INVESTMENT

MANAGEMEMNT

Chapter 1

Investment (meaning)
Investment (meaning) :
It is an activity that is engaged in by people who
Have savings but all savings are not investments.

Investment management:
It is the professional assetmanagementof
various
securities (shares, bonds and other securities) and
other assets (e.g., real estate) in order to meet
specifiedinvestmentgoals for the benefit of the
investors.

Investment is a postponed
consumption
When you postpone consumption, sacrifice takes
place
and the present and is certain whereas the
benefits occur
in future and are uncertain.
Therefore important features of investment
includes:
Current sacrifice
Future benefit
Risk and
Expected returns

Definitions
In finance, the purchase of a financial product or
other item of value with an expectation of favorable
future returns. The practice of investment refers to the
buying of a financial product or any valued item with
anticipation that positive returns will be received in the
future.
In business, the purchase by a producer of a physical
good, such as durable equipment or inventory, in the
hope of improving future business.
According to economics, investment is the
utilization of resources in order to increase income or
production output in the future. An amount deposited
into a bank or machinery that is purchased in
anticipation of earning income in the long run is both
examples of investments.

Need and importance of investment

Longer life expectancy

To save tax
To earn interest
Fear of inflation
Income
Future need expectation

Objectives of investment
1. Primary
objectives

2. Secondary
objectives

Safety
Income
Growth of
capital

Tax
minimization
Marketability
/ liquidity

Characteristics of
investment

Rate of return : annual income + (ending price beginning

price)/beginning price
Risk : variability of its rate of return
Marketability/liquidity : quickly transacted with cost is low
and change between two successive transactions is
negligible
Tax shelter
Concealability: 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.
Capital growth: appreciation of investment.
Convenience: ease with which the investment can be made
and looked after
Purchasing power stability: buying capacity of investment in

Investment and savings

Savings is that part of the income which remains
in the hands of an investor after meeting all his
expenses including tax obligations.
While investments can be in physical assets like
precious metals or real estate or various
financial instruments or schemes like equity,
bonds, mutual funds, ULIPs, pension scheme etc.
Savings are normally generated in the cash
surplus sector(household sector) which then
flows into cash deficit sector (business sector)
through the financial intermediaries.

Investment, gambling and

speculation
All three are different form each.
While investment is planned allocation of
funds to generate certain expected returns.
Gambling is allocation of funds for the
sure/sole purpose of enjoying the thrill of an
outcome without actually knowing in certain
the outcome.
Speculation Is allocation of funds where the
outcome is certain. But the probability of
out come is either one or zero.

Nature and scope of investment

management

To understand the exact meaning of investment.

To find out different avenues of investment
To maximize return and minimize risk
To make a programme for investment through
evaluating securities, construction of portfolio
and reviewing a portfolio.
To find out a time period for investments to take
place
To evaluate through various techniques to get
the best return for the investor.

Avenues for investment

Derivatives

Security/Marketable Financial Assets

(Security forms of investment are those instruments which are
transferable and traded in any organized financial market. )

1. EQUITY SHARES :Equity capital represents ownership capital. Equity

shareholders collectively own the company. They bear the risk and enjoy
the rewards of ownership.

CLASSIFICATION OF EQUITY SHARES

Blue Chip Shares: Shares of large, well established and financially strong
companies with an impressive record of earning and dividends.
Growth Shares: Shares of companies that have a fairly entrenched
position in a growing market and which enjoy an above average rate of
growth as well as profitability.
Income Shares: Shares of companies that have fairly stable operations,
relatively limited growth opportunities and high dividend payout ratios.
Cyclical Shares: Shares of companies that have a pronounced cyclicality
in their operations.
Defensive Shares: Shares of companies those are relatively unaffected of
ups and downs in general business conditions.
Speculative Shares: Shares that tend to fluctuate widely because there is
a lot of speculative trading in them.

2. PREFERENCE SHARES
A preference share is one, which satisfies
the following:
They have a preferential right to be paid
dividend during the life-time of the
company and;
They have a preferential right to the
return of capital when the company goes
into liquidation.
Currently preference dividend is taxexempt upto a certain limit.

CLASSIFICATION OF PREFERENCE SHARES

Cumulative Preference Shares: Shares on which arrears of dividend
accumulate. Unless otherwise stated, a preference share is always deemed to
be a cumulative one.
Non Cumulative Preference Shares: Shares on which arrears of dividend do
not accumulate as per the express provision in the Articles of Association.
Convertible Preference Shares: Shares on which confers on its holder a right
of conversion into equity share.
Non-Convertible Preference Shares: Shares on which does not confer on its
holder a right of conversion into equity share. Unless otherwise stated, a
preference share is always deemed to be a non-convertible one.
Participating Preference Shares: Shares which, in addition to two basic
preferential rights, also carries one or more of the following rights as per
Articles:
A right to participate in the surplus profits left after paying dividend to equity
shareholders.
A right to participate in the surplus assets left after the repayment of capital to
equity shareholders on the winding up of the company.
Non-Participating Preference Shares: A non-participating preference share
is that share which is not a participating share. Unless otherwise stated, a
preference share is always deemed to be a non-participating preference share.
Redeemable Preference Shares: A redeemable preference share is that
share which is redeemable in accordance with the provision of Sec. 80 and Sec.
80A of the Companies Act, 1956.

3. DEBENTURES :
A debenture is a document under the
companys seal
which provides for the payment of principal sum
and
interest thereon at regular intervals,
acknowledging a
loan to the company.
A debenture holder is a creditor of the
company.
A fixed rate of interest is paid on debentures.
The interest on debentures is a charge on the
profit
and loss account of the company.

Types of debentures
A. From Security Point of View
. Naked/Simple Debentures are those which are not secured on any
asset.
. Mortgage Debentures are those which are secured either on a
particular asset or on all the assets of the company in general. In India,
only the secured debentures can be issued.

B. From Permanence Point of View

. Redeemable Debentures are those which are repayable after a
specified period in lump sum or by installments during the life time
of the company.
. Irredeemable Debentures are those which are not redeemable
during the life time of the company.

C. From Records Point of View

. Bearer Debentures are those which are payable to the bearer
thereof. These can be transferred merely by delivery. Interest is
paid to the person who produces the interest coupon attached to
such debentures.

D. From Convertibility Point of View

Convertible Debentures are those, the
holders of which have a right to convert
them into shares.
Non-Convertible Debentures (NCD)
are those, the holders of which do not
have a right to convert them into shares.
E. From Priority Point of View
First Debentures are those which have
a first claim on the assets charged.
Second Debentures are those which
have a second claim on the assets
charged

4. DERIVATIVES :
Derivatives are instruments whose value
is derived from one or more underlying
financial asset, hence, the term
derivative came into existence. The
underlying instrument could be a
financial security, a securities index or
some combination of securities, indexes
and commodities.
CLASSIFICATION OF DERIVATIVES:

FORWARDS:
A forward contract is a customized contract between two
entities,
where settlement takes place on a specific date in the
future at todays
pre-agreed price. The rupee-Dollar exchange rate is a big
forward
contract market in India with banks, financial institutions,
corporate and
exporters being the market participants. Forward
contracts are generally
traded on OTC.
FUTURES:
A futures contract is an agreement between two parties to
buy or sell an
asset at a certain time in the future at a certain price.
Futures contracts

Options:
An option represents the right (but not the obligation) to buy or
sell a security or other asset during a given time for a specified
price (the strike price). Options are of two types calls and
puts. Calls give the buyer the right but not the obligation, to buy
a given quantity of the underlying asset, at a given price on or
before a given future date. Puts give the buyer the right, but not
the obligation, to sell a given quantity of the underlying asset at
a given price on or before a given date.
Swaps:
Swaps are private agreements between two parties to exchange
cash flows in the future according to a prearranged formula. They
can
be regarded as portfolios of forward contracts. Swaps generally are
traded OTC through swap dealers, which generally consist of large
financial institution, or other large brokerage houses. There is a
recent trend for swap dealers to mark to market the swap to reduce
the risk of counterparty default.

