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MODULE NO:- 1 CONCEPT OF INVESTMENT

INTRODUCTION OF INVESTMENT:- An investment is an asset or item acquired with the goal

of generating income or appreciation. Appreciation refers to an increase in the value of an asset
over time. When an individual purchases a good as an investment, the intent is not to consume
the good but rather to use it in the future to create wealth.
MEANING:- An investment always concerns the outlay of some resource today—time, effort,
money, or an asset—in hopes of a greater payoff in the future than what was originally put in.
For example, an investor may purchase a monetary asset now with the idea that the asset will
provide income in the future or will later be sold at a higher price for a profit.

*An investment involves putting capital to use today in order to increase its value over time.
*An investment requires putting capital to work, in the form of time, money, effort, etc., in hopes
of a greater payoff in the future than what was originally put in.
*An investment can refer to any medium or mechanism used for generating future income,
including bonds, stocks, real estate property, or alternative investments.
*Investments usually do not come with guarantees of appreciation; it is possible to end up with
less money than with what you started.

INVESTMENT ATTRIBUTES : Every investor has certain specific objectives to achievethrough

his long term/short term investment. Such objectives may be monetary/financial orpersonal in
character. The objectives include safety and security of the funds invested(principal amount),
profitability (through interest, dividend and capital appreciation) and liquidity (convertibility into
cash as and when required). These objectives are universal in character as every investor will
like to have a fair balance of these three financial objectives. An investor will not like to take
undue risk about his principal amount even when the interest rate offered is extremely attractive.
These objectives or factors are known as investment attributes.

There are personal objectives which are given due consideration by every investor while
selecting suitable avenues for investment. Personal objectives may be like provision for old age
and sickness, provision for house construction, provision for education and marriage of children
and finally provision for dependents including wife, parents or physically handicapped member
of the family. Investment avenue selected should be suitable for achieving both the objectives
(financial and personal) decided. Merits and demerits of various investment avenues need to be
considered in the context of such investment objectives.

(1) Period of Investment : Period of investment is one major consideration while selecting
avenue for investment. Such period may be short (upto one year), medium (one to three years)
or long (more than three years). Return/rate of interest is normally more in the case of longer
term investment while it is less in the shorter period investment. The period of investment
relates to liquidity. An investor has to decide when he needs money back and adjust the period
accordingly. LIC policy is an investment for a very long period. Balance in the savings bank

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account is a short term investment with highest liquidity but lowest rate of return.

(2) Risk in Investment : Risk is another factor which needs careful consideration while selecting
the avenue for investment. Risk is a normal feature of every investment as an investor has to
part with his money immediately and has to collect it back with some benefit in due course. The
risk may be more in some investment avenues and less in others. The risk in the investment
may be related to non-payment of principal amount or interest thereon. In addition, liquidity risk,
inflation risk, market risk, business risk, political risk, etc. are some more risks connected with
the investment made. The risk in investment depends on various factors. For example, the risk
is more, if the period of maturity is longer. Similarly, the risk is less in the case of debt
instrument (e.g., debenture) and more in the case of ownership instrument (e.g., equity share).
In addition, the risk is less if the borrower is creditworthy or the agency issuing security is
creditworthy. It is always desirable to select an investment avenue where the risk involved is
minimum/comparatively less. Thus, the objective of an investor should be to minimise the risk
and to maximise the return out of the investment made.

ECONOMIC VERSES FINANCIAL INVESTMENT

Economic Investment
This investment refers to the money spent on the purchase of new or replacing the capital
assets of a company. The capital assets here are all things necessary for the production of
goods or services. A few examples of such investments are retail stores, factories, equipment
and much more. Investments in raw materials will also fall under economic investments.
Financial Investment
Financial investment is a much broader concept, and we can say that economic investment is a
part of it. This type of investment involves the purchase of an asset with the goal of financial
gain. This investment could be made in the new asset or in any old assets.
A company makes a financial investment in assets that it expects to make a profit on for a
number of years. This investment could be in financial assets, including stocks, bonds, and
more, or in tangible assets such as land, buildings, machinery, and more.

