UNIT - 1
Concept of Investment: The meaning of investment is putting your money into an asset that can
grow in value or produce income or both. For example, you can buy equity stock of a listed company
in the hopes of receiving regular dividends and capital appreciation in the form of the share price.
Your savings become investments when they are put into assets that carry investment risk or a degree
of illiquidity. Such investments help you create wealth that can be used as an emergency fund, a
retirement corpus, for buying a house, or funding a child's education, etc.
Purchasing the financial assets for future benefit is known as an “Investment”.
Sacrifyse the current funds for future benefits is also called as an “Investment”.
Investment is an activity that is engaged in by people who have savings, i.e. investments are made
from savings, or in other words, people invest their savings. But all savers are not investors.
Investment is an activity which is different from saving.
It may mean many things to many persons. If one person has advanced some money to another, he
may consider his loan as an investment. He expects to get back the money along with interest at a
future date. Another person may have purchased one kilogram of gold for the purpose of price
appreciation and may consider it as an investment. Yet another person may purchase an insurance plan
for the various benefits it promises in future. That is his investment.
In all these cases it can be seen that investment involves employment of funds with the aim of
achieving additional income or growth in values. The essential quality of an investment is that it
involves waiting for a reward. Investment involves the commitment of resources which have been
saved in the hope that some benefits will accrue in future.
Thus, investment may be defined as "a commitment of funds made in the expectation of some positive
rate of return"¹. Expectation of return is an essential element of investment Since the return is
expected to be realised in future, there is a possibility that the return actually realised is lower than the
return expected to be realised. This possibility of variation in the actual return is known as investment
risk. Thus, every investment involves return and risk.
FINANCIAL AND ECONOMIC MEANING OF INVESTMENT:
In the financial sense, investment is the commitment of a person's funds to derive future income in the
form of interest, dividend, premiums, pension benefits or appreciation in the value of their capital.
Purchasing of shares, debentures, post office savings certificates, insurance policies are all
investments in the financial sense. Such investments generate financial assets.
In the economic sense, investment means the net additions to the economy's capital stock which
consists of goods and services that are used in the production of other goods and services. Investment
in this sense implies the formation of new and productive capital in the form of new constructions,
plant and machinery, inventories, etc. Such investments generate physical assets.
The two types of investments are, however, related and dependent. The money invested in financial
investments are ultimately converted into physical assets. Thus, all investments result in the
acquisition of some assets either financial or physical.
CHARACTERISTICS OF INVESTMENT
All investments are characterised by certain features. Let us analyse these characteristic features of
investments.
Return: All investments are characterised by the expectation of a return. In fact, investments are
made with the primary objective of deriving a return. The return may be received in the form of yield
plus capital appreciation. The difference between the sale price and the purchase price is capital
appreciation. The dividend or interest received from the investment is the yield. Different types of
investments promise different rates of return. The return from an investment depends upon the nature
of the investment, the maturity period and a host of other factors.
Risk: Risk is inherent in any investment. This risk may relate to loss of capital, delay in repayment of
capital, non-payment of interest, or variability of returns. While some investments like government
securities and bank deposits are almost riskless, others are more risky. The risk of an investment
depends on the following factors.
1. The longer the maturity period, the larger is the risk.
2. The lower the credit worthiness of the borrower, the higher is the risk.
3. The risk varies with the nature of investment. Investments in ownership securities like equity shares
carry higher risk compared to investments in debt instruments like debentures and bonds.
Risk and return of an investment are related. Normally, the higher the risk, the higher is the return.
Safety: The safety of an investment implies the certainty of return of capital without loss of money or
time. Safety is another feature which an investor desires for his investments. Every investor expects to
get back his capital on maturity without loss and without delay.
Liquidity: An investment which is easily saleable or marketable without loss of money and without
loss of time is said to possess liquidity. Some investments like company deposits, bank deposits, P.O.
Deposits, NSC, NSS, etc. are not marketable. Some investment instruments like preference shares and
debentures are marketable, but there are no buyers in many cases and hence their liquidity is
negligible. Equity shares of companies listed on stock exchanges are easily marketable through the
stock exchanges.
An investor generally prefers liquidity for his investments, safety of his funds, a good return
with minimum risk or minimisation of risk and maximisation of return.
Objectives of Investment:
Before investing, it’s important to understand why you are investing. While everyone’s individual
objectives may differ, the overall goals of investing money may include building wealth, saving for
retirement, or creating a financial cushion. Here are some reasons why you should invest:
1.To maintain financial security: Ensuring that your money does not erode over time is a key goal
when investing. Instruments such as fixed deposits, government bonds, and savings accounts are all
suitable for this purpose. They may not offer the highest returns, but they guarantee that your capital
remains secure.
2.To accumulate wealth: Investing money is done with the goal of building a sizeable corpus over
time. Capital appreciation is an important long-term goal that helps people plan for their financial
future. To grow your money, you need to consider your investment objectives and options that can
provide high returns. Real estate, mutual funds, commodities, and stocks are some of the best
investments for growth but come with risks.
3.To receive regular returns: Investments can be a reliable source of income. Examples include
fixed deposits and stocks of companies that regularly distribute dividends. These investments can help
cover everyday expenses in retirement, as well as provide supplementary income during working
years.
4.To minimise tax liability: In addition to capital growth or preservation, investors may have other
reasons for investing. The Income Tax Act 1961 provides tax exemption to those who invest in
options such as Unit Linked Insurance Plans (ULIPs), Public Provident Fund (PPF), and Equity
Linked Savings Schemes (ELSS). This type of investment can be deducted from one's total income,
resulting in a lower taxable income and a lower tax liability.
5.To prepare for retirement: Preparing for retirement is essential. Having a sufficient retirement
fund is important to ensure financial security during your later years, as you may not be able to
continue working forever. Investing your income wisely can help your funds grow, giving you a
comfortable retirement.
6.To achieve your financial objectives: Investing can be an effective way to reach your short-term
and long-term financial objectives without too much effort or strain. Some investments, such as those
with a short lock-in period and high liquidity, can be ideal instruments to store your funds in if you
want to save up for near-term goals like financing home renovations or setting up an emergency fund.
Meanwhile, investments with a longer lock-in period can be great for saving up for long-term
objectives.
INVESTMENT Vs. SPECULATION (Prepare the content available in Text Book)
The key difference between investment and speculation is that investment is made in the long term,
while speculation aims for the short term. Let us explore other critical difference between the two -
Investment Speculation
Short-term bets on financial assets to gain
Definition Money allocation for an asset purchase.
quickly.
The investor’s main objective is to achieve
The speculator seeks to achieve small profits
Aim small recurring returns in the long term, such as
in the short term.
the payment of dividends.
Generally, the investor keeps the assets in his Speculators usually change assets in the short
Time portfolio for a long time, years and even a term, in minutes,
lifetime. hours, or a few days.
Thorough analysis of fundamental factors, Technical analysis mainly combined with
including company ratios, competitive and fundamental and market
Analysis
industry conditions, and technical factors
throughout the asset’s history. sentiment.
Income Certainty Stable. Erratic.
Moderate risk. The lower the risk, the lower the High risk. The higher the risk, the higher the
Risks
return. potential gains.
Conclusion: Investors take a systematic approach to growing their wealth. They invest in assets with
reasonable levels of risk in exchange for long-term growth. On the other hand, speculators buy assets
that may experience rapid growth but can also lose their entire value in case of a market crash. Both
approaches involve making profits. You must know the difference between the two if you plan to
widen your financial portfolio, so you can properly manage the level of risk you take against your
expected return.
Examples for speculation and Investment
Betting, momentum contributing, development The financial exchange, saving accounts, Government
stocks, foreign monetary standards, digital forms of securities, factor contributing, shared assets, and so
money. on.
INVESTMENT PROCESS:
An Investment Process is a systematic approach that individuals or organisations follow to
make informed decisions about allocating their funds. The goal of an Investment Process is to
maximise returns while managing risks effectively. It provides a structured framework,
guiding Investors in selecting appropriate assets, diversifying portfolios, and adapting
strategies to achieve specific financial objectives, ensuring long-term financial stability and
growth.
Steps:
