MB4303 - SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

UNITI INVESTMENT SETTING 9

Financial and economic meaning of Investment – Characteristics and objectives of Investment –Types of
Investment– Investment alternatives– Choice and Evaluation– Risk and return concepts.

Financial and economic meaning of Investment:

In an economic outlook an investment is the purchase of goods that are not consumed today but are used
in the future to generate wealth. In finance, an investment is a financial asset bought with the idea that the
asset will provide income further or will later be sold at a higher cost price for a profit.
Characteristics and objectives of Investment –
Liquidity
Liquidity is the ease and speed at which an Investment can be converted into cash without significantly
affecting its value. Cash itself is the most liquid asset, as it can be used immediately for transactions.
Conversely, real estate or certain Investments might have lower liquidity due to the time required for
selling and the potential impact on the sale price.
Risk and return
Risk and return are the twin determinants that shape every Investment decision. In the context of
Investment, risk encapsulates the possibility of not achieving expected returns or experiencing losses. It's
vital to recognise that higher levels of risk often accompany the potential for higher returns. This
relationship underscores the importance of aligning one's risk tolerance with one's choices.
Short-term Investments, such as day trading or short-maturity bonds, focus on preserving capital and
generating immediate gains. Medium-term Investments span several years and aim to achieve growth or
specific financial milestones. Long-term Investments, often held for decades, leverage the power of
compounding to deliver substantial returns potentially.
Diversification
. It involves investing in a mix of asset classes, sectors, and geographic regions to help decrease the
impact of poor performance in any single area. By diversifying, an investor can potentially achieve more
stable returns over time, as different assets often react differently to economic events.
Inflation protection
Certain Investments have historically acted as a hedge against inflation, aiming to retain or even increase
their value in the face of rising costs. These assets include commodities like gold and oil, real estate, and
specific equities.
Tax efficiency
This involves understanding the tax implications of different choices and structuring Investments
to minimise tax liabilities.
Market volatility
Understanding market volatility is essential for maintaining a disciplined Investment approach. Investors
should focus on their long-term objectives instead of making impulsive decisions in response to short-
term fluctuations.
Psychological factors
Psychological biases often influence investor behaviour, leading to suboptimal decisions. Fear of missing
out (FOMO), fear of loss, and herd mentality are common cognitive biases that can drive irrational
actions. Recognising these biases and actively countering them is crucial for successful investing.
Educating oneself about these psychological factors, setting predefined strategies, and seeking advice
from financial professionals can help temper emotional responses and enable rational decision-making
Cost efficiency
Cost efficiency is a crucial yet often overlooked characteristic of Investment. It pertains to the expenses
associated with acquiring, managing, and eventually selling Investments. These costs can impact the
overall returns an investor receives.

OBJECTIVES OF INVESTMENTS:
Safeguard your Money
Investing keeps your money safe from immediate and unnecessary expenditures. It also helps you keep
your money safe from inflation effects.
Grow your Savings
Investment is the only way to start growing your invested money. It allows your money to earn interest
and if you keep the interest invested it will also start to earn interest.
Build Funds for Emergencies
Life is usually a series of ups and downs. Few times you are earning decent and saving money while other
times you need a large sum for an emergency. Building investment pools help you on such rainy days.
Secures your Retired Life
Retired life is where you don’t have a source of income to sustain your life. Once you have built a
retirement corpus, you can experience the freedom that comes with it.
Save Tax
Investment in tax-saving instruments like life insurance plans, ULIPs, PPF, NPS, etc allows you to claim
deductions on your taxable income. Thus, investing in specific assets can help you reduce your tax
liability.

