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Introduction to Investment Management P. SAI PRATHYUSHA ( PONDICHERRY UNIVERSITY) 1st M.COM BUSINESS FINANCE
1. Meaning of Investment
Investment in narrow sense refers to the acquisition of the asset to get return and in
wider sense it refers to the sacrifice of present money or other resources for the
benefits that will arise in future. Investments are divided into two categories namely
fixed income and variable income investment. Fixed income investment would
provide a pre specified rate of return like bonds, preference shares, provident fund
and fixed deposits. Return is not pre determined or specified in variable income
investment like equity shares or property. It is an employment of funds with the aim
of getting return on it. In other words it is 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 favorable future returns. It could have
been the purchase of an asset, giving a loan or keeping funds in a bank with the aim
of generating future return. The funds used for purchase or investment has been
saved from current consumption with the hope that some benefits will be received
in future and therefore it is called as deferred consumption. Savings of the people
are invested in assets depending on their risk and return demands. There are
various investment options offering risk-reward tradeoffs. Thus, investment may be
termed as a reward for waiting for money. Therefore, it is said that an investment is
the current commitment of rupee for a period of time in order to derive future
payments that will compensate the investor for: i) the time the funds are committed,
ii) the expected rate of inflation and iii) the uncertainty of the future payments.
This investment has two concepts namely; Economic Investment and Financial
Investment. Economic investment is an addition to the capital stock of the society;
which are goods used in the production of other goods. Therefore investment is the
formation of new and productive capital in the form of new construction and
producers durable instrument like plant and machinery; including inventories and
human capital. Thus, in economic sense, investment is an increase in building,
equipment and inventory. Whereas financial investment is an allocation of
monetary resources to assets that are expected to yield some gain or return over a
given period of time. It is an exchange of financial claims such as shares and bonds,
real estate, fixed deposits, national saving certificates, life insurance policies,
provident funds etc.; for future income in the form of interest, dividends, rent,
premiums, pension benefit and the appreciation of the value of their principal
capital. In uncomplicated economies investments are of the real variety and in a
modern economy investment is of the financial variety. These two concepts of
economic and financial concepts are related to each other, as investment is a part of
the savings of individuals which flow into the capital market either directly or
through institutions like Banks and Insurance companies. Thus investment
decisions and financial decisions interact with each other. Financial decisions are
primarily concerned with the source of money whereas investment decisions are
traditionally concerned with uses or budgeting of money.
2. Objectives of an Investment
Every one is interested to invest in order to achieve certain objectives; these
objectives may be tangible like buying a car, house etc. and intangible like social
status, security etc. These objectives may also be classified as financial or personal;
financial objectives are safety, profitability and liquidity. Personal objectives are
related to personal characteristics of individuals like family commitments, status,
dependents, educational requirements, income, consumption and provision for
retirement etc. It can also be classified based on the investors approach like Short-
term high priority objectives like buying a car, house or jewellery, Long term high
priority objectives like investing for post retirement period or education of a child,
Low priority objectives like investment for tour or buying domestic appliances and
money making objectives like maximizing the wealth by buying shares of
companies. The importance of each objective varies from investor to investor and
depends upon the age, amount of capital they have and risk bearing capacity of that
individual investor. The decision to invest in particular asset is his or her personal
approach; not based on any other sources of information. Sources of information
can help by giving information but decision to investment on particular type of asset
their person choice based on the following:
Lifestyle: The asset to be chosen for investment by the investors would be based on
the desire to ensure that assets in which money is invested would meet their
financial needs over the life time.
Financial Security: Investors would select the asset for their investment to protect
their financial needs for consumption, expenses, against financial risks like inflation
at all time.
Return: Selection of asset for investment would be a balance of risk and return that
is suitable to their personal risk preferences.
Value for Money: Assets for investment would be chosen by the investors with an
intension to minimize the costs of managing their assets and their financial needs.
Peace of Mind: There are group of investors who are not worried about the day-to-
day changes of markets.