COMPARISON CHART
BASIS OF COMPARISON FINANCE
Meaning Finance refers to that branch of
economics which is concerned
with the procurement,
management and utilization of
funds in an effective manner.
ECONOMIC
Economics is the science
which studies the behavior of
human beings, as a link
between ends (wants) and
limited means (resources) to
fulfill them, having alternative
uses.

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What is it? An offshoot of Economics that Branch of knowledge that

deals with arrangement and deals with production,
administration of money. consumption, distribution and
exchange of commodities for
money.

Based on Time value of money Money value of time

Concerned with Optimization of funds to increase Decision making regarding the
wealth. way resources are to be used,
to attain maximum
satisfaction.

Determines How the funds are actively and How humans make decisions,
optimally managed and utilized? when there is scarcity of
resources?

Aim Maximization of wealth Optimization of scarce

resources.

Explains Reasons for trade surplus and Reasons for fluctuation in the
deficit, affecting the economy as a rate of interest, inflow and
whole. outflow of cash, etc.

INVESTMENT VERSES SPECULATION

Meaning of Investment:- Investment refers to the acquisition of the asset, in the expectation of
generating income. In a wider sense, it refers to the sacrifice of present money or other
resources for the benefits that will arise in future. The two main element of investment is time
and risk
Nowadays, there is a range of investment options available in the market as you can deposit
money in the bank account, or you can acquire property, or purchase shares of the company, or
invest your money in government bonds or contribute in the funds like EPF or PPF.

Meaning of Speculation:- Speculation relies upon future expectations of market changes.

Examiners or speculators attempt to get profited from the high points and low points of market
variances. In any case, this approach is unsure, and the likelihood of misfortune is high. Market
variances are the premise of speculations.

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Basis of Investment Speculation

comparison

Defination Money allocation for an asset purchase. Short-term bets on financial

assets to gain quickly.

Aim The investor’s main objective is to achieve The speculator seeks to

small recurring returns in the long term, achieve small profits in the
such as the payment of dividends. short term.

Time Generally, the investor keeps the assets in Speculators usually change
his portfolio for a long time, years and assets in the short term, in
even a lifetime. minutes, hours, or a few days.

Analysis Thorough analysis of fundamental factors, Technical analysis mainly

including company ratios, competitive and combined with fundamental
industry conditions, and technical factors and market sentiment.
throughout the asset’s history.
Income certainty Stable Erratic

Risks Moderate risk. The lower the risk, the High risk. The higher the risk,
lower the return. the higher the potential gains.

CHARACTERISTICS OF GOOD INVESTMENT

A. Objective fulfillment:- An investment should fulfill the objective of the savers. Every
individual has a definite objective in making an investment. When the investment objective is
contrasted with the uncertainty involved with investments, the fulfillment of the objectives
through the chosen investment avenue could become complex.

B. Safety:- The first and foremost concern of any ordinary investor is that his investment
should be safe. That is he should get back the principal at the end of the maturity period of the
investment. There is no absolute safety in any investment, except probably with investment in
government securities or such instruments where the repayment of interest and principal is
guaranteed by the government.

C. Return:- The return from any investment is expectedly consistent with the extent of risk
assumed by the investor. Risk and return go together. Higher the risk, higher the chances of
getting higher return. An investment in a low risk - high safety investment such as investment in

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government securities will obviously get the investor only low returns.

D. Liquidity:- Given a choice, investors would prefer a liquid investment than a higher return
investment. Because the investment climate and market conditions may change or investor
may be confronted by an urgent unforeseen commitment for which he might need funds, and if
he can dispose of his investment without suffering unduly in terms of loss of returns, he would
prefer the liquid investment.