TYPES OF INVESTMENTS:
1. Fixed Deposits
2. Mutual Funds
3. Stocks
4. Recurring Deposits
5. Public Provident Fund(PPF)
6. National Pension System
Fixed Deposits: When you choose to invest in a Fixed Deposit offered by banks or non-banking
financial organisations (NBFCs), you can put aside a lump sum of cash for a pre-determined period of
time and gain interest at the agreed rate. This type of investment is quite popular in India as it offers a
secure way to grow your funds. Upon completion of the tenure, your deposit gets you interest at the rate
that was set.
2.Mutual Funds:
Investing in Mutual Fund (MF) can involve stocks, bonds, or a combination of the two. Depending on
your financial goals and risk appetite, different types of investors in India can choose between equity
funds, debt funds, and balanced funds. Additionally, you can also use Systematic Investment Plan
(SIP) to invest smaller amounts periodically. Before investing, review your risk preferences and be aware
of the taxation system. Moreover, you may opt for tax-saving mutual funds such as the ELSS (Equity
Linked Savings Scheme) to help maximise your returns.
3. Stocks:
Stocks are type of security that gives stockholders a share of ownership in a company. Companies sell
share typically to gain additional money to grow the company. This is called the initial public offering
(IPO). After the IPO. Stockholders can resell shares on the stock market.
4. Recurring Deposits
A Recurring Deposit, commonly known as RD. It is an investment tool which allows people to make
regular deposits and earn decent returns on the investments.
5. Public Provident Fund(PPF)
Public Provident Fund (PPF) is viewed as one of the safest forms of investment in India, since
it is backed by the government. Opening an account with any bank or post office is the first step to
investing in PPF and can be done with a minimal amount of Rs.100 in some banks (can vary for different
banks). Yearly deposits range from a minimum of Rs.500 to a maximum of Rs.1.5 lakh, and these
investments are locked in for 15 years, as well as qualifying for tax deductions under section 80C of the
Income Tax Act, 1961.
6. National Pension System
The National Pension System (NPS) is an investment plan sponsored by the government of India, which
is suitable for long-term savings, particularly for retirement. NPS investments can be diversified across 4
asset classes – Equities, Government Bonds, Corporate Bonds and Alternative Investment Funds (AIFs)
Currently, NPS investments are eligible to be annuitized after the investor reaches the age of 60, though
they can continue to be invested in up to the age of 75 without annuitization. To maximise the benefit of
your NPS investment, you can take advantage of the tax deductions available under sections 80CCD (1),
80CCD (1B), and 80CCD (2).
Investment Alternatives:
Types of Alternative Investments
Real Estate
Real estate as an investment includes investing in physical properties or property based securities. It can
also include investing in real estate crowdfunding platforms, real estate investment trusts (REITs), and
real estate mutual funds. In addition to capital appreciation of tangible assets, investors strive for
operating income to potentially provide ongoing, stable cash flow.
Commodities
Commodities are raw materials such as gold, silver, oil, or agricultural products. Investors can invest in
these tangible goods that have real world uses and often perpetual demand due to the underlying
characteristics of what they are. For example, gold's price is arguably more stable because it used in a
variety of industries and is considered a store of value.
Farmland
 A blend of real estate and commodities, investors can turn to farmland as an alternative investment. In
addition to reaping the benefits of physical, tangible land, farm owners may also receive ongoing cash
proceeds should operations and sales of commodities yield positive results.
Art and Collectibles
Some investments may double as a hobby, with art, sports memorabilia, entertainment memorabilia, or
other collectibles acting as alternative investments. These items may have historical worth or develop
worth over time as related parties (i.e. the artist, the associated movie star, or the associated athlete)
become more historic.
Cryptocurrencies
The emerging form of digital currency, cryptocurrency is seen as an alternative investment as it is
outside the traditional scope of stocks and bonds. Though some may claim cryptocurrency does not offer
a strong hedge against other risk-on investments, it may provide capital appreciation or passive income
due to staking rewards.
Venture Capital/Private Equity
Blurring the lines of an alternative investment, venture capital or private equity are simply a refined
branch of stock investments. Instead of trading shares of public companies in an open market, investors
may seek alternative avenues to put capital into private companies or start-ups.

Peer-to-Peer Lending
Investing in peer-to-peer lending translates to making loans to individuals or businesses through online
platforms that connect borrowers with investors. Peer-to-peer lending takes a very similar form as
investing in bonds, though it is done on more private markets and often entails transacting with riskier
clients. There is a potential for higher returns, though not always.
The term "alternative investment" simply refers to an investment being alternative to stocks, bonds and
cash. Both an unboxed Star Wars figurine with appreciating value and a rundown local warehouse may
fall into the definition of an alternative investment.
Choice & Evaluation of Investments:
Investment evaluation evaluates the merits of an investment after it has been made. It looks at factors
such as the company's performance, its financial health, and its future prospects. Post-investment
evaluation assesses whether the benefits of an investment have been realized. It looks at factors such as
the company's profitability, its competitive landscape, and its ability to repay loans.

Risk & Return concepts:

 Risk-return tradeoff is an investment principle that indicates that the higher the risk, the higher the
potential reward.
 To calculate an appropriate risk-return tradeoff, investors must consider many factors, including overall
risk tolerance, the potential to replace lost funds, and more.
 Investors consider risk-return tradeoff on individual investments and across portfolios when making
investment decisions.