Chapter 1

Investment Scenario
Savings and Investment – Two sides of a coin
 What is Investment?

“Investment is the process of sacrificing

something now for the prospect of gaining
something later”
 INVESTMENT VS. SPECULATION

INVESTOR SPECULATOR

• PLANNING LONG SHORT

HORIZON
• RISK MODERATE HIGH
DISPOSITION
• RETURN MODEST HIGH
EXPECTATION
• BASIS FOR FUNDAMENTAL TECHNICAL
DECISIONS
• LEVERAGE NO HIGH
 INVESTMENT VS. Gambling
INVESTOR Gambler
Planning Long Very Short

Risk Disposition Moderate Very High

Return Expectation Modest Very High

Basis for decision Fundamental Perceptions

Leverage No Very High

 Investment Objectives
1) Nearterm High Priority Goals
– High Emotional Priority

2) Long term High Priority Goals

– Need for financial independence

3)Low priority Goals

– Much lower down in the scale of priority

4) Enterpreneurial
Goals
– Maximization of Wealth
 INVESTMENT CONSTRAINT

• Liquidity

• Age

• Need for regular income

• Time horizon

• Risk Tolerance

• Tax Liability
 INVESTMENT ALTERNATIVES

Investment
Avenues

Non-
marketable Money
Financial Market
Assets Instruments
InstrumentsI
Equity and
nstruments
Preference
Bonds
Shares

Mutual Fund
Schemes Life Insurance
Policies

Financial
Derivatives Real Assetss
 Investment Alternatives

 Non-marketable Financial Assets

 Money Market Instruments
 Bonds or Fixed Income Securities
 Equity and preference shares
 Mutual Fund Schemes
 Life Insurance
 Financial Derivatives
 Real Assets
 NON-MARKETABLE FINANCIAL ASSETS

• BANK DEPOSITS
• POST OFFICE TIME DEPOSITS (POTDs)
• MONTHLY INCOME SCHEME OF THE POST
OFFICE (MISPO)
• KISAN VIKAS PATRA (KVP)
• NATIONAL SAVINGS CERTIFICATE
• COMPANY DEPOSITS
• EMPLOYEES PROVIDENT FUND SCHEME
• PUBLIC PROVIDENT FUND SCHEME
 MONEY MARKET
INSTRUMENTS

• TREASURY BILLS

• CERTIFICATES OF DEPOSITS

• COMMERCIAL PAPER

• REPOS
 BONDS OR FIXED INCOME
SECURITIES

• Government Securities

• Savings Bonds

• Private Sector Debentures

• PSU Bonds

• Preference Shares
 EQUITY AND PREFERENCE SHARES

 TERMINOLOGY

 RIGHTS OF EQUITY SHAREHOLDERS

 STOCK MARKET CLASSIFICATION OF EQUITY

SHARES

 PREFERENCE SHARES
 CLASSIFICATION OF EQUITY SHARES

• BLUE-CHIP SHARES

• GROWTH SHARES

• INCOME SHARES

• CYCLICAL SHARES

• DEFENSIVE SHARES

• SPECULATIVE SHARES
 MUTUAL FUND SCHEMES

• Equity Schemes

• Balanced Schemes

• Debt Schemes

• Regulation

• Pros and Cons

 INSURANCE POLICIES

• Endowment Assurance

• Money Back Plan

• Whole Life Assurance

• Unit Linked Plan

• Term Assurance

• Immediate Annuity

• Deferred Annuity
 FINANCIAL DERIVATIVES

A derivative is an instruments whose value depends on the

value of some underlying asset.

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.

Options An option gives its owner the right to buy or sell

an underlying asset on or before a given date at a
predetermined price.
 REAL INVESTMENT
Land and House Property
Residential House

Commercial Property

Agricultural Land

Suburban Land

Gold and Silver

Precious Stones

Art Objects
 SUMMING UP
A bewildering range of investment avenues is available. The
These fall into two broad categories, viz., financial assets and real
assets.
 For evaluating an investment, the following attributes are
relevant: rate of return, risk, marketability, tax shelter, and
convenience.
A good portion of the financial assets of individual
investors is held in the form of non-marketable financial
assets such as bank deposits.

Debt instruments which have a maturity of less than one

year at the time of issue are called money market instruments.

 Bonds or debenture represent long-term debt instruments.

Equity shares represent ownership capital

Preference shares represent a hybrid security

 A mutual fund represents a vehicle for collective
investment. Mutual fund schemes are broadly
classified as equity schemes, balanced schemes,
and debt schemes.

Endowment assurance policy, money back policy,

whole life policy, unit linked plan, and term policy
are popular life insurance policies in India

Futures and options are the two most important

financial derivatives.
 As a category, investment in real assets includes
real estate, Gold and Silver, Precious Stones, Art
objects etc.