It is not possible to achieve all these objectives by investing in one asset, rather an
investor is expected to have many assets for their investment in the form of
portfolio and it needs to be managed with the strategy of ensuring that the these
invested asset would match individual needs and risk preferences.
Every investor would be having certain goals or objectives to be achieved through
their short and long-term investment. These objectives may be of financial or
monetary and personal in character.
The financial objectives are:
1. Risk: Risk refers to loss of principal amount due to the following factors.
Longer investment period will lead for larger risk, government securities
will have lesser risk, debt instrument or fixed deposits will have low but
assured income with lesser risk, whereas ownership security like equity
and preference shares have more risk due to their insecure nature.
2. Safety: It is the certainty of return without loss of money. It will take time
to retain it. It is the protection of invested principal amount and expected
regular return. More return entitles for greater risk and endangering the
safety of principal amount and return.
3. Profitability: It refers to (Through interest, dividend and capital
4. Liquidity: It refers to the possibility for conversion of investment into
cash position. Investments are to be easily realizable, saleable,
marketable. When the liquidity is high then the return is to be low.
5. (Convertibility into Cash as and when required)
6. Income/ Return: Investments are made with an objective of deriving a
return or income. This return may be in the form of yield plus capital
appreciation. The return depends upon the nature of the investment and
the maturity period. Safest investmetns are to have lowest rate of return
and so does the risk.
Return = Capital Gain + Yield (Interest, Dividend etc)
7. Capital Growth (Purchase of common stock with considerable
opportunity for an increase in value. Blue-chip stock has possibility for
the reasonable safety, modest income and potential for capital growth)
8. Tax Minimization (Certain investments would be opted for minimization
of tax as part of their investment strategy)
There are personal objectives like provision for old age and sickness, provision for
education and marriage of children and provision for dependents (Wife, parents or
physically handicapped member of family); which are given due consideration at the
time of selecting avenues for investment.
3. Investment Management
Investment management is also called as money management, portfolio
management or wealth management; is handling in the form of buying and selling of
financial assets and other investments. Management includes devising a short or
long-term strategy for acquiring and disposing of stocks held in portfolio.
Investment management services include asset allocation, financial statement
analysis, stock selection, monitoring of existing investments, banking, budgeting and
tax services. It also includes financial planning and advising services, overseeing a
client’s portfolio but coordinating it with other assets and life goals. In corporate
finance, investment management includes maintenance of company’s tangible and
intangible assets, accounting them and well utilization of these assets.
Investment Management is the activity of overseeing and making decisions
regarding the investments of an individual, company or other institution. Individual
investor having personal investments in the form of either physical assets like real
estate or paper assets like bonds and stock shares may take on the tasks of
managing their investments on their own, or they may use an investment manager
to make decisions about their investments. Depending upon the type of investors
and investment involved, investment management is known as wealth management
or portfolio management if an private individual investor invests large value; it will
be called as fund management if financial firms like banks and insurance companies
manage investments; asset management is the name for the management of mutual
funds, managed funds and other funds that allows large number of shareholders to
participate in a range of investment opportunities. In corporate finance investment
management is the process of ensuring that the company’s tangible and intangible
assets are maintained, accounted for and put to their highest and best use with an
intension to find ways to maximize company value by managing long-term tangible
and intangible asset to be more reliable, efficient or cheaper. Whereas the financial
services company provides investment management by coordinating and
overseeing a client’s financial portfolio like investments, budgets, accounts,
insurance and taxes with the ultimate goal of growing the client’s portfolio.
Financial advisors conduct research and statistical analyses of companies, markets
and trends to determine what investment to make or to avoid investment on their
Due to development of new kinds of investments, an advance in communication
networks and the ability to access financial information the investment
management has become complex since the beginning of twentieth century.
Licensing system was introduced to the fund managers like individuals and firms to
manage fund like mutual fund, pension fund and insurance fund. These fund
managers invest the funds in diverse set of investment opportunities like assets
including stocks, bonds, options, commodities and money market securities.
