Module 1:

Introduction – Investment
Investment is the employment of funds with the aim of getting return on it. In general terms,
investment means the use of money in the hope of making more money. In finance, investment
means the purchase of a financial product or other item of value with an expectation of
favourable future returns.
Investment refers to the acquisition of the asset, in the expectation of generating income. In a
wider sense, it refers to the sacrifice of present money or other resources for the benefits that
will arise in future. The two main element of investment is time and risk.

Investment of hard-earned money is a crucial activity of every human being. Investment is the
commitment of funds which have been saved from current consumption with the hope that
some benefits will be received in future. Thus, it is a reward for waiting for money. Savings of
the people are invested in assets depending on their risk and return demands.

Elements/ Attributes of Investment:

Return: Investors buy or sell financial instruments in order to earn return on them. The return
on investment is the reward to the investors. The return includes both current income and
capital gain or losses, which arises by the increase or decrease of the security price.

Risk: Risk is the chance of loss due to variability of returns on an investment. In case of every
investment, there is a chance of loss. It may be loss of interest, dividend or principal amount
of investment. However, risk and return are inseparable. Return is a precise statistical term and
it is measurable. But the risk is not precise statistical term. However, the risk can be quantified.
The investment process should be considered in terms of both risk and return.

Time: Time is an important factor in investment. It offers several different courses of action.
Time period depends on the attitude of the investor who follows a ‘buy and hold’ policy. As
time moves on, analysis believes that conditions may change and investors may revaluate
expected returns and risk for each investment.

Liquidity: Liquidity is also important factor to be considered while making an investment.

Liquidity refers to the ability of an investment to be converted into cash as and when required.
The investor wants his money back any time. Therefore, the investment should provide
liquidity to the investor.

Tax Saving: The investors should get the benefit of tax exemption from the investments. There
are certain investments which provide tax exemption to the investor. The tax saving
investments increases the return on investment. Therefore, the investors should also think of
saving income tax and invest money in order to maximize the return on investment.

There are two concepts of Investment:

1. Economic Investment: The concept of economic investment means addition to the

capital stock of the society. The capital stock of the society is the goods which are used
in the production of other goods. The term investment implies the formation of new and
productive capital in the form of new construction and producers durable instrument
 such as plant and machinery. Inventories and human capital are also included in this
concept. Thus, an investment, in economic terms, means an increase in building,
equipment, and inventory.
2. Financial Investment: This is an allocation of monetary resources to assets that are
expected to yield some gain or return over a given period of time. It means an exchange
of financial claims such as shares and bonds, real estate, etc. Financial investment
involves contracts written on pieces of paper such as shares and debentures. People
invest their funds in shares, debentures, fixed deposits, national saving certificates, life
insurance policies, provident fund etc. in their view investment is a commitment of
funds to derive future income in the form of interest, dividends, rent, premiums, pension
benefits and the appreciation of the value of their principal capital. In primitive
economies most investments are of the real variety whereas in a modern economy much
investment is of the financial variety.

Investment and Speculation

Speculation is a trading activity that involves engaging in a risky financial transaction, in

expectation of making enormous profits, from fluctuations in the market value of financial
assets. In speculation, there is a high risk of losing maximum or all initial outlay, but it is
offset by the probability of significant profit. Although, the risk is taken by speculators is
properly analysed and calculated.

Investment refers to the acquisition of the asset, in the expectation of generating income.
In a wider sense, it refers to the sacrifice of present money or other resources for the benefits
that will arise in future. The two main element of investment is time and risk

Comparison Chart
BASIS FOR
INVESTMENT SPECULATION
COMPARISON

Meaning The purchase of an asset with the Speculation is an act of conducting a risky
hope of getting returns is called financial transaction, in the hope of
investment. substantial profit.

Basis for decision Fundamental factors, i.e. Hearsay, technical charts and market
performance of the company. psychology.

Time horizon Longer term Short term

Risk involved Moderate risk High risk

Intent to profit Changes in value Changes in prices

Expected rate of Modest rate of return High rate of return

return

Funds An investor uses his own funds. A speculator uses borrowed funds.

