INVESTMENT

Contents

Meaning of Investment
Speculation and Gambling
Objectives of Investment
Features of Investment
Needs of Investment
Types of Investments
Types of Investors
Comparative study on types of investment
Investment Avenues
Investment Process
Conclusion


INVESTMENT

Definition
In finance, the purchase of a financial product or other
item of value with an expectation of favorable future
returns.

Meaning
Investment is the employment of funds on assets with the
aim of earning income or capital appreciation
Investment has two attributes namely time and risk.
Present consumption is sacrificed to get a return in future.






SPECULATION
Speculation means taking up the business
risk in the hope of getting short term gain.

Speculation essentially involves buying
and selling activities with the expectation
of getting profit from the price
fluctuations.

Gambling and Investment
A gamble is usually a very short term
investment in a game or chance
Gambling is different from speculation
and investment
The time horizon involved in gambling is
shorter than speculation and investment
OBJECTIVES OF INVESTMENT
1.Return
Rate of Return defined as the total income that the
investor receives during the holding period.
Stated semi-annually or annually.
Return =
End period value Beginning period value + Dividend
___________________________________________
Beginning period value
For Ex. If a particular share is purchased in 1998 at Rs.50,
disposed at Rs.60 in 1999 and the dividend yield is
Rs.5, then the return would be calculated as;

2. Risk
Related with the probability of actual return
Investment risk is as important as measuring its expected rate
of return.

3. Liquidity
Marketability of the investment.
Depends on the marketing and trading facility

4. Hedge against Inflation
The return rate should be higher than the rate of inflation.

5. Safety
Investment avenues should be under the legal and regulatory
framework.
Approval of law itself adds a flavour of safety.
FEATURES OF INVESTMENT

1. Safety of Principal-
The safety sought in investment is not absolute or
complete.
Diversify the securities.
Limiting investment.
Holding different media at the same time.

2. Adequate liquidity and collateral value-
An investment is a liquid asset.
Every investor must have a sound portfolio.

3. Stability of income-
Security of Principal
An investor must consider stability of monetary income
and stability of purchasing power of income.

4 Capital growth-
Principle of capital appreciation.
Seeking Growth Stocks

5 Tax benefits-
Tax status costly to the investors.

6 Purchasing power stability
Objective of receiving greater units of future
funds.
Investor has to maintain purchasing power
stability.


NEED OF INVESTMENT
To keep the value of your money from
inflation.

To get a good return from your ideal money.

To satisfy your future financial goals

Provide enough money for meeting uncertain
future needs




Types of Investments
Autonomous Investment

Investment

Financial Investment

Real Investment Planned Investment

Unplanned Investment

Gross Investment

Net Investment



Types of investors


A. Individual investors
Individual investors purchase securities in their individual
capacity. They have surplus money and are interested in
investing the same in the corporate sector.

1. Conservative investors: Conservative investors tend to be
risk averse.

2. Moderately Conservative: Moderately conservative
investors are willing to take on some amount of risk.

3. Moderately Aggressive: Moderately aggressive investors
usually have similar investment objectives as aggressive
investors.








Aggressive: Aggressive investors commonly do most of their
investing in the stock market which is highly risky.

Active investors: Active investors, are those who have achieved
significant wealth, or earned well, during their own lifetime.

Emotional investors: Emotional - easily attracted to fashionable
investments.

Busy investors: Busy investors - these investors need to be
involved with the markets

Casual investors: Casual investors - a laid-back attitude to
investment, these individuals are often hardworking and involved
with work or family.



B. Institutional investors



Institutional investors are investment agencies with surplus
money to invest in securities.

Institutional investors are of two types:

Private
Public




a. Private Investors

Commercial Banks: A commercial bank is one
which transacts the business of banking such as
the accepting deposit for the purpose of lending.

Insurance Company: Insurance is a form of risk
management primary used to hedge against the
risk of a contingent, uncertain loss.

Charitable Trusts: A legal arrangement where
by real or personal property is placed in trust for
the benefit of a charity




b . Public Investors

IDBI: IDBI plays a very important role as an
institutional investor and assists all types of industrial
concerns engaged in the manufacture, processing,
mining by investing in these industries as per their
requirements.

