Investment

Introduction

Definition
An Investment may be defined as the current commitment of funds for a period of time in order to derive future payments that will compensate the investor for 1. The time the funds are committed, 2. The expected inflation, and 3. The uncertainty of the future payments. The objective of the investor is to minimize the risk involved in investment and maximize the return. Characteristics of investment I. Risk the longer the maturity period, the larger is the risk. The more the creditworthiness of the borrower or agency issuing securities, the less is the risk. The nature of instrument, namely the debt instrument or fixed deposit or ownership instrument determines risk II. Return III. Safety IV. Liquidity V. marketability

Investment Alternatives
The investor has alternative avenues of investment for his savings to flow in accordance with his preferences. Savings are invested in assets depending on their risk and return characteristics. Instruments traded can be classified on the following criteria: 1. By ownership or debt nature of instruments 2. By term period to maturity- short-term, medium-term and long-term. 3. By the issuers creditworthiness , say, Government securities or private securities or Po certificates

Nonmarketable financial assets Equity shares Bonds

Investment
Physical assets

avenues

Life insurance policies

Money market instruments

Financial Derivatives

1.

Non-marketable Financial Assets: a. Bank deposits b. Post office deposits c. Company deposits d. Provident fund deposits

5. Mutual Funds a. Equity schemes b. Debt schemes c. Balance schemes

2. Equity shares a. Blue chip shares b. Growth shares

6. Life Insurance a. Endowment assurance policy b. Money back policy c. Whole life policy 7. Financial Derivatives a. Options b. Futures

3. Bonds or Debenture a. Government Securities b. Debentures of private sector companies c. PSU bonds
4. Money Market Instrument a. Treasury bills b. Commercial paper c. Certificates of deposits

8. Real Estate a. Agriculture land b. Commercial property c. A resort home

Investor Vs Speculator
Investor Time-horizon Return expectation Risk disposition Leverage Basis for decisions Long Good return Risk-averse Use his own funds Fundamental factors Sticks to investment Speculator Short Abnormal return Takes greater risk Resorts to borrowings Market psychology and Technical charts Rapid shifts

Process of investment Decision Making

A typical investment decision involves certain sacrifice now in exchange for uncertain but potentially large inflow of resources in near or distant future. Investment positions are undertaken with the goal of earning returns in the form of periodical income and/or growth in value Thus, investment or portfolio management may be defined as the process of construction, revision and evaluation of a portfolio to obtain maximum return commensurate with the risk dispositions of the investor. The hierarchy of the investment process or the process of portfolio management may be viewed as comprising of the six broad tiers as below:

1.

Specification of objectives and constraints: this depend on the nature of the and type of the investor(Determine investment objectives and policy).
Current income on a steady basis; Growth in current income; Capital appreciation; Safety of principal; In the modern portfolio theory objectives are expressed in terms of riskreturn trade off

2.

Understand security analysis.

Examining several individual securities Identify mispriced securities Technical analysis Fundamental analysis Identifying those specific assets in which to invest Determining the proportions of the investors wealth Selectivity, timing and diversification need to be addressed by the investor

3.

Construct a portfolio

4. 5.

Revision of portfolio Evaluate the performance of portfolio.

Classification of Investments based on risk-categories

Total risk can be divided into 1. Systematic Risk 2. Unsystematic Risk or Non-systematic risk