BA Program / Hons

VAC Sem- 1/2/3/4

Financial
Literacy
NEP – DU SOL
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 Unit III
Lesson 1
Investment Opportunity
and Financial Products
 Investment
➢ Investing refers to the allocation of resources in a way that generates
income or profits in the future.
➢ Investments can take various forms, such as stocks, bonds, real
estate, mutual funds, commodities or even starting a business.
➢ The goal of investing is to grow your wealth over time by earning a
return on your initial investment.
➢ This return can come in the form of capital appreciation, dividends,
interest or rental income, depending on the type of investment.
 Financial investments and real investments
Financial investments and real investments are two different
ways of allocating resources for potential returns :

1. Financial investments:
Financial investments involve purchasing financial assets such as
stocks, bonds, mutual funds or derivatives. Financial investments
typically generate returns in the form of
1. Capital appreciation (The increase in the value of assets over time)
2. Income (Dividends, Interest or Distributions).
2. Real Investment:
On the other hand, real investment involves the purchase of
tangible assets that have intrinsic value, such as real estate,
machinery, equipment or infrastructure. Real investments are
typically made to acquire physical assets that can be used in
the production of goods and services.
Returns on real investment can come from :-
1. Capital appreciation (increase in property value)
2. Income (Rental income, lease payments or operating profits)
 Objective of Investment
The purpose of investing varies depending on the person or entity
investing, but generally, there are several common objectives:
1.Wealth accumulation: A primary purpose of investing is to accumulate
wealth over time. By investing wisely, individuals seek to grow their
capital and assets, there by increasing their net worth for future
financial security.
2.Income generation: Some investors prioritize generating a steady
stream of income from their investments. This can come in the form of
dividends from stocks, interest from bonds, rental income from real
estate, or profits from businesses.
3.Capital appreciation: Another objective is capital appreciation,
which involves the increase in the value of investments over time.
Investors seek to buy assets at a low price and sell them at a
higher price, earning a profit from the difference.

4.Risk management: Investing can also serve as a means of risk

management by diversifying assets across different investment
vehicles and asset classes. Diversification helps to reduce the
effects of volatility in any one investment and spread out the risk.
5. Long-term financial goals: Investing is often done with
specific long-term financial goals in mind, such as retirement
planning, funding education, buying a home or starting a
business. The aim is to build a portfolio that can meet these
goals over time.

6. Preservation of Capital: Some investors prioritize the preservation

of capital, particularly those with a lower risk tolerance or nearing
retirement. They seek investments that offer stability and protection
of their initial investment, even if it means sacrificing potential higher
returns.
 Direct and Indirect Investments:
Direct Investing:
➢ Direct investing involves purchasing financial assets directly,
meaning you own the asset outright. For example,
➢ if you buy shares of a company's stock through a brokerage account,
you are directly investing in that company.
➢ Direct investing provides the investor with full control over their
investment decisions, including when to buy, sell, or hold assets.
➢ It also allows for more customization and the ability to tailor
investments to specific preferences or strategies.
Indirect Investing:
➢ Indirect investing involves investing in financial assets through
intermediary vehicles such as mutual funds, exchange-traded funds
(ETFs), or retirement accounts.
➢ When you invest in a mutual fund or an ETF, you are pooling your
money with other investors, and the fund manager makes decisions
on behalf of the investors.
➢ It may also be more convenient for investors who lack the time or
expertise to manage individual investments.
 Investment in Equity and Debt Instruments
Investing in both equity and debt instruments can provide
diversification and balance to an investment portfolio.

Equity Instruments:
1. Growth potential: Equity investments, such as stocks, have the
potential for significant capital appreciation over the long term.
When you invest in the stock market, you're buying ownership in
companies whose value may increase over time.
2. Dividend income: Many companies distribute a portion of
their profits to shareholders in the form of dividends.
Investing in dividend-paying stocks can provide a steady
stream of income, which may be attractive to income-
oriented investors.

