefits derived from an
investment are known as ‘returns’.
 Giving loan: with an expectation to get the principal back
along with the interest at a future date.
 Buying gold: with an expectation of appreciation in its value
in future.
 Buying an insurance plan: for various benefits derivable in
future and/or in case of an eventuality.
 Buying shares of companies: for dividend and/or capital
appreciation. As the reward would accrue only in future, it
involves ‘risk’ (of realized return being lower than that
expected)
 Investment Attributes People generally find the
following things in an investment before
making an investment.
 Rate of Return [It constitutes two aspects
namely current income (always +ve) and
capital gain (may be either +ve or -ve)]
 Risk Marketability Tax Shelter Convenience
(can it be made and looked after easily)
 Objectives of an investor Maximization of
return.
 Minimization of risk. Hedge against inflation (if
the investment cannot earn as much as the
rise in price level, the ‘real’ rate of return will be
negative). Face future contingencies with ease.
INVESTMENT ALTERNATIVES
FINANCIAL ASSETS

 Equity shares Bonds

 Preference shares Non- marketable financial
assets Money market instruments
 Mutual funds
 Life insurance
 Financial derivatives
 REAL ASSETS Real estate Precious objects
EQUITY SHARES

 Represents ownership capital. Risk: residual

claim over income and is always fluctuating
throughout the years.
 Rewards:
 1.Dividends at the end of a year
 2.chances of getting capital gains (difference
between purchase price and selling price),
 3.all share holders are partners in progress.
 BONDS They are long term debt instruments
issued for a fixed time period. Bonds are debt
securities issued by the government or PSUs.
Debentures are debt securities issued by
private sector companies. Debt securities
issued by the central government , state
government and quasi government agencies
are referred to as gilt-edged securities.
 BONDS (contd..) They comprise of periodic
interest payments over the life of the
instrument and the principal repayment at the
time of redemption. Coupon rate is the nominal
rate of interest fixed and printed on the bond
certificate. It is calculated on the face value
and is payable by the company till maturity.
 PREFERENCE SHARES Represents a hybrid
security that has attributes of both equity
shares and debentures. They carry a fixed rate
of dividend. However it is payable only out of
distributable profits. Dividend on preference
shares is generally cumulative. Dividend
skipped in one year has to be paid
subsequently before equity dividend can be
paid.
 NON-MARKETABLE SECURITIES These
represent personal transactions between the
investor and the issuer. Bank deposits
Company deposits Post Office Monthly Income
Scheme
 Bank deposits There are various kinds of bank
accounts – current, savings and fixed deposit. While a
deposit in a current account does not earn any interest,
deposit made in others earn an interest. Liquidity,
convenience and low investment risks are the common
features of the bank deposits. Deposits in scheduled
banks are safe because of the regulations of RBI and
the guarantee provided by the Deposit Insurance
Corporation on deposits upto Rs 1,00,000 per
depositor of the bank.
 Company deposits Deposits mobilized by
companies are governed by the provisions of
section 58A of Companies Act, 1956. The
interest offered on this fixed income deposits is
higher than what investors would normally get
from the banks. Manufacturing and trading
companies are allowed to pay a maximum
interest of 12.5%. The rates vary depending on
the credit rating of the company offering the
deposit.
 Post Office Monthly Income Scheme Meant for
investors who want to invest a lump sum
amount initally and earn interest on a monthly
basis. Minimum investment is Rs.1,000 in
multiples of Rs 1,000. The maximum deposits
in all the accounts taken together should not
exceed Rs.3 lakh in a single account and Rs.6
lakh in a joint account. The tenure of the MIS
scheme is six years.
 MONEY MARKET INSTRUMENTS Debt
instruments which have a maturity of less than
a year at the time of issue are called money
market instruments. These are highly liquid
instruments. Types of money market
instruments : Treasury bills Certificate of
deposits Commercial papers
 Treasury bills Issued by GOI. They are of two durations
– 91 days and 364 days Are negotiable instruments
and can be rediscounted with GOI. They are sold on an
auction basis every week in certain minimum
denominations by the RBI. They do not carry an explicit
interest rate. Instead they are issued at a discount to
be redeemed at par. The implicit return is a function of
the size of discount and the period of maturity. They
have zero default risk, assured return, are easily
available.
 Certificate of deposits Negotiable instruments
issued by banks / financial institutions with a
maturity ranging from 3 months to 1 year.
These are bank deposits transferable from one
party to another. The principal investors are
banks, financial institutions, corporates and
mutual funds. These carry an explicit rate of
interest. Banks normally tailor make their
denominations and maturities to suit the needs
of the investors.
 Commercial papers Issued in form of
promissory notes redeemable at par by the
holder on maturity. Usually has a maturity
period of 90 to 180 days. They are sold at a
discount to be redeemed at par. CPs can be
issued by corporates having a minimum net
worth of Rs 5 crores and an investment grade
from credit rating agencies. Minimum issue
size is Rs 25 lacs.
 MUTUAL FUNDS Also known as an instrument for collective
investment. Investment is done in three broad categories of
financial assets i.e. stocks, bonds and cash. Depending on the
asset mix, mutual fund schemes are classified as: Equity
schemes, hybrid schemes and debt schemes. On the basis of
flexibility, Mutual fund schemes may be: Open ended or Close
ended. Open ended schemes are open for subscription and
redemption throughout the year. Close ended schemes are open
for subscription only for a specified period and can be redeemed
only on a fixed date of redemption. On the basis of objective,
mutual funds may be growth funds, income funds, or balanced
funds. NAV of a fund is the cumulative market value of the assets
of the fund net of its liabilities.
 FINANCIAL DERIVATIVES Derivative is a product whose value is
derived from the value of the one or more underlying assets.
These underlying assets may be equity, index, foreign exchange,
commodity or any other asset. Derivative does not have a value of
its own. Rather its value depends on the value of the underlying
asset. Derivatives initially emerged as hedging devices against
fluctuations in commodity prices and commodity linked derivatives
remained the sole form of such products. Financial derivatives
emerged post 1970 period. Financial derivatives have various
financial instruments as the underlying variables. Forwards,
Futures, Options & Swaps are four basic types of derivatives
 Real Estate Real Estate is a tangible kind of
investment. This investment could be buying a
house, an apartment, or just plain land. It
includes land and anything permanently
attached to a piece of land. Real estate can
make you a lot of money over time. This
investment involves a long-term commitment of
funds and gains that are generated through
rental or lease income as well as capital
appreciation.
 Precious objects Gold and Gold Coins : The
'yellow metal' is a preferred investment option,
particularly when markets are volatile. Today,
beyond physical gold, a number of products
which derive their value from the price of gold
are available for investment. These include
gold futures and gold exchange traded funds.
Silver Jewels and gems Arts and antiques
 Commodities A commodity is anything from
gold, silver, or oil, to farm products, such as
cotton, paddy, wheat, pulses, etc. The prices of
commodities are driven mostly by supply and
demand. For example, oil prices will go higher
if there is a shortage. Investments in
commodities are very speculative because
their future demand is difficult to predict. These
investments are best left to professionals.
The Investment Process

