Investment Management

Chapter 01: Concept of Investment

Introduction:
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 favourable 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.
Investment meaning is primarily to obtain an additional source of income or gain or
profit from the investment over a specific period of time.

Investment is the employment of funds with the aim of achieving additional income and
growth in value.

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Investment activity involves
❖ Use of funds or savings for acquisition of assets are further creation of assets.
❖ Employment of funds on assets to earn income or capital appreciation.

Meaning of investment

• Economic sense or economic investment: It is the net additions to the

economics capital stock which consists of goods and services that are used in the
production of other goods and services.
Examples purchase of land, machinery, factory etc.

• Financial Sense or Financial investment: Financial investment refers to the

allocation of funds into various assets or securities with the expectation of
generating returns or profits over time. This could include purchasing stocks,
bonds, mutual funds, real estate, commodities, or other financial instruments. The
primary goals of financial investment are to preserve and grow capital, generate
income, and mitigate risks.
In simple an investment made on financial instrument with expectation of
positive rate of return.

Types of Investment
a. Real investment: It involves purchase of tangible assets (fixed assets) like land
and building, machinery etc.
b. Financial investment: It involves contracts in paper or electronic form such as
purchase of shares, bonds and derivatives. (purchase of securities)

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Characteristics/ features of good investment
Good investments typically possess several key characteristics that make them
attractive options for investors
a. Risk: Risk is inherent in any investment.
Risk refers to the loss of principal amount of an investment. It is one of the major
characteristics of an investment. The risk varies with the nature of investment.
Investments in ownership securities like equity shares carry higher risk compared
to investments in debt. That is risk varies based on secured and unsecured.

b. Return: All investments are characterized by the expectation of a return. In fact,

investments are made with the primary objective of deriving a return. The return
may be received in the form of yield plus capital appreciation. The difference
between the sale price & the purchase price is capital appreciation. The dividend
or interest received from the investment is the yield. Different types of investments
promise different rates of return.

c. Safety: The safety of an investment implies the certainty of return of capital

without loss of money or time. Safety is another feature which an investors desire
for his investments. Every investor expects to get back his capital on maturity
without loss & without delay.

d. Liquidity: An investment which is easily saleable, or Marketable without loss of

money and without loss of time. That is the securities which are ready to be
converted into cash.

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e. Marketability: refers to the ease with which the investment securities can be
purchased and sold or can be transferred in the market.

f. Stability of Income: Constant returns from an investment. Ex investment in a

debentures security, which yield same rate of interest every year.

g. Tax Benefits: Different investments are subject to different tax treatments.

Understanding the tax implications of an investment is crucial for maximizing
after-tax returns.

Economic investment V/S Financial Investment

Economic investment Financial Investment

Economic investments refers either to It refers to either buying as asset or
pay for new additions or new building an asset in the expectation of
replacements for capital stock financial gain.
Under this it involves investment in Involves investment in both real and
real asset only financial assets
Examples of economic investments Example of financial investment are
new land, factories, machinery, stock, bonds, derivatives etc.
equipment’s retail stores etc.
The objective of economic investment The objective of financial investment is
is to improve productivity. to make profit or gain.
It has narrow scope It has wider scope
New companies usually invest in Developed company generally make
economic investment. financial investment.

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Speculation: is a practice of engaging in risky financial transactions in an attempt to
make profits from short- and medium-term fluctuations in market value of tradable
goods such as financial instruments.
speculation can be seen as a form of risk-taking behaviour where individuals or groups
make decisions based on uncertain factors in the hopes of achieving some desired
outcome.
0r
Investment involves putting money into an asset which is not necessarily in order to
enjoy a series of returns. The investor sacrifices some money today in anticipation of a
financial return in future.
Features
• They are based on tips and rumours.
• speculation is considered as an investment of funds with high risk
• Speculation involves buying a security at a low price and selling at a high price to
make a capital gain.
• speculation involves holding a security for a short-term and trading quickly for
earning higher gain
Gambling: It involves money on the occurrence of an event that has an uncertain
outcome of winning for an action to be considered as gambling three requirements must
be present
a. the stake
b. the risk involved
c. the price to be obtained upon the occurrences of the event