3. Higher risk: Equity investments are generally riskier than

debt instruments because their value can fluctuate
significantly in response to market conditions, economic
factors, and company-specific events.
4. Ownership rights: As a shareholder, you may have the
opportunity to participate in corporate decision-making through
voting rights and shareholder meetings.
Debt instruments:
1. Steady income: Debt instruments such as bonds provide a
predictable flow of income through regular interest payments. This
can be attractive to investors looking for a steady source of cash flow.
2. Fixed Returns: Bonds usually have fixed interest rates, which means
you know how much income you will receive over the lifetime of the
bond.
3. Principal protection : Unlike stocks, which can experience
significant price fluctuations, bonds typically offer more
stability and a return of principal at maturity. This makes them
a more conservative investment option.
4. Lower Risk : Debt investments are generally considered less
risky than equity investments because bondholders have a
higher claim on a company's assets in the event of bankruptcy.
However, they still carry some risk, such as credit risk and
interest rate risk.
Financial derivatives
Derivatives are financial instruments whose value depends on
or is derived from an underlying asset. The underlying asset
may be a real asset such as commodity, gold etc. or a financial
asset such as indices, interest rates etc.

Classification of Derivative :-
Derivatives can be classified into broader category based upon
underlying asset.
1. Commodity Derivative or Financial Derivative:
➢ In case of commodity derivative, the underlying asset is physical or
real asset such as wheat, rice, jute, pulses, or even metal such as gold,
silver, copper, etc.
➢ In case of financial derivative, the underlying asset is financial asset
such as equity share, bonds, debenture, stock index etc. Financial
derivatives are traded on BSE, NSE, United stock exchange (USE) and
MCX-SX in India.
2. Elementary Derivatives and Complex Derivatives:
➢ Elementary derivative are those derivatives which are simple and
easily understandable. Such derivative are futures and options.

➢ Complex derivative has complex provisions and features

which make them difficult to understand by investor. Complex
derivatives include exotic options, synthetic futures and
options.
 3. Exchange Traded Derivatives and Over the Counter (OTC)
Derivative:

➢ Exchange-traded derivatives are standard products traded on

regulated exchanges, like stock index futures or options.

➢ OTC derivatives are private contracts between two parties and

aren't standardized. These are tailored to fit the needs of the parties
involved, like forward contracts in the foreign exchange market.
 Participants in Derivatives Market
There are many parties in derivative market and make it liquid and
smooth market. Derivative were initially developed to provide hedging
against price risk. There are three kind of traders in derivative
markets: hedgers, speculators and arbitrageurs.

1. Hedgers: Hedgers are market participants who use derivatives to

reduce or eliminate the risk of adverse price movements in underlying
assets. They include producers, consumers, and businesses exposed
to fluctuations in commodity prices, interest rates, exchange rates, and
other variables.
2. Speculators: Speculators are traders who enter the
derivatives market with the primary goal of making profits from
price movements in underlying assets. They may take long, or
short positions based on their expectations of future market
trends.

3. Arbitrageurs: Arbitrageurs are those who take advantage of

any discrepancy in pricing and exploit it to bring equilibrium.
They take advantage of price discrepancy in two markets.
 Type of Financial Derivative
Financial derivatives come in various types, each serving
different purposes and catering to specific risk management
or investment needs. Here are some common types of
financial derivatives:
1. Forward Contracts: Forward contracts are agreements between two
parties to buy or sell an asset at a specified price (the forward price)
on a future date. They are customizable and traded over-the-counter
(OTC), allowing parties to tailor contract terms to their specific needs.
2. Futures Contracts : Futures contracts are standardized
agreements traded on organized exchanges, obligating the buyer to
purchase and the seller to sell an asset at a predetermined price (the
futures price) on a specified future date. They are highly liquid and
serve as important risk management and speculation tools.
3. Options Contracts: Options give the holder the right, but not the
obligation, to buy (call option) or sell (put option) an underlying asset
at a predetermined price (the strike price) on or before a specified date
(the expiration date). Options provide flexibility and are widely used for
hedging and speculation.
 Mutual Funds
Mutual funds are investment vehicles that pool money from multiple
investors to invest in a diversified portfolio of securities, such as stocks,
bonds, money market instruments, and other assets. They are managed
by professional portfolio managers who make investment decisions on
behalf of the fund's investors.
SEBI (Mutual Fund) Regulation, 1996 defines mutual fund as under :
Mutual fund means fund established in the form of trust to raise monies
through the sale of units to the public or section of the public under one
or more securities including money market instruments or real estate
assets.
 Advantages of Investing in Mutual Fund

