INVESTMENT

Investment involves making of a sacrifice in the present with the hope of deriving future benefits. Two most important features of an investment are current sacrifice and future benefit. Investment is the sacrifice of certain present values for the uncertain future reward. The expectation brings with it a probability that the quantum of return may vary from a minimum to a maximum. This possibility of variation in the actual return is known as investment risk. Financial investment is the commitment of funds for a future return, thus investment may be understood as an activity that commits funds in any financial or physical form in the presence of an expectation of receiving additional return in future. Financial investments are commitments of funds to derive income in form of interest, dividend premium, pension benefits or appreciation in the value of initial investment. DEFINITION: Investment is the current commitment of money for a particular period of time in order to derive anticipated future benefits that will compensate for: a) The time for which funds are committed. b) The expected rate of Inflation. C) The uncertainty of future payment. An investment refers to sacrifice of current resources in anticipation of a future benefit. Investment involves commitment of certain current cash flow in anticipation of an uncertain future cash flows

Nature and Scope of Investment Decision Higher the Risk, Higher is the Expected Return. A well diversified Portfolio reduces Unsystematic risk by a large way. Higher the time period of investment, lesser is the uncertainties of Investment. Investor prefers among securities which yield higher return for the same risk or lower risk for the same return. Investment decisions are based on Investment objectives and Constraints.

CHARACTERISTICS OF INVESTMENT

Investment refers to invest money in Financial physical assets and Marketable assets. Major investments features such as risk, return, safety, liquidity, marketability concealability, capital growth, purchasing power, stability and the benefits.

Risk Return Safety Liquidity Marketability Concealability Capital growth Purchasing power stability Stability of income Tax benefits.

Risk: Risk is inherent in any investment. Risk may relate to loss of capital, delay in repayment of capital, nonpayment of return or variability of returns. The risk of an investment is determined by the investments, maturity period, repayment capacity, nature of return commitment and so on. Risk and expected return of an investment are related. Theoretically, the higher the risk, higher is the expected returned. The higher return is a compensation expected by investors for their willingness to bear the higher risk.

The risk depends on the following factors: The investment maturity period is longer, in this case, investor will take larger risk. Government or Semi Government bodies are issuing securities which have less risk. In the case of the debt instrument or fixed deposit, the risk of above investment is less due to their secured and fixed interest payable on them. For instance Debentures. In the case of ownership instrument like equity or preference shares, the risk is more due to their unsecured nature and variability of their return and ownership character. The risk of degree of variability of returns is more in the case of ownership capital compare to debt capital. The tax provisions would influence the return of risk. Return
All investments are characterized by the expectation of a return. In fact, investments are made with the primary objective of deriving return. The expectation of a return may be from income (yield) as well as through capital appreciation. Capital appreciation is the difference between the sale price and the purchase price. The expectation of return from an investment depends upon the nature of investment, maturity period, market demand and so on.

In other word ,Return refers to expected rate of return from an investment. Return is an important characteristics of investment. Return is the major factor which influences the pattern of investment that is made by the investor. Investor always prefers to high rate of return for his investment.

Safety Safety refers to the protection of investor principal amount and expected rate of return. Safety is also one of the essential and crucial elements of investment. Investor prefers safety about his capital. Capital is the certainty of return without loss of money or it will take time to retain it. If investor prefers less risk securities, he chooses Government bonds. In the case, investor prefers high rate of return investor will choose private Securities and Safety of these securities is low. Liquidity Liquidity refers to an investment ready to convert into cash position. In other words, it is available immediately in cash form. Liquidity means that investment is easily realisable, saleable or marketable. When the liquidity is high, then the return may be low. For example, UTI units. An investor generally prefers liquidity for his investments, safety of funds through a minimum risk and maximisation of return from an investment. Marketability Marketability refers to buying and selling of Securities in market. Marketability means transferability or saleability of an asset. Securities are listed in a stock market which are more easily marketable than which are not listed. Public Limited Companies shares are more easily transferable than those of private limited companies. Concealability Concealability is another essential characteristic of the investment. Concealability means investment to be safe from social disorders, government confiscations or unacceptable levels of taxation, property must be concealable and leave no record of income received from its use or sale. Gold and precious stones have long been esteemed for these purposes, because they combine high value with small bulk and are readily transferable.