Income Stable Uncertain and Erratic

BASIS FOR
INVESTMENT SPECULATION
COMPARISON

Behaviour of Conservative and Cautious

Daring and Careless
participants

Key Differences Between Investment and Speculation

The basic difference between investment and speculation are mentioned in the points given
below:

1. Investment refers to the purchase of an asset with the hope of getting returns. The term
speculation denotes an act of conducting a risky financial transaction, in the hope of
substantial profit.
2. In investment, the decisions are taken on the basis of fundamental analysis, i.e.
performance of the company. On the other hand, in speculation decisions are based on
hearsay, technical charts, and market psychology.
3. Investments are held for at least one year. Hence, it has a longer time horizon than
speculation, where speculators hold assets for short term only.
4. The quantity of risk is moderate in investment and high in case of speculation.
5. The investors, expect profit from the change in the value of the asset. As opposed to
speculators who expect profit from the change in the prices, due to demand and supply
forces.
6. An investor expects the modest rate of return on the investment. On the contrary, a
speculator expects higher profits from the speculation in exchange for the risk borne by
him.
7. The investor uses his own funds for investment purposes. Conversely, speculator uses
borrowed capital for speculation.
8. In speculation, the stability of income is absent it is uncertain and erratic which is not
in the case of investment.
9. The psychological attitude of investors is conservative and cautious. In contrast,
speculators are daring and careless.

What is a good investment?

When we talk about good and bad investment, a question naturally comes to our mind: What

is a good investment? There are several characteristics of a good investment opportunity that

separate it from the other available choices.

CHARACTERISTICS OF GOOD INVESTMENT:

a. Objective fulfilment
An investment should fulfil the objective of the savers. Every individual has a definite
objective in making an investment. When the investment objective is contrasted with the
uncertainty involved with investments, the fulfilment of the objectives through the chosen
investment avenue could become complex.
b. Safety
The first and foremost concern of any ordinary investor is that his investment should be safe.
That is he should get back the principal at the end of the maturity period of the investment.
There is no absolute safety in any investment, except probably with investment in government
securities or such instruments where the repayment of interest and principal is guaranteed by
the government.
c. Return
The return from any investment is expectedly consistent with the extent of risk assumed by the
investor. Risk and return go together. Higher the risk, higher the chances of getting higher
return. An investment in a low risk - high safety investment such as investment in government
securities will obviously get the investor only low returns.
d. Liquidity
Given a choice, investors would prefer a liquid investment than a higher return investment.
Because the investment climate and market conditions may change or investor may be
confronted by an urgent unforeseen commitment for which he might need funds, and if he can
dispose of his investment without suffering unduly in terms of loss of returns, he would prefer
the liquid investment.
e. Hedge against inflation
The purchasing power of money deteriorates heavily in a country which is not efficient or not
well endowed, in relation to another country. Investors, who save for the long term, look for
hedge against inflation so that their investments are not unduly eroded; rather they look for a
capital gain which neutralizes the erosion in purchasing power and still gives a return.
f. Concealability
If not from the taxman, investors would like to keep their investments rather confidential from
their own kith and kin so that the investments made for their old age/ uncertain future does not
become a hunting ground for their own lives. Safeguarding of financial instruments
representing the investments may be easier than investment made in real estate. Moreover, the
real estate may be prone to encroachment and other such hazards.
h. Tax shield
Investment decisions are highly influenced by the tax system in the country. Investors look for
front-end tax incentives while making an investment and also rear-end tax reliefs while reaping
the benefit of their investments. As against tax incentives and reliefs, if investors were to pay
taxes on the income earned from investments, they look for higher return in such investments
so that their after-tax income is comparable to the pre-tax equivalent level with some other
income which is free of tax, but is riskier.
Investment Avenues:
Some people rely on saving rather than investing. However, in a dynamic world, savings may
not be adequate to guarantee continued financial security. Idle money in lockers or even in a
bank account may not serve the purpose. Investments could help beat inflation through capital
appreciation. The power of compounding also assists in wealth creation. Investing is further
helpful in meeting future goals such as purchasing a house, going on a foreign vacation, or
planning your retirement. There are several alternatives/ options available in India for
investment as follows.