E. Hedge against inflation:- The purchasing power of money deteriorates heavily in a country
which is not efficient or not well endowed, in relation to another country. Investors, who save for
the long term, look for hedge against inflation so that their investments are not unduly eroded;
rather they look for a capital gain which neutralizes the erosion in purchasing power and still
gives a return.

F. Concealabilty:- If not from the taxman, investors would like to keep their investments rather
confidential from their own kith and kin so that the investments made for their old age/
uncertain future does not become a hunting ground for their own lives. Safeguarding of financial
instruments representing the investments may be easier than investment made in real estate.
Moreover, the real estate may be prone to encroachment and other such hazards.

G. Tax shield:- Investment decisions are highly influenced by the tax system in the country.
Investors look for front-end tax incentives while making an investment and also rear-end tax
reliefs while reaping the benefit of their investments. As against tax incentives and reliefs, if
investors were to pay taxes on the income earned from investments, they look for higher return
in such investments so that their after tax income is comparable to the pre-tax equivalent level
with some other income which is free of tax, but is more risky.

INVESTMENT PROCESS:-
An Investment Process is a systematic approach that individuals or organisations follow to
make informed decisions about allocating their funds. The goal of an Investment Process is to
maximise returns while managing risks effectively. It provides a structured framework, guiding
Investors in selecting appropriate assets, diversifying portfolios, and adapting strategies to
achieve specific financial objectives, ensuring long-term financial stability and growth.

Steps involved in Investment Process

Step 1: Setting financial goals
Setting clear financial goals is the cornerstone of any successful Investment journey. Short-term
goals like purchasing a car and long-term objectives such as retirement planning must be
defined and prioritised. These goals act as guiding stars, shaping your Investment strategies
and providing direction.

Step 2: Assessing risk tolerance

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Understanding your risk tolerance is pivotal in making Investment decisions. It refers to your
ability to endure fluctuations in the value of your Investments. Assessing your risk tolerance
involves evaluating your comfort level with market uncertainties.
This step ensures that your Investments align with your temperament, making your financial
journey not just profitable but also emotionally secure.

Step 3: Creating a budget and emergency fund

A strong financial foundation starts with disciplined budgeting and building an emergency fund.
Budgeting helps in tracking income and expenses, ensuring surplus funds for Investments.
Simultaneously, having an emergency fund safeguards Investments from unexpected events
such as medical emergencies or sudden job loss.
The emergency fund acts as a safety net, preventing the need to liquidate Investments during
crises, thus preserving long-term goals. Creating a budget cultivates financial discipline,
enabling systematic Investments, while an emergency fund provides:
1) Financial security
2) Reinforcement in your ability to stay invested during market fluctuations
3) Surety that your Investments stay on course to meet your goals

Step 4: Diversifying Investment portfolio

Diversification is the golden rule of Investments. It refers to spreading Investments across
different asset classes, such as stocks, bonds, mutual funds, and real estate. This strategy
mitigates risks by reducing the impact of poor performance in any single Investment.
Diversifying ensures that a downturn in one sector doesn’t your entire portfolio, balancing
potential losses.

Step 5: Conducting research and analysis

Informed decisions are the bedrock of successful investing. Conducting thorough research and
analysis is imperative before making Investment choices. Fundamental analysis delves into a
company's financial health, while technical analysis studies market trends. Staying updated on
economic indicators and market dynamics enables anticipation of trends.
Continuous analysis aids in tracking Investments, ensuring they align with goals. With
comprehensive knowledge, Investors can navigate the ever-changing market landscape, making
well-informed decisions that pave the way for sustainable financial growth.

Step 6: Making informed Investment decisions

Regularly monitoring Investment performance is essential, ensuring they align with your goals.
Adapting strategies to market changes and evolving life goals is critical.
Whether it’s seeking expert advice or using online tools, informed decisions are the result of
meticulous evaluation and adaptation. By staying vigilant and flexible, Investors can respond to
market dynamics, ensuring that their Investments remain aligned with their objectives, even
amidst economic fluctuations, securing their financial future.