 Benefits of Investing Liquidity Income Safety

Growth Savings Reinvestment Improvement in
standard of living
 Types of Investors Institutional investors:
professionals who are responsible for investing
the money of a financial institution on behalf of
their clients. Portfolio managers: employees of
financial institutions who make investment
decisions. Individual investors: individuals who
invest a portion of their own money. Day
traders: investors who buy stocks and then sell
them on the same day.
 Steps in Investing Step 1: Meeting Investment
Prerequisites Step 2: Establishing Investment
Goals Step 3: Adopting an Investment Plan
Step 4: Evaluating Investment Vehicles Step 5:
Selecting Suitable Investments Step 6:
Constructing a Diversified Portfolio Step 7:
Managing the Portfolio
 Do’s of Investment Investment plan and proper asset allocation
Diversify your investments Invest regularly through SIP
(Systematic Investment Plan) Be invested and never panic when
market crash Do invest in fundamentally liquid stocks Think
market is always bullish (upward trend). Start as early as possible
Choose a Balanced Fund if you are a first time investor in Mutual
Funds Be patient while investing in equities Be mindful of tax
liability Look at complete picture Equity investment is mainly for
long term Be realistic about returns Control your emotions Go
through the stock invest journals.
 Don’ts of Investment Don’t blindly follow media
reports Don’t see price of the stock, look out for
fundamentals Don’t invest and forget Don’t buy
too many stocks Don’t confuse investing and
trading Don’t try to time the market Don’t invest
without a plan Don’t fall in love with your
investments Don’t follow the herd Don’t Borrow
to invest Don’t Take risks to recover losses
from previous investments