Non-Security/ Non-Marketable Financial Assets

(Non security form of investments are neither transferable nor traded in any organized
financial market)

1. Bank Deposits:
The simplest of investment avenues,
opening a bank
account and depositing money in it can
make a bank
deposit.
Various Kinds of Bank
Deposits/Accounts
a. Current accounts
b. Fixed deposits/ term deposits

Current Accounts
These accounts are used mainly by businessmen
and are not generally used for the purpose of
investment. These deposits are the most liquid
deposits and there are no limits for number of
transactions or the amount of transactions in a day.
Most of the current accounts are firm/company
accounts.Cheque book facility is provided and the
account holder can deposit all types of the cheques
and drafts in their name or endorsed in their favor
by third parties. No interest is paid by bankson
these accounts. On the other hand, banks charge
service charges, on such accounts.

Fixed Deposits/Term
Deposits
All Banks offer fixed deposits schemes with a wide range of
tenures for periods from 7 days to 10 years.The term fixed
in Fixed Deposits (FD) denotes the period of maturity or
tenure. Therefore, the depositorsare supposed to continue
such Fixed Deposits for thelength of time for which the
depositor decides to keep the money with the bank.
However, in case of need,the depositor can ask for closing
(or breaking) the fixed deposit prematurely by paying a
penalty (usually of 1%, but some banks even do not charge
any penalty).The rate of interest for Fixed Deposits
differsfrom bank to bank (unlike previously when the same
were regulated by RBI and all banks used to have the same
interest rate structure.The present trends indicate that
private sector and foreign banks offer higher rate of interest.

Savings Bank Account

A Saving Bank account is meant to promote the habit of saving among
the people. It also facilitates safekeeping of money. In this scheme fund is
allowed to be withdrawn whenever required, without any condition.
Most common form of bank deposit is savings bank account. The account
can be opened by individuals introduction by a person known to the
bank. Many banks have now arrangements to take photographs at their
premises. Accounts can be opened jointly with more than one person in
which case the account holders should specifically authorize persons to
operate the accounts. The customer can remit money and withdraw as
and when he/she desires to do so. The bank pays interest at the rate of
4.5 per cent per annum for the minimum balance outstanding between
10th and the last day of each month. Savings bank account can now be
accessed through ATMs and internet. Consequent to the introduction of
core banking solution in branches, customers can now access their
accounts from any branch of that bank at any place. Hence a savings
account is a safe, convenient and affordable way to save the money.

Recurring Deposits
These kinds of deposits are most suitable for people who do not
have lump-sum amount of savings, but are ready to save a
small amount every month.Normally, such deposits earn
interest on the amount already deposited (through monthly
installments) at the same rates as are applicable for Fixed
Deposits/Term Deposits. These are best if one wish to create a
fund for his/her childs education or marriage of daughter or buy
a car without loans.
Such accounts are normally allowed for maturities ranging from
6 monthsto 120 months. A Pass book issuedwhere the person
can get the entries for all the deposits made by him/her and the
interest earned.Premature withdrawal of accumulated amount
permitted is usually allowed (however, penalty may be imposed
for early withdrawals).These accounts can be opened in single
or joint names. Nomination facility is also available.

Special Bank Term Deposit Scheme Bank

Deposit Scheme under Section 80C:

This is the only Tax Saving Scheme

available with banks. The accounts
are opened under this scheme for
availing relief under Section 80C of
the Income Tax, Act.