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Step 7: Regularly reviewing and rebalancing the portfolio

Investment strategies need periodic review and adjustment. Regular portfolio reviews help
gauge performance against goals. Rebalancing involves adjusting asset allocation to maintain
the desired risk and return levels. Life events like marriage or nearing retirement may
necessitate changes in the Investment approach.
This step ensures that Investments remain relevant, aligning with evolving goals, ultimately
securing a stable and prosperous financial future.

Conclusion
In conclusion, mastering the Investment Process is not just about making money; it's about
creating a secure financial future. By following the seven steps outlined in this blog, readers can
navigate the complex world of Investments with confidence. Empowered with knowledge and a
systematic approach, individuals can work towards achieving their financial dreams and
aspirations. Remember, Investment is not just about numbers; it is about building a foundation
for a prosperous and financially secure life.

FINANCIAL INSTRUMENT:-
Financial instruments are assets that can be traded, or they can also be seen as packages of
capital that may be traded. Most types of financial instruments provide efficient flow and
transfer of capital throughout the world’s investors. These assets can be in the form of cash, a
contractual right to deliver or receive cash or another type of financial instrument, or evidence of
one’s ownership in some entity.

Money Market Instruments

Money market instruments are financial instruments that help companies, corporations, and
government bodies to raise short-term debt for their needs. The borrowers meet their short-
term needs at a low cost and the lenders benefit from interest rates and liquidity. Money market
instruments include bonds, treasury bills, certificates of deposit, commercial paper, etc.
Types of Money Market Instruments in India
1. Treasury Bills:- Treasury Bills are one of the most popular money market instruments. They
have varying short-term maturities. The Government of India issues it at a discount for 14 days
to 364 days.
These instruments are issued at a discount and repaid at par at the time of maturity. Also, a
company, firm, or person can purchase TB’s. And are issued in lots of Rs. 25,000 for 14 days &
91 days and Rs. 1,00,000 for 364 days.

2. Commercial Bills:- Commercial bills, also a money market instrument, works more like the bill
of exchange. Businesses issue them to meet their short-term money requirements.
These instruments provide much better liquidity. As the same can be transferred from one
person to another in case of immediate cash requirements.

3. Certificate of Deposit:- Certificate of Deposit (CD’s) is a negotiable term deposit accepted by

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commercial banks. It is usually issued through a promissory note.

CD’s can be issued to individuals, corporations, trusts, etc. Also, the CD’s can be issued by
scheduled commercial banks at a discount. And the duration of these varies between 3 months
to 1 year. The same, when issued by a financial institution, is issued for a minimum of 1 year
and a maximum of 3 years.

4. Commercial Paper:- Corporates issue CP’s to meet their short-term working capital
requirements. Hence serves as an alternative to borrowing from a bank. Also, the period of
commercial paper ranges from 15 days to 1 year.
The Reserve Bank of India lays down the policies related to the issue of CP’s. As a result, a
company requires RBI’s prior approval to issue a CP in the market. Also, CP has to be issued at
a discount to face value. And the market decides the discount rate.
Denomination and the size of CP:
Minimum size – Rs. 25 lakhs
Maximum size – 100% of the issuer’s working capital

5. Call Money:- It is a segment of the market where scheduled commercial banks lend or borrow
on short notice (say a period of 14 days). In order to manage day-to-day cash flows.
The interest rates in the market are market-driven and hence highly sensitive to demand and
supply. Also, historically, interest rates tend to fluctuate by a large % at certain times.

Features Of Money Market Instruments

1. High liquidity
The money market offers short-term securities that are highly liquid. Their high liquidity makes
them cash equivalents; that is, they can be traded for cash anytime. Several renowned financial
institutions and dealers issue these securities to take loans or generate funds.

2. Secure investment
Risk is inevitable, however in the case of the money market, the risk is significantly reduced due
to low tenure. Also, only companies and corporations with high credibility and goodwill issue
short-term securities and bonds. Hence, the risk of default is low as compared to higher tenure
instruments.