Capital Growth Capital Growth refers to appreciation of investment. Capital growth has today become an important character of investment. It is recognising in connection between corporation and industry growth and very large capital growth. Investors and their advisers are constantly seeking growth stock in the right industry and bought at the right time. Purchasing Power Stability It refers to the buying capacity of investment in market. Purchasing power stability has become one of the import traits of investment. Investment always involves the commitment of current funds with the objective of receiving greater amounts of future funds. Stability of Income It refers to constant return from an investment. Another major characteristic feature of the Investment is the stability of income. Stability of income must look for different path just as security of principal. Every investor always considers stability of monetary income and stability of purchasing power of income. Tax Benefits Tax benefits is the last characteristic feature of the investment. Tax benefits refer to plan an investment programme without regard to ones status may be costly to the investor. There are actually two problems: One concerned with the amount of income paid by the investment. Another is the burden of income tax upon that income.

NEED AND IMPORTANCE OF INVESTMENTS

An investment is an important and useful factor in the context of present day conditions. Some factors are important. They are as

outlined below: Longer life expectancy or planning for retirement Increasing rates of taxation High interest rates High rate of inflation Larger incomes Availability of a complex number of investment outlets. Longer Life Expectancy Investment decisions have become more significant as most people in India retire between the ages of 56 to 60. So that, they are planned to save their money. Saving by themselves do not increase wealth, saving must be invested in such a way that the principal and income will be adequate for a greater number of retirement years. Longer life expectancy is one reason for effective saving and further investment activity that help for investment decisions. Increasing Rates of Taxation When tax rate is increased, it will focus for generating saving by tax payer. When the tax payer invest their income into provident fund, pension fund, Unit Trust of India, Life Insurance, Unit Linked Insurance Plan, National Saving Certificates, Development Bonds, Post Office Cumulative Deposit Schemes etc. It affects the taxable income. Interest Rates Interest rate is one of the most important aspects of a sound investment plan. The interest rate differs from one investment to another. There may be changes between degree of risk and safe investments. They may also differ due to different benefit schemes offered by the institutions. A high rate of interest may not be the only factor favouring the outlet for investment. Stability of interest is an important aspect of receiving a high rate of interest. Inflation Inflation has become a continuous problem. It affects in terms of

rising prices. Several problems are associated and coupled with a falling standard of living. Therefore, investor careful scrutiny of the inflation will make further investment process delayed. Investor ensures to check up safety of the principal amount, security of the investment. Both are crucial from the point of view of the interest gained from the investments. Income Income is another important element of the investment. When government provides jobs to the unemployed persons in the country, the ultimate result is ensuring of income than saving the extra income. More incomes and more avenues of investment have led to the ability and willingness of working people to save and invest their funds. Investment Channels The growth and development of the country leading to greater economic prosperity has led to the introduction of a vast areas of investment outlets. Investment channels means an investor is willing to invest in several instruments like corporate stock, provident fund, life insurance, fixed deposits in the corporate sector and unit trust schemes. INVESTMENT ACTIVITY Investment activity includes buying and selling of the financial assets, physical assets and marketable assets in primary and secondary markets. Investment activity involves the use of funds or savings for further creation of assets or acquisition of existing assets. Accordinglyinvestment activity refers to acquisition of assets like: Financial Assets Physical Assets Marketable Assets from the Primary and Secondary Market

Investment categories: Investment generally involves commitment of funds in two types of assets: -Real assets - Financial assets Real assets: Real assets are tangible material things like building, automobiles, land, gold etc. Financial assets: Financial assets are piece of paper representing an indirect claim to real assets held by some one else. These pieces of paper represent debt or equity commitment in the form of IOUs or stock certificates. Investments in financial assets consist of - Securitiesed (i.e. security forms of) investment - Non-securities investment

FACTORS INFLUENCING INVESTMENT Investment refers to investment of physical assets, financial assets and marketable assets. Legal safe guards, stable currency, existence of financial institutions to encourage savings and forms of business organization factors are influenced to investor to invest money in different investment avenues.