2. Other deposits
Post Office Deposits: The investment avenues provided by
the post offices are generally non-marketable, as they are the
savings media. The only exception is Indira Vikas Patra, which
are bearer bonds transferable by delivery.
Saving Deposits: These are savings deposited by public up to a
maximum of `50,000 in individual account and Rs.1 Lac in joint
account. They carry interest at 5.5%-6%, which is tax-free totally.
Fixed Deposits: These accounts are open to individuals either
separately or jointly for varying fixed periods of time, say 1 to 5
years. The interest rates vary from 8 to 10.5%.
Recurring Deposits upto 5 years: This is an instrument of regular
monthly savings. The account holder has to save and deposit every
month a fixed amount of `5 or in multiple of `5 for 60 months. This
account carries a rate 10.5% on the balance to the account,
compounded quarterly and payable at maturity at the end of 5 years.
Fixed Investment with Monthly Income: Under this scheme, an
individual can invest from a minimum of `5, 000 to `1 lac lumpsum
for a period of six years. Interest at 11% payable monthly and bonus
of 10% at the end of maturity. Income up to `13,000 per annum is tax
free.

 Public Provident Fund: The PPF deposits can be made in

monthly installments with a minimum of `100 and a maximum of
`60,000 per annum. These deposits carry cumulative interest of
11% credited to the account. The account has a maturity period of
15 years.
National Savings Scheme: Deposits made in NSS were
completely exempted from tax under section 80 CCA of Income
Tax Act but income, however, is taxable at the time of withdrawal.
Interest is credited to the account at the end of each month at the
rate of 10% per annum now. The number of deposits that can be
made are only 12 in a year and the deposits have to be in
multiples of `100 and not exceeding `40,000 per annum.
Indira Vikas Patra: The Indira Vikas Patras are capital asset as
per provisions of section 2(14) of Income-tax Act, 1961; the tax
leviable on transferable/ tradable assets prior to the maturity is
under the head capital gain tax in the case of the investor.
Kisan Vikas Patra: These are certificates in denomination of `
1,000, ` 5,000 and ` 10,000, which will double in 6 years, giving a
compound rate of interest of 12.25%. These can be encashed
after 2 years for specified amounts of money.

 Company Deposits: Many companies, large and

small, solicit fixed deposits from the public. Fixed
deposits mobilized by manufacturing companies are
regulated by the Company Law Board and fixed
deposits mobilized by finance companies (more
precisely non-banking finance companies) are
regulated by the Reserve Bank of India. The key
features of company deposits in India are as follows:
Employee Provident Fund Scheme: A major
vehicle of savings for salaried employees, the
employee provident fund scheme has the following
characteristics:
Monthly Income Scheme of the Post Office
(MISPO): A popular scheme of the post office, the
MISPO is meant to provide regular monthly income to
the depositors. The salient features of this scheme
are as follows:

3. Money market instruments

Debt instruments which have a maturity less than one year at the time of issue are called money
market instruments. These instruments are highly liquid and have negligible risk. Money
market is dominated by the Government, Financial Institutions, Banks and Corporates.

The major money market instruments are:

Treasury Bills: Treasury bills represent the obligations of Government
of India, which have a primary tenure like 91 days and 364 days. They
are sold on an auction basis every week in certain minimum
denominations by Reserve Bank of India. They do not carry an explicit
interest rate. Instead, they are sold at discount and redeemed at par.
Commercial Paper: A commercial paper represents short-tem
unsecured promissory note issued by firms that are generally
considered to be financially strong. A commercial paper usually has a
maturity period of 90 to 180 days. It is sold at a discount and
redeemed at par.
Certificates of Deposits: Certificates of deposits (CDs) represent
short-term deposits, which are transferable from one party to another.
Banks and financial institutions are the major issuers of CDs. The
principal investors in CDs are banks, financial institutions, corporate,
and mutual funds. CDs are issued in either bearer or registered form.
They generally have a maturity of 3 months to 1 year. CDs are issued
at a discount and redeemed at par.