Difference between Investment, speculation, Gambling

Basis Investment Speculation Gambling
Financial Own funds and Own funds or Own fund or
profile looking to create borrowed money to borrowed money to
wealth earn high returns have wealth and
looking to have fun

Time period Long term Short term Immediate

Basis of Analysis of Technical analysis, Luck, Gut feeling,
decision fundamentals of News and sentiments Probabilities
underlying assets and in the markets
company
Risk Reasonable and Higher risk Very high risk
moderate risk (chances of winning
are very less)

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 Returns Reasonable returns High returns Depends upon the
over a longer period luck
of time
Objectives Capital gain + regular Only to gain high Gamble for fun,
income, safety and returns excitement and trill
stability of returns

Nature Carefully planned and Planned Unplanned

systematic
Example Stocks, bond, Mutal Stocks, futures, and Horse race, lottery,
funds, real estate, options card games, casino,
Gold etc online betting etc.

Real asset and financial asset

Real asset are the tangible assets such as real estate (land and building) plant and
machinery, furniture, gold, silver, antiques.

Financial Assets: refers to an income generated by some form of legal representation.

The different types of financial assets are shares, debentures, bonds, fixed deposits,
derivatives, certificate of deposit, loans investment in subsidiary, rental, lease etc.
Capital appreciation: Capital appreciation refers to the increase in the value of an asset
over time. It typically applies to investments such as stocks, real estate, or mutual funds.
When the market value of an asset rises higher than its purchase price, the difference
represents capital appreciation.

Attributes of Investment
Every investor has certain specific objectives to achieve through his long term or short-
term investment. Such objectives may be monitory, financial or personal character. The
objectives include safety and security of the funds invested profitability and liquidity.
These objectives are known as attributes of an investment.
1. Rate of return: The rate of return on investment comprises of 2 parts namely the
annual income and the capital gain or loss.

2. Risk: The risk of an investment refers to the variability of the rate of return. That
means the deviation of the outcome of an investment from its expected value.

Risk is another factor which needs careful consideration while selecting the
investment.

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3. Marketability: refers to buying and selling of securities in market. Marketability
means transferability or saleability of an asset. Securities listed in a stock market
are more easily marketable than which are not listed.
Investment instrument is considered to be highly marketable when
1. It can be transacted quickly
2. When the transaction cost (brokerage cost) is low
3. The price change between 2 transactions is negligible

4. Taxes: Some of the investments provide with tax benefits while other not. Tax
benefits are mainly

a. Initial tax benefits (life insurance section 80 C up to 1,50,000)

b. Continuous Tax benefits (NSC: National saving scheme)
c. Terminal tax benefit ( Ex: withdrawal form a provident fund is not taxable)

5. Convenience: It helps for managing the investment. The degree of

convenience from one investment instrument to another is different. Example:
now with the digital flat form it made easy for the various investment
opportunities.

6. Safety: it is important to determine how much risk is involved in an

investment. The average performance of an investment normally provides a
good indicator. Past performance is a guide to future performance but not a
guarantee.

7. Liquidity: How quickly the invested instrument can be converted into cash. A
liquid investment is tradable. There are a greater number of buyers and seller
on the market for a liquid investment.

8. Duration/ time Horizon: The time horizon is the length of time an investor
expects to hold an investment before selling it. Some investments are short-
term (e.g., stocks traded frequently), while others are long-term (e.g.,
retirement accounts, real estate).

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Process of an investment Management:
The process of investment management involves several key steps designed to help
investors achieve their financial goals while managing risks

1. Evaluation of investment Goals: Evaluation of investment goals is the first

crucial step of the investment process. The purpose of your investment can be
wealth creation, income generation or safety. Also, your goals may vary according
to age and income. So, drawing out your investment goals help you hit the right
investment asset to generate adequate returns.