1. Diversification: Mutual funds pool money from multiple investors

to invest in a diversified portfolio of securities across various asset
classes, sectors, and regions. This diversification helps spread risk
and reduces the impact of poor performance from any single
security on the overall portfolio.
2. Professional Management: Mutual funds are managed by
experienced portfolio managers who conduct research, analyze
market trends, and make investment decisions on behalf of
investors. These professionals have expertise in security
selection and portfolio management, potentially leading to
better investment outcomes.
3. Affordability: Mutual funds typically have lower investment
minimums compared to directly investing in individual securities.
This makes mutual funds accessible to a wide range of investors,
including those with limited capital.

4. Liquidity: Mutual fund shares can generally be bought or sold on

any business day at the fund's current net asset value (NAV). This
liquidity provides investors with flexibility to enter or exit their
investments as needed, without facing significant transaction
costs or delays.
5. Convenience and Accessibility: Mutual funds offer convenience
and accessibility through various channels, including online
platforms, financial advisors, and direct investment through fund
companies. Investors can easily monitor their investments, access
account information, and make transactions through user-friendly
interfaces.
6. Cost Efficiency: Mutual funds benefit from economies of
scale, as the operating expenses are spread across a large
investor base. This typically results in lower transaction costs,
management fees, and administrative expenses compared to
managing individual investment portfolios.
7. Tax Efficiency: Mutual funds offer tax advantages, such as
capital gains tax deferral and tax-exempt income in certain cases
(e.g., dividends from equity mutual funds in India). Additionally,
tax-saving mutual fund schemes (e.g., Equity Linked Savings
Schemes or ELSS in India) offer tax deductions under Section 80C
of the Income Tax Act.
8. Flexibility: Mutual funds offer a wide range of investment
options, including equity funds, debt funds, hybrid funds,
index funds, and sector-specific funds. Investors can choose
funds based on their investment goals, risk tolerance, time
horizon, and asset allocation preferences.
 Limitation of Investing in Mutual Fund
1. No Direct Choice of Securities: Mutual fund represents indirect
mode of investment; hence investor does not have a say in securities
selection. They cannot select a security in which they wish to invest.

2. Relying on Mutual Fund Manager’s Performance: Investor has to rely

on fund manger for receiving any earning made by the fund. Further, if
manger’s pay is linked with the fund’s performance, then in the zest of
earning more, he may go for short-term goals ignoring the long-term.
3. High Management Fee and other Expenses: All mutual fund
does not run efficiently. Mutual funds at times charge
management fee so as to pay high compensation to the fund
manager.

4. Lock in Period: Many mutual funds scheme especially tax

saving scheme have strict lock in period. The mutual fund
units cannot be redeemed during lock in period. Hence during
lock in period, the units of mutual funds become illiquid.
 Mutual Fund Schemes
Mutual fund schemes are investment products offered by
mutual fund companies, each with its own investment
objectives, asset allocation strategy, and risk profile. Here are
some common types of mutual fund schemes:
Equity Funds:
1. Large Cap Funds: Invest predominantly in large-cap stocks, aiming for
stable returns and lower volatility.
2. Mid Cap Funds: Invest primarily in mid-cap stocks, offering potential
for higher growth but with higher risk compared to large caps.
3. Small Cap Funds: Invest predominantly in small-cap stocks,
offering high growth potential but with higher volatility and
risk.
4. Multi Cap Funds: Invest across large-cap, mid-cap, and
small-cap stocks, providing diversified exposure to the equity
market.
5. Sector Funds: Focus on specific sectors or industries, such
as technology, healthcare, or banking, offering targeted
exposure to sectoral themes.
Debt Funds:
1. Liquid Funds: Invest in short-term money market instruments
with a maturity of up to 91 days, offering high liquidity and low
risk.
2. Ultra Short Term Funds: Invest in short-term debt instruments
with slightly longer durations than liquid funds, offering slightly
higher returns.
3. Income Funds: Invest in a mix of debt securities across various
maturities and credit qualities, aiming for regular income with
moderate risk.
4. Credit Risk Funds: Invest in lower-rated or lower-quality
debt securities, offering higher yield potential but with
higher credit risk.