A. Securities:
1. Stocks:
Equity Shares: These represent ownership in a company. When you buy a stock, you
become a shareholder and are entitled to a portion of the company's profits (in the form
of dividends) and voting rights on certain company decisions. Stocks can be
volatile, but they also have the potential for high returns. The types of the equity shares
are,
• Blue-chip shares
• Growth shares (shares having more growth than its industry or market)
• Income shares
• Defensive shares
• Cyclical Shares
• Speculative
Preference Shares: Preference shares, more commonly referred to as preferred stock, are
shares of a company’s stock with dividends that are paid out to shareholders before common
stock dividends are issued. If the company enters bankruptcy, preferred stockholders are
entitled to be paid from company assets before common stockholders.
Debentures and Bonds: Debentures and bonds are both debt instruments used by entities like
corporations and governments to raise money from investors. They act like loans, where the
investor is essentially lending money to the issuer and expects to be repaid with interest over a
specified period. However, they differ in terms of risk and security:

2. Debentures:

• Unsecured: Debentures are not backed by any collateral, meaning if the issuer defaults
(fails to make repayments), the investors have no claim on any specific assets and may
not get their money back. This makes them riskier than bonds.
• Higher interest rates: Due to the higher risk, debentures generally offer higher interest
rates than bonds to attract investors.
• Issued by: Both corporations and governments can issue debentures.

Bonds:

• Secured: Bonds are typically backed by collateral, such as property, equipment, or

future revenue streams. This provides a layer of security for investors, as they may be
able to claim the collateral if the issuer defaults.
• Lower interest rates: Because they are less risky, bonds offer lower interest rates than
debentures.
• Issued by: Bonds are issued by a wider range of entities, including
corporations, governments, and even financial institutions.

In simpler terms:

• Debentures: Think of them as personal loans with no collateral. They are riskier but
offer higher returns potential.
• Bonds: Think of them as mortgages secured by property. They are safer but offer lower
returns.
3. Government securities: Government securities, also known as treasuries or treasuries,
are essentially debt instruments issued by a government to raise money for its various
needs.
4. Money market instruments:
The money market is a crucial segment of the financial system that deals with short-term
borrowing and lending of funds, typically with maturities of less than one year. The
instruments are as follows:
Treasury bills
 Certificate of Deposits
Commercial Papers
5. Derivatives: Derivatives are fascinating and complex financial instruments that can be
both exhilarating and intimidating. They essentially derive their value from the
performance of an underlying asset or financial instrument like stocks, bonds,
commodities, or even currencies
6. Mutual Funds: mutual fund is a pool of money collected from multiple investors and
managed by a professional team. They offer a bunch of perks for those looking to get
into the investment world
B. Deposits:
• Bank deposits
Bank deposits refer to funds that individuals, businesses, or other entities place in a
bank for safekeeping and to earn interest. These deposits are a crucial component of
the banking system and serve as a foundation for various financial activities. There are
several types of bank deposits, each with its own characteristics and purposes. Here
are the common types of bank deposits:
1. Savings Deposits:
Purpose: These deposits are meant for individuals to save money over time.
Interest: Generally, savings accounts offer lower interest rates compared to
other types of deposits.
Access: Customers may have restrictions on the number of withdrawals and
transfers.
2. Fixed Deposits (Time Deposits or Certificates of Deposit - CDs):
Purpose: Investors deposit a lump sum amount for a fixed term.
Interest: Fixed interest rates are applied for the agreed-upon period.
Access: Withdrawal before maturity may result in penalties.
3. Current or Checking Deposits:
Purpose: Primarily used for everyday transactions, including withdrawals and
payments.
Interest: Typically, these accounts offer little to no interest.
Access: Easily accessible for day-to-day financial activities.
4. Recurring Deposits:
Purpose: Similar to fixed deposits, but customers make regular, periodic
deposits instead of a lump sum.
Interest: Earns interest at the fixed rate, similar to fixed deposits.
Access: Withdrawal before maturity may have penalties.
• Non-banking financial deposits:
These are fixed deposit schemes offered by non-banking finance
companies which offer superior interest rates than banks. The
Reserve Bank of India authorizes the companies to accept money
from general public for fixed term and these companies perform
the tasks under specified regulations of RBI.
 C. Postal Deposits:

Postal schemes are financial instruments offered by postal services, allowing individuals to
deposit money, earn interest, and sometimes invest in government-backed securities. These
schemes leverage the extensive reach and trust associated with postal services to encourage
savings and financial inclusion.

Types of Postal Schemes:

• Savings Accounts:

Regular Savings Account: This is a basic savings account where individuals can deposit
money and earn interest. Withdrawals can usually be made at any time.

Fixed Deposit Accounts: Customers deposit a lump sum for a fixed period, and in return, they
receive a predetermined interest rate. Withdrawals before maturity may incur penalties.

