INVESTMENT MANAGEMENT
Module-2
Meaning of
Investment
Investment is the process of investing your money in an asset with the objective to grow
your money in a stipulated time period.
Investment involves allocating resources, usually money, with the expectation of generating
an income or profit. This can encompass purchasing assets like stock, bonds or real estates,
aiming for future financial returns.
Investment management, also known as portfolio management or wealth management, is the
professional process of managing various securities (stocks, bonds, etc.) and assets like (real
estates) to meet specific investment goals for the benefit of investors.
Definition of
Investment
• “Commitment of funds made in the
expectation of some positive rate of
return”
• Investment is the employment of funds
with the aim of achieving additional
income or growth in
value.
• Expectation of return is an essential
element of investment.
Meaning of
Investment
• It involves the commitment of resources
which have been saved or put away from
current consumption in the hope some
benefits will accrue in future.
• Investment involves long term commitment of
funds and waiting for a reward in the future.
Characteristics of
Investment
•Return
•Risk
•Liquidity
Investment Avenues Analysis
Post office Gold Share market
saving scheme
Risk No to Low Low to High
Moderate
Return Low Moderate to Low to High
High
Liquidity Moderate Moderate to Low
High
[Link] Deposits (FDs):
Investment Options
1. Risk: Low risk as they are backed by the bank.
2. Return: Moderate returns, typically slightly higher than savings accounts.
3. Liquidity: Generally low liquidity due to lock-in periods, but some banks offer premature
withdrawal with penalties.
[Link] Provident Fund (PPF):
1. Risk: Government-backed, hence low risk.
2. Return: Moderate to high returns compared to FDs.
3. Liquidity: Low liquidity as it has a lock-in period of 15 years, with partial withdrawals allowed
after the 7th year.
[Link] Market (Equities):
1. Risk: High risk due to market fluctuations.
2. Return: Potentially high returns, but highly volatile.
3. Liquidity: High liquidity as stocks can be bought and sold easily on stock exchanges.
[Link] Funds:
1. Risk: Varies based on the type of mutual fund (e.g., equity funds, debt funds, balanced
funds).
2. Return: Can vary from low to high depending on the type of fund and market conditions.
3. Liquidity: Generally high liquidity, as units can be redeemed based on the prevailing Net
Asset Value (NAV).
[Link] Estate:
1. Risk: Moderately high risk due to market fluctuations and illiquidity.
2. Return: Historically, real estate has provided good returns over the long term.
Investment Options
6. Gold:
1. Risk: Moderate risk due to market fluctuations.
2. Return: Generally, provides moderate returns over the long term.
3. Liquidity: High liquidity as gold can be easily bought and sold in various forms such as jewelry,
coins, or bullion.
7. Bonds:
4. Risk: Moderate risk depending on the issuer (government bonds are generally lower risk).
5. Return: Typically, lower returns compared to equities but higher than savings accounts.
6. Liquidity: Can vary, with some bonds having lower liquidity compared to others, especially if
they are not traded frequently.
8. National Pension System (NPS):
7. Risk: Moderate risk depending on the asset allocation chosen.
8. Return: Can vary but generally offers moderate to high returns over the long term.
9. Liquidity: Relatively low liquidity as it is meant for retirement savings and withdrawals are
restricted.
9. Savings Account:
10. Risk: Low risk as they are backed by the bank.
11. Return: Very low returns, often below the inflation rate.
12. Liquidity: High liquidity as funds can be withdrawn at any time without penalties.
10. Initial Public Offerings (IPOs):
13. Risk: High risk due to uncertainties associated with new companies.
1. Fixed Deposits (FD)
Traditional Fixed Deposit: The standard FD with a fixed tenure and interest rate.
Tax-saving Fixed Deposit: FD with a 5-year lock-in period offering tax deductions under Section 80C.
Cumulative Fixed Deposit: Interest is compounded and paid at the end of the tenure.
Non-Cumulative Fixed Deposit: Interest is paid out at regular intervals (monthly, quarterly, or annually).
Corporate Fixed Deposit: FD offered by companies, often with higher interest rates but more risk compared to bank FDs.
2. Provident Fund (PF)
Employees' Provident Fund (EPF): Mandatory retirement savings scheme for salaried individuals in India.
Voluntary Provident Fund (VPF): An extension of EPF where employees can contribute more than the mandated 12%.
Public Provident Fund (PPF): Long-term investment scheme with tax benefits under Section 80C, available to all individuals (not limited to salaried employees).
3. Government Bonds
Sovereign Gold Bonds: Bonds issued by the government backed by gold, providing returns linked to the
price of gold.
Savings Bond: Issued by the Government of India, providing fixed returns for a set period.
Government Securities (G-Secs): Debt instruments issued by the central or state governments, generally
low-risk.
Treasury Bills: Short-term instruments (less than a year) issued by the government to manage short-term
liquidity.
4. Post Office Schemes
Post Office Savings Account: A savings account offered by India Post, with a higher interest rate than
most regular savings accounts.
Post Office Fixed Deposit: Similar to bank FDs but with a government-backed guarantee.
Post Office Monthly Income Scheme: Offers regular monthly income with a fixed interest rate.
Public Provident Fund (PPF): Also available at post offices, a long-term savings instrument offering tax
benefits.
Kisan Vikas Patra (KVP): A savings instrument designed to double your investment in a specific time
frame (currently 124 months).
5 Property
Residential Property: Investing in homes, apartments, or villas for rental income or capital appreciation.
Commercial Property: Investment in office spaces, retail outlets, or industrial properties for rental
income.
Real Estate Investment Trusts (REITs): A way to invest in property without directly buying real estate,
offering returns from property rental income and capital gains.
Agricultural Land: Investment in agricultural land which can provide returns through farming or leasing
it out for agricultural use.
6. Mutual Funds
Equity Mutual Funds: Funds that invest primarily in the stock market. These are high-risk, high-return
options.
Debt Mutual Funds: Invests in bonds or other fixed-income securities. Typically lower risk but also lower
returns.
Hybrid Mutual Funds: Funds that invest in both equity and debt instruments.
Index Funds: A type of equity fund that replicates the performance of a specific market index, like the
Nifty 50 or Sensex.
Sectoral Funds: Focuses on investing in a specific sector like technology, pharmaceuticals, or
infrastructure.
Thematic Funds: Focus on investments related to a particular theme (e.g., clean energy, or
7. Stock Market
Equity Shares: Direct investment in the stocks of companies listed on stock exchanges.
Exchange-Traded Funds (ETFs): A type of investment fund that holds assets like stocks or bonds and is traded on stock
exchanges.
Initial Public Offering (IPO): Investment in shares of a company when it gets listed on the stock exchange for the first time.
Blue-chip Stocks: Shares of large, well-established companies known for stability and steady returns.
Mid-cap and Small-cap Stocks: Shares of companies with mid-sized or small market capitalization, usually riskier but with
higher potential returns.
8. Gold
Physical Gold: Investing in physical gold in the form of coins, bars, or jewelry.
Gold ETFs: Exchange-traded funds that track the price of gold.
Sovereign Gold Bonds (SGB): Government-issued bonds that track gold prices, providing returns linked to gold's
performance.
Gold Mutual Funds: Mutual funds that invest in gold-related assets, including gold mining companies.
9. Systematic Investment Plan (SIP)
Equity SIP: Regular investment in equity mutual funds to accumulate wealth over the long term.
Debt SIP: SIPs in debt mutual funds to build a stable income over time with moderate risk.
Hybrid SIP: SIP in hybrid mutual funds that mix equity and debt investments.
Thematic SIP: SIPs that focus on a particular theme or sector like infrastructure or technology.
Portfolio Management and Risk
A Portfolio refers to a collection of investment tools such as
stocks, shares, mutual funds, bonds, cash and so on
depending on the investor’s income, budget and convenient
time frame.
Portfolio management is the art of selecting the right
investment policy for the individuals in terms of minimum risk
and maximum return.
It refers to managing an individual’s investments in the form
of bonds, shares, cash, mutual funds etc so that he earns the
maximum profits within the stipulated time frame.
In plain terms, it is managing money of an individual under
expert guidance of portfolio managers.
1. Portfolio management presents the best investment plan
to the individuals as per their income, budget, age and
ability to undertake risks.
2. Portfolio management minimizes the risks involved in
investing and also increases the chance of making profits.
3. Portfolio management enables the portfolio managers to
provide customized investment solutions to clients as per
their needs and requirements.
Types Of
Risk
• Types of Risk
• 1. Market Risk : This is the risk of losing money due to overall market fluctuations. Stock prices,
for example, can go up or down based on market conditions.
• 2. Credit Risk : The chance that a borrower will not be able to repay their debt. If companies or
governments default, investors could lose their money.
• 3. Liquidity Risk : This occurs when you can’t quickly sell an investment without losing value.
Some assets are harder to sell in a short time.
• 4. Inflation Risk : The risk that inflation will reduce the value of your investment returns. If
prices rise too much, the purchasing power of your money decreases.
• 5. Interest Rate Risk : Changes in interest rates can affect the value of your investment. When
rates rise, bond prices usually fall, and vice versa.
• 6. Currency Risk : This happens if you invest in foreign assets and the value of the foreign
currency changes. A weaker foreign currency means less value for your investment.
• 7. Political Risk : This refers to the risk that government actions or instability will negatively
impact your investments. Changes in laws or regulations can hurt your returns.
• 8. Reinvestment Risk : The risk that future interest or dividends won’t be reinvested at the
same rate. If rates drop, reinvestment could generate lower returns.
• 9. Business Risk : The risk that a company you’ve invested in will perform poorly. This could be
due to poor management, competition, or other factors.
• 10. Systemic Risk : This is the risk that an entire financial system or market could collapse. A
major financial crisis can impact all investments.
Difference Between systematic and unsystematic
Risk
Basis for Systematic risk Unsystematic
Comparison risk
Meaning Systematic risk refers to the Unsystematic risk refers to
hazard which is associated the risk associated with a
with the market or market particular security,
segment as a whole. company or industry.
Nature Uncontrollable Controllable
Factors External Factors Internal Factors
Affects Large number of securities Only particular company.
in the market.
Types Interest Rate Risk, Market Business Risk and Financial
Risk Risk.
and Purchasing Power Risk.
Example Change in inflation, change in Workers strike in the factory,