2. Evaluation of the present financial situation:

You cannot implement an effective investment decision process without
disciplined savings. So, after evaluating your long and short-term financial goals,
it is necessary to know about your current financial situation. It helps you decide
how much to save according to the time horizon of your investment goal. So, before
picking an asset, assess your monthly expenses, assets, liabilities, risk-taking
ability, etc.

3. Asset allocation

After an analysis of goals and financial situation, the next step is asset allocation.
You can choose between equity, bonds, money market instruments, gold, real
estate, etc according to your risk appetite and needs.

Diversification of assets is also an essential step to minimise risks. Asset allocation

usually depends on your present financial condition. But you can change it
according to your risk appetite and needs which might change with income and
age. Also, ensure to include liquid and fixed income assets in your portfolio. This
helps to meet your urgent financial needs and long-term goals.

Depending on your needs and risk tolerance, you can choose between the
following portfolios:

a. Aggressive: The portfolio consists of riskier assets that generate apt returns.
b. Defensive: The portfolio has assets that are less sensitive to market
movements.
c. Income: Income Portfolio helps provide regular profit distributions and
dividends for the investor.
d. Hybrid: The portfolio has several assets including equity, bonds, real estate,
etc.

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 4. Choose the right investment strategy
An appropriate investment strategy is another crucial step for better and stable returns.
The strategies of investment are as follows:
Short term: A short-term investment strategy offers returns in a short duration. It may
include short-term bonds, cash funds, money market instruments, etc.
Long term: This strategy includes investments in stocks, mutual funds, real estate, gold,
etc. Long-term investments generate returns over many years and usually offer lesser risk
and more returns. While investing in long-term assets remember that the capital is locked
in for a longer duration.
Active: An active investment strategy involves the active participation of the investor in
fund management.
Passive: Passive investment strategy doesn’t need day-to-day involvement. It allows the
investor to sit back while their investment generates returns.

5. Track and manage your portfolio

After following the above investment process steps, it is time to track and manage your
portfolio. This step involves reviewing the performance of assets at regular intervals. It
ensures that your investments are in line with your financial goals and needs. Apart from
this, it is important to change your fund allocation according to performance, market
volatility and risk tolerance. You must know when to sell and buy specific assets to
generate more returns or avoid losses.

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Types of Investment:

Direct investment Type

1. Variable principal securities (capital market instruments)
Equity share: it refers to an investment in the company’s equity stock and get the
ownership rights, voting rights as well as control over functioning of company
a. Blue chip shares: the shares of companies well established, financially strong, good
record of earnings, paying regular dividend are called blue chip shares. These
shares are the fancy of long-term investors.
Example: nifty fifty company stock
b. Cyclical shares: the shares of companies having cyclical tendency of growth are
called cyclical shares. The shares of shipping companies are generally called
cyclical shares. Ex prestige, cochin shipyard fertilizer

c. Defensive shares: the shares of companies which are relatively unaffected by the
ups and downs of general business conditions are called defensive shares.
Example HAL

2. Preference shares: these shares have two preferences as compared to other shares.
There is a preference for payment of dividend when the company has distributed
profit. The second preference is regarding repayment of capital at the time of
liquidation of the company but they do not have voting rights.

3. Debentures: Debentures are a type of debt instrument issued by corporations or

governments to raise capital. When an entity issues debentures, it essentially
borrows money from investors who purchase these instruments. In return, the
issuing entity promises to repay the principal amount at a specified future date,
along with periodic interest payments.

