MODULE 1

INTRODUCTION TO INVESTMENT
What is Investment?
Investment is the employment of funds with the aim of
achieving additional income or growth in value.
Investment is the action or process of investing money for
profit.
Investment is putting money into something with the
expectation that will generate income or the value will
appreciate in future or profit.
Definition of Investment
“ Commitment of funds made in the expectation of some
positive rate of return”.
“Investment is the employment of funds wit the aim of
achieving additional income or growth in value”.
“Expectation of return is an essential elements of
investment”.
Investment management
Investment management refers to the handling of financial
assets and other investments—not only buying and selling them.
Management includes devising a short- or long-term strategy for
acquiring and disposing of portfolio holdings. It can also include
banking, budgeting, and tax services and duties, as well.
The professional management of financial assets. Investment
managers make investments on behalf of people, institutions, or
pension funds.
Investment management refers to the professional management
of different securities and assets so as to meet specified
investment goals for the investors’ benefits. Investors may
include private investors as well as institutions.
Characteristics of Investment
Risk
Return
Safety
Liquidity
Marketability
Stability of income
Characteristics of Investment
Risk: Every investment contains certain portion of risk. It
is a key feature of investment which refers to loss of
principal, delay in payment of interest and capital etc.
Most investors prefer to invest in less riskier securities.
Return: Return expectation is the main objective of
investment. Investors expect regularity of high and
consistent income for their capital.
Characteristics of Investment
Safety: Investors expect safety for their capital. They
desire certainty of return and protection of their
investment or principal amount.
Liquidity: Liquidity means easily sale or convert the
capital or investment into cash without any loss. So, most
investors prefer liquid investment.
Characteristics of Investment
Marketability: It is another features of investment that
they are marketable. It means buying and selling or
transferability of securities in the market.
Stability of income: Investors invest their capital with
high expectation of income. So, return on their investment
should be adequate and stable.
Objectives of investment
Maximization of return
Minimization of risk
Maintaining liquidity
Hedge against inflation
Increasing safety
Saving tax
Investment process
Investment policy
Investment Analysis
Valuation of securities
Portfolio construction
Investment process
Investment policy: The first stage determines and
involves personal financial affairs and objectives
before making investments. It may also be called
preparation of the investment policy.
The investor has to see that he should be able to
create an emergency fund, element of liquidity and
quick convertibility of securities into cash. This stage
may, therefore; be considered appropriate for
identifying investment assets and considering the
various features of investment.
Investment process
Investment Analysis:
When an individual has arranged a logical order of the
types of investments that he requires on his portfolio,
the next step is to analyze the securities available for
investment. He must make a comparative analysis of
the type of industry, kind of security and fixed vs.
variable securities.
Investment process
Valuation of Securities:
The third step is perhaps the most important
consideration of the valuation of investments.
Investment value, in general, is taken to be the present
worth to the owners of future benefits from
investments. The investor has to bear in mind the
value of these investment.
Investment process
Portfolio Construction:
Under features of investment programme, portfolio
construction requires a knowledge of the different
aspects of securities. This is an important step as it
measures the performance of the investment with
respect to a benchmark, in both absolute and relative
terms.
Investment Vs Gambling
Investment is an attempt to carefully plan, evaluate
and allocate funds in various investment outlets which
offers safety of principal, moderate and continuous
returns and long term commitment.
Gambling is quite the opposite of investment. It
consist of uncertainty and high stakes for thrill and
excitement. E.g., horse racing, game of cards, lottery
etc.
Investment Vs Gambling
Points of difference Investment Gambling