• Recurring Deposit Schemes:

Monthly Deposit Scheme: Individuals make regular monthly deposits into their account, and
at the end of a specified period, they receive the accumulated amount along with interest.

• Senior Citizens Savings Scheme (SCSS):

This scheme is specifically designed for senior citizens, offering higher interest rates and tax
benefits. It usually has a fixed tenure.

• Public Provident Fund (PPF):

PPF is a long-term savings scheme with a lock-in period, providing tax benefits. It is a
popular investment option due to its security and guaranteed returns.

• Monthly Income Scheme (MIS):

Investors deposit a lump sum amount and receive monthly interest payouts. The principal
amount is returned at the end of the scheme's tenure.

• Kisan Vikas Patra (KVP):

Targeted at rural investors, KVP is a fixed-income investment with a lock-in period. The
invested amount doubles after a predetermined period.

• National Savings Certificates (NSC):

NSC is a government-backed savings instrument with a fixed tenure and interest rate. It
encourages long-term savings and offers tax benefits.

• Life Insurance Products:

Some postal schemes offer life insurance products, providing both savings and insurance
benefits.

• Postal Monthly Income Plan (MIP):

Similar to the Monthly Income Scheme, this plan offers regular monthly income to investors.

D. Insurance Policies: Life insurance policies

• Term Insurance:

Purpose: Provides pure life coverage.

Features: Pays a death benefit if the insured dies during the policy term. It does not have a
cash value component.

Usage: Commonly used for financial protection and to ensure the financial security of
dependents in case of the policyholder's demise.

• Endowment Insurance:

Purpose: Combines insurance coverage with savings.

Features: Offers a death benefit and a maturity benefit. If the policyholder survives the policy
term, they receive a lump sum amount.

Usage: Serves as a form of forced savings with an insurance component.

• Money Back Insurance:

Purpose: Provides periodic payouts during the policy term.

Features: Offers survival benefits at regular intervals, and if the policyholder survives the
entire term, a lump sum amount is paid.

Usage: Can be used for meeting financial needs at different stages of life.

• Whole Life Insurance:

Purpose: Provides lifelong coverage.

Features: Covers the policyholder until death, and a cash value component accumulates over
time, which can be withdrawn or borrowed against.

Usage: Suitable for those seeking permanent coverage with a savings element.

• Child Insurance:

Purpose: Designed for the financial well-being of children.

Features: Provides financial protection and may include maturity benefits for the child's
future education or other needs.

Usage: Parents often purchase these policies to secure their child's financial future.

• Retirement/Pension Plans:

Purpose: To create a corpus for retirement.

Features: Regular contributions during the working years and a lump sum or regular income
post-retirement.
Usage: Helps in building a retirement fund to maintain a desired lifestyle after leaving the
workforce.

• ULIPs (Unit Linked Insurance Plans): Triple Advantage ULIP:

Purpose: Merges insurance coverage with investment opportunities.

Features:

Life Cover: Provides a death benefit in case of the policyholder's demise.

Market-Linked Returns: Invests premiums in market instruments (equity, debt, or a mix),

offering potential for higher returns.

Flexibility: Allows policyholders to switch between different funds based on risk appetite and
market conditions.

Usage: Offers a combination of insurance and investment benefits, providing flexibility and
market-linked returns.

E. Other investments:
• Real estate: Real estate is one of the most popular investments, and for good
reason. It can provide a steady stream of income through rental properties, and it
can also appreciate in value over time. However, it's important to remember that
real estate is also a relatively illiquid investment, meaning it can be difficult to sell
quickly if you need the money. It's also important to factor in the costs of
ownership, such as property taxes, insurance, and maintenance.
• Precious metals: Precious metals, such as gold and silver, have been seen as a safe
haven investment for centuries. They tend to hold their value during times of
economic uncertainty, and they can also be a good hedge against inflation.
However, precious metals are also a volatile investment, and their prices can
fluctuate significantly.
• Art and antiques: Art and antiques can be a lucrative investment, but they are also
a very risky one. The value of art and antiques is subjective, and it can be difficult
to predict whether a particular piece will appreciate or depreciate in value. It's
also important to remember that art and antiques can be difficult to sell, and you
may have to pay storage and insurance costs.

Investment process:

Investment is the commitment of funds at present in some course of

action with the expectation of some positive rate of return. An investment
is an asset or item that is purchased with the hope that it will generate
income or will appreciate it in the future.