3. Fixed returns
Money market instruments in India are available at a discount on face value. Therefore, the
return on securities and bonds is pre-decided. You can be rest assured while investing in the
money market, as it promises fixed returns if held till maturity. The money market offers short-
term securities that are highly liquid. Their high liquidity makes them cash equivalents; that is,
they can be traded for cash anytime. Several renowned financial institutions and dealers issue
these securities to take loans or generate funds.

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Instruments of Capital Market

Below are the 10 major instruments of capital market. Let’s look at individually.
1. Stocks
Stocks or Equity instruments represent ownership in a company. They represent the residual
claim on the assets and profits of a corporation after all debts have been paid. The holders of
these stocks, called shareholders, are entitled to dividends when declared by the company and
may vote for key decisions such as board members.

2. Equities
Equities are the instruments of capital market that involve buying and selling shares. They
represent ownership in a company and enable individuals to share in the profits or losses
generated by the company. By owning equities, investors may receive a dividend income from
companies when they declare dividends and any potential capital appreciation.
Investors can purchase equities directly from the companies offering them or through stock
exchanges.

3. Bonds
Bonds function as tools for issuers to secure funds from investors by offering them a debt-
based investment opportunity. These instruments guarantee periodic interest payments and the
repayment of the principal amount upon maturity, all at a predetermined interest rate. The value
of bonds can fluctuate in the secondary market, influenced by various factors such as credit
ratings, changes in the economy, and other pertinent considerations.
In this type of capital market instrument, investors can take part in this market by buying and
selling bonds, considering these factors and potential returns.

4. Derivatives
Investors can efficiently and profitably reach their financial goals by using derivatives. Financial
derivatives derive their value from an underlying asset, like stocks, commodities, or currencies.
They are mainly used to hedge against price fluctuations in the underlying asset and to
speculate on future market trends.

5. Commodities
Commodities serve as tangible capital market instruments that encompass essential raw
materials and primary goods of commerce. These include agricultural products, steel, other
metals, energy sources such as coal and oil, and livestock. Commodities are traded on a
regulated exchange through futures contracts that require the buyer to purchase the commodity
at a fixed price in the future.

6. Mutual Funds
Mutual funds are an ideal choice for people who want to invest but lack the expertise or time to
manage their portfolio of stocks and bonds. It involves pooling together money from various
investors with similar investment objectives and investing in various securities such as equities,

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debt instruments etc. The performance of these funds depends on the type of fund, its asset
composition, the market conditions, etc.

7. Exchange Traded Funds (ETFs)

ETFs are like mutual funds that track an index, commodity or basket of assets like an index fund,
but they trade like a stock on an exchange throughout the day. ETFs have become increasingly
popular over recent years due to their low cost, tax efficiency, and diversity. They are an easy
way to diversify a portfolio and take advantage of different market sectors without purchasing
multiple stocks.

8. Initial Public Offerings (IPOs)

An IPO signifies when a privately-held company transforms into a publicly-traded entity, making
its shares available for the general public to purchase for the first time. Companies utilize IPOs
to raise capital from public investors and list their shares on a stock exchange.

9. Real Estate Investment Trusts (REITs)

REITs serve as a capital market intrument that amass funds from investors to invest in real
estate properties that generate income. They allow individuals to invest in real estate without
directly owning physical properties. REITs distribute a significant portion of their income as
dividends to investors.
The appeal of REITs lies in their liquidity, providing the flexibility to buy or sell shares,
diversification benefits, and the potential for regular income, making them an attractive
investment option.

10. Exchange-Traded Funds (ETFs)

ETFs are investment funds traded on stock exchanges, akin to individual stocks. Their objective
is to mirror the performance of a specific index, sector, or asset class. This capital market
instrument offer advantages such as diversification across multiple securities, flexibility in daily
trading, and transparency in tracking underlying assets.

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