5. Gilt Funds: Invest in government securities (gilts) issued

by the central or state governments, offering safety and
stability but with interest rate risk.
Hybrid Funds:
1. Balanced Funds: Invest in a mix of equity and debt securities, aiming
for capital appreciation and income generation with moderate risk.
2. Aggressive Hybrid Funds: Have a higher allocation to equities
compared to balanced funds, offering higher growth potential with
slightly higher risk.
3. Dynamic Asset Allocation Funds: Adjust asset allocation between
equity and debt based on market conditions, aiming to capitalize on
changing market trends.
Tax-saving Funds:

➢ Equity Linked Savings Schemes (ELSS): Invest primarily in

equities and offer tax benefits under Section 80C of the
Income Tax Act, aiming for long-term capital appreciation.

Index Funds:
➢ Index Funds: Replicate the performance of a specific
market index, such as the Nifty 50 or Sensex, by holding the
same securities in the same proportions.
International Funds:
1. Global Funds: Invest in equities or debt securities of
companies or issuers outside India, offering exposure to
international markets and currencies.

2. Gold Funds: Invest in gold bullion or gold-related

securities, offering exposure to the price movements of gold.
 Latest Developments Regarding Mutual Funds

Exchange Traded Fund

An Exchange-Traded Fund (ETF) is a type of investment fund that trades
on stock exchanges, similar to individual stocks. ETFs are designed to
track the performance of a specific index, sector, commodity, or asset
class.
Advantages of ETFs :-
ETFs provide exposure to an index or a basket of securities that trade on
exchange like single stock. The following are the advantages of ETFs.
➢ While redemption of index fund takes place at a fixed NAV price, ETFs offer the
convenience of intra-day purchase and sale on the exchange, to take advantage
of prevailing price, which is close to actual NAV of the scheme at any point in
time.
➢ They are low-cost investment options than traditional funds.
➢ Since an ETF is listed on an exchange, costs of distribution is lower, and the reach
is wider.
➢ ETFs protect long-term investors from inflows and outflows of short-term
investor. This is because the fund does not incur extracost for buying/selling the
index shares due to frequent subscription and redemption.
Funds of Funds

A fund of funds scheme means a scheme which invests in other mutual

fund schemes. In other words, a scheme where the subscription
proceeds are invested in other mutual funds, instead of investing in
equity or debt instruments. Since these funds invest in other mutual
funds, they offer and achieve greater diversification than traditional
mutual funds. Expense and fee for such fund is higher as they need to
pay to underlying fund.
Systematic Investment Plan
A Systematic Investment Plan (SIP) is a disciplined way of investing in mutual funds. It allows
investors to invest a fixed amount regularly (typically monthly or quarterly) into mutual funds,
regardless of market conditions.

Following are the benefits of SIP.

1.Rupee-cost Averaging – An investor invests a fixed amount irrespective
of NAV, so he gets fewer units when NAV is higher and more units when
NAV is lower. This smooth out the market ups and downs thereby
reducing the risk of investment when markets are volatile. Thus, SIP
allows its investors to achieve.
2. Power of Compounding – Albert Einstein once said
“compound interest is the eighth wonder of the world. He who
understand it, earns it… he who doesn’t ... pays it’’ “the sooner
you start investing, the more time your money has to grow”.

3. Disciplined Saving – When investment is made through SIP,

investor commits to himself to save regularly. This leads to
discipline in saving and investment.
4. Flexibility – While it is preferred to invest in SIP for a long-term,
there is no compulsion. Investor can discontinue the plan at any time.
Moreover, one can also increase/ decrease the investment amount.
5. Long-term Gains – Due to rupee- cost averaging and the power of
compounding SIPs have the potential to deliver attractive return over
long investment horizon.
6. Convenience – SIP is a hassle-free mode of investment One can
issue a standing instruction to his bank to facilitate auto debits from
bank account.
Systematic Withdrawal Plans
Systematic withdrawal plan or SWP Permit the investor to make an
investment at one go and systematically withdraw at periodic interval, at
the same time permitting the balance amount to remain invested.
Withdrawal can be done either on monthly basis or on a quarterly basis,
based on need and investment goal of investor. SWP includes convenient
pay out options and has several tax advantages. Under SWP, neither tax
is deducted nor is dividend distribution tax applicable. Moreover, there is
no entry or exit loads in SWP.
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