4. Mutual funds
A mutual fund is a professionally
managed type of
collective investment scheme that pools
money from many investors and invests it
in stocks, bonds, short-term
money market instruments and/or in
other securities, thus enabling the
investor to reap the advantages of a
diversified portfolio with a single
commitment.
In India, following entities are central to a
mutual fund operation: the sponsor, the

Classification of mutual
funds
1.Equity schemes:
a. Growth schemes
b. Index schemes
c. Sector schemes

2. Debt schemes:
d. Income schemes
e. Gilt schemes
f. Money market schemes

3. Balanced schemes

5. Insurance
Insurance can be defined as a legal
contract between
two parties whereby one party called
insurer
undertakes to pay a fixed amount of money
on the
happening of a particular event, which may
be certain
or uncertain.
The other party called insured pays in
exchange a

Types of insurance :
1. Life insurance :
In a life insurance policy the amount of
policy is paid
either on the death of the policy holder or
on the
maturity of the policy whichever is earlier.
LIC has a
Monopoly of life insurance.
a. Term insurance
b. Whole life assurance
c. Endowment assurance

2. General insurance:
In case of general insurance the loss is
indemnified.
There may or may not be a loss in general
insurance.
The money received from people is in the
custody of
insurance companies as trustees. The funds
at the
disposal of these companies are judiciously
used by
keeping in view safety, yield, and liquidity.
Types of general insurance :

Types of general insurance :

a. fire insurance
b. Automobile insurance
c. Health insurance
d. Marine insurance
e. Business and commercial insurance
f. Political risk insurance
g. Professional indemnity insurance
h. Property/casualty insurance
i. Credit insurance
j. Travel insurance
h. Locked funds insurance
i. Miscellaneous

Non financial forms of investments

(Non Financial Form of Investment or real assets are
represented as tangible assets )
1. Real estate:
a. Residential house
b. Commercial property
c. Agriculture land
d. Sub urban land
e. Holiday resort

2. Precious objects:
f. Gold and silver
g. Precious stones
h. Art objects :
i. Paintings
ii. Antiques

Investor
An investor is a person who allocates
capital with the expectation of a
future financial return.
A person who provides a business with
capital and one who buy a stock are
both investors.

Types of investors
Investors operating in the stock market:
1. Contrarians: The contrarian buys when
the rest of the world sells.
2. Trend Followers: Trend followers are more
conservative and tend to invest in
products such as bank stocks.
3. The last is the very conservative hedger
and holder - the famous small investor of
India who wants high return and low risk,
preferably guaranteed by the government.

Types of investors according to

researchers
Measured Investor: The measured investor starts
investing early, enjoys investing and is happy with his or
her current financial situation.
Reluctant Investor: The reluctant investor does not
enjoy investing and prefers to spend as little time as
possible on his or her investments. However, the
reluctant investor is confident that he or she will have a
comfortable retirement.
Competitive Investor: The competitive investor
enjoys
investing, but makes a habit of trying to beat the market.
This investor is happy with his or her current situation
and is confident about the future

 Unprepared Investor: The unprepared investor tends to

put off investing. This investor is not happy with his or her
current financial situation and prospects for a secure
retirement, and lacks confidence in his or her investment
ability.
Individual Investors: Individual investors make implicit
forecasts or assumptions about these factors without
elaborate reports because they have no need to
communicate beyond the purchase or sale order to their
brokers. The individual need not prepare any formal studies
because a simple one-line note may serve to preserve the
basis of a decision for future reference.
Institutional Investors: An institution, however, must
develop a deliberative process for reconciling different
views and a communication system to make the
conclusions uniformly applicable.A large institutions policy
committee may, require extensive reports and supporting
materials to keep a defined investment strategy in place.

Types of assets
Physical / real assets:
Financial assets:

Common investment
strategies
1.
2.
3.
4.

top-down approach:
Fundamental or technical analysis
Contrarian investing
Dividend investing