Legal safeguards Stable currency Existence of financial institutions to encourage savings Form of business organization

Legal Safeguards A stable government brings adequate legal safeguards that encourages accumulation of savings and investments. Investors will be willing to invest their funds. They want the assurance and protection of their property rights from the government. In India, the investors have the dual advantage. Free enterprise Government control India is a mixed economy. It encourages the combination of the public sector which is controlled by the government and private sector left free to operate with a hope to achieve the benefits of both socialistic

and capitalist forms of government without any disadvantages. A Stable Currency A well organised monetary system with definite planning and proper policies is a necessary pre-requisite to an investment market. Most of investments in terms of bank deposits, life insurance and shares are payable in a fixed amount of the currency of the country. A proper and well organised monetary policy will give direction to the investment outlets. Therefore, the monetary policy should neither promote acute inflationary pressures nor prepare for a deflation model. Neither of them is desirable. It affects as: Price inflation destroys the purchasing power of investments. Deflation is equally disastrous because the nominal values of inventories, plant and machinery and land and building tend to shrink. The wise and planned monetary and fiscal management contributes towards proper control, good governance, economic well being and a well disciplined growth-oriented investment market along with the protection to the investor. Existence of Financial Institutions to Encourage Savings Existence of Financial Institutions which encourage savings and directing them effective utilisation of investment through growth of investment market. The financial institutions are generally in existence in most countries in terms of Commercial Banks Life Insurance Companies Investment Companies. In India, the presence of large number of financial institutions under Central Government and local bodies have encouraged the growth of savings and investment. Life Insurance Corporation and Unit Trust of India offer a wide variety of schemes for savings and give tax benefits also. Industrial Development Bank of India (IDBI) Industrial Credit Investment Corporation of India (ICICI) Industrial Finance Corporation of India (IFCI) State Financial Corporations

 National Bank of Agriculture and Rural Development (NABARD) Commercial Banks Co-operative Banks Life Insurance Corporation Unit Trust of India Development Banks These financial institutions offer wide variety of policies for encouraging savings and investment. There are two types of investors: _ individual investors; _ Institutional investors. Individual investors are individuals who are investing on their own. Sometimes individual investors are called retail investors. Institutional investors are entities such as investment companies, commercial banks, insurance companies, pension funds and other financial institutions.

GAMBLING Gambling means:Taken risk in the hope of a favourable outcome. Gambling most often refers specifically to the wagering of money on games of chance or more broadly to engaging in high risk behaviour. Gambling refers to an act of involving an element of risk. A gambling involves taking on risk without demanding compensation in the form of increased expected return. Characteristics of Gambling An important characteristics of gambling Gambling is a typical, chronic and repetitive experience Gambling absorbs all other interests The Gambler displays persistent optimism without winning

 The gambler never steps while wining The gambler eventually take more risk The gambler seeks and enjoys a strange thrill from gambling The gambler seeks pleasure and pain from gambling In gambling artificial and unnecessary risks are created

Example of speculations
In any stock exchange, there are two main categories of speculators called the bulls and bears. A bull buys shares in the expectation of selling them at a higher price. When there is a bullish tendency in the market, share prices tend to go up since the demand for the shares is high. A bear sells shares in the expectation of a fall in price with the intention of buying the shares at a lower price at a future date. These bearish tendencies result in a fall in the price of shares.

A share market needs both investment and speculative activities. Speculative activity adds to the market liquidity. A wider distribution of shareholders makes it necessary for a market to exist.

THE INVESTMENT PROCESS:The investment process involves a series of activities leading to the purchase of securities or other investment alternatives. The investment process can bedivided into five stages (i) framing of investment policy (ii) investment analysis(iii) valuation (iv) portfolio construction (v) portfolio evaluation.

INVESTMENT POLICY The government or the investor before proceeding into investment formulatesthe policy for the systematic functioning. The essential ingredients of the policyare the investible funds, objectives and the knowledge about the investmentalternatives and market. Investible funds: The entire investment procedure revolves around theavailability of investible funds. The fund may be generated through savings orfrom borrowings. If the funds are borrowed, the investor has to be extra carefulin the selection of investment alternatives. The return should be higher than the interest he pays. Mutual funds invest their owners money in securities. Objectives: The objectives are framed on the premises of the required rate of return, need for regularity of income, risk perception and the need for liquidity. The risk takers objective is to earn high rate of return in the form of capital appreciation, whereas the primary objective of the risk averse is the safety of theprincipal.

