CHAPTER 1 INVESTMENT –AN OVERVIEW 2. Investment is has lower risk but
need more capital to generate
Meaning of investment : Investment is an more value while speculation is
activity that is engaged in by people who challenging, has higher risk but
have savings, i.e. investments are made from requires less capital. This ex-
savings, or in other words, people invest their plains why most people are
speculating because its entry
savings .But all savers are not investor’s .
requirement (capital) is lower.
investment is an activity which is different
from saving. Let us see what is meant by in- 3. Investment is about getting what
vestment. market offers you while specu-
lation is about trying to get
F. Amling defines investment as “purchase of more by doing more in believ-
financial assets that produces a yield that is ing that you can beat the mar-
ket.
proportionate to the risk assumed over some
future investment period.” 4. Investment is about doing least
since you let the companies or
Speculation : Speculation is the practice of industries work for you by
engaging in risky financial transactions in an owning a piece of their busi-
attempt to profit from short or medium term nesses while speculation is
fluctuations in the market value of a tradable about doing the most (uncon-
sciously) and it is more involv-
good such as a financial instrument, rather
ing because you keep chasing
than attempting to profit from the underlying the price movement. You need
financial attributes embodied in the instru- to keep buying and selling to
ment such as capital gains, interest, or divi- generate profit.
dends. Many speculators pay little attention
5. Investment is over long term
to the fundamental value of a security and while speculation is of shorter
instead focus purely on price movements. term. For the former, the success
Speculation can in principle involve any trad- rate is highest by maximizing
able good or financial instrument. Specula- the holding period of a position
tors are particularly common in the markets while for the latter; the success
rate will peak if the position is
for stocks, bonds, commodity futures, curren-
kept open for the shortest time
cies, fine art, collectibles, real estate, and de- possible. This also explains
rivatives. why people like to speculate
because it provides “shortcuts”
Difference between Investment and to wealth.
Speculation
Investment objectives
1. Investment is all about value
creation (e.g. manufacturing Investment is made because it serves
products and providing ser- some objective for an investor. De-
vices) while speculation is con- pending on the life stage and risk ap-
cerned about price movement.
petite of the investor, there are three
In the latter, you profit purely
from price differences. The main objectives of investment: safety,
price movement is mostly influ- growth and income. Every investor in-
enced by the psychology of the vests with a specific objective in mind,
market. and each investment has its own
,unique set of benefits and risks. Let us liquid instruments include stock,
understand these objectives in detail. money market instruments and ex-
change-traded funds, to name a few.
Safety : While no investment option is Investment decision process
completely safe, there are products that
are preferred by investors who are risk Investing has been an activity con-
averse. Some individuals invest with fined to the rich and business class in
an objective of keeping their money the past. But today, we find that in-
safe, irrespective of the rate of return vestment has become a house hold
they receive on their capital. Such near- word and is very popular with peo-
safe products include fixed deposits, ple from all walks of life .India ap-
savings accounts, government bonds, pears to be slowly but surely closing
etc. in some of the top savers among
countries in the global peaking or-
Growth : While safety is an important derDefining the investment objective
objective for many investors, a majority
of them invest to receive capital gains, Analyzing securities
which means that they want the invest-
ed amount to grow.There are several Construct a portfolio
options in the market that offer this
Evaluate the performance of portfo-
benefit. These include stocks, mutual
lio
funds, gold, property, commodities, etc.
It is important to note that capital gains Review the portfolio
attract taxes, the percentage of which
varies according to the number of years 1. Defining the investment objective
of investment.