4. Investment and Speculation:
Investment is an act of purchasing of an asset with an intension of getting returns
and the decision to invest is taken on the basis of scientific and rational analysis
through fundamental analysis; which is kept for long period of time; at least more
than a year. Mostly investors use their own funds and expects moderate rate of
return. Due to the scientific approach with needed information for investments,
investors face moderate risk. Whereas speculation is a trading activity that involves
engaging in a risky financial transaction to make greater profits from price changes
due to fluctuations in the market value of financial assets bought. There is a high
risk of losing but it is expected to compensate through the possibility for significant
profit and also the speculators analyze and calculate before taking investment
decision. Usually speculation is seen in markets where high fluctuations in the price
of stocks, bonds, derivatives, currency and commodity futures exists. Speculators
use many types of trades like future contract, put and call option, short selling and
Differences between Investor/Investment and Speculator/Speculation
Investment process Valuation of securities is
done through scientific
Valuation is done based on
hunches, rumours, hope,
jumping on the bandwagon
Quantity of Risk Risk is moderate High risk
Rate of return Expects the modest rate of
Expects higher profits in
exchange for the risk born by
Purpose Getting returns Substantial profit
Basis of Decision Decisions are taken based
on Fundamental Analysis
Decisions are based on
hearsay, technical charts and
Period of Investment Hold the assets for longer
time: at least for one year
Hold the assets for short term
Expectation of Profit Profit is expected from the
change in the value of the
Profit is expected from the
change in the prices due to
demand and supply
Sources of funds Uses his own funds
Uses borrowed capital
Stability of Income It is absent and uncertain Stability of income in the form
of dividend is present
Psychology of Investor Is conservative and
Is daring and careless
Strategy Buys when value is
greater than price and
sells when value is lesser
Beliefs in bigger fool theory
Attitude Strives for adequate and
realistic return over the
Chases quick and
Behaviour during the
Cautious, selective buying,
possibly not seller
Get out before the crash
Behaviour during the
Holds on high quality
stocks and buys
Gets caught off guard loses,
panics near the bottom
5. Reasons why should make investment?
Whatever is done in life has reasons for example every one is working to make sure
that family does ont fall short of basic necessities, save money for vacations,
unforeseen events, etc but it is better to know why investments are made. The
following are the reasons:
Inflation: There are umpteen ways to keep the savings for example; saved money
may be kept in cupboard, hundi or banks. But question is whether they all give you
enough return. In all these situations the money kept are not rotated; it is dead.
Therefore there will be shortage of money in the market and which creates scarcity.
Due to this, inflation increases. Inflation upto some limit is acceptable but it should
not increase a lot. By investment the money is kept rotating in the market and this
keeps the inflation constant.
Pension and retirement savings: Meeting and getting ready to meet the
requirement of today is important but these requirements will keep growing and
increasing year after year and as the growth of everyone. Today’s requirements can
be met with the earnings of today, but what will happen when earning is stopped or
retired from service?. In such situations, a pension or retirement plan would help
through investment for future without being dependent on any of the family
Money to be rotated: It is to be understood that money kept in the bank, locker are
simply lazing around. If the money is placed in the right path and direction it would
earn more than expected. Right path may be the investment in market directly or
the mutual funds or the insurance based on the future requirements. If needed,
advises may be obtained from the persons who have knowledge of investments.
Meet the financial goals: Every one has goals to be achieved for which money or
finance is required; which are called as financial goals. For example: Children’s
higher education, need for money after retirement, to build wealth etc. All these
require us to put the money in the right direction and in the right manner. If not, the
money would be stagnant or dormant or useless. Therefore, in order to create
wealth correctly for the future requirements, one has to study the market properly
and work towards the same. In case there is no adequate knowledge experts’s
advised may be obtained.
Increase the wealth: If money is saved in the right way and little aggressively then
it is possible to have more money than our investment with added risk as higher
return is assured. Higher returns from investment add value and help to create
wealth for meeting financial goals at the faster rate.
Secure the future of family: Future is uncertain with our needs and desires also it
is not known for what reason money is needed and therefore, money is saved. In
case of any emergency or something goes wrong the saved money will be used to
ward of the situation. When money is put into market it will grow to meet our
requirements and keeps every one in the family safe without panicking.