Module 1:

Introduction
Course Coordinator: Dr. Noor Ulain Rizvi
Specific Learning Objectives
After completing the module, you should be able to:
• Distinguish the characteristics of an investor from that of a speculator.
• Describe various investment alternatives.
• Compare investment alternatives on key investment attributes.

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Introduction
Many people consider investing to be a daunting activity!
They are bewildered by the profusion and proliferation of investment alternatives,
rattled by the fluctuations in financial prices, overwhelmed by the presence of mighty
institutional investors, confounded by exotic instruments and complicated investment
strategies, confused by the intricacies of the tax system, and exasperated by the
financial scams that periodically rock the market.
Notwithstanding these concerns, investing can be a manageable, rewarding, and
enjoyable experience, if you adhere to certain principles and guidelines.

This subject is designed to equip you with the requisite knowledge.

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What is investment?
Broadest sense: Sacrifice of current money or other resources for future benefits.

Examples:
• Deposit money in a bank account
• Purchase a long-term government bond
• Invest in the equity shares of a company
• Contribute to a provident fund account
• Buy stocks
• Acquire a plot of land or invest in some other form.
The two key aspects of any investment are time and risk. The sacrifice takes place
now and is certain. The benefit is expected in the future and tends to be uncertain.
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How is investment different from speculation?
According to Benjamin Graham:
“An investment operation is one which, upon thorough analysis, promises safety of
principal and an adequate return. Operations not meeting these requirements are
speculative.”

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How is investment different from speculation?

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Is speculation same as gambling?
Gambling is fundamentally different from speculation and investment
in the following respects:
• Compared to investment and speculation, the result of gambling is
known more quickly. The outcome of a roll of dice or the turn of a
card is known almost immediately.
• Rational people gamble for fun, not for income.
• Gambling does not involve a bet on an economic activity. It is based
on risk that is created artificially.
• Gambling creates risk without providing any commensurate economic
return.

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 Traders, Speculators, and Investors
Traders: Very short time horizon
Stock market participants

Square off their positions within a day or week

(rarely exceeds a month)
Traders Usually work on margin in the derivatives markets
Positions are highly leveraged
Investors Mostly rely on technical analysis.
Speculators: time horizon that may extend up to six months.
Speculators Investors: Have a longer time horizon - at least one year.
Generally, investors do not resort to margin
trading and take fewer risks compared to traders
or speculators.
General, rely on fundamental analysis
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Traders and Investors

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 Investment alternatives and their evaluation
There is a bewildering range of
investment alternatives.

The more important ones, from

the point of view of individual
investors, are displayed here:

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Investment alternatives
Deposits: A good portion of the financial assets of individuals is held in the form of
deposits. They can be broadly classified as:
• Bank deposits
• Post office deposits
• Company fixed deposits

Government Savings Schemes: Governments sometimes offers a number of small

savings schemes to individual investors. The important savings schemes are:
• Public Provident Fund
• Senior Citizens’ Saving Scheme
• National Savings Certificate

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Investment alternatives
Money Market Instruments*1: Debt instruments which have a maturity of less than one
year at the time of issue are called money market instruments – these instruments are
highly liquid and have negligible risk. The major money market instruments are:
• Treasury bills
• Certificates of deposit
• Commercial paper
• Repos
Bonds or Debentures: Bonds or debentures represent long-term debt instruments. The
issuer of a bond promises to pay a stipulated stream of cash flow. Bonds may be classified
into the following categories:
• Government securities
• PSU bonds
• Debentures of private sector companies
• Preference shares 12
 Investment alternatives
Equity Shares: It represent ownership capital. As an equity shareholder,
you have an ownership stake in the company. This essentially means
that you have a residual interest in income and wealth. Perhaps the
most romantic among various investment avenues, equity shares are
classified into the following broad categories by stock market analysts.