Investment objective may vary
Income : Some individuals invest with from person to person .it should be
the objective of generating a second stated in terms of both risk and re-
source of income. Consequently, they turn .In other words ,the objective
invest in products that offer returns of an investor is to make money ac-
regularly like bank fixed deposits, cor- cepting the fact of risks that likely
porate and government bonds, etc. to happen .The typical objectives
of investor include the current in-
Other objectives: While the aforemen- come ,capital appreciation, and
tioned objectives are the most common safety of principal. More over con-
ones among investors today, some oth- strains arising due to liquidity, the
er objectives include: time horizon, tax and other special
• Tax exemptions : some people invest circumstances, if any must also be
their money in various financial considered this steps of investment
products solely for reducing their process also identifies the potential
tax liability. Some products offer tax financial assets that may be includ-
exemptions while many offer tax ed in the portfolio based on the in-
benefits on long-term profits. vestment objectives.
• Liquidity : Many investment options 2. Analyzing securities
are not liquid. This means they can- The second steps of analyzing se-
not be sold and converted into cash curities enable the investor to dis-
instantly. However, some people tinguish between underpriced and
prefer investing in options that can overpriced stock. Return can be
be used during emergencies. Such maximized by investing in stocks
, which are currently underpriced the current portfolio.
but have the potential to increase
.it might be useful to remember the Types of Investments
golden principle of investment;
Nonnegotiable securities
buy low sell high. There are two
approaches used for analyzing se- Deposits earn fixed rate of return.
curities ;technical analysis and Even though bank deposits resemble
fundamental analysis. fixed income securities they are not
negotiable instruments. Some of the
3. Construct a portfolio
deposits are dealt subsequently.
The actual construction of portfolio,
1)Bank deposits : It is the simplest in-
which can be divided into three sub
vestment avenue open for the investors.
parts.
He has to open an account and deposit
a) How to allocate the portfolio the money. Traditionally the banks of-
across different asset classes such fered current account, Saving account and
as equities, fixed income securities fixed deposits account. Current account
and real assets does not offer any interest rate. The
drawback of having large amount in sav-
b) The assets selection decision,
ing accounts is that the return is just 4
this is the step where the stocks
percent. The saving account is more liq-
make up the equity component,
uid and convenient to handle. The fixed
the bonds that make up the fixed
account carries high interest rate and the
income component.
money is locked up for a fixed period.
c) The final component is execu- With increasing competition among the
tion, where the portfolio is actually banks, the banks have handled the plain
put together, where investors have saving account with the fixed account to
to trade off transaction cost against cater to the needs of the small savers.
transaction speed.
2)Post office deposits :Post office also
4. Evaluate the performance of portfo- offers fixed deposit facility and
lio monthly income scheme. monthly
income scheme is a popular scheme
The performance evaluation of the for the retired . an interest rate of 9
portfolio done on the in terms of risk percent is paid monthly .the term of
and return. Evaluation measures are the scheme is 6 years, at the end of
to be developed .CAGR(compounded which a bonus of 10 percent is paid
annual growth rate) may be one crite- .the annualized yield to maturity
ria. Hindustan unilever gave a CAGR works out to be 15.01 per annum. af-
of 21 percent in returns to the share- ter three years,
holders for the last 13 years.
premature closure is allowed without any
5. Review the portfolio penalty .if the closure is one year, a pen-
alty of 5 percent is charged.
It involves the periodic repetition of
the above steps. The investment ob- NBFC deposits
jective of an investor may change
1) In recent years there has been a sig-
overtime and the current portfolio
nificant increase in the importance of
may no longer be optimal for him. so
non- banking financial companies in
the investor may form a new portfo-
the process of financial intermedia-
lio by selling certain securities and
tionPeriod the period ranges from
purchasing others that are not held in
, few months to five years. assured on the happening of event
insured against. Usually the contract
2) Maximum limit the limit for ac- provides for the payment of an
ceptance of deposit has been on the amount on the date of maturity or at a
credit rating of the company. specified date or if unfortunate death
3)Interest NBFCs have been de- occurs. The major advantage of life
barred from offering an interest insurance is given below;
rate exceeding 16% per annum and 1) Protection saving through life
a brokerage fee over 2% on public insurance guarantees full protec-
deposit. The interest rate differs tion against risk of death of the
according to maturity period. saver. The full assured sum is
paid, whereas in other schemes
Tax sheltered saving scheme only the amount saved is paid.