A systematic process should be followed while investing. The formal and

detailed steps of the investment process are as follows;
1. Investment Policy: Investment policy refers to a set of guidelines and principles that
define an investor's objectives, risk tolerance, time horizon, and constraints. It serves as a
blueprint for making investment decisions and helps align investment strategies with the
investor's financial goals.
• Investible Funds: Investible funds represent the amount of money available for
investment after accounting for essential expenses and financial obligations. It's the
portion of an individual's or organization's financial resources that can be allocated to
various investment opportunities.
Follow the finance rule always: Income-Investment= Expenses
• Objectivity: Objectivity in the investment process emphasizes the objective the
investment. The purpose of investment helps to take decisions on what kind of
investment avenue a investor should chose, This also influenced by time horizon (short
term or long term).
• Knowledge Analysis: Knowledge analysis involves assessing the investor's
understanding of the financial markets, investment instruments, and economic factors.
It highlights the importance of staying informed and continuously updating one's
knowledge to make informed investment decisions.
2. Analysis: Investment analysis involves evaluating various aspects of potential
investments to make informed decisions about buying, holding, or selling financial assets. It
is a crucial step in the investment process and aims to assess the attractiveness and potential
risks associated with different investment opportunities. Here are key components of
investment analysis:
 • Fundamental Analysis: Fundamental analysis is a method of evaluating securities by
analyzing various factors at different levels:
o Market/economic Analysis: Examining overall economic and market
conditions. Which also includes analysis of the different global economies as
whole, individual domestic economies by considering several factors like GDP,
inflation, interest rate, exchange rates, tax rates, savings rates, FDI and FII,
Agricultural production, BOP, Infrastructure, Political stability etc. Also, the
analysis considers social aspects education, per capita income, Gender ratio,
Employment rate etc.
o Industry Analysis: Evaluating the prospects of specific industries. It includes
performance of industry, life cycle, Trends and fluctuations, External influences
such as law, Competitive and complementary industry performance barriers to
entry etc.
o Company Analysis: Assessing the financial health and performance of
individual companies. Here both financial and nonfinancial aspects are
analyzed.
▪ Financial aspects like PE ratio, ROE, Dividend yield, EPS, Revenue
growth, Profit growth, Debt equity ratio etc have been considered.
▪ Non-financial aspects like marketing success, business model,
competitive advantage, Management, Corporate governance etc.
• Technical Analysis: Technical analysis involves studying past market data, primarily
price and volume, to forecast future price movements. It includes theories, charting
techniques, and the use of technical indicators to make investment decisions. Charts,
Trend analysis, theories like Dow theory, Random walk theory, Efficient market
hypothesis are analyzed for the prediction.
3. Valuation: While choosing the investment avenue deciding whether the avenue is
overvalued or undervalued becomes crucial. The valuation of the same is done by the
following methods.
▪ Intrinsic Value: The intrinsic value of an asset is its true, inherent value, often
determined through fundamental analysis. It represents what an asset is worth based on
its fundamental characteristics.
▪ Future Value: Future value is an estimate of the worth of an asset at a specific future
point in time, considering factors such as growth, interest rates, and compounding.
4. Portfolio Construction: Portfolio is combination of different investment avenues based
on the objectivity risk tolerance and time horizon where investor will get optimum return.
To construct a portfolio following steps will be crucial:
▪ Diversification: Diversification involves spreading investments across different asset
classes, industries, and geographic regions to reduce risk and enhance potential returns.
▪ Selection and Allocation: Choosing specific securities and determining the percentage
of the portfolio allocated to each, based on the investor's goals and risk tolerance.
5. Portfolio Evaluation: Optimum portfolio will not be idle combination since market
fluctuates with all events and factors may be internal or external. To get the optimum return
in all situations following considerations should be done:
▪ Appraisal: Appraising a portfolio involves assessing its performance against predefined
benchmarks and objectives. It helps investors understand how well their investments
are meeting expectations.
 ▪ Revision: If needed, the portfolio is revised by adjusting asset allocation, securities
selection, or other elements based on changes in market conditions or the investor's
objectives.
Note: All the steps of Investment process are discussed in detail in next modules of this
subject hence brief explanations are given in this module (module 2 and 3- Fundamental
analysis, Risk Return and valuation. Module 4 and 5 technical analysis and portfolio
management)