4. Bonds: Bonds are fixed-income securities issued by governments, municipalities,

or corporations to raise capital. When you purchase a bond, you are essentially
lending money to the issuer for a predetermined period of time, during which the
issuer agrees to pay you interest at a fixed rate (known as the coupon rate) at
regular intervals, usually semi-annually. At the end of the bond's term (maturity
date), the issuer repays the bond's face value (also known as par value) to the
bondholder.
Government Bonds
Municipal Bonds
Corporate Bonds
Convertible Bonds
Zero-Coupon Bonds

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Exchange Traded Fund (ETF): an ETF is a marketable security that tracks an
index, a commodity, bonds or a basket of assets like an index fund ETFs. Listed on
stock exchange.
Unlike regular mutual funds an ETF trades like a common stock on a stock
exchange. The traded price of an ETF changes throughout the day like any other
stock, as it is bought and sold on the stock exchange.

Indirect Investment:

1. National pension scheme (NPS): the National Pension Scheme (NPS) is a

voluntary, long-term retirement savings scheme introduced by the
Government of India in 2004
It is a retirement saving scheme open to all the Indians, but mandatory for the
government employees. It aims to provide retirement income to the citizens of
India. Indian citizens and NRI in the age of group of 18 – 60 can subscribe to
this scheme. Under NPS scheme the funds are invested in equity, corporate
bonds, and government securities.

2. Public Provident Fund (PPF): PPF is a also one of the oldest retirement
schemes launched by the government of India. The amount invested, interest
earned and the amount withdrawn are all exempt from tax. Thus the public
provident fund is not only safe, but can help you save taxes at the same time.
The funds hold a longer tenure of 15 years. The overall influence of
compounding interest that is tax free trends to be significant especially during
the later years. Moreover, as interest gets earned and all the invested principal
gets backed by the respective sovereign guarantee.

3. Atal pension Yojana (APY): Atal Pension Yojana or APY is a social security
scheme launched by the government of India for the workers in the
unorganised sector. An Indian citizen in the age group of 18-40 years with a
valid bank account is eligible to apply of the scheme. It is launched to
encourage individuals from the weaker section to opt for a pension which
would benefit them during their old age.

4. Real Estate and REITs: an alternative to directly investing in real estate.

A real estate investment trust is a corporation, trust or association that invests

directly in income-producing real estate and is traded like a stock. A real estate
fund is type of mutual fund that primarily focuses on investing in securities
offered by public real estate companies.

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Government Schemes:
Sukanya Samriddhi Yojana (SSY): scheme was launched with an aim to encourage
the parents to secure the future for their daughters. It was launched in the year
2015 by Prime Minister of India Narendra Modi under the ‘Beti Bachao, Beti
Padhao’ campaign this scheme is targeted towards the major girl child SSY account
can be opened in the name of the girl from her birth to any time before she turns
10 years old.
The minimum investment amount for this scheme is ₹ 1000 to maximum of ₹ 1.5
lakh per year. Sukanya samridhi scheme is operative for 21 years from the date of
opening.

National Savings certificate (NSC)

NSC was launched by the Government of India to promote the habit of savings
amongst the citizens. The minimum investment amount for this scheme is ₹100
and there is no maximum investment amount. The interest rate of NSC changes
every year one can claim tax deduction of ₹ 1.5 lakh under section 80 C of the
Income Tax.

Pradhana Mantri Jan Dhan Yojana (PMJDY)

Pradhana Mantri Jan Dhan Yojana was launched to provide basic banking services
like a saving account, deposit account, insurance pension and so on to the Indian
citizen. The government of India aimed to provide easy access to financial services
such as saving and deposit accounts, Remittance, Insurance, Credit, Pension to
Poor and needy section of our society.

Prime Minister Vaya Vandana Yojana

This investment scheme is meant for the senior citizens aged above 60 years of
age. It is known to offer them the guaranteed return of around 7.4 % P.a.
The scheme offers access to pension scheme that is payable on a monthly, annually,
and quarterly basis. The minimum amount that is received in the form of pension
is ₹ 1000.

Sovereign Gold Bonds

The sovereign Gold Bonds were introduced by the Government of India in
November 2015. It aims at offering a lucrative alternative to own and save gold.
Moreover, the scheme is known to belong to the category of debt fund or SGBs not
only help in tracking the overall import-export value of the given asset, but also
helps in ensuring transparency throughout.