The important tax sheltered saving 2)Easy payments for the salaried
scheme is people the salary saving schemes
are introduced. Further there is an
a) public provident fund scheme(PPF)
installment facility method of
PPF earn an interest rate of 8.5% per payment through monthly, quar-
annum compounded annually which terly, half yearly or yearly mode.
is exempted from the income tax un-
3) Liquidity loans can be raised on the
der sec80 C. The individuals and
security of the policy
Hindu undivided families can partic-
ipate in this scheme. There is a lock 4) Tax relief tax relief in income
in period of 15years.PPF is not in- tax and wealth tax is available for
dented for those who are liquidity amounts paid by way of premium
and short term returns. at the time of for life insurance subject to the
maturity no tax is to be given. tax rates in force.
b) National saving scheme(NSS) Type of life insurance policy
This scheme helps in deferring the a) Endowment policy;
tax payment. Individuals and HUF The objective of this policy is to
are eligible to open NSS account in provide an assured sum, both in
the designated post office. the event of the policy holders’
death or at the expiry of the pol-
c) National saving certificate
icy.
This scheme is offered by the post b) Term policy:
office. These certificate come in the In a term policy investor pays a
denomination of Rs.500,1000,5000 small premium to insure his life
and 10000.the contribution and the for a comparatively higher val-
interest for the first five years are ue. The objective behind the
covered by sec 88.the interest is cu- scheme is not to get any amount
mulative at the rate of 8.5%per an- on the expiry of the policy but
num and payable biannually is cov- simply to ensure the financial
ered by sec 80 L. future of the investor’s depend-
ents.
Life insurance c) Whole life policy
It is a low cost insurance plan
Life insurance is a contract for pay-
where the sum assured is paya-
ment of a sum of money to the person
ble on the death of the life in-
need more capital to generate
Meaning of investment : Investment is an more value while speculation is
activity that is engaged in by people who challenging, has higher risk but
have savings, i.e. investments are made from requires less capital. This ex-
savings, or in other words, people invest their plains why most people are
speculating because its entry
savings .But all savers are not investor’s .
requirement (capital) is lower.
investment is an activity which is different
from saving. Let us see what is meant by in- 3. Investment is about getting what
vestment. market offers you while specu-
lation is about trying to get
F. Amling defines investment as “purchase of more by doing more in believ-
financial assets that produces a yield that is ing that you can beat the mar-
ket.
proportionate to the risk assumed over some
future investment period.” 4. Investment is about doing least
since you let the companies or
Speculation : Speculation is the practice of industries work for you by
engaging in risky financial transactions in an owning a piece of their busi-
attempt to profit from short or medium term nesses while speculation is
fluctuations in the market value of a tradable about doing the most (uncon-
sciously) and it is more involv-
good such as a financial instrument, rather
ing because you keep chasing
than attempting to profit from the underlying the price movement. You need
financial attributes embodied in the instru- to keep buying and selling to
ment such as capital gains, interest, or divi- generate profit.
dends. Many speculators pay little attention
5. Investment is over long term
to the fundamental value of a security and while speculation is of shorter
instead focus purely on price movements. term. For the former, the success
Speculation can in principle involve any trad- rate is highest by maximizing
able good or financial instrument. Specula- the holding period of a position
tors are particularly common in the markets while for the latter; the success
rate will peak if the position is
for stocks, bonds, commodity futures, curren-
kept open for the shortest time
cies, fine art, collectibles, real estate, and de- possible. This also explains
rivatives. why people like to speculate
because it provides “shortcuts”
Difference between Investment and to wealth.