Mutual Funds: Instead of directly buying equity shares and / or fixed

income instruments, you can participate in various schemes floated by
mutual funds which, in turn, invest in equity shares and fixed income
securities. There are three broad types of mutual fund schemes:
• Equity schemes
• Debt schemes
• Balanced schemes

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Investment alternatives
Real Estate: The most important asset in their portfolio is a residential house. In
addition to a residential house, the more affluent investors are likely to be
interested in the following types of real estate:
• Agricultural land
• Semi-urban land
• Commercial property
• A resort home
• A second house

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 Investment alternatives
Extra reading
Precious Objects: Generally small in size but highly valuable in monetary terms.
https://www.ny

• Gold and silver

times.com/2013
/05/13/arts/desi
gn/art-proves-att
ractive-refuge-fo

• Precious stones
r-money-launder
ers.html

• Art objects
• Non-fungible token (NFT)

$11.8 Million 4,200 ETH in March 2021 4,200 ETH in March 2021 World Wide Web source code:
$5.43 Million 15
$7.56 Million
Investment alternatives
Financial Derivatives: A financial derivative is an instrument whose value is derived
from the value of an underlying asset. It may be viewed as a side bet on the asset.
The most important financial derivatives from the point of view of investors are:
• Options
Extra reading
An option gives its holder the right to buy or sell an underlying asset https://corporate
financeinstitute.c
(our focus here will be on equity shares) on or before a given date at a om/resources/kn
owledge/trading-
predetermined price. investing/derivati
ves/

• Futures
A futures contract is an agreement between two parties to exchange
an asset for cash at a predetermined future date for a price that is
specified today.
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Criteria for Evaluation
For evaluating an investment avenue, the following criteria are relevant.
• Rate of return
• Risk
• Marketability
• Tax shelter
• Convenience

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Criteria for Evaluation: Rate of return

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 Criteria for Evaluation: Risk
The risk of an investment refers to the variability of its
rate of return.

Measures used commonly in finance are as follows:

• Variance: This is the mean of the squares of deviations

of individual returns around their average value

• Standard deviation: This is the square root of variance

• Beta: This reflects how volatile is the return from an

investment relative to market swings.
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Criteria for Evaluation: Marketability
An investment is highly marketable or liquid if: Liquidity of a market may be judged
by:
(a) it can be transacted quickly;
(b) the transaction cost is low • Depth refers to the existence of
buy as well as sell orders around
Liquidity of a market

the current market price.

Depth • Breadth implies the presence of

such orders in substantial volume.
Breadth
• Resilience means that new orders
Resilience emerge in response to price
changes.

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Generally, equity shares of large, well-established companies enjoy high marketability.
 Criteria for Evaluation: Marketability
Is high marketability/liquidity
Desirable characteristic
• Investors value liquidity as it
allows them to change their
minds.
• They can correct errors they
might have made quickly and
cheaply.
• Further, they can easily modify
their investments in line with
their changing circumstances and
objectives.
Undesirable characteristic
• Induces sloppiness:
Since decision can be easily
modified, it may not be
rigorously developed based on
objectives and policies.
• The mere fact that investor can
‘always change their minds’ can
lead to a casual approach to
investment decisions.
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Criteria for Evaluation: Tax shelter
Tax benefits are of the following three kinds:
Initial Tax Benefit: Tax relief enjoyed at the time of making the investment.
For e.g., Contribution to Provident fund is exempt.

Continuing Tax Benefit: Represents the tax shield associated with the periodic
returns from the investment.
For e.g., dividend income and income from certain other sources are tax-exempt,
up to a certain limit, in the hands of the recipient.

Terminal Tax Benefit A terminal tax benefit refers to relief from taxation when an
investment is realised or liquidated.
For e.g., a withdrawal from a Public Provident Fund Account is not subject to tax.
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 Criteria for Evaluation: Convenience
Convenience broadly refers to the ease with which the investment can be
made and looked after.
The degree of convenience associated with investments varies widely.

Deposit in a savings bank account Purchase of a property

Can be made readily and Lot of procedural and legal hassles at

that does not require any the time of acquisition and
maintenance effort. maintenance effort subsequently
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Summary Evaluation of Various Investment Alternatives
Criteria Return Risk Marketability Tax shelter Convenience
Alternatives Current Yield Capital
appreciation

Equity shares Low High High Fairly High High High

Debentures High Negligible Low Average Nil High

Mutual funds- Low High High High High Very High

Equity
Schemes
Mutual funds- Moderate Low Low High Low Very High
Debt Schemes
Bank deposits Moderate Nil Negligible High Low Very High

Residential Moderate Moderate/High Negligible Low High Low/Fair

House
Gold/Silver Nil Moderate Low/fair High Nil Average

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INVESTMENT WISDOM: 1

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Suggested reading
• Chapter- 1 of the book titled ‘Investment Analysis and Portfolio
Management’ by Prof. Prasanna Chandra

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