Planning Horizon Longer planning horizon Short planning horizon

Nature Planned activity Unplanned activity

Risk Commercial risk Artificial risk

Action Detailed analysis Based on tips and

rumors
Motive For regular income& For thrill & excitement
capital gain
Investment Vs Speculation
Points of difference Investment Speculation
Time Horizon Long term time Short term planning
framework beyond 12 holding assets even for
months one day with the
objective.
Risk It has limited risk There are high profit &
gains
Return It is consistent and High returns through
moderate over a long risk of loss is high.
period
Use of funds Own funds through Own funds, borrowed
savings funds
Decisions Safety, liquidity, Market behavior
profitability & stability information,judgements
considerations & on movement in the
performance of stock market.
companies
Investment Avenues
Different avenues and alternatives of
investment include share market, debentures
or bonds, money market instruments, mutual
funds, life insurance, real estate, precious
objects, derivatives, non-marketable securities.
All are differentiated based on their different
features in terms of risk, return, term etc .
Investment Avenues
EQUITY SHARES
Equity investments represent ownership in a running
company. By ownership, we mean share in the profits and
assets of the company but generally, there are no fixed
returns. It is considered as a risky investment but at the
same time, depending upon situation, it is liquid
investments due to the presence of stock markets. There
are equity shares for which there is a regular trading, for
those investments liquidity is more otherwise for stocks
have less movement, liquidity is not highly attractive. 
Investment Avenues
DEBENTURES OR BONDS
Debentures or bonds are long-term investment options
with a fixed stream of cash flows depending on the quoted
rate of interest. They are considered relatively less risky.
An amount of risk involved in debentures or bonds is
dependent upon who the issuer is. For example, if the
issue is made by a government, the risk is assumed to be
zero. However, investment in long term debentures or
bonds, there are risk in terms of interest rate risk and price
risk.
Investment Avenues
MONEY MARKET INSTRUMENTS
Money market instruments are just like the debentures but
the time period is very less. It is generally less than 1 year.
Corporate entities can utilize their idle working capital by
investing in money market instruments. Some of the
money market instruments are
Treasury Bills
Commercial Paper
Certificate of Deposits
Investment Avenues
MUTUAL FUNDS
Mutual funds are an easy and tension free way of investment and
it automatically diversifies the investments. A mutual fund is an
investment only in debt or only in equity or mix of debts and
equity and ratio depending on the scheme. They provide with
benefits such as professional approach, benefits of scale and
convenience. Further investing in mutual fund will have advantage
of getting professional management services, at a lower cost,
which otherwise was not possible at all. In case of open ended
mutual fund scheme, mutual fund is giving an assurance to investor
that mutual fund will give support of secondary market. There is an
absolute transparency about investment performance to investors. 
Investment Avenues
LIFE INSURANCE AND GENERAL INSURANCE
They are one of the important parts of good investment
portfolios. Life insurance is an investment for the security
of life. The main objective of other investment avenues is
to earn a return but the primary objective of life insurance
is to secure our families against unfortunate event of our
death. It is popular in individuals. Other kinds of general
insurances are useful for corporate.
Investment Avenues
REAL ESTATE
Every investor has some part of their portfolio invested in
real assets. Almost every individual and corporate investor
invest in residential and office buildings respectively. Apart
from these, others include:
Agricultural Land
Semi-Urban Land
Commercial Property
Raw House
Farm House etc
Investment Avenues
PRECIOUS OBJECTS
Precious objects include gold, silver
and other precious stones like the
diamond. Some artistic people invest
in art objects like paintings, ancient
coins etc.
Investment Avenues
DERIVATIVES
Derivatives means indirect investments in the assets. The
derivatives market is growing at a tremendous speed. The
important benefit of investing in derivatives is that it
leverages the investment, manages the risk and helps in
doing speculation. Derivatives include:
Forwards
Futures
Options
Swaps etc
Investment Avenues
NON-MARKETABLE SECURITIES
Non-marketable securities are those securities which
cannot be liquidated in the financial markets. Such
securities include:
Bank Deposits
Post Office Deposits
Company Deposits
Provident Fund Deposits
Risk
Risk means a probability or threat of damage, injury, liability,
loss, or any other negative occurrence that is caused by
external or internal vulnerabilities, and that may be avoided
through pre-emptive action.
In finance risk is the probability that an actual return on an
investment will be lower than the expected return. Financial
risk is divided into the following categories: Basic risk, Capital
risk, Country risk, Default risk, Delivery risk, Economic risk,
Exchange rate risk, Interest rate risk, Liquidity risk, Operations
risk, Payment system risk, Political risk, Refinancing risk,
Reinvestment risk, Settlement risk, Sovereign risk, and
Underwriting risk.
Elements of Risk
In finance, risk relates to any material loss attached to the
project that may affect the productivity, tenure, legal
issues, etc. of the project.
In finance, different types of risk can be classified under
two main groups, viz.,
-Systematic risk.
-Unsystematic risk.
Elements of Risk
Elements of Risk
Systematic Risk:
Systematic risk is due to the influence of external factors on an
organization. Such factors are normally uncontrollable from an
organization's point of view.
Systematic risk is a macro in nature as it affects a large number of
organizations operating under a similar stream or same domain. It cannot
be planned by the organization.
Types of risk under the group of systematic risk are listed as follows:
-Interest rate risk.
-Market risk.
-Purchasing power or Inflationary risk.
Elements of Risk
Elements of Risk
Unsystematic risk:
It is due to the influence of internal factors prevailing within
an organization. Such factors are normally controllable from an
organization's point of view.
Unsystematic risk is a micro in nature as it affects only a
particular organization. It can be planned, so that necessary
actions can be taken by the organization to mitigate (reduce the
effect of) the risk.
The types of risk grouped under unsystematic risk are depicted
below.
-Business or liquidity risk.
-Financial or credit risk.
-Operational risk.
Elements of Risk