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INTRODUCTION	
	
1.	Meaning	of	Investment		
	
Investment	in	narrow	sense	refers	to	the	acquisition	of	the	asset	to	get	retu...
2.	Objectives	of	an	Investment	
	
Every	 one	 is	 interested	 to	 invest	 in	 order	 to	 achieve	 certain	 objectives;	 th...
The	financial	objectives	are:	
1. Risk:	Risk	refers	to	loss	of	principal	amount	due	to	the	following	factors.	
Longer	inve...
Investment	 Management	 is	 the	 activity	 of	 overseeing	 and	 making	 decisions	
regarding	the	investments	of	an	individ...
use	many	types	of	trades	like	future	contract,	put	and	call	option,	short	selling	and	
pattern	trading.		
	
Differences	be...
unforeseen	events,	etc	but	it	is	better	to	know	why	investments	are	made.	The	
following	are	the	reasons:	
	
Inflation:	Th...
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Introduction to Investment Management P. SAI PRATHYUSHA ( PONDICHERRY UNIVERSITY) 1st M.COM BUSINESS FINANCE

MEAING OF INVESTMENT # OBJECTIVES OF INVESTMENT # INVESTMENT MANAGEMENT # INVESTMENT AND SPECULATION # DIFFERENCE BETWEEN INVESTOR AND SPECULATOR # REASONS TO INVEST

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Introduction to Investment Management P. SAI PRATHYUSHA ( PONDICHERRY UNIVERSITY) 1st M.COM BUSINESS FINANCE

  1. 1. INTRODUCTION 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. 2. 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. Investment Objectives 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.
  3. 3. 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 Appreciation) 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.
  4. 4. 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 behalf. 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
  5. 5. use many types of trades like future contract, put and call option, short selling and pattern trading. Differences between Investor/Investment and Speculator/Speculation Investor Speculator Investment process Valuation of securities is done through scientific screening and fundamental analysis. 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 return Expects higher profits in exchange for the risk born by him Purpose Getting returns Substantial profit Basis of Decision Decisions are taken based on Fundamental Analysis Decisions are based on hearsay, technical charts and Market Psychology Period of Investment Hold the assets for longer time: at least for one year Hold the assets for short term only Expectation of Profit Profit is expected from the change in the value of the asset 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 cautious Is daring and careless Strategy Buys when value is greater than price and sells when value is lesser than price Beliefs in bigger fool theory Attitude Strives for adequate and realistic return over the long term Chases quick and extraordinary return Behaviour during the bull markets Cautious, selective buying, possibly not seller Get out before the crash Behaviour during the bear markets 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,
  6. 6. 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 members. 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.

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