INVESTMENT ANALYSIS AND MANAGEMENT – MODULE 1

MODULE – 1: BASICS OF INVESTMENT

Syllabus: Concept of Investment, Investment vs Speculation, Gambling and Arbitrage, Forms of Investment –
Investment in Physical and Financial Assets; Investment Alternatives, Investment Objectives, Constraints;
Investment Process: Direct and Indirect Investment, Macro economic factors influencing investments, Investment
Environment in India.

CONCEPT OF INVESTMENT
An investment is essentially an asset that is created with the intention of allowing money to grow. The wealth
created can be used for a variety of objectives such as meeting shortages in income, saving up for retirement, or
fulfilling certain specific obligations such as repayment of loans, payment of tuition fees, or purchase of other
assets.

INVESTMENT OBJECTIVES
1) Safety: Everyone wishes to keep their money safe and secure. If you are a conservative investor who
desires to get their initial capital investment at maturity on time and without losses, then indeed, the safety
objective is essential to you. Although, you must know that no investment is entirely safe or risk-free.
But, if your primary objective is safety, you can make investments that come with low or reduced risks.
Naturally, the returns will also be low on these investments and may not keep up with rising inflation.
Some examples of safe investment objectives are government bonds, bank securities, or money market
instruments.
2) Capital Gain: A vital investment objective, capital gain or capital appreciation, is when you wish to grow
your wealth. While safety is crucial, many people majorly invest money for it to grow. One can achieve
capital gains through conservative growth, aggressive growth, and speculation. Capital gains involve
plenty of forecasting and identifying which stock to buy when. Plus, they attract taxes. As a result, such
investments should be carried out only with thorough research in a disciplined manner.
3) Return / Income: As the name suggests, the income investment objective means investing to generate a
source of income for yourself. This income comes in the form of dividends, interest, or yields. These
investment objectives come with a high level of risks and low stability, but the returns are also higher.
Conservative investors tend to include income objectives in their portfolios due to their attractive returns
and ability to keep up with inflation. An example of an income investment object is the stock market - it
comes with high risks and high returns.
4) Liquidity: Another investment objective is the liquidity of the type of investment you make. Liquidity is
the ability to instantly trade/sell-off/convert assets into cash with ease in the market and with minimal risk
of loss. While some securities are easier to liquidate, others may not be so. Most investors generally prefer
investing in securities that are easier to liquidate and use during emergencies. If not entirely, they try to
keep a part of their total investments in the form of readily marketable securities. Thus, if liquidity is one
of your key objectives, you can consider investing in such securities too.
5) Tax Savings: Tax-free savings accounts and National Pension Scheme are some investment examples
that promote tax savings. Moreover, life insurance policies and tax-saving mutual funds are also popular
in saving tax and earning good returns. Actual returns on investment are the returns after taxes. Hence,
before choosing to invest, it is best to research and find out all tax considerations and exemptions available
to you to minimise your tax burden.

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 INVESTMENT ANALYSIS AND MANAGEMENT – MODULE 1

INVESTMENT CONSTRAINTS
1) Liquidity: Liquidity is the ease of converting assets to cash. Such constraints are associated with expected
expenses which are required at a specific time in future and are generally in excess of income available.
Moreover, you might also want to keep aside some money for emergencies. Stocks and bonds are more
liquid assets than private equity or real estate investments.

2) Time Horizon: These constraints are related to the time periods over which returns are expected from the
portfolio to meet specific needs in future. You may have to pay for college education for your children or
need the money after your retirement. Such constraints are important to determine the proportion of
investments in long term and short term asset classes. Generally, if you have a longer time horizon have
the ability to take more risk in their portfolios and require less liquidity.

3) Tax: These constraints depend on when, how and if returns of different types are taxed. If you are an
individual investor, income generated from your investments is taxable. The tax environment needs to be
kept in mind while drafting the policy statement.

4) Legal and Regulatory: Such constraints are mostly externally generated and may affect only institutional
investors. For Eg: There may be limits for company directors on trading securities in their firms. These
constraints usually specify which asset classes are not permitted for investments or dictate any limitations
on asset allocations to certain investment classes.

INVESTMENT vs SPECULATION

Basis of difference Investment Speculation

Meaning Purchase of an asset/security for Executing a risky financial transaction

securing stable returns with the hope of profit-making

Time Horizon Long Term Short-term generally less than a year

Risk level Moderate High

Deployment of An investor using funds of self Borrowed Funds

Funds

Expectations of Modest but continuous A high rate of return.

Returns

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Decision criteria Fundamental and Basic factors, i.e., Individual opinion

Financial performance of the
company/sector

GAMBLING AND ARBITRAGE

 A gamble is a game of chance. It is usually for a very short period.

 The result of gambling is known more quickly as compared to speculation and investment
 In gambling, artificial and unnecessary risks are created and people bet on these risks.
 Rational people gamble for fun and not for income

 Gambling creates risk without offering any commensurate economic return.

 Arbitrage is the simultaneous purchase and sale of the same commodity in two different markets in order
to make profits from the price difference between the two markets

FORMS OF INVESTMENT
There are two basic investment avenues
1) Investment in Financial Assets eg. Equity shares, corporate debentures, government securities, deposits
with banks, mutual funds, insurance policies, derivatives

2) Investment in Physical or Real Assets eg. Residential houses, commercial property, agricultural farm,
gold, precious stones, art objects.