Knowledge The knowledge about the investment alternatives and markets playsa key role in the policy formulation. The investment alternatives range fromsecurity to real estate. The risk and return associated with investmentalternatives differ from each other. Investment in equity is high yielding but hasmore risk than the fixed income securities. The tax sheltered schemes offer taxbenefits to the investors.The investor should be aware of the stock market structure and the functions of the brokers. The mode of operation varies among BSE, NSE and OTCEI. Brokerage charges are also different. The knowledge about the stock exchangesenables him to trade the stock intelligently. SECURITY ANANALYSIS After formulating the investment policy, the securities to be bought have to be scrutinized through the market, industry and company analysis. Market analysis The stock market mirrors the general economic scenario. Thegrowth in gross domestic product and inflation are reflected in the stock prices.The recession in the economy results in a bear market. The stock prices may be fluctuating in the short run but in the long run they move in trends i.e. either upwards or downwards. The investor can fix his entry and exit points through technical analysis. Industry analysis The industries that contribute to the output of the major segments of the economy vary in their growth rates and their overall contribution to economic activity. Some industries grow faster than the GDP and are expected to continue in their growth. For example the information technology industry has experienced higher growth rate than the GDP in 1998.The economic significance and the growth potential of the industry have to be analysed.

Company analysis The purpose of company analysis is to help the investors to make better decisions. The companys earnings, profitability, operating efficiency, capital structure and management have to be screened. These factorshave direct bearing on the stock prices and the return of the investors.Appreciation of the stock value is a function of the performance of thecompany. Company with high product market share is able to create wealth tothe investors in the form of capital appreciation.

VALUATION The valuation helps the investor to determine the return and risk expected froman investment in the common stock. The intrinsic value of the share is measured through the book value of the share and price earning ratio. Simple discountingmodels also can be adopted to value the shares. The stock market analysts havedeveloped many advanced models to value the shares. The real worth of theshare is compared with the market price and then the investment decisions aremade. Future value Future value of the securities could be estimated by using a simple statistical technique like trend analysis. The analysis of the historical behavior of the price enables the investor to predict the future value. CONSTRUCTION OF PORTFOLIO A portfolio is a combination of securities. The portfolio is constructed in such a manner to meet the investors goals and objectives. The investor should decide how best to reach the goals with the securities available. The investor tries to attain maximum return with minimum risk. Towards this end he diversifies hisportfolio and allocates funds among the securities.

Diversification The main objective of diversification is the reduction of risk inthe loss of capital and income. A diversified portfolio is comparatively lessrisky than holding a single portfolio. There are several ways to diversify theportfolio.Debt and equity diversification Debt instruments provide assured return withlimited capital appreciation. Common stocks provide income and capital gainbut with the flavour of uncertainty. Both debt instruments and equity arecombined to complement each other. Industry diversification Industries growth and their reaction to government policies differ from each other. Banking industry shares may provide regularreturns but with limited capital appreciation. The information technology stock yields high return and capital appreciation but their growth potential after theyear 2002 is not predictable. Thus, industry diversification is needed and itreduces risk. Company diversification Securities from different companies are purchased toreduce risk. Technical analysts suggest the investors to buy securities based onthe price movement. Fundamental analysts suggest the selection of financiallysound and investor friendly companies. Selection Based on the diversification level, industry and company analyses thesecurities have to be selected. Funds are allocated for the selected securities.Selection of securities and the allocation of funds and seals the construction of portfolio. EVALALUATION The portfolio has to be managed efficiently. The efficient management calls for evaluation of the portfolio. This process consists of portfolio appraisal and revision. Appraisal The return and risk performance of the security vary from time to time. The variability in returns of the securities is measured and compared. The developments in the economy, industry and relevant companies from which them stocks are bought have to be appraised. The appraisal warns the loss and step scan be taken to avoid such losses.

Revision Revision depends on the results of the appraisal. The low yielding securities with high risk are replaced with high yielding securities with low risk factor. To keep the return at a particular level necessitates the investor to revise the components of the portfolio periodically.