Speculation
Investment objectives
1. Investment is all about value
creation (e.g. manufacturing Investment is made because it serves
products and providing ser- some objective for an investor. De-
vices) while speculation is con- pending on the life stage and risk ap-
cerned about price movement.
petite of the investor, there are three
In the latter, you profit purely
from price differences. The main objectives of investment: safety,
price movement is mostly influ- growth and income. Every investor in-
enced by the psychology of the vests with a specific objective in mind,
market. and each investment has its own
,unique set of benefits and risks. Let us liquid instruments include stock,
understand these objectives in detail. money market instruments and ex-
change-traded funds, to name a few.
Safety : While no investment option is Investment decision process
completely safe, there are products that
are preferred by investors who are risk Investing has been an activity con-
averse. Some individuals invest with fined to the rich and business class in
an objective of keeping their money the past. But today, we find that in-
safe, irrespective of the rate of return vestment has become a house hold
they receive on their capital. Such near- word and is very popular with peo-
safe products include fixed deposits, ple from all walks of life .India ap-
savings accounts, government bonds, pears to be slowly but surely closing
etc. in some of the top savers among
countries in the global peaking or-
Growth : While safety is an important derDefining the investment objective
objective for many investors, a majority
of them invest to receive capital gains, Analyzing securities
which means that they want the invest-
ed amount to grow.There are several Construct a portfolio
options in the market that offer this
Evaluate the performance of portfo-
benefit. These include stocks, mutual
lio
funds, gold, property, commodities, etc.
It is important to note that capital gains Review the portfolio
attract taxes, the percentage of which
varies according to the number of years 1. Defining the investment objective
of investment.
Investment objective may vary
Income : Some individuals invest with from person to person .it should be
the objective of generating a second stated in terms of both risk and re-
source of income. Consequently, they turn .In other words ,the objective
invest in products that offer returns of an investor is to make money ac-
regularly like bank fixed deposits, cor- cepting the fact of risks that likely
porate and government bonds, etc. to happen .The typical objectives
of investor include the current in-
Other objectives: While the aforemen- come ,capital appreciation, and
tioned objectives are the most common safety of principal. More over con-
ones among investors today, some oth- strains arising due to liquidity, the
er objectives include: time horizon, tax and other special
• Tax exemptions : some people invest circumstances, if any must also be
their money in various financial considered this steps of investment
products solely for reducing their process also identifies the potential
tax liability. Some products offer tax financial assets that may be includ-
exemptions while many offer tax ed in the portfolio based on the in-
benefits on long-term profits. vestment objectives.
• Liquidity : Many investment options 2. Analyzing securities
are not liquid. This means they can- The second steps of analyzing se-
not be sold and converted into cash curities enable the investor to dis-
instantly. However, some people tinguish between underpriced and
prefer investing in options that can overpriced stock. Return can be
be used during emergencies. Such maximized by investing in stocks
, which are currently underpriced the current portfolio.
but have the potential to increase
.it might be useful to remember the Types of Investments
golden principle of investment;
Nonnegotiable securities
buy low sell high. There are two
approaches used for analyzing se- Deposits earn fixed rate of return.
curities ;technical analysis and Even though bank deposits resemble
fundamental analysis. fixed income securities they are not
negotiable instruments. Some of the
3. Construct a portfolio
deposits are dealt subsequently.
The actual construction of portfolio,
1)Bank deposits : It is the simplest in-
which can be divided into three sub
vestment avenue open for the investors.
parts.
He has to open an account and deposit
a) How to allocate the portfolio the money. Traditionally the banks of-
across different asset classes such fered current account, Saving account and
as equities, fixed income securities fixed deposits account. Current account
and real assets does not offer any interest rate. The
drawback of having large amount in sav-
b) The assets selection decision,
ing accounts is that the return is just 4
this is the step where the stocks
percent. The saving account is more liq-
make up the equity component,
uid and convenient to handle. The fixed
the bonds that make up the fixed
account carries high interest rate and the
income component.
money is locked up for a fixed period.
c) The final component is execu- With increasing competition among the
tion, where the portfolio is actually banks, the banks have handled the plain
put together, where investors have saving account with the fixed account to
to trade off transaction cost against cater to the needs of the small savers.
transaction speed.