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Mutual Fund
It is a trust that collects money from a number of investors who share a common
investment objective then it invests the money in equity, bonds, money market
instruments and or other securities. Each investor owns units which represents a portion
of the holdings of the fund.
The income/gains generated from these collective investments is distributed
proportionally amongst the investors after deducting certain expenses, by calculating a
scheme’s Net Asset Value

Unit Trust of India

The unit trust provides an opportunity to small and medium investors to make
investments indirectly in those stocks in which they could not have made otherwise the
small investors purchase units of trust which are of small denomination. The trusts, on
the other hand invest this money in purchasing shares of good companies. The income
and capital gains from these investments are shared with the unit holders.

Money market Instruments

Call money:
• It is the money borrowed or lent for a very short period (1-14 days)
• Call money is for 1 day (overnight)
• Short notice money is for up to 14 days
• It is an interbank money market

Treasury Bills(T-Bills)
• These are issued by the central government in India to meet the short term
liquidity requirements
• These are issues for the term of 91, 182, or 364 days
• These are issues at a discounted rate
• And are redeemed at par.
Commercial bills
• These are the bills and other than the T-bills
• These are drawn from the commercial banks by the seller(drawer) on buyer
(Drawee) for the value of the goods delivered.

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Certificate of deposits
• Thes are issued by the scheduled commercial banks and other financial
institutions to raise additional fund
• These are negotiable and tradable in the money market
• The banks can issue CDs up to the maturity period of one year and other financial
institutions can issue them for up to 3 years.
Commercial papers
• These are issued by corporates, primary dealers, satellite dealers and all India
finance institution.
• These can be issued in the denominations of multiple of 5 lakhs

Money Market Mutual Fund

These are mutual funds which invest solely in the money market instruments.
These provides short term investment opportunity to the individuals

Repo and Reverse Repo

Repo (Repurchase rate) allows banks facing fund shortages to borrow from RBI for a short
term. This rate of lending is known as the repo rate
Through reverse repo the RBI borrows funds from the banks in exchange of the
government securities this rate of lending is called reverse repo rate.

Derivatives
A derivative is a financial instrument whose value is derived from the value of an
underlying asset, index, or rate. Derivatives are used for various purposes, including
speculation, and arbitrage. Here are some key points about derivatives:
According to the securities contract (Regulation) Act 1956 under section 2 (ac)
“Derivatives Includes”
A security derived from a debt instrument, share, loan whether secured or
unsecured risk instrument or contract for differences or any other form of security.

Forward Contracts:
Forward contract or simply a forward is a non-standardized contract between two
parties future time at a price agreed upon today. This is in contract to a spot
contract which is an agreement to buy or sell an asset today. The Party agreeing to

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buy the underlying asset in the future assumes a long position and the party
agreeing to sell the asset in the future assumes a short position.

Swaps

A Swap is a derivative in which two counterparties exchange cash flows of one

party’s financial instruments involved for example, in the case of a swap involving
two bonds, specifically, two counter parties agree to exchange one stream of cash
flows against another stream

Options
An option is a contract which gives the buyer the right but not the obligation to
buy or sell an underlying asset or instruments at a specified strike price on or
before a specified date. The seller has the corresponding obligation to fulfil the
transaction- that is to sell or buy if the buyer “exercise” the option.

Call option

A call option is one which gives the option holders the right to buy a underlying
asset as commodities foreign exchange, stock share etc. at a predetermined price
called exercise price or strike price on or before a specified date in future in such
case the writer of a call option is under an obligation to sell the asset at a specified
price, in case the buyer exercises his option to buy.

Put option

A put option is one which gives the option holder the right to sell an underlying
asset at a predetermined price on or before a specified date in future. It means that
the writer of a put option is under an obligation to buy the asset at the exercise
price provides the option holder exercises his option to sell.

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