(U.T.I) :The Unit Trust of India is a statutory public
sector investment institution established under the Unit
Trust of India Act, 1963.

I.F.C.I.) :The primary role of IFCI is to provide direct
financial assistance on medium and long term basis to
industrial projects in the corporate and co-operative
sectors.


Investment avenue




LIFE INSURANCE POLICY (LIC)

Life insurance is a contract for payment of a sum of
money to the person assured on the happening of event
insured against.

PUBLIC PROVIDENT FUND SCHEME

It is a long term, government backed small saving scheme
of the Central Government.
Interest is calculated on the lowest balance between the
fifth day and the last day of the calendar month and is
credited to the account on 31
st
march every year.



NATIONAL SAVINGS
CERTIFICATE


National Savings Certificate is available for
purchase or issue of at all Post Offices in India.
There is no maximum limit for purchase of the
certificate.

MUTUAL FUND
open ended schemes
close ended schemes






FIXED DEPOSITS

It refers to a savings account or certificate of deposit
that pays a fixed rate of interest until a given maturity
date.

EQUITY LINKED SAVING SCHEME (ELSS)

Equity Linked Saving Scheme is a kind of mutual fund
like diversified equity funds with tax benefits.

It is a mutual fund that has to invest a minimum of 80%
in equity shares. The balance 20% can be in debt,
money market instruments, cash or even more equity.




INFRASTRUCTURE BONDS




The infrastructure bonds will have maturity of
10 years and lock-in period of 5 years.
investment decisions in the infrastructure bonds
are affected by Inflation and Interest rates

EQUITY SHARES
Investing in equities is a good long term options
as the returns on equity over a long time horizon
are generally higher than most other investment
avenues.


National Savings Certificate
National Savings Certificate is available for
purchase or issue of at all Post Offices in India.
There is no maximum limit for purchase of the
certificate.

Mutual Fund
open ended schemes
close ended schemes



DEBENTURES

It is a written instrument acknowledging a
debt under the common seal of the
company

GOLD
Investors generally buy gold as a hedge or
safe haven against any economic,
political, social or fiat currency crisis.

INVESTMENT PROCESS
1.Investment Policy

The investor formulates the policy for
systematic functioning. Its essential
ingredients are:

1.Investible Funds-Availability of funds ie
savings or borrowings for investment.

2.Objectives-Main objective of investment is to
earn return, need for regular income &
liquidity.

3.Knowledge-Investor should have adequate
knowledge of investment alternatives,
avenues, risk associated, returns, operations
of stock exchanges and brokers.
2.Security Analysis

Once the investment policy is formulated, then
the securities have to be scrutinized through:

1.Market analysis-GDP & inflation growth are
reflected in stock prices. Stock prices fluctuate in
short run, but move in trends in the long run.

2.Industry Analysis-Industries contribute a lot of
output as well as to the economic growth.

3.Company analysis- it helps the investor make
better decisions. Cos earnings, profitability,
operating efficiency, capital structure & mgmt
must b screened.
3.Investment Valuation

Valuation helps the investor determine the return
and risk expected from the investment. There are
2 values:

1.Intrinsic Value-It is measured through the book
value of the share & P/E ratio.

2. Future Value- It is measured using Trend
analysis.
4. Portfolio Construction
A portfolio is a combination of securities. It is made
in such a way to meet the investors goals &
objectives.

1. Diversification-Its main objective is to reduce risk.
There are several ways to diversify the portfolio:
Debt & Equity Diversification
Company Diversification

2.Selection-Based on the diversification level & the
various analysis, the security is selected. Funds are
allocated to the selected securities & the construction
of portfolio is sealed.
5.Portfolio Evaluation

The portfolio has to be managed efficiently. It
consists of 2 steps:

1.Appraisal- The stocks have to be appraised. It
warns the loss & steps can be taken to prevent
the loss.

2.Revision-Revision depends on the result of the
appraisal. The low yielding risky securities are
replaced with high yielding less risk securities.
CONCLUSION


Investment is the employment of funds on
assets or other securities with the aim of
earning income or capital appreciation.
Investments have 3 attributes namely time,
return and risk.

Investors should take proper precautions while
investing in any avenues