Investments in financial assets include

1. Securitized investments: Securities are those instruments which are quoted and are transferable. Eg:
Shares, bonds
2. Non-securitized investments: Non-securitized investments are those which are not quoted and not freely
marketable. Eg: Bank deposits, national savings, insurance policies

INVESTMENT PROCESS
1) Investment Policy

2) Analysis
3) Valuation
4) Portfolio Construction

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5) Portfolio Evaluation

MACRO ECONOMIC FACTORS INFLUENCING INVESTMENT

1) Interest Rates: Investment is financed either out of current savings or by borrowing. Therefore,
investment is strongly influenced by interest rates. High interest rates make it more expensive to borrow.
High interest rates also give a better rate of return from keeping money in the bank. With higher interest
rates, investment has a higher opportunity cost because you lose out the interest payments.

2) Confidence: Investment is riskier than saving. Firms will only invest if they are confident about future
costs, demand and economic prospects. Keynes referred to the ‘animal spirits’ of businessmen as a key
determinant of investment. Keynes noted that confidence wasn’t always rational. Confidence will be
affected by economic growth and interest rates, but also the general economic and political climate. If
there is uncertainty (e.g. political turmoil) then firms may cut back on investment decisions as they wait
to see how event unfold.

3) Inflation: In the long-term, inflation rates can have an influence on investment. High and variable
inflation tends to create more uncertainty and confusion, with uncertainties over the future cost of
investment. If inflation is high and volatile, firms will be uncertain at the final cost of the investment, they
may also fear high inflation could lead to economic uncertainty and future downturn. Countries with a
prolonged period of low and stable inflation have often experienced higher rates of investment.

4) Government Policies: Some government regulations can make investment more difficult. For example,
strict planning legislation can discourage investment. On the other hand, government subsidies/tax breaks
can encourage investment. In China and Korea, the government has often implicitly guaranteed –
supported the cost of investment. This has led to greater investment – though it can also affect the quality
of investment as there is less incentive to make sure the investment has a strong rate of return.

5) Technological Development: Long-term changes in technology can influence the attractiveness of

investment. In the late nineteenth century, new technology such as Bessemer steel and improved steam
engines meant firms had a strong incentive to invest in this new technology because it was much more
efficient than previous technology. If there is a slowdown in the rate of technological progress, firms will
cut back investment as there are lower returns on the investment.

INVESTMENT ENVIRONMENT IN INDIA

 As of March 25, 2022, foreign exchange reserves in India increased to US$ 617.65 billion.

 Private equity (PE) and venture capital (VC) investments stood at US$ 15.5 billion across 360 deals
between January-March 2022. The largest deal in this time period was Baring PE Asia buying out IGT
Solutions Private Limited from AION for over US$ 800 million.

 Private equity and venture capital firms invested US$ 77 billion across 1,266 deals in India in 2021, a
62% increase from last year’s US$ 47.6 billion across 923 deals.

 In 2021, 598 M&A deals worth US$ 112.8 billion were signed/concluded, a record high.

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 Canada’s pension fund investment board invested Rs. 1,200 crore (US$ 160.49 million) as an anchor
investor in the IPO of multiple Indian companies - One 97 communication (Paytm), Zomato, FSN E-
Commerce Ventures (Nyaaka), and PB Fintech.

 Start-up PE/VC investments were the highest between January-March 2022, with US$ 7.7 billion invested
across 255 deals.

 2,250 new startups were founded in India in 2021, who raised US$ 24.1 billion combined.

 Toyota Kirloskar Motor and Toyota Kirloskar Auto Parts, subsidiaries of Toyota Group of Companies,
have inked an MoU with the Karnataka government to invest Rs. 4,100 crore (US$ 529.84 million) in the
state to promote green technology and set up local manufacturing facilities.

 Toyota Kirloskar Motor and Toyota Kirloskar Auto Parts, subsidiaries of Toyota Group of Companies,
have inked an MoU with the Karnataka government to invest Rs. 4,100 crore (US$ 529.84 million) in the
state to promote green technology and set up local manufacturing facilities.

 Procter & Gamble India announced investments of about Rs. 500 crore (US$ 64.61 million) on women-
led businesses in India between 2021-2025.

 ArcelorMittal Nippon Steel India (AMNS India), which owns a steel mill at Hazira in Surat, will invest
Rs. 166,000 crore (US$ 22.20 billion) in six different projects in Gujarat, which will create 1.8 lakh job
opportunities.

 The Adani Group is planning to invest upwards of Rs. 4,646 crore (US$ 621.36 million) to create two
data centre projects in Uttar Pradesh.

 Videotex International has announced plans to invest Rs. 100 crore (US$ 12.92 million) in setting up a
new TV manufacturing plant in Greater Noida in the National Capital Region (NCR).

 The Economic Survey 2022 estimates that the production-linked incentive (PLI) scheme will result in
fresh investment of Rs. 19,000 crore (US$ 2.54 billion) in the textile sector over the next five years.

 In January 2022, the Cabinet Committee on Economic affairs (CCEA) greenlit a Rs. 12,031 crore (US$
1.6 billion) plan to set up the infrastructure to transmit electricity from renewable energy projects as it
seeks to boost the output from green energy sources.

 Reliance Industries announced their plan to invest US$ 75 billion in renewables infrastructure, which will
include generation plants, solar panels and electrolyzers, and convert all of that clean power into hydrogen.

 The Production Linked Incentive (PLI) Scheme for domestic production of specialty steel will result in
capacity addition of 25 million tons, additional investments of about Rs. 40,000 crore (US$ 5.34 billion)
and generate employment for 5.25 lakh people.

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