Module 1

Investment: Attributes, Economic vs. Financial

Investment, Investment and speculation, Features of a
good investment, Investment Process. Financial
Instruments: Money Market Instruments, Capital
Market Instruments, Derivatives. Mutual Funds:
Functions of Investment companies, Classification of
Investment companies, Mutual Fund types,
Performance of Mutual Funds- NAV.

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INVESTMENT CONCEPT

Investment in broad since, an investment is a sacrifice of

current money or other resources for future benefit. In
other words Investment is the employment of funds on
assets with the aim of earning income or capital
appreciation. There are several ways of investment, you
can invest in equity share of the company or deposit in
the Bank a/c or purchase a long term Govt. Bond or
acquire a plot of land or invest in some other forms.
Investment has two attributes namely risk and return.

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Can we think of Some Transactions, which
will Qualify as Investments as per Our
Definition!
1. In order to settle down, a young couple
buys a house for Rs.10 lakhs in
Bangalore.
2. A wealthy farmer pays Rs1 lakh for a
piece of land in his village.
3. A cricket fan bets Rs.100 on the
outcome of a match in England.
4. A government officer buys units of Unit
Trust of India worth Rs 4,000.
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6. A college professor buys, in anticipation
of good return, 100 shares of Reliance
Industries Ltd. for Rs.24, 000.
7. A lady clerk deposits Rs.5, 000 in a Post
Office Savings Account.

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 Is there any Common Feature to all these
Investments?
A common feature of all these transactions is
that something is sacrificed now for the
prospects of gaining something later. For
example, the wealthy farmer in transaction 2
sacrifices Rs1 lakh now for the prospects of
crop income later. The lady clerk in transaction
6 sacrifices Rs.5,000 now for the prospect of
getting a larger amount later due to interest
earned on the savings account. Thus, in a broad
sense, all these seven transactions qualify as
investment.
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SPECULATION

Speculation means taking up business risk

in the hope of getting short term gain.
Speculation essentially involves buying and
selling activities with the expectation of
getting profit form price fluctuations.

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 DIFFERENCE BETWEEN INVESTOR AND SPECULATOR

Investor Speculator
Planning Horizon Plans for long term 1yr to Plans for short term few
few year days to months
Risk Assumes moderate risk Willing to undertake high
risk
Return Moderate rate of return High return for high risk
Decision Considers fundamental Considers inside
factors information, heresays
and market behaviour
Funds Uses isown funds and Uses barrowed funds.
aviods barrowed funds

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 GAMBLING

Gambling, usually a very short term

investment in a game or chance. Gambling is
differing from speculation and investment.
The time horizon involved in gambling is
shorter than speculation and investment. The
results are determined by the roll of dice or
the turn of the card. People gamble as a way
to entertain themselves earning income
would be the secondary factor.
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FEATURES OF INVESTMENT

Safety of principal amount

Stability of income
Capital growth
Purchasing power stability
Adequate (ample) liquidity
Tax benefit

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OBJECTIVE OF INVESTMENT
Maximizing the Return
Minimizing the Risk
Safety
Hedge against inflation
Increasing rate of return
Maintaining Liquidity
Saving tax

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COMMON ERROR IN INVESTMENT
MANAGEMENT
Inadequate comprehension (understanding) of risk and
return
Unclearly formulated investment policy.
Inexperienced of the past.
Quick decision making.
Simultaneous switching.
Misplaced love of cheap stocks.
Over diversification and under diversification.
Buying share of familiar company.
Wrong attitude toward losses and profits.
Tendency to speculate.

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INVESTMENT PROCESS

Forming of Investment Policy

investible fund objective knowledge

Investment Analysis Market

Industry - Company

Valuation -- Intrinsic value Future

value
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Continue
Portfolio Construction
Diversification Selection and allocation

Portfolio Evaluation Appraisal

Revision

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I. Forming of Investment Policy Investible
fund Objective Knowledge
Investible fund: Availability of funds like
savings, barrowed fund.
Objective: It cab framed on the basis of
RRR, need for regular income, need for
liquidity.
Knowledge: Its about investment
alternatives, Market, Policy formulation,

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II. Investment Analysis Market
Industry - Company
Market Analysis: Stock market is the
mirrors the general economic scenario.
The growth in GDP, inflation is reflected
in the stock price. Recession in the
economy results in a bear market.
Industry Analysis : It contributes to the
output of major segments of the
economy vary in their growth rates
overall contribution to the economic
activities.
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 Company Analysis : It helps to the
investor to make better decision on their
investment.
It includes:
Earnigs, Profitability, Operating efficiency,
Capital structure and Management.

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III. Valuation - Intrinsic value
Future value
It helps the investors to determine the
return and risk.
Intrinsic Value of the share is measured
through the book value of the share and
P/E Ratio. The real worth of the share is
compared with market price and
investment decisions are then made

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IV. Portfolio Construction
Diversification Selection and allocation
Portfolio is combination securities.
Investor tries to attain maximum return
and minimum risk.
Diversification: this portfolio is less risky
than holding a single portfolio.
Debt and Equity diversification, Industry
diversification, Company diversification
Selection and allocation: Based on
level of above diversification funds are
allocated for selected securities.
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 V. Portfolio Evaluation Appraisal
Revision
How much importance given for the
Valuation, Portfolio Analysis & construction
same weight age should be given to
Evaluation. In simple words it is nothing but
monitoring the investment.
Appraisal: Time to time risk and return
varies, it should be measured and compared.
If the performance is on track or positive,
then it is favorable to the investor if not
they have to take corrective action.
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APPROACHES TO
INVESTMENT DECISION
Fundamental Approach: The basic
tenets (belief) fundamental approach,
which is perhaps most commonly
advocated by investment professionals,
and economic, social, and government
condition.
Psychological Approach: Is based on
the premise that stocks price are guided
by emotion rather than reason.

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Count.
Academic Approach: Over the last five
decades, the academic community has
studied various aspects of the capital
market, particularly in the advanced
countries, with the help of fairly
sophisticated method of investigation.
Eclectic / Free Approach: It draws all
the three different approaches.

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Investment Constraints
Liquidity
Age
Need for regular income
Risk Tolerance
Tax liability

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 Investment V/s Economics
Investment has different meanings in finance and
economics.
In economics, investment is related to saving and
consumption. Investment is involved in many areas of
the economy, such as business management and finance
whether for households, firms, or governments.

In finance, investment is putting money into an asset

with the expectation of capital appreciation, usually
over the long-term future. This may or may not be
backed by research and analysis.

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 Investment
Avenues

Postal
Securities Deposits Insurance Real assets
Schemes

Stocks
Bonds / Monthly Real estate
Debenture Life
Income insurance Precious
Money Bank Scheme Metals
market Deposits ULIP
NSC Art &
Instrument NBFCs Vikas Patras Antiques
Derivatives
PPF
Mutual
funds

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FINANCIAL MARKET:

Money Market

Capital Market

Forex Market

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 MONEY MARKET
The money market is collective name given
to the various firms and institutions that
deal in the various grades of near money. It
deals with short term finance and deposits,
which maturity period of not exceeding one
year.
Money Market Instruments: Treasury Bills,
Bankers Acceptance, Negotiable
Certificates of Deposit (NCD), Repo/
Reverse Repo, Certificates of Deposit
(CDs),Tax-Exempt Bonds.
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CAPITAL MARKET
A capital market is a market for securities
(debt or equity), where business
enterprises and government can raise
long-term funds. It is defined as a market
in which money is provided for periods
longer than a year.

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CAPITAL MARKET
It is the market for financial instruments
having long term maturity. Here new
securities are created, issued, traded and
transferred. It plays a major role in
economy and is being regulated by
government.They are two types:
Primary Market
Secondary market

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 Financial instruments: equity and
preference shares, fully convertible
debentures (FCDs), non-convertible
debentures (NCDs) and partly
convertible debentures (PCDs) currently
dominate the capital market, however
new instruments are being introduced
such as debentures bundled with
warrants, participating preference shares,
zero-coupon bonds, secured premium
notes, etc.
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DERIVATIVES
A derivative is a financial instrument
whose characteristics and value depend
upon the characteristics and value of
some underlying asset typically
commodity, bond, equity, currency, index,
event etc.

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 Advanced investors sometimes purchase
or sell derivatives to manage the risk
associated with the underlying security, to
protect against fluctuations in value, or to
profit from periods of inactivity or
decline. Derivatives are often leveraged,
such that a small movement in the
underlying value can cause a large
difference in the value of the derivative.

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 Forward
Future
Option
Swap

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THANK YOU

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