2)Post office deposits :Post office also
4. Evaluate the performance of portfo- offers fixed deposit facility and
lio monthly income scheme. monthly
income scheme is a popular scheme
The performance evaluation of the for the retired . an interest rate of 9
portfolio done on the in terms of risk percent is paid monthly .the term of
and return. Evaluation measures are the scheme is 6 years, at the end of
to be developed .CAGR(compounded which a bonus of 10 percent is paid
annual growth rate) may be one crite- .the annualized yield to maturity
ria. Hindustan unilever gave a CAGR works out to be 15.01 per annum. af-
of 21 percent in returns to the share- ter three years,
holders for the last 13 years.
premature closure is allowed without any
5. Review the portfolio penalty .if the closure is one year, a pen-
alty of 5 percent is charged.
It involves the periodic repetition of
the above steps. The investment ob- NBFC deposits
jective of an investor may change
1) In recent years there has been a sig-
overtime and the current portfolio
nificant increase in the importance of
may no longer be optimal for him. so
non- banking financial companies in
the investor may form a new portfo-
the process of financial intermedia-
lio by selling certain securities and
tionPeriod the period ranges from
purchasing others that are not held in
, few months to five years. assured on the happening of event
insured against. Usually the contract
2) Maximum limit the limit for ac- provides for the payment of an
ceptance of deposit has been on the amount on the date of maturity or at a
credit rating of the company. specified date or if unfortunate death
3)Interest NBFCs have been de- occurs. The major advantage of life
barred from offering an interest insurance is given below;
rate exceeding 16% per annum and 1) Protection saving through life
a brokerage fee over 2% on public insurance guarantees full protec-
deposit. The interest rate differs tion against risk of death of the
according to maturity period. saver. The full assured sum is
paid, whereas in other schemes
Tax sheltered saving scheme only the amount saved is paid.
The important tax sheltered saving 2)Easy payments for the salaried
scheme is people the salary saving schemes
are introduced. Further there is an
a) public provident fund scheme(PPF)
installment facility method of
PPF earn an interest rate of 8.5% per payment through monthly, quar-
annum compounded annually which terly, half yearly or yearly mode.
is exempted from the income tax un-
3) Liquidity loans can be raised on the
der sec80 C. The individuals and
security of the policy
Hindu undivided families can partic-
ipate in this scheme. There is a lock 4) Tax relief tax relief in income
in period of 15years.PPF is not in- tax and wealth tax is available for
dented for those who are liquidity amounts paid by way of premium
and short term returns. at the time of for life insurance subject to the
maturity no tax is to be given. tax rates in force.
b) National saving scheme(NSS) Type of life insurance policy
This scheme helps in deferring the a) Endowment policy;
tax payment. Individuals and HUF The objective of this policy is to
are eligible to open NSS account in provide an assured sum, both in
the designated post office. the event of the policy holders’
death or at the expiry of the pol-
c) National saving certificate
icy.
This scheme is offered by the post b) Term policy:
office. These certificate come in the In a term policy investor pays a
denomination of Rs.500,1000,5000 small premium to insure his life
and 10000.the contribution and the for a comparatively higher val-
interest for the first five years are ue. The objective behind the
covered by sec 88.the interest is cu- scheme is not to get any amount
mulative at the rate of 8.5%per an- on the expiry of the policy but
num and payable biannually is cov- simply to ensure the financial
ered by sec 80 L. future of the investor’s depend-
ents.
Life insurance c) Whole life policy
It is a low cost insurance plan
Life insurance is a contract for pay-
where the sum assured is paya-
ment of a sum of money to the person
